There is something wrong in DOGWAGVILLE:
As a Board Member, Bush OKd a Deal Like
Enron's
Business: The SEC rejected the 1989 sale of Hawaiian gas stations by Harken Energy
Corp.
By WARREN VIETH, Times Staff Writer
WASHINGTON -- In early 1989, George W.
Bush and his fellow board members at Harken
Energy Corp. were presiding over a company that
was headed south in a hurry. The Dallas-based oil
firm had lost millions of dollars placing bad bets on
commodity futures. Debt was piling up; red ink was
beginning to flow.
Harken's executives came up with a novel plan to
ease the pain. They would sell a small chain of
Hawaiian gas stations called Aloha Petroleum to a
group of investors that included Harken's chairman
and one of its directors. The buyers would pay $1
million up front, but the accountants would record
an immediate $7.9-million profit, enough to erase
most of Harken's losses for the year.
They made a point of seeking the approval of
directors who were not participants in the investor
group. Bush, a member of the board's audit
committee, signed off on the deal, according to
Harken documents. So did the company's outside
auditor, Arthur Andersen & Co.
But the government challenged and ultimately overturned the accounting
method used by Harken to post a gain on the sale. Aloha was sold a second
time, and the new buyer extracted big concessions from the company. The
initial profit recorded on the sale morphed into a big loss. In the midst of all the
maneuvering, Bush sold most of his Harken stock in June 1990.
Based on a review of publicly released Securities and Exchange Commission
filings, meeting minutes, memos and correspondence from that period, there is
no evidence that Bush, or any of the other directors, raised objections or
expressed concern about the Aloha deal.
Experts on corporate governance say that as an independent director and one
of only three members of the audit committee, Bush was in a position to
exercise an important oversight role but apparently failed to do so.
An audit committee's primary responsibility is to ensure that the company's
outside auditors conduct a thorough examination of the financial records
without interference from officers and employees.
The White House on Thursday declined to comment on the SEC documents
pertaining to Bush's actions as a director.
As the president tries to respond to the wave of accounting scandals sweeping
corporate America, the events of 12 and 13 years ago have come back to
haunt him.
The Aloha sale was so similar to what Enron Corp. did to hide its losses that
Harken could have served as a model for the now-disgraced company, one
accounting expert said.
"The people at Enron could have gone to school on this thing," said Alfred
King, former managing director of the Institute of Management Accountants,
vice chairman of Milwaukee-based Valuation Research Corp. and former
advisor to the Financial Accounting Standards Board.
"They sold to themselves and recorded a profit," King said. "That's exactly
what Enron did on a number of those off-balance-sheet transactions. On this
one transaction at least, it's almost identical."
Bush rejects the comparison to Enron, a far larger Texas energy firm that
cooked its books on a scale never before seen. He insists his actions at Harken
were thoroughly investigated by the Securities and Exchange Commission.
"In the corporate world, sometimes things aren't exactly black and white when
it comes to accounting procedures," Bush said when asked in general about
Aloha at a news conference this week.
It's up to the SEC, Bush said, "to determine whether or not the decision by the
auditors was the appropriate decision. And they did look, and they decided
that the earnings ought to be restated, and the company did so immediately."
Bush's father was vice president in 1986 when Bush's previous company was
purchased by Harken and he became a member of the board. Bush's sale of
his Harken stock in 1990 was an issue in his 1994 gubernatorial campaign and
2000 presidential bid.
But Harken's sale of Aloha received little public attention until Enron's
spectacular collapse and parallels were noted between the Aloha deal and
Enron's practice of inflating its earnings and shoring up its balance sheet by
hiding massive amounts of debt in partnerships consisting of company insiders.
The magnitude of Enron's collapse is many times greater than Harken's financial
travails. Moreover, Enron's top officers are facing criminal charges for their
actions. Although the SEC required Harken to revise its financial results for
1989, it did not refer the case to its enforcement division for prosecution.
"If the division of corporate finance had believed the purpose of the [Aloha]
transaction was to generate a phantom profit, there is little question that it
would have made a referral," said Jacob S. Frenkel, a former SEC
enforcement attorney who heads the white-collar crime group at the Gambrell
& Russell law firm in Washington.
Still, accounting experts, security law specialists and political analysts say there
is enough similarity between events at Harken and Enron to keep Bush on the
defensive about his own actions a decade ago and undermine his credibility as
a corporate reformer.
Indeed, Bush would not have been allowed to serve on Harken's audit
committee if the reform proposals he outlined this week had been in effect then.
The president says audit panel membership should be limited to outside
directors. Besides sitting on Harken's board, Bush had a consulting contract
with the company. According to accounting experts, that qualifies him as a
corporate insider.
"Hiding losses in partnerships, playing games with accounting, not reporting
forthrightly transactions as a potential inside trader—it's all eerily reminiscent of
Enron," said Charles Lewis, executive director of the Center for Public
Integrity, a Washington research group. "This is not a corporate executive who
laid awake at night worrying about complying with federal laws, from all
appearances," said Lewis, who has been critical of the Bush administration.
Another transaction at Harken would have violated Bush's reform proposals as
well: On Thursday, the White House confirmed that Harken made two loans to
Bush while he served on the board of directors, a practice that Bush now
wants publicly held companies to prohibit.
The loans, totaling $180,375, were made in 1986 and 1988 at a below-market
interest rate to enable Bush to purchase Harken stock under an incentive plan
for board members. They were later converted into stock options that Bush
never exercised, the White House said.
Suspicions about the Aloha Petroleum deal have been fueled by the fact that
most of the principals refuse to talk.
Of the seven Harken directors who served on the board with Bush, five
declined to discuss the deal or did not return calls seeking comment. Executives
at Aloha, now a privately held company, also declined to comment. So did
past and present officials at Harken, Arthur Andersen and the SEC.
Former director Talat M. Othman, who chaired the three-member audit
committee, said he did not recall the details of the Aloha sale or the company's
reasons for arranging it. "I'm not sure that our motivation was to create instant
profits," said Othman, a Palestinian who represented Saudi investors who
owned 13% of Harken's stock. "It was a normal part of the business to be
buying and selling."
The third audit committee member, E. Stuart Watson, also said he didn't
remember much about Aloha. "I don't know about that Hawaiian outfit because
I was getting off the board about that time," Watson said.
Aloha dispensed gasoline at 40 or so service stations, convenience stores and
mini-marts on Oahu and Hawaii. The little chain traced its history to J. Paul
Getty, who installed the island's first gas pumps.
Harken acquired Aloha in 1986 when it bought a multi-state gas retailer called
E-Z Serve. When it announced its plan to sell 80% of Aloha in 1989, it said
Hawaii was too far away from its other gasoline markets and required too
much management attention.
But the new owners looked an awful lot like the old owners. The buyers were
an investor group controlled by the family of Harken Chairman Alan G.
Quasha. The sales price was $12 million, of which $11 million would come in
the form of a loan from Harken, with no payments due for several years.
Although the company received only $1 million, it recorded a $7.9-million
profit on the sale.
Harken reported a net loss of $3.3 million for that year. It was bad news for
shareholders, but it could have been much worse. Harken's commodity trading
losses had reached $16.6 million by year's end. Without the Aloha profit, the
1989 shortfall would have been a real shocker.
The Aloha transaction raised eyebrows at the SEC, which spent several
months reviewing the relationship between Harken and the buyer group and the
accounting procedures that produced the big profit.
In the end, the agency forced Harken to restate its earnings for 1989. The
$3.3-million loss ballooned to $12.6 million.
In the meantime, Aloha had changed hands a second time. Quasha's investor
group sold the chain to a firm headed by David Halbert, a business associate of
Harken President Mikel D. Faulkner and a friend of Bush.
Once again, it was not a clean break. When Harken sold Aloha to Quasha's
group, it had agreed to retain liability for any environmental problems
associated with the chain.
In early 1990, it discovered that the commitment would cost it dearly. Aloha's
new owner had 20 gas outlets tested and found that 11 had leaky underground
tanks requiring expensive repairs. There were 21 sites still awaiting tests.
Meanwhile, Harken was experiencing a severe cash flow crisis and needed to
raise money fast. Acknowledging in internal memos that it was negotiating from
weakness, the company agreed to forgive $7.2 million of the money it was
owed by Halbert for the Aloha purchase and related transactions in exchange
for accelerated payments of the remaining debt.
King, the accounting expert, said the initial sale to the insider group and the
subsequent concessions to the second buyer no doubt contributed to the SEC's
conclusion that Harken had no business booking a profit.
"When it came time to have a third party put up real cash, they didn't get
anywhere near what they were hoping for," he said. "That suggests they did not
have a true sale at the nominal price."
Bush's audit committee colleagues, Othman and Watson, said they consider it
unfair to hold the president responsible for a deal that was conceived and
carried out by Harken's corporate executives.
"He was one of several directors," said Othman, president of Grove Financial,
a Chicago-area investment firm. "Any sale or purchase of that nature doesn't
hinge on one director's responsibility or one director's opinion. It's the
consensus of the board."
Watson said he thinks Democrats in Congress are fanning the flames of the
Aloha controversy in an effort to hurt Bush politically.
"George wasn't running that company," Watson said. "And by golly, I was with
him for about four years on the board, and I liked him. I thought he was a
straight shooter then, and I still think so."
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