If I Were Defending Bill Frist

If I had the grim challenge of explaining Bill Frist's sale of stock, the ownership of which he was ostensibly unaware, I might start with S.1002, a bipartisan bill introduced by Grassley and Baucus, the ranking members of the Senate Finance Committee, on May 11, 2005.

The Street describes the bill and its possible impact on health care stocks in an article from May 26:

The hospital industry could pay dearly to cure a festering sore spot. 

The group has long cried out for relief from physician-owned specialty hospitals that snag lucrative cardiology and orthopedics cases for themselves. In response, however, the government is now poised to go a step further by reducing the profitability of such cases for regular and specialty hospitals alike.

Indeed, Congress is currently weighing a bipartisan bill that would dramatically alter the entire Medicare payment system. Under the proposal, Medicare would pay hospitals on the basis of their cost to treat patients rather than the amount they charge to do so.

"This bill would make corrections to the payment system so that certain cases and patients are not significantly more profitable or less profitable to treat than others," says Chuck Grassley, an Iowa Republican who chairs the powerful Senate Finance Committee. "This will improve payment accuracy for all hospitals and will better reflect the actual cost of delivering care."

Grassley's proposal, based in part on recommendations from the Centers for Medicare and Medicaid Services, would rein in the growth of specialty hospitals while undercutting certain business strategies at regular hospitals as well... 

UBS analyst Kenneth Weakley... warns of an unexpected backlash for the industry.

"If CMS is successful in altering the [diagnosis-related group] system such that it achieves tight, normal distribution of profit margins across all DRG codes, then forward projections for hospital economics will likely lose ALL of their reliability," Weakley wrote last week. "Indeed, should CMS implement this change for fiscal 2007 (which begins in October 2006), as it currently intends, it would not be unfair to say that few even in the hospital industry would be able to accurately predict the ultimate impact on hospital-by-hospital reimbursement."

Already, industry executives look skittish. Since CMS first made its recommendations in early March, senior managers at a number of hospital chains -- including Community  (CYH:NYSE - commentary - research), LifePoint  (LPNT:Nasdaq - commentary - research), HCA  (HCA:NYSE - commentary - research) and Triad  (TRI:NYSE - commentary - research) -- have been shedding large amounts of stock. All of those stocks set new 52-week highs this spring but have since begun to retreat.

Shares of industry leader HCA, where insider selling has been especially pronounced, fell 1.2% to $53.01 on Wednesday. The stock is now off 6.5% from the peak it hit last month.

The obvious defense - this bill created a huge conflict of interest for Frist, so he did the responsible thing and sold his shares. 

However - if this bill created a new and problematic conflict of interest for the Senate Majority Leader on May 11, why did he wait until June 13 to order the sale of his stock?  And might one argue that, as Majority Leader, he had inside information about the legislative prospects for this bill, and might one speculate that this inside information prompted his sale?

Well, if I were defending Frist, I might get fired, because this is a pretty lackluster effort.  But it may be that the status of the bill was public info and the potential impact on his pocket book was obvious, so he sold his shares.

Or it may be that this bill will be DOA in the House.  I throw this idea out there as a possible motivation for Frist's sale - there is nothing else in the company announcements or news headlines that catches my eye.

The Captain and Jon Henke want Frist to step down pending a resolution of this; anyone feeling some love for First, be sure to leave a comment or trackback, but my guess is that if Frist were gone today, he would be forgotten tomorrow (and with a fine defense like this, tomorrow may be here by yesterday...)

More reaction at Memeorandum.

Comments

[larwyn]

HOLD IT A MINUTE!
TIGERHAWK HAS IT ALL - WITH CHARTS!

PLEASE READ BEFORE YOU JOIN SPITZER
AND THE "GREY BITCH"

Click here: TigerHawk
http://tigerhawk.blogspot.com/2005/09/bill-frist-insider-selling-and-doing.html
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.

PLEASE READ THE WHOLE POST BEFORE YOU JUMP TO CONCLUSIONS.

REMEMBER SPITZER WILL BENEFIT FROM THIS AS WILL HILLARY IN NY!

Click here: Captain's Quarters
http://www.captainsquartersblog.com/mt/archives/005503.php
September 24, 2005
Frist Has Some Explaining To Do

Larwyn

Click here: PoliPundit.com » Shades of Martha Stewart
http://polipundit.com/wp-comments-popup.php?p=10124&c=1
Friday, September 23rd, 2005
Shades of Martha Stewart

[Steven J.]

Frist should step down for lying about his knowledge of the contents of the trust fund.

[kim]

Last week lefty stupid radio was decrying HCA's pushing the envelope with Medicare reimbursement a few years ago but completely failed to mention that at thtat time the Frist family did not have effective control of the company. They were brought back in as the white hats to save the company, and they did.

Now, if the details and ramifications of the bill were public information, there should be no stigma attached to his sale. Believe me, analysts were probably running way ahead of him.

All that said, I don't care much for him. He's probably a better doctor than majority leader. I'll not shed many tears for him if this destroys his leadership(Can you destroy..etc...?); I'll shed tears if it is done unjustly, which is likely.

This is red meat for the liberals to throw to the ignoramuses they cultivate.
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[kim]

This may be an opportunity for a discussion of just treatment of family wealth. His father, and I believe brother, built the value in the company.

And it looks to me like he took a hell of a risk waiting so long to sell. I'd guess that's because the decision is in the hands of trustees, at least arm's length from him. But who cares? Certainly not his critics.
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[Steven J.]

Last week lefty stupid radio was decrying HCA's pushing the envelope with Medicare reimbursement a few years ago but completely failed to mention that at thtat time the Frist family did not have effective control of the company.

Wasn't HCA fined $1.7 billion? And, what proportion of the shares does the Frist family own?

[kim]

I think that fine is correct. It happened when other people were running the company. I think Frist's father and brother still own significant amounts of stock.

And I'm sorry to inform all of you that Bill Frist's 100 million dollar stake was relatively insignificant.
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[Steven J.]

completely failed to mention that at thtat time the Frist family did not have effective control of the company.

REALLY?

[Steven J.]

And I'm sorry to inform all of you that Bill Frist's 100 million dollar stake was relatively insignificant.

Irrelevant. Frist lied about his knowledge of the trust funds.

[Dwilkers]

The first scandal in this from my perspective is that if what's being reported is true then Frist's "blind trust" wasn't blind at all. According to the ABC News website he denied having any knowledge about owning HCA stock (which would be true if the trust was really blind) but later documents show his trustee sent him an update on how much HCA stock he owned 2 weeks prior to that statement.

The whole point of a "blind trust", which is commonly used by politicians of all stripes, is that their holdings are handled by someone else without their involvement so there is no conflict of interest in their actions as elected leaders. If the trustees are sending reports to let them know what stock they own then the entire purpose of the "blind trust" is reduced to a damn lie. If the same politicos are giving buy/sell orders to their trustees it is an even more egregious damn lie.

I don't know if that's common among politicos but if it is then its about time we learned it.

If he had inside info and sold then he should not only step down he should be prosecuted. But if Martha Stewart wasn't guilty of insider trading then nobody else is either, so I'm not going to hold my breath on that one.

[kim]

Yes, really, SG, check out the history of Columbia/HCA a little.

I agree the size of his stake is irrelevant. I'm not sure of the status of this so-called 'blind trust' thing, but even I knew that he had some shares of HCA and that his stake paled in comparison to his father's and his brother's stakes. So if it was public information that he owned stock, why wasn't he allowed to know?

I know next to nothing about the claim that he lied about knowledge of his ownership.
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[kim]

What bugs me is the claim that his stake was sold to clear up the appearance of a conflict of interest. How come that 'appearance' only unveiled itself in June?
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[kim]

Look at his financial disclosure forms. This 'ostensibly unaware' or 'blind trust' thing is wrong. It was public information that he owned HCA stock.
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[Dwilkers]

Are you saying it wasn't a blind trust Kim? I can't find his actual disclosure form online.

In any case, if it wasn't a blind trust, why did he say:

"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"

"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."

?

[kim]

Dwilkers and SJ, I'm having a lot of trouble reconciling his statements about his ignorance of this trust. I find it almost impossible to believe that I knew more about his financial status re HCA than he did.

I'll bet the bottom line is that he has enough arms length to have avoided illegality; but then why say such ignorant things.

Smart doctor, stupid politician.
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[Ranger]

Funny that people are focusing on this one incident when a prize winning academic journal article pointed out recently that Senate members’ portfolios produce a 100% better return than the average investors.

try doing a google search using:

us senate portfolio performance

and you find this article

http://chronicle.augusta.com/stories/050705/bus_4090222.shtml

(use the cashed link to avoid registration).

Officials' portfolios outperform average

The Senate advantage

Web posted Friday, May 6, 2005
By Adrian Burns | Staff Writer

Key parts being:

According to a study co-written by Augusta State University finance professor Brigitte J. Ziobrowski, senators don't just edge out other investors - on average they get twice the returns others do.

...

Although not every senator's stock transaction is a winner, on average they make 24 percent on their investments, compared with the 12 percent average for other investors.

The improved portfolio performance stems from inside information senators learn on the job, said Ms. Ziobrowski, who has taught at ASU for 14 years.

"I'm very sure that they do have insider information," she said.

With many senators sitting on committees with significant ties to businesses such as defense contracting and pharmaceuticals, it's not hard to see where the information might come from, Ms. Ziobrowski said.

And it's not illegal for senators to use that information when selecting stocks, she said.

"If it's learned through a senatorial function, then there's no limitation to what they can do with that information," she said.

...

So, don't expect Frist's fellow senators to be in a hurry to sanction him or even draw attention to this issue. The press may have inadvertently stuck gold with this story if they start digging deep enough and wide enough.

[kim]

We're throwing 'insider' around here without a precise definition. For legal puposes 'insider' has a precise definition.

I've not looked at the study, but I'd guess that it was poorly done. Did the Senators simply have sense enough to hire better help than the 'average' investor? What about blind trusts? Does she show any data to support her allegation that the Senators used early warning of information to actually generate those double returns? And 24% and 12% over what time frame? Looks like hooie to meie.
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[kim]

I like that. "I'm very sure that they have insider information", she says.

Oh yeah, why are you sure? Care to tell us?
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[kim]

On what scale is the average investor getting 12%?
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[Ranger]

Well, you are correct when you say people are using the term "inside" loosely. In fact, what is going on here is not "insider trading" in the sense that they are getting information from inside the company that is not available to the public. What they have access to is government information (proposed legislation and regulatory changes)that will affect the market combined with an understanding of how and when those changes are going to become public and if they will actually take effect.

None of that is illegal, but it dose represent an asymmetrical knowledge level that gives members of the Senate an advantage, if they choose to exercise it.

In fact, most Senators don't need to trade to get rich. Most are very wealthy going into the Senate, but for those that are not, this represents an opportunity for them to dramatically improve their financial condition without breaking the law.

[kim]

Here's the idea for a mutual fund. We'll call it the Solons Hundred Fund. It'll maintain a basket tracking and replicating the Senators' investments.

Slam dunk 24%, eh, Ms. Brigitte?
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[kim]

Good point, Ranger, but is it actually being done? Does this information actually work, and are you arguing that the info is not in the public realm?
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[Ranger]

Technically I'm sure most of this information is in the public realm, but you'd probably have to a) know that a particular set of regulations are being re-written and b) have to submit an FOI request to get a copy of the draft changes. But Senators get that information routinely as part of their oversight function. As to legislation, it is one thing to know the contents of a particular bill, it is quite another to really know the probability of passage.

As to whether it is being done, lets look at one of the big money makers in this whole thing, Sen. Barbara Boxer (D-Calif.).

According to The Hill (http://www.hillnews.com/news/031104/stocks.aspx) on March 11, 2004, Sen. Boxer was identified in the study as one of the most active stock traders in the study. In her own words "We’ve done pretty well." Then look at her non-denial denial:

But she indicated that she has had her investments in a blind trust for at least three years (note here that she was elected to the Senate in 1992, so that is up to 8 years in the Senate without a blind trust). “We’ve always had a power of attorney,” she explained (but a power of attorney is not a blind trust).

Boxer was also a stock broker before going into politics. Is that conclusive evidence? No. Is it a sufficient set of coincidences to lead to reasonable suspicion? I think so.

[kim]

All very interesting. I'll bet BB has a natural talent for investing and trading, one that Hillary Clinton, for instance, probably lacks.

I wonder just how 'green' BB's investments have been?
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[Charlie (Colorado)]

"Blind trust" doesn't mean he doesn't know what's in the trust, you ninnies. Do you imagine that Dick Cheyney doesn't know that he put Halliburton stock into his blind trust? It means he doesn't have the authority to make transactions. And sure enough, all he could do was ask the trustees to sell any remaining HCA stock, which they did.

Why did he do that? Because people kept complaining about the appearance of impropriety.

So now we have the interesting situation that Frist has acceded to the request to ask the trustees sell his stock, and having done so is being accused of ... asking his trustees to sell his stock.

Look, I don't care which side of the political fence you're on, but cripes, try to exhibit memory longer-term than one news cycle. What is this, DailyKos?

[TM]

"Blind trust" doesn't mean he doesn't know what's in the trust, you ninnies.

As a practical matter (and I got this from Josh Marshall), assuming that Frist knew how much HCA he put into his trust, and assuming he looks at his tax returns for captial gains and such, he can probably guess whether he still owns HCA.

Unfortunately, Frist offered this explanation on television:

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.''

Petard, auto-hoist.

[Syl]

"Petard, auto-hoist"

I don't see it, Tom. The trust can do transactions. Frist can't. He put the stock in there, what's been bought and sold he probably doesn't even know.

I don't think he gets statements on specific transactions. Only what he needs to know for his tax liability.

"From Sale of Stock you get $45." He doesn't even have to bypass Go.

[kim]

Frist is trying to snow us with the meaning of 'blind', and his opponents are trying to snow us with the meaning of 'insider'.

There's a blinding snowstorm outside and I'm staying inside.
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[TM]

Very astutue guess by Kim. This is from the Monday Times, on "blind" trusts:

Federal ethics laws make it virtually impossible for members of Congress or top White House officials to set up trusts fully beyond their knowledge or control. While officials may choose to set up a conventional blind trust under the control of an independent administrator, ethics laws require the annual public disclosure of its contents.

So the laws provide for the creation of special "qualified blind trusts" like Mr. Frist's that are exempt from public disclosure. The laws strictly limit communications between the trustee and the beneficiary, but they also mandate disclosure of the original holdings and notification to the beneficiary whenever an original asset is sold.

And the rules give beneficiaries like Mr. Frist, Republican of Tennessee and the Senate majority leader, the power to order the sale of all of a stock or other asset at any time in the name of eliminating a potential conflict.

So it would have been his job to know whether he still held HCA.

[kim]

So when he said he couldn't know, he didn't know his job.

Exemplary of the Man.
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[kim]

And again, why did his ownership of HCA stock only become a potential conflict of interest in June?

Is this a case of doing well by doing good? Oh well, trading decisions are rarely unicausal.
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[Crank]

I concur entirely with Tigerhawk's analysis of why it is plausible that Frist did nothing wrong. That may not be the truth, but he certainly makes a compelling case that there were rational reasons to sell based on the publicly-disclosed facts that (1) the stock had gone way up and (2) the insiders were selling like crazy.

But what you raise is actually an interesting theoretical question under the securities laws: would Frist, as Senate Majority Leader, be guilty of trading while in possession of material nonpublic information solely on the basis of his knowledge of the legislative status and prospects of bills working through Congress.

Certainly, government regulatory action can be material nonpublic information (think: "FDA" and "imClone"). But where legislation is concerned and the prospective defendant is a leader of the legislature, the line might be much fuzzier.