From the Front Page of Tuesday's Washington Post...
For Cheney, Tarnish From Halliburton
Firm's Fall Raises Questions About Vice President's Leadership There
By Dana Milbank
Washington Post Staff Writer
Tuesday, July 16, 2002; Page A01
An executive sells shares in his energy company two months before the company announces unexpected bad news, and the stock price eventually tumbles to a quarter of the price at which the insider sold his.
George W. Bush at Harken Energy Corp. in 1990? Yes, but also Richard B. Cheney at Halliburton Co. in 2000.
When Cheney left Halliburton in August 2000 to be Bush's running mate, the oil services firm was swelling with profits and approaching a two-year high in its stock price. Investors and the public (and possibly Cheney himself) did not know how sick the company really was, as became evident in the months after Cheney left.
Whether through serendipity or shrewdness, Cheney made an $18.5 million profit selling his shares for more than $52 each in August 2000; 60 days later, the company surprised investors with a warning that its engineering and construction business was doing much worse than expected, driving shares down 11 percent in a day. About the same time, it announced it was under a grand jury investigation for overbilling the government.
In the months that followed, it became clear that Halliburton's liability for asbestos claims, stemming from a company Cheney acquired in 1998, were far greater than Halliburton realized. Then, in May of this year, the company announced it was under investigation by the Securities and Exchange Commission for controversial accounting under Cheney's leadership that inflated profits. Halliburton shares closed at $13.10 yesterday on the New York Stock Exchange.
There has been no serious allegation of wrongdoing by the vice president himself in all of this. But the highflying company Cheney hailed as a "great success story" during the 2000 campaign is now a troubled behemoth fighting for its life. The humbling of Halliburton raises doubts about Cheney's stewardship there and, by extension, his reputation as a smart executive bringing a businessman's acumen to the White House.
The developments at Halliburton since Cheney's departure leave two possibilities: Either the vice president did not know of the magnitude of problems at the oilfield services company he ran for five years, or he sold his shares in August 2000 knowing the company was likely headed for a fall.
Amid a wave of corporate accounting scandals, Democrats are eager to raise the issue of Cheney's leadership. Noting the collapse in Halliburton shares since Cheney sold, Rep. Henry A. Waxman (Calif.), the ranking Democrat on the House Government Reform Committee, wrote to Bush on Friday saying: "Vice President Cheney could provide an extraordinary example of personal responsibility by donating all or a portion of the profits" to a charity for displaced workers. Halliburton has shed 18,000 jobs since 1999.
Overall, financial analysts say Cheney was an unremarkable executive. "He came in at a time when any okay manager could ride the cyclical wave," said James Wicklund, an analyst with Banc of America Securities who has followed Halliburton for years. "He did okay. He did not blow anybody's doors off."
In particular, one of Cheney's actions, the 1998 acquisition of Dresser Industries, could end up ruining the company with asbestos liabilities. "You have to put that on Cheney," Wicklund said. "In hindsight, would they have done it? Of course not." Still, Wicklund added that the acquisition looked good at the time, and he wonders "how much could anybody have known" about the asbestos liability.
The vice president's office declined to comment for this article. "Until such time as the SEC concludes its review of Halliburton's practices, the vice president will refrain from commenting on this matter," Cheney adviser Mary Matalin said. "Any statement could be misinterpreted as an effort to influence the process of an independent regulatory body, which would be inappropriate."
After Aug. 16, 2000, his last day at Halliburton, Cheney exercised stock options and sold 660,000 shares between Aug. 21 and 28 for $35 million; Halliburton shares were soaring because of high oil prices.
Though Cheney was under pressure to sever his future financial interest in Halliburton, conflict-of-interest laws did not require the sale. "There's no conflict until I'm sworn in on January 20th," Cheney said Aug. 27. Four other Halliburton insiders also sold shares in August, including the vice chairman and the chief financial officer.
A Halliburton spokeswoman, Wendy Hall, said the sales were "pre-cleared with the legal department per company policy." She said the sales were made during a "window" before Aug. 31 in which "there were no trading restrictions imposed on executives due to inside information." The stock sales are not part of the SEC investigation.
Halliburton does everything from making drill bits and pipeline to building natural gas plants. The 83-year-old company provides a vast range of products and services to the energy industry, from exploration to production and maintenance.
When Cheney left, outward signs were good for Halliburton. On July 27, Deutsche Banc Alex. Brown analysts wrote that "quarterly earnings have impressively turned the corner, in our opinion." Even as late as Oct. 16, Jefferies & Co. analysts wrote that "Halliburton's earnings should show greater growth momentum in 2001 as the Engineering & Construction business turns decidedly more positive."
But on Oct. 24, Halliburton delivered a different message in a conference call with analysts: Despite its strong current earnings, Halliburton was encountering weak orders and high costs in its engineering and construction businesses -- about a third of the company. To rectify matters, it announced plans to combine the unit's two businesses, essentially reversing Cheney's strategy, which was to make each stand alone.
The change would lead to asset sales, layoffs and a $120 million after-tax charge against earnings. Cheney's successor, David Lesar, told analysts he was "not at all satisfied with this situation," and analysts sharply reduced their earnings forecasts. Halliburton's Hall said plans for the overhaul were made after Cheney left.
The news, coming a day after Halliburton acknowledged it was the target of a federal grand jury investigation related to overbilling of the government at Fort Ord in California, was a surprise.
By Nov. 13, Jefferies wrote that "Halliburton's stock has lost between $3 billion and $4 billion of total market value." The researchers attributed half of that to the bad news about the engineering business, and half to worries about Halliburton's asbestos troubles "since Owens-Corning filed for bankruptcy protection" in October.
Lately, much of the news coverage of Halliburton involves the SEC probe, announced in May, into an apparent 1998 change in the company's accounting practices. The change allowed Halliburton to increase revenue by $89 million in the fourth quarter of 1998 by postponing possible losses from customers' nonpayments.
Lesar, in an interview with Newsweek, defended the accounting treatment as a long-standing practice and said Cheney knew about it. Hall confirmed that "the vice president was aware we accrued revenue on unapproved claims in accordance with generally accepted accounting principles." Cheney, in a 1996 promotional video, praised Halliburton's accountants, Arthur Andersen, for their advice "over and above the, just sort of the normal by-the-books audit arrangement."
Whatever the SEC finds in its investigation, the matter is not of major financial importance to Halliburton, which had revenue of $13 billion last year.
As a financial matter, Halliburton's overbilling of the government at Fort Ord is even less significant. It agreed in February to pay $2 million to settle the accusations from a former employee of Halliburton's Brown & Root subsidiary who said his superiors told him to bill the government for work not performed at the military base from 1994 to 1998.
When Halliburton announced the grand jury inquiry in October 2000, the Bush-Cheney campaign suggested the prosecution was politically motivated. Daniel Schrader, the lawyer for the whistle-blower, said he has "circumstantial evidence" suggesting the overbilling is "a company-wide practice," but he could not prove it.
Such accusations are directed at the area in which Cheney most excelled at Halliburton: government business. In his five years, the company obtained $2.3 billion in federal contracts, up from $1.2 billion the previous five years, according to the Center for Public Integrity. Halliburton also received $1.5 billion in guaranteed or direct loans from government lenders, up from $100 million in the previous five years.
Halliburton said it does not overbill. "We have a long and successful relationship with government agencies," Hall said.
By far the greatest threat to Halliburton is the huge asbestos liability incurred in the 1998 purchase of Dresser Industries for $7.7 billion. In a quarterly report issued Aug. 10, 2000, six days before Cheney's departure, Halliburton was sanguine, setting aside reserves of $24 million for cases involving the cancer-causing material. Though adverse court rulings could change matters, the company wrote, "we believe that the pending asbestos claims will be resolved without material effect on our financial position."
Even after the October bankruptcy filing of Owens-Corning, also a target of asbestos lawsuits, Halliburton did not change. "Although there is no guarantee," analysts at A.G. Edwards & Sons wrote Oct. 25, "management does not anticipate increasing the accrued liability beyond the current level." On Nov. 9, Jefferies wrote: "Halliburton believes that insurance should cover most of the litigation costs or settlements."
But 2001 brought evidence to the contrary. In June, it became known that Harbison-Walker Refractories, which Dresser had spun off in 1992, could not pay asbestos claims against it, and the victims would go after Halliburton. By year's end, Halliburton had raised its reserves to $125 million as the number of open claims against it grew to 274,000 from 129,000 earlier in the year. Credit rating agencies downgraded Halliburton's debt.
Early this year, Halliburton acknowledged that it has no idea what its asbestos liabilities may be and that its reserves "may not be sufficient." As Harbison-Walker headed into bankruptcy proceedings, Halliburton hired experts to estimate the liabilities; a report is due this year, which could allow Halliburton to reach a settlement next year.
Investors, meanwhile, are betting the liability is $8 billion to $9 billion, based on the amount Halliburton's market value, now just under $6 billion, has been discounted relative to others in its industry without asbestos woes.
The best hope for Halliburton, investors and analysts say, is for the federal government to pass a law limiting damages that can be claimed against former asbestos makers. Bush had planned to do just that by including a "tort reform" proposal in his State of the Union address in January. But Bush ultimately decided against calling for that, leaving the impression on Wall Street that the administration could not press for limits on asbestos damages -- because of Cheney's history at Halliburton.
© 2002 The Washington Post Company
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