More On Frist and Insider Trading

Here's some interesting news from the Saturday Wall Street Journal Online:
Senate Majority Leader Bill Frist began exploring ways to sell his shares in HCA Inc. on April 29, more than two months before a July 13 earnings warning caused the stock to fall, according to documents reviewed by The Wall Street Journal.

The timing of his communications about the sales will likely be a key defense for Mr. Frist, who is under investigation for potential insider trading by the Securities and Exchange Commission and the Department of Justice. Mr. Frist's shares weren't sold until July 1 and July 8, just several days before HCA's warning caused the stock to fall 9%. But the timing could help Mr. Frist, since it suggests he started the process long before HCA knew of its financial problems.

Click here for the whole thing (note: subscription required).

While a violation of insider trading laws requires a number of criteria to be met (and I'm sure Steve Bainbridge could go on at length about this), at the minimum it requires that an insider initiate the trades due to his possession of "material non-public information". This is one of the reasons that insider trade volume goes up following earnings announcements and management forecasts. If an insider trades after shortly after an information event like this, it's less likely that they have a huge information advantage.

If Frist initiated started the trading process this far in advance, it's less likely that it was due to information about earnings shortfalls (not impossible, just less likely). However, the article says more:
Investigators are looking at whether Mr. Frist received any inside information between the time he initiated the sale and when it was completed. If Mr. Frist had received inside information about problems, he was obligated to halt any pending sales, even if he had begun the process to sell months earlier, these people said. The scrutiny stems in part from the fact that six HCA insiders sold shares in early June, just weeks before the earnings warning. The SEC is also investigating those sales.

HCA insiders were selling shares throughout the first six months of 2005, including large sales in April, before Mr. Frist registered his interest in selling.

I didn't think this was the case. Stay tuned to Bainbridge's website - I'm sure he'll be commenting on this (or at least I hope so).

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