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Public Citizen Calls on Senate Ethics Committee and SEC to Probe New Stock Trading Questions Involving Frist Trust Funds

Nov. 16, 2005

Public Citizen Calls on Senate Ethics Committee and SEC to Probe New Stock Trading Questions Involving Frist Trust Funds

Senate Majority Leader Already Under Investigation for HCA Trading; New Review Shows Big Gains in Trading of Another Firm With Former Family Tie

WASHINGTON, D.C. – Public Citizen today called on the U.S. Senate Select Committee on Ethics and the Securities and Exchange Commission (SEC) to investigate additional lucrative stock trading in so-called blind trusts set up by Senate Majority Leader Bill Frist (R-Tenn.).

Public Citizen’s examination of Senate documents involving “qualified blind trusts” that Frist established for himself and family members shows that:

  • In addition to well-publicized trading involving health care giant, and Frist family business, HCA Inc., there also have been questionable transactions in stocks of other companies that had ties to the Frist family.
  • There appear to be inconsistencies between what Frist and his trustees reported as being in his blind trusts.
  • There may have been improper communications between the senator and the trustees running his trusts.

Frist already is under investigation by the SEC and the Department of Justice, which are probing whether he may have acted on inside information when he ordered sale of stock in HCA in advance of an abrupt drop in price. In June, Frist directed that his HCA stock be sold, a sale that took place at the same time HCA executives were selling off shares and shortly before a disappointing earnings forecast that quickly drove down the price by about 12 percent.

A blind trust involves an official turning over assets for management by a trustee without the official’s knowledge of what investments are being made. Such trusts are meant to insulate an official from financial conflicts of interest, and by extension, of shoring up public confidence in public officials – confidence that is necessary for democratic government to function well.

“Our findings, though, raise more questions about the operation of Sen. Frist’s blind trusts and suggest that the HCA deal may not have been an aberration,” said Public Citizen President Joan Claybrook. “Given well-timed transactions that could involve millions of dollars in the stock of other companies with past ties to the Frist family, was all trading done on the up-and-up? It’s important that these questions be answered.”

Most significant among the trading Public Citizen identified was activity in the stock of American Retirement Corp. The company, which offers services to seniors including independent living, assisted living, skilled nursing and Alzheimer’s care, was established in 1978, and among its chief founders was Dr. Thomas F. Frist Sr., one of the principal founders of HCA and Frist’s father. In well-timed transactions in 2003 and 2005, three Frist family blind trusts may have reaped big gains by acquiring and selling American Retirement stock, according to disclosure documents. Frist family members remained major investors in the company until at least the late 1990s, corporate records show. Today, American Retirement regularly touts its past affiliation with Frist Sr., although it’s not clear what any continuing association with the family might be.

In September 2003, the three trusts acquired American Retirement shares with an aggregate value of between $300,000 and $750,000. At the time, American Retirement’s stock was valued at $3.13 and had been languishing for several years. But after acquisition by the Frist family trusts, the price rose steeply. The stock was sold at some time before June 30, 2005, when the closing price reached $14.62 – a 367 percent gain over the price at time of acquisition. Based on this price move, the aggregate value would have increased to as much as $1.4 million to $3.5 million.

The sale of the American Retirement shares came at the same time as Frist’s well-publicized sale of HCA stock. The pattern of well-timed stock transactions by the Frist family trusts can be seen in both large and small investments:

  • Around May 2002, another Frist family trust sold shares of Triad Hospitals Inc., a Plano, Texas, company that owns and manages hospitals and ambulatory surgery centers and which was spun off from HCA in 1999. This sale took place six weeks before the stock reached a peak and began a 10-month slide, during which the price fell 56 percent. Disclosure documents suggest, but do not clearly show, that the value of the stock was about $12,350. Thomas F. Frist III, Sen. Frist’s nephew, is a director and major shareholder of Triad, and the company is in business dealings with HCA.
  • The same trust sold shares of LifePoint Hospitals Inc., a Brentwood, Tenn., hospital company that was also spun off from HCA in 1999. Around July 2001, the trust sold shares about four weeks before the stock reached a peak and began a three-month, 40 percent decline in price. About 10 months later, another sale took place very near a peak, according to disclosure documents, after which the price plummeted 57 percent over the next 12 months. Disclosure documents likewise suggest the value of these transactions were relatively small. LifePoint continues to have business dealings with HCA, including through HealthStream Inc, a health care industry training company.The chief executive officer and a co-founder of HealthStream is Robert A. Frist Jr., Sen. Frist’s nephew.

“There is no proof anything improper took place in these Frist family trust transactions,” said Frank Clemente, director of Public Citizen’s Congress Watch. “But the favorable timing, coupled with the companies’ past ties to the Frist family, raise questions about whether the transactions were proper. In light of the HCA matter, it’s important these questions be resolved.”

Copies of Public Citizen’s letters to the Senate ethics committee and the SEC are available here.