Harken Papers Offer Details on Bush Knowledge
Motive for Stock Sale In '90 Remains Unclear
By Mike Allen and George Lardner Jr.
Washington Post Staff Writers
Sunday, July 14, 2002; Page A01
The thrill of standing at the pitcher's mound on opening day as the new
managing partner of the Texas Rangers baseball club was one year old for
George W. Bush. As he looked toward politics, Bush wanted to pay off a
$500,000 loan he had taken to buy into the team. It was 1990, and his father
was president. The younger Bush, who joked in his oil-patch days about being
"all name and no money," was short on cash.
He did have one asset big enough to retire the loan: a block of stock in
Harken Energy Corp., a Texas oil and gas explorer. Harken had bought out
Bush's failing drilling company in 1986, put him on its board and hired him as a
consultant.
So Bush sold most of his Harken stock -- 212,140 shares at $4 a share, or
$848,560, on June 22, 1990. Two months later, Harken announced huge losses
for the quarter ending June 30, and its stock price plunged. The Securities and
Exchange Commission investigated Bush for insider trading but found no case.
Although Bush has maintained over the years that the size of the losses
took him by surprise, interviews and internal Harken documents provide a newly
detailed picture of how much Bush knew about Harken's financial straits when
he sold the stock.
A confidential Harken chronology, obtained by the nonpartisan Center for
Public Integrity, said that 16 days before he sold the stock, Bush was sent the
company's "weekly flash report," giving "information provided by subsidiaries
regarding estimated historical and projected earnings."
Asked about the document, a White House official said Bush thought the
company was going to lose about $9 million in the quarter. That would have
been four times as much as the company lost in the previous quarter but not
nearly as much as it did lose. As it turned out, the company lost $23 million for
the period, according to an earnings report made public two months after Bush
sold.
SEC investigators knew Bush had seen the flash report but still dropped the
case. Bush agreed to be interviewed by the SEC, but the investigators did not
take him up on it, provoking skepticism from some government officials about
their thoroughness.
The latest information leaves unresolved whether Bush knew his biggest
asset was about to shrink and unloaded before other investors found out, or
whether he sold only because, as he says, he wanted to pay off his loan.
The Harken trade was one of many turning points in Bush's life that showed
golden timing, or uncommon luck, and the circumstances have tormented him
since. During his winning campaign to unseat Texas Gov. Ann Richards (D) in
1994, she repeatedly accused him of getting an SEC whitewash because he
was a president's son.
Now, the sale is a major reason President Bush has been flummoxed in his
efforts to respond convincingly to the corporate accounting scandals that have
contributed to a bear market on Wall Street and turned a recovering economy
into a faltering one.
The episode also has caused critics to question Bush's credibility and
candor. Bush aides refused, both in 1994 and last week, to call on the SEC to
release its full file on the investigation.
Bush had hoped to use a news conference last Monday to preview his
package of proposals for reining in corporate executives. Instead he was asked
repeatedly about his record in Harken's boardroom. "This is recycled stuff," he
said. "I guess we're going to have to go through this again in the 2002
campaign. But nothing has changed."
Bush, who sat on Harken's audit committee, has said he did not know
about the extent of the losses later reported for the quarter in which he sold the
stock. If he had, he could have been subject to charges that he profited from
insider information. "I absolutely had no idea and would not have sold had I
known," he told the Dallas Morning News in 1994.
The White House said only Harken's executive committee, which did not
include Bush, knew about the size of the losses that took investors by surprise
when the second-quarter earnings were reported Aug. 20, 1990. Other board
members, including Bush, knew part of the story. "They knew that there were
going to be some losses -- in the neighborhood of $9 million, not $22 million,"
White House communications director Dan Bartlett said.
Harken minutes list Bush as attending a March 14, 1990, audit committee
meeting at which a "significant supply and trading loss and other accounting
issues" were discussed. An April 20, 1990, memo to the board from Harken
President Mikel D. Faulkner, addressed "Gentlemen," warned of a "liquidity
crisis." Other internal Harken documents from the period refer to a "severe cash
crisis" and "critically-tight cash flow."
The flash report Bush was sent 16 days before his stock sale, which was for
the week ending May 31, 1990, projected losses for the second quarter of
about $4 million.
Ralph D. Smith, a broker for Sutro & Co. in Los Angeles who retired five
years ago, said he approached Bush and other Harken stockholders and told
them he had an institutional client who wanted to buy a large number of Harken
shares. "At the first conversation, he said not at that time but maybe in a
couple of weeks he might be able to," Smith said. "In a couple of weeks, we
still had the buyer. So I called him and he said yes, that he'd checked with the
corporate counsel, that it was okay for him to sell. I then checked with
corporate counsel, also, to make sure he could."
Bush told The Washington Post in 1999, "I was mindful that this transaction
would be completely scrutinized. I knew the law and I sold at a time that I was
cleared."
The buyer has never been identified, and Smith said he has an obligation of
confidentiality to his client. Smith said it was a standard trade and that the
buyer has nothing to do with Bush or his family "in the wildest, furthest part of
anybody's imagination."
Bush sent the SEC a notice of his intention to sell but filed his disclosure of
the actual sale 34 weeks late. In explaining why, Bush said during his Texas
campaigns that the SEC lost the form; his aides now say it was a mix-up
between Bush and Harken lawyers. "I still haven't figured it out completely," he
said at last week's news conference.
The SEC opened a formal inquiry into Bush's sale in April 1991. The
investigators said in an internal 1992 memo that the available evidence showed
Bush "was not aware of the majority of the items that comprised the loss
Harken announced" shortly after his sale.
"Based upon our investigation, it appears that Bush did not engage in illegal
insider trading because it does not appear that he possessed material
nonpublic information," the memo said. Courts say information is material if a
reasonable investor would consider it significant in deciding to buy or sell. An
SEC analysis noted, as an exculpatory factor for Bush, that Harken's stock
recovered shortly after the losses were announced.
The SEC left open the possibility that it would reconsider the case if new
information became available, and Democrats have pointed to that in arguing
that Bush was never cleared. An Oct. 18, 1993, letter from the SEC
Enforcement Division to Robert W. Jordan, Bush's lawyer, said "no enforcement
action is contemplated." It then adds, in a quotation from securities regulations
that was set off from the body of the letter and that SEC officials said was
boilerplate, the standard caution that a case's termination "must in no way be
construed as indicating that the party has been exonerated."
Bush had many family connections to the investigation. The SEC's general
counsel at the time was James R. Doty, who represented Bush in his purchase
of the Texas Rangers. Doty recused himself. Bush was represented in the SEC
case by Jordan, who had been law partners with Doty and now is Bush's
ambassador to Saudi Arabia. The SEC chairman was Richard C. Breeden,
nominated by Bush's father.
Several former SEC officials said they found it unusual that Bush and other
board members were not interviewed during the inquiry. William R. McLucas, a
Washington lawyer who was SEC enforcement director at the time, said he has
no reservations about the process. "We were free to interview him -- his counsel
certainly made that crystal clear," he said. "If you determine that the
information wasn't material, you can talk to somebody under the hot lights for
10 hours, what's it going to get you?"
McLucas acknowledged that investigators knew they were investigating the
president's son. "They know who George Bush is, for God's sake -- they don't
live on the planet Mars," he said. "But these are hungry, aggressive, hopefully
fair-minded people."
Bush's service on the Harken board has drawn attention in other ways as
the recent wave of revelations about accounting fraud unfolded. In 1989, Harken
sold a subsidiary, Aloha Petroleum Ltd., by lending money to the buyer.
Harken then declared the amount as a cash gain, masking massive losses on
its balance sheet. Critics call it reminiscent of Enron Corp.'s accounting
gimmicks, although the White House contends the Harken situation was
different in scope and intent.
At his news conference, Bush told reporters who asked about his Aloha role
that they "need to look back on the director's minutes." His aides then refused
to release the minutes, saying they did not have them and would not ask
Harken for them. Texas newspaper accounts show aides took the same
position in 1994.
Aloha Petroleum, a retail gasoline subsidiary in Hawaii, was picked up in
1986 as part of Harken's purchase of Aloha's parent company, E-Z Serve Inc.,
which had about 900 retail outlets. The deal gave Harken numerous tax
advantages. By 1989, Harken had financial problems. E. Stuart Watson, then a
Harken board member, said he thought the Harken executives "were nuts."
"They were engaging in hedging operations, trying to protect themselves in
the purchase and sale of gasoline and oil, and man, they were losing millions,"
he said.
Eager to "redeploy assets," as the company later put it in a report to the
SEC, Harken sold for $12 million an 80 percent interest in Aloha to a company
that was one of its major shareholders. The purchaser, Intercontinental Mining
and Resources Ltd., two of whose directors were also on Harken's board, paid
$1 million in cash and submitted an $11 million IOU.
The first installment on the loan, for $1 million, wasn't due until mid-1992,
three years after the purchase, but Harken accounted for the sale as a $7.9
million capital gain for 1989. The move enabled it to keep its losses down to
$3.3 million that year. Harken's outside auditors, Arthur Andersen LLP,
approved the company's annual report to the SEC as a fair presentation of
Harken's financial position.
The SEC's accountants didn't see it that way and told the company to
restate its earnings. In 1991, Harken filed an amended report for 1989, stating
that as a result of "discussions with the Securities and Exchange
Commission's accounting staff," it was no longer counting the $7.9 million as a
gain for 1989. As a result of "the change in accounting method" and other
restatements, Harken said in a footnote, its losses for that year were actually
$12.6 million.
What did Bush know?
Bartlett, his communications director, said of the decision to sell Aloha that
Bush and other board members "gave management the discretion to execute
the transaction and negotiate the details, but not every board member was
involved in those negotiations."
As to Bush and the disputed accounting, Bartlett said the audit committee
was briefed after the fact about the write-downs resulting from SEC objections.
"I can't tell you if there was any other meeting in which they discussed the
details of how they were going to account for the sale," he said. "I can't say
definitively. This is based on the material I have."
Harken, based in Houston, closed Friday on the American Stock Exchange
at 41 cents a share.
-------
Staff writer Lois Romano and staff researcher Madonna Lebling contributed
to this report.
(In accordance with Title 17 U.S.C. Section 107, this material is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.) (In accordance
with Title 17 U.S.C. Section 107, this material is distributed without profit to
those who have expressed a prior interest in receiving the included information
for research and educational purposes.)
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