Friday, September 23, 2005

Bill Frist, insider selling, and doing the right thing 

Bill Frist's trust sold his remaining shares in HCA, Inc., the company that is the source of his extended family's wealth. The press is in a lather (the Grey Bitch bleats here), as are the lefty blogs (AMERICABlog, breathlessly and in bold: "When insiders dump $100,000,000 of stock in a short period of time there is something very suspicious happening. Frist gave the order to sell everything he owned in the middle of this sell off."). The SEC has asked Frist about the sale (which is fairly routine when there has been a sell-off in advance of poor earnings), and the United States Attorney for the Southern District of New York has dropped a subpoena on HCA (which is not surprising, given the opportunity for political advancement). Professor Bainbridge, for my money the premier securities law blawgger, teases apart the legal issues here.

In fact, a careful examination of the timeline of the sales reveals that it is highly unlikely that Frist did anything unlawful. More importantly, the facts adduced in the press accounts suggest that Frist (or his trustee) acted morally. Frist absorbed the risk of a decline in the price of HCA stock because he delayed his sale until after the market had time to digest the size and timing of sales by HCA's management.

Let's start with a look at HCA's one-year chart:

Now let's overlay the periods of heavy insider selling (in red - sorry about the transporting shittiness of my photoediting) and the date Frist gave the direction to sell to his trustee (black "X") and the period over which his trustee actually executed the sales according to the news accounts (in green):

During the period in red, more than twenty HCA insiders sold shares after a long period of fairly limited selling by management. Why? Look at the five two year chart (same color scheme):

The management selling began in November and then intensified as HCA stock began to rise after a long drought. There is nothing surprising in this -- executives are paid in equity, so they are going to sell that equity when they think the price is relatively high. Indeed, we require corporate executives to disclose their purchases and sales of company stock precisely because we believe that information about management purchases and sales says something about the company's prospects. Some investors consider insider buying and selling to be so important that they build their entire strategy around management transactions.

Now, one might reasonably ask whether the HCA management that sold its stock in advance of the July earnings warning (note the sharp drop in early July) knew that HCA was having a weak quarter. The likely answer is that management probably suspected that the company was having a weak quarter, but did not know it. First, the company probably did not know in absolutely real time how it was doing. Realistically, they probably knew how April and May went, but were far from certain as to the results for the first half of June. Second, there were more than two weeks left in the quarter when the management stopped selling, so whatever information the management might have had as late as June 15 was probably not very useful. Since the management almost certainly did not know how the quarter was going to finish up but may have been worried about weakness, many executives took the opportunity to sell their shares and communicate their suspicion, if you will, to the market. This is entirely usual and lawful behavior, and there was nothing wrong with it unless management had a great deal more specific information about the quarter's financial results than is probably the case.

Bill Frist, if he had any information at all about HCA when he ordered his trustee to sell his shares, knew what everybody else knew: that the management was shoveling stock out the door. That fact alone would be sufficient for many investors to sell their shares, and so it should have been for Frist, who was probably trying to get rid of them anyway in advance of his presidential campaign.

Moreover, we -- and HCA investors -- should applaud Frist for having handled the transaction the way he did. It was well within his rights to sell his shares much earlier in the spring, before the extent of the selling by insiders (including his own relatives) came to light via filings at the SEC. Instead, he waited to give his instruction to his trustee until after all the management selling had been disclosed. The result was that HCA's public investors had every opportunity in the world to sell their own shares on the basis of the management selling before Bill Frist. The timing of Frist's sale benefited those HCA shareholders wise enough to act on the insider selling, insofar as they got out the door before Frist. In the absence of surprising new facts -- and I'm not sure what they would be -- Frist almost certainly followed the law and acted honorably by giving HCA's public investors the opportunity to sell first.


By Blogger RiverRat, at Fri Sep 23, 02:46:00 PM:

38 years as a compliance officer in the Investment Management Industry. Last in, Last out! That's fine fine fine for fiduciaries, but not for investors. Frist obviously played by the rules.  

By Anonymous Anonymous, at Fri Sep 23, 04:36:00 PM:

Facts? We don't need no stinkin' facts! Frist is a republican Nazi so he is a thug and a thief! Guilty as charged and send him to jail!

That is all you need to know.

Now go send some more money to MoveOn and ANSWER...for the children!


By Anonymous Anonymous, at Fri Sep 23, 05:52:00 PM:

Thank you for this. Bet that NYT et al. will find some room to cover this. No confusion in picking correct editor as they seem to be having with "where to put" Air America story.

Even tho we are a bit upset with Frist's timid actions in the senate, we must defend him on this.

Let's give Upstate NY and the surviving NYC Republican voters another
reason to vote against Spitzer.

Bet Don Luskin can't wait to see Krugman's take on this,should be a classic Kooky!
Best Regards,  

By Blogger Gordon Smith, at Sun Sep 25, 07:49:00 AM:

Not a member of the investor class, I'm not too well schooled in this sort of thing, but I have a general idea what a "blind trust" is...

ABC via Eschaton: "Senate Majority Leader Bill Frist, R-Tenn., was updated several times about his investments in blind trusts during 2002, the last time two weeks before he publicly denied any knowledge of what was in the accounts, documents show."

"Frist, asked in a television interview in January 2003 whether he should sell his HCA stock, responded: "Well, I think really for our viewers it should be understood that I put this into a blind trust. So as far as I know, I own no HCA stock"

Frist, referring to his trust and those of his family, also said in the interview, "I have no control. It is illegal right now for me to know what the composition of those trusts are. So I have no idea."

So, while Frist was "morally" selling his stocks, he was lying, lying, lying about it. I'm confused. I know we can't all be paragons of morality, but doesn't this strike us as a bit less than What Jesus Would Do?

And, help me here, what is a "blind trust" exactly? From the way Frist behaved, I'm guessing it's a phrase one uses when wanting to give the impression that one's assets are under someone else's control. The blind trust is, I'm also guessing, in place to assure that political leaders don't make money off their political positions through any sort of legislative shenanigans or quid pro quo.

But that's just from some poor fella who isn't wise in the ways of the stock. Most of the country, who are more sophisticated in all fiduciary Gordian knots, will understand the meat and potatoes I'm sure. Hell, folks love Martha Stewart!  

By Blogger TigerHawk, at Sun Sep 25, 09:21:00 AM:

To be clear, I am not expert in the Senate ethics rules surrounding blind trusts. I also agree that Frist's earlier public statements -- at least those unearthed so far -- do not help him from that perspective. However, the various subpoenas floating around seem to address the securities law considerations. My strong point of view is that it is highly unlikely that Frist did anything wrong from that perspective. In addition, I also believe that of the various alternative times for disposing of his HCA stock, he chose the best time from the point of view of HCA's public stockholders.  

By Blogger FastNed, at Sun Sep 25, 09:35:00 AM:

Note the size of his holdings. While he would have no exact knowledge of the Trusts actions, a watch on large volume transactions would surely give him some idea of the chance that there were large holdings left in his name. Seeing its potential problems, a call suggesting they sell any remanding stock (if there was any) would not have been out of order.
And this presupposes that he did something - the Trustee could have seen the insider trend and got out all on his own.  

By Anonymous Anonymous, at Sun Sep 25, 09:51:00 AM:

The blind trust is, I'm also guessing, in place to assure that political leaders don't make money off their political positions through any sort of legislative shenanigans or quid pro quo.

Hmmm... let's hope Hillary's not been indulging in any more cattle futures, eh?

Or would the left once more ignore that kind of "shenanigan", so long as it's committed by the annointed?  

By Anonymous Anonymous, at Sun Sep 25, 09:56:00 AM:

Given that HCA was the "family business" blind trust or not Frist could have logically assumed his portfolio still contained HCA stock.

As for how the blind trust works I'll defer to the Washington Post explanation:

"Frist's shares were sold by July 1 and those of his wife and children by July 8, Call said. The trustee decided when to sell the shares, and the Tennessee Republican had no control over the exact time they were sold, she said. ... To keep the trust blind, Frist was not allowed to know how much HCA stock he owned, Call said, but he was allowed to ask for all of it to be sold."  

By Blogger sammy small, at Sun Sep 25, 10:42:00 AM:

I don't know what share of the $100M belonged to Frist's blind trust, but I would assume its sizeable. I also assume he made quite a gain looking at the 5 Yr window. That would yield a hell of an income tax hit! Someone will watch his trust's 1040 next year if he runs for office again.  

By Anonymous Anonymous, at Sun Sep 25, 06:29:00 PM:

No hurry on this. Let the investigation find what it will. Frist probably thought he was removing a conflict of interest but since the stock was near the peak it looks (with hindsight) otherwise.

Blind trusts are only a fig leaf for politicans. It enables them to keep the public from knowing. Since the politican selects the trustee, and the trustee receives a nice fee for being nice, it all depends on personal integrity. And we know how that works.

We can say that most blind trusts are "blind enough for government work." and no more.

It would be better if politicans managed their own assets and the results were seen by the voters.  

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