The Tennessean (Nashville, Tennessee)

WASHINGTON — What started out as a defensive political play may have suddenly backfired on Senate Majority Leader Bill Frist.

The Tennessee Republican sold all his stock in HCA Inc., the giant hospital company his family founded, in an attempt to shake conflict-of-interest charges that have dogged him through his political career. Barely two weeks later, the stock price plunged when the company’s earnings failed to meet Wall Street’s expectations, leaving Frist open to speculation about whether his family’s connections to the firm helped him sell before a big loss.

Frist aides refused requests to interview the majority leader yesterday, but there was no indication that government regulators are considering investigating whether his sale violated insider trading laws. Still, the very issue Frist was trying to overcome — his close personal ties to HCA — is finding new political traction as he considers a run for the 2008 Republican presidential nomination.

“Timing is everything in life, and this was not necessarily good timing for him,” said Jennifer Duffy, an analyst with the nonpartisan “Cook Political Report.”

Frist’s late father, Thomas Frist, founded the company in 1968. His brother, Thomas Frist Jr., a former CEO who still sits on the board, is the largest individual investor in HCA, with 16.9 million shares worth almost $800 million.

Government watchdogs and political opponents often have criticized Frist for owning stock in the company, especially because of his advocacy for medical malpractice reform and other legislation that might help HCA make money.

Frist had put most of his money in blind trusts formed under Tennessee law in 1995 after winning his Senate seat. But he established a new series of trusts under more rigorous Senate Ethics Committee rules in 2000, just after he won his second term, with his HCA shares and most of his other considerable personal wealth, as well as most of the assets of his wife and children. The trusts allowed Frist to order stock positions he had when he opened the accounts to be sold off, but otherwise left him largely unaware of how his family’s money was being managed.

He could be advised of when initial stock positions were sold, but not how much money those sales generated. The trustees give annual reports of how much the accounts are worth, but they don’t tell Frist what stocks the trusts own.

When he set up the trusts, Frist reported owning $5 million-$25 million in HCA stock, according to paperwork filed with the Senate ethics committee at the time. His wife, Karyn Frist, put at least $1 million in her own blind trust, and their three sons each had trusts established with more than $1 million of the company’s stock, as well. Rules don’t require them to disclose as much financial information as Frist must.

Several ethics experts and watchdogs said they found it odd that Frist could intervene to order such a sale when the HCA stock was ostensibly out of his reach in blind trusts. Fred Wertheimer, president of Democracy 21, said, “The notion that you have a blind trust but you can tell your trustee when to sell stock in it just doesn’t make any sense. It means you have a seeing-eye trust and not a blind trust. It’s ridiculous.”

Larry Noble, executive director of the nonpartisan Center for Responsive Politics, agreed that the arrangement “seems to defeat the purpose of a blind trust. Somebody else is supposed to have control over it to avoid potential conflicts of interest. If you can just reach in and sell stock, it seems to defeat the whole purpose.”

A sample agreement for blind trusts published by the Senate Ethics Committee staff on its Web site says there should be no “direct or indirect communication” between senators and trustees unless the senator is directing the trustee “to sell all of an asset … (which) creates a conflict of interest or the appearance thereof due to the subsequent assumption of duties” by the senator.

The Senate Ethics Committee had twice ruled that Frist’s ties to HCA posed no conflict of interest because he had never worked for the company and didn’t own a controlling interest in it, but his advisers say he wanted to make sure to put a potential political problem behind him.

“Frist was going above and beyond anything that the ethics folks would have required of him,” said Mark Tipps, Frist’s first Senate chief of staff and now a Nashville lawyer. “They certainly didn’t ask him to do it.”

That never settled the matter, though. A California-based watchdog group, the
Foundation for Taxpayer and Consumer Rights, filed a third ethics complaint
about HCA last March, as the Senate was preparing to take up medical malpractice
legislation. Their complaint was dismissed, as well, but it appears to have been
enough to convince Frist that keeping the stock wasn’t worth continued political
trouble.

On June 13, he ordered trustees to sell off all of his and his family’s stock in HCA and American Retirement Corp., a Brentwood-based nursing home company founded by the same people who formed HCA.

By June 30, the stock had been sold, according to letters the trustees — Equitable Trust Co. of Nashville and Northern Trust of Chicago — sent Frist and the Ethics Committee. The letters don’t say how much HCA stock Frist and his family still owned.

A month after he ordered the sale, HCA announced that its second-quarter earnings wouldn’t meet Wall Street’s expectations, and its stock lost 8.9% of its value.

Selling before the drop could have saved Frist money, though how much is unclear. But stock analysts said they didn’t think anyone at HCA knew by June that the company was heading for trouble.

“They had a very good first quarter,” said Nancy Weaver of Stephens Inc. in Little Rock, Ark. “I don’t think that in mid-June that HCA thought it was going to miss earnings. … I talked to them a good bit during the time frame, and I got no indication they thought things were going badly.”

The Foundation for Taxpayer and Consumer Rights, a group based in Santa Monica, Calif., said yesterday that it sent a letter to the Securities and Exchange Commission asking for an investigation of Frist’s sale.

None of the company’s directors or officers sold large amounts of stock before the July 13 announcement. Frist’s brother, Thomas, sold 450 shares in March but bought 594 in June.

“HCA is very aboveboard,” Weaver said. “The minute they know there’s a problem, they let people know.”

It wasn’t the first time Frist had sold positions he’d acquired through his HCA ties.

Senate documents show that one of his blind trusts liquidated more than 14,000 shares of HCA in November 2002. Another trust sold all of its American Retirement Corp. holdings in September or October 2003, and the Frist family sold most of its stock in Triad Hospitals Inc. and LifePoint Hospitals Inc. — two HCA spinoffs — in October 2003, as well.

The documents don’t indicate whether Frist requested those sales, but he was notified of them because they cleared out positions he’d held when he formed the trusts.

Political strategists said that Frist would have to answer questions about HCA whether he sold the stock but that getting rid of it before the 2008 presidential campaign got heated was probably wise.
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Tennessean staff writer Todd Pack contributed to this report. Information from The Washington Post and The New York Times was used in this report. Mike Madden can be reached at 202-906-8123 or [email protected]

Sen. Frist’s relationship with HCA

1968 — Frist’s father, Thomas Frist Sr., older brother, Thomas Frist Jr., and Jack Massey form Hospital Corporation of America in Nashville.

1969 — HCA sells its first public stock offering.

1994 — February — HCA merges with Columbia Health Care, forming a larger corporation, Columbia/HCA.

November — Bill Frist runs for Senate against incumbent Democrat Jim Sasser. He wins but faces questions throughout the campaign about whether HCA poses a conflict of interest for him. The Senate Ethics Committee rules after his election that it doesn’t.

January 1995 — Frist takes office and forms blind trusts under Tennessee laws to avoid conflict-of-interest allegations over HCA.

July 1997 — Thomas Frist Jr. takes over as CEO after former chief Richard Scott was
forced out over allegations that the company had defrauded Medicaid and Medicare.

July 1999 — U.S. Rep. Harold Ford Jr., D-Memphis, asks the Senate Ethics Committee for another ruling on Frist’s ties to HCA, as he weighs a possible campaign against the Republican in the 2000 election. The committee once again finds no conflict.

2000 — November — Frist is elected to a second Senate term.

December –Frist sets up new blind trusts, in accordance with stricter Senate Ethics Committee guidelines, to help minimize the HCA conflict-of-interest charges.

2000-03 — Columbia/HCA pays a total of $1.7 billion to the federal government to settle charges of Medicare and Medicaid fraud. The company changes its name back to HCA to avoid public relations problems caused by the charges.

December 2002 — Frist is elected Senate Republican leader, replacing Trent Lott of
Mississippi after Lott made racially insensitive comments. Interest in Frist’s ties to HCA rises in the national media.

April 2004 – The Foundation for Taxpayer and Consumer Rights, a California-based watchdog group, files a complaint to the Senate Ethics Committee over Frist’s HCA stock, saying he should be forced to recuse himself from voting on legislation to reform medical malpractice laws. The committee rejects the complaint.

2005 — June 13 — Frist asks the managers of his blind trusts to sell all of his and his family’s shares of HCA.

July 1 — Equitable Trust, based in Nashville, reports that it has sold Frist’s HCA shares.

July 8 — Northern Trust, based in Chicago, reports that it has done the same.

July 13 — HCA reports that it will miss second-quarter earnings expectations. It’s stock price falls 8.9%.