Senator’s sale came as executives exercised longtime stock options

The Tennessean (Nashville, Tennessee)

Senate Majority Leader Bill Frist‘s move to sell his remaining shares of HCA Inc. stock in June came at the tail end of at least a three-month period in which many of the company’s top executives were cashing in long-term stock options for millions of dollars in profits.

A review by The Tennessean of stock transactions by HCA insiders between April 1 and June 30 shows the group as a whole sold nearly 1.8 million shares of stock worth nearly $100 million over that period. The data come from Securities and Exchange Commission filings used by Wall Street analysts to track whether executives are accumulating or selling shares in their own companies.

Watchdog groups have criticized Frist’s stock sale and have asked the Securities and Exchange Commission to investigate the timing of the transaction. Frist’s order to a blind trust to sell his shares came on Monday, June 13, one month before the stock took a nearly 9% drop in a single trading day.

The New York Times reported today that the Securities and Exchange Commission had contacted Frist’s office about the sale in June of his shares in HCA. A spokesman for Frist said the majority leader will provide the SEC any information that it needs with respect to this matter.

Frist was not alone in selling shares in the Nashville-based health-care company.

For example, in the five trading days before Frist made his sell order, HCA’s top executives and directors sold 228,800 shares of stock worth $12.4 million. Most of the transactions came as company executives exercised past stock options that HCA had given to them as performance incentives over a long period of time.

Stock analyst Mark LoPresti with Thomson Financial said the wave of stock sales by HCA executives was a bearish sign that could have been picked up by savvy investors.

“What you did have was HCA people selling in record numbers,” LoPresti said. “It sends a signal that they think they’re getting a good price, and they’re taking the shares off the table.”

“Why would (the average investor) want to increase holdings when other people are unloading theirs?”

It’s impossible to say the executives or Frist had advance knowledge of an earnings report issued by HCA in mid July warning of weaker second-quarter profits, the stock analyst said. That report led directly to the 9% dip in the company’s stock on July 13.

LoPresti said the only other period in which HCA executives sold a comparable volume of stock was in the spring of 2002, and the company’s shares fell 30% over the next 12 months.

LoPresti said he can’t get inside the heads of individuals to determine exactly why they sold shares at a given time.

Frist’s stock sale and the fact that it came amid a wave of selling by HCA insiders has caused political troubles for the potential 2008 presidential candidate.

Frist dodged the issue yesterday, with his staff cutting off questions from reporters as he left a rally at the Capitol in support of John Roberts’ nomination to be chief justice of the Supreme Court. Aides again refused requests to interview Frist.

“He’s not going to talk about it,” spokeswoman Amy Call said.

If Frist sold his HCA stock in the midst of a massive insider sell-off, that could cause him more problems in Washington. “It definitely gives you pause,” said Larry Noble, executive director of the nonpartisan Center for Responsive Politics, a government watchdog group. “It goes beyond just the question of whether or not he complied with ethics rules in terms of selling stock in the blind trust. Now he may be dealing with an even more serious allegation having to do with insider trading.”

The Foundation for Taxpayer and Consumer Rights, a Santa Monica, Calif.-based group that complained to the Senate Ethics Committee about Frist’s HCA holdings last year, has asked the SEC to investigate the sale.

Nashville securities attorney Gary Brown said he wouldn’t be surprised if security regulators look into Frist’s sales. “Any time something like that
happens, you’ve got to at least raise the question.”

One potential explanation of the increased sales this year could be that HCA in December made 19.1 million shares tied to stock options immediately exercisable for executives and employees, even though the shares were accumulated over a period of years.

“To the extent that options were accelerated (meaning they could be sold) that means that this year there were a greater number of options available for exercise and sale of the shares,” Brown said.

The decision by HCA came ahead of an expected change in accounting rules that would require companies to deduct the value of options from their profits. But at the time, company spokesman Jeff Prescott downplayed that connection, adding that employees would have become vested in roughly half of the 19.1 million shares in early 2005 anyway, with the rest kicking in over the next three years.

Early vesting increased opportunities for HCA executives to sell shares, LoPresti said.

“You can’t make the definitive statement that these guys knew there was trouble ahead. That would be irresponsible,” LoPresti said. Still, LoPresti said that between Jan. 31 and April 7, 17 HCA insiders sold almost 1.5 million shares as the company’s stock ran up above $50 a share. The stock peaked at $58.60 on June 22.

Frist ordered his stock sold to avoid the appearance of a conflict of interest, Call, the Frist spokeswoman, said earlier this week. The senator declined to comment further yesterday.
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Staff Writer Todd Pack and Mike Madden of the Tennessean Washington Bureau contributed to this report.