Board was told of risks before Bush stock sale
Harken memo went to SEC after probe
"The crucial question is whether Bush was motivated to sell when
he did by information he learned at the special meeting of Harken
directors on May 17, five weeks before he sold his stock"
boston.com Harken memo went to SEC after probe
By Michael Kranish and Beth Healy, Globe Staff, 10/30/2002
W ASHINGTON - One week before George W. Bush's
now-famous sale of stock in Harken Energy Corp. in 1990,
Harken was warned by its lawyers that Bush and other members
of the troubled oil company's board faced possible insider trading
risks if they unloaded their shares.
The warning from
Harken's lawyers
came in a legal
memorandum whose
existence has been
little noted until
now, despite the
many years of
scrutiny of the Bush
transaction. The
memo was not
received by the
Securities and
Exchange
Commission until
the day after the agency decided not to bring insider-trading
charges against Bush, documents show.
The memo, a copy of which was obtained by the Globe, does not
say directly whether Bush would face legal problems if he sold his
stock. But it does lay out the potential for insider-trading
violations by Bush and other members of the Harken board, and
its existence raises questions about how thoroughly the SEC
investigated Bush's unloading of $848,000 of his Harken stake to
a buyer whose name has not been made public.
The SEC cleared Bush after looking into whether he had insider
knowledge of an upcoming quarterly loss at Harken. But the SEC
investigation apparently never examined a key issue raised in the
memo: whether Bush's insider knowledge of a plan to rescue the
company from financial collapse by spinning off two troubled units
was a factor in his decision to sell.
The plan engineered by one of the company's largest
shareholders, the endowment fund of Harvard University, raised
uncertainty about the value of Harken after the breakup. The
question is, did Bush sell believing that the stock might soon dip?
''It would certainly have raised a
question in the mind of a reasonable
investigator,'' said Theresa
Gabaldon, a professor at George
Washington University and author of
the textbook ''Securities Regulation.''
Gabaldon, who reviewed the
documents at the request of the
Globe, also examined company
minutes related to the move to split
up Harken through what is called a
''rights offering'' and concluded that
they would have been worthy of
further examination by securities
regulators. But, she said, ''I don't
think [the SEC investigators] were
looking at the rights offering at all.''
The Globe contacted four former SEC
officials who worked on the Bush
case; none of them recalled seeing
the memo in question. None would
speak about the case on the record,
but a July 1991 memo from the SEC
investigators to their boss reveals
that they were having difficulty
securing documents from Bush, who
was holding many items back, saying
they were private correspondence
between him and his lawyer.
''Bush has produced a small amount
of additional documents, which
provide little insight as to what
Harken nonpublic information he
knew and when he knew it,'' the
memo said.
The SEC nevertheless cleared Bush
on Aug. 21, 1991. One day later
Bush's lawyer - Robert Jordan, now
the US ambassador to Saudi Arabia -
turned over the legal memorandum
outlining concerns about insider
trading. The nine-page memo, dated
June 15, 1990, was titled ''Liability
for Insider Trading and Short-Term
Swing Profits'' and addressed the
possibility that Harken board
members might know more about
the spinoff plan, which included a
stock rights offering, than the
general public did.
The memo, did not instruct the
board members whether to sell. One
week after the memo was written,
Bush sold his stock. In the following
six months, the stock price dropped
from $4 per share to $1.25 per
share, although the price later
recovered.
White House spokesman Dan
Bartlett said the memo does not
suggest that Bush refrain from
selling the stock. Bartlett also said
that the memo was sent to the
Harken board, of which Bush was a
member, but did not mention Bush
by name.
''This is a general memo that goes
through the perfunctory guidelines
of a rights offering,'' Bartlett said. ''It
was not specific to the transaction
that the president was
contemplating.''
SEC reports on the case make it
clear, however, that the memo was
written in response to Bush asking
Harken executives whether he could
sell his shares. Bartlett said he did
not believe that Bush had seen the
memo, but instead thought that
Bush was told about the advice by a
company lawyer.
The memo raised a specific concern
about the insiders' knowledge of the
rights offering, which split Harken
into three entities. The plan was
recommended by Harken board
member Michael Eisenson, the
Harvard Management executive in
charge of the university's Harken
investment. Eisenson was trying to
save the company from bankruptcy,
according to board meeting minutes.
Eisenson has declined to be
interviewed.
In 1990, Harken, a small,
Texas-based energy company, was
Harvard Management's
seventh-largest stock holding. The
investment, made in 1986, had been
part of an ill-timed plunge by the
university endowment into the energy sector. There has been
speculation that Bush's presence on the Harken board attracted
Harvard to the company. But former Harvard executives and
others with knowledge of the Harken investment said Bush had
nothing to do with the fund's investment.
The crucial question is whether Bush was motivated to sell when
he did by information he learned at the special meeting of Harken
directors on May 17, five weeks before he sold his stock . The
meeting was held at a moment of crisis for the company, which
was expected to run out of cash within three days, according to
internal documents. One Harken memo related to the rights
offering says the company had ''no other source of immediate
financing'' if the deal was not completed. Indeed, the offering was
necessary to get leniency from Harken's two lenders, the former
Bank of Boston (now part of FleetBoston Financial) and First City
Bank of Texas. The major shareholders, led by Harvard, had to put
up financial guarantees to seal the bargain.
Meanwhile, Bush was pondering the sale of most of his own
Harken holding, which he came into in 1986 when Harken bought
out his interest in another failing oil venture, called Spectrum 7.
Bush has said that a Los Angeles stockbroker, Ralph Smith,
called him in early June 1990 to ask if he would sell his Harken
shares to one of Smith's clients. Bush said no, but said he might
be interested in selling ''in a few weeks,'' according to the SEC
memo.
Shortly after the Smith call, Bush asked Harken's general
counsel for advice. The counsel, in turn, asked Harken's law firm,
Haynes and Boone, whose advice included this warning: ''The act
of trading, particularly if close in time to the receipt of the inside
information, is strong evidence that the insider's investment
decision was based on the inside information. ... Unless the
favorable facts clearly are more important than the unfavorable,
the insider should be advised not to sell.''
The memo notes that in Harken's May 22 announcement, it ''does
not disclose the purchase price for which the rights will be offered
and expressly states that `additional terms of the proposed rights
offering are currently being formulated.'''
The price would not be announced until Oct. 3; that's when
investors would know how much they would have to pay to buy
shares in spun-off companies. The Globe could not determine
when Bush and other board members learned what the price
would be.
One week after the memo was written, Bush sold his shares on
June 22 via the broker, Smith. Smith could not be reached for
comment, but has been quoted as saying the buyer was an
institution that he would never reveal.
Nearly a year would go by before the SEC investigated the
transaction, a delay caused in large measure because Bush was
late in notifying the agency of his insider sale.
During the SEC investigation, Bush's lawyer was asked by the
SEC what advice was given to Bush about selling. The Bush
lawyer told the SEC that no objection to the sale was made by
Harken's law firm. ''Haynes and Boone informed [Bush] that they
had met internally to consider the issue and, based upon the
information they had, they saw no reason why Bush could not sell
his shares,'' the SEC report said.
The summary was released a day before the agency received the
legal memo in which Harken and Boone offered much more
cautious advice to Bush and the board. Jordan could not be
reached to discuss the apparent conflict. The SEC investigators
also declined to comment.
Harken remains financially troubled, with its stock trading at 22
cents a share. It is currently in the middle of another effort to
raise capital.
As for Bush, he has often said that he could not be faulted for
insider trading because he was selling into good news; the prior
January Harken had entered into a deal to drill for oil in the
Persian Gulf nation of Bahrain.
Michael Aguirre, a California securities lawyer who filed the
original Freedom of Information request that led to the release of
some of the documents, said he is astonished that the SEC did
not investigate the rights offering. |
