October 3, 2005
The Investigation of Senator Frist's Stock Sales
The investigation of Senate Majority Leader Bill Frist is moving forward quickly, although as with many such investigations, it is likely to move into an extended quiet period once the documents are delivered and testimony is taken. On Sept. 29, HCA disclosed (here) that the SEC had issued a formal order of investigation, which means the Enforcement Division staff has subpoena power to compel the production of documents and testimony from witnesses. The staff is likely to seek testimony from a number of individuals at HCA because of the large volume of stock sales during the period before the negative earnings announcement. With the number of attorneys involved, it will probably take months rather than weeks to get through the depositions.
A Washington Post article (here) discusses e-mails involving the decision-making process for the sale of Senator Frist's HCA stock from the so-called "blind trusts" that held the shares. It appears that Senator Frist first raised the possibility of selling the shares in late April with his counsel and accountant, and the process took until late June to complete. That makes it more difficult to establish a link between the sales and any possible tipping about the earnings problems at HCA, although the company's disclosure was not the result of a single event, such as a buy-out offer or other specific decision. Earnings shortfalls don't occur over night, and it is not impossible that information started to leak out from HCA about potential problems much earlier in the quarter. An interesting question would be whether a person who makes a tentative decision to sell stock, and then learns inside information that would impel such a sale, violates Rule 10b-5 by trading while in possession of the information. This raises issues about the materiality of the information and to what extent the information has be a cause of the decision to trade.
Senator Frist has brought in the first-team to represent him in the SEC and U.S. Attorney investigations of his HCA stock transactions: former Enforcement Division director Bill McLucas of Wilmer Cutler. Unfortunately for the Majority Leader, the investigation is unlikely to be resolved quickly. (ph)
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