Harken Board Was Told of Risks Before Bush Stock Sale
Harken memo went to SEC after probe
By Michael Kranish and Beth Healy,
The Boston Globe
October 30, 2002
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.
''It was something they either overlooked or consciously avoided,'' he said. ''It appears that Mr. Bush had
insider information, that he was told that such insider information could be considered material, [and] was
given express warnings about what the consequences could be.''
Thus, Aguirre said, it is ''imperative'' that Bush allow the buyer of his stock to be identified because that
would clarify whether Bush knew the buyer and conveyed inside information to the buyer.
Go To Original
Harvard invested heavily in Harken
By Beth Healy and Michael Kranish
The Boston Globe
October 30, 2002
It was a moment of deep embarrassment in 1991 when Harvard University's prestigious endowment fund
admitted it had just experienced its worst loss ever. Jack Meyer, Harvard Management Co. president, said
at the time he hoped the fund would never again take such a big hit, a $200 million write-down.
Back then there was relatively little focus on one major reason for the loss: Harvard Management's large
and ill-timed bet on little-known Harken Energy Co., whose board included George W. Bush, then the son
of the US president and now the president himself. Even as losses mounted, Harvard Management bailed
out the troubled company, first by splitting up Harken and then by sheltering Harken's liabilities in a
partnership.
Indeed, even as Bush was dumping the bulk of his Harken holdings - about $848,000 in stock sold to a
buyer whose name has never been disclosed - Harvard Management plowed millions more into the firm.
Several former Harvard Management officials said in interviews that they wanted to pull out of the Harken
deal, but they said one man in particular - Harvard Management executive and Harken director Michael
Eisenson - resolutely insisted he could turn around the investment by pumping more money into it.
Interviews and reviews of documents by the Globe showed that Harvard's stake in Harken-related
investments was, in the end, nearly two-thirds larger than the university has ever previously acknowledged,
about $50 million. The Texas-based energy company was, in 1990, the seventh-largest stock holding in
Harvard's portfolio, bigger even than the university's stake in Exxon Corp. In all, Harvard Management risked
1 percent of the university's endowment in the small, struggling company, a surprisingly large bet by any
measure, but particularly given Harken's dismal prospects.
The Globe review also found no evidence to support the contention by some critics of Harvard
Management and some adversaries of Bush that its deep involvement in Harken was a political favor to the
Bush family.
Meyer, who previously has said only that the Harken investment was profitable and appropriate,
acknowledged in his first in-depth interview about the matter that the deal was hardly Harvard
Management's finest hour.
''This clearly did not work out as well as we had hoped,'' said Meyer, who has run the endowment since
September 1990. ''In our recollection, the presence or absence of Mr. Bush had no bearing on these
investment decisions.''
The controversy over Harvard Management's dealings with Harken - a controversy kicked up in large
measure by student and faculty allegations about what they view as questionable endowment investments -
began with what would prove to be a bad bet on the direction of oil prices.
It was in 1986 that the board of Harvard Management, a subsidiary established by the university to
manage its endowment, decided to pursue investments in the energy industry aggressively. Led by Robert
G. Stone Jr., an influential director with experience in the energy business, the board reasoned that oil
prices had hit rock bottom and were poised to rise, Meyer said. The group directed that the endowment
invest some 5 percent of its $5 billion in assets in private oil and gas companies, to take advantage of the
low prices and to stash some money in investments that might rise in value should the stock market falter.
One of the investments chosen by the Harvard fund was Harken. Meyer and former Harvard fund officials
said it was a ripe target because it was a small, depressed energy stock.
Some critics have suggested that Harvard made its investment in Harken solely because the son of
then-Vice President Bush was on the board. Harvard's initial investment in Harken was made within a
month of Bush's joining the company, but Harvard officials say Bush was not on the Harken board when the
university made its investment.
A half-dozen former top Harvard Management officials, several of whom said they are no fans of Bush,
said his presence was not a factor for them. To the contrary, several former Harvard Management officials
dismissed Bush as an out-of-touch board member whose value was overrated. Eisenson, who had control
over the investment, declined to talk about it.
Most suggestive to critics is the way Harvard Management poured more money into Harken after the
initial investment - and after Bush's father became president in 1988. Harvard bailed out Harken several
times and poured millions into the company in 1989, 1990, and 1991, all while Bush's father was president
and his son still a director of the firm.
In particular, questions have been raised for years about whether Stone - who was in the Texas oil
business and knew the elder Bush - influenced the investment. Stone, while acknowledging that he favored
the energy investment strategy, vehemently denied suggesting Harken.
''I never recommended Harken. I didn't know anything about them,'' Stone said in a telephone interview
from his New York City office in what appears to be his first interview about the matter. ''I don't tell them
what to invest in.'' He said that at the time of Harvard's investment, he knew then-Vice President George
H.W. Bush ''very, very slightly.''
''I was at Harvard the same year he was at Yale. I met him a few times, and that was that,'' Stone said.
''I had nothing to do with his administration.''
As for Bush's son, a graduate of Harvard Business School, Stone said, ''I don't know the current
president at all.''
So who brought the Harken deal to the Harvard fund?
Donald Bartlett, a spokesman for President Bush, said the conduit was an employee of Harken named
Gary Vibbard. The White House had not previously identified the go-between, and Vibbard could not be
reached for comment. Vibbard worked with Harken's chairman at the time, Alan Quasha, who came to
Boston to meet with Harvard Management officials about the deal.
Harvard's Meyer offered this elliptical summary: ''There were not too many degrees of separation
between Stone and Quasha.''
Quasha, a Harvard alumnus, declined comment.
Harvard Management officials said Bush's presence at the company meant little, and they deemed him
''not a serious player,'' as one former top Harvard fund official put it.
Eisenson, by contrast, was clearly a serious player. The Harvard Management investment executive
served on Harken's board and often formulated company policy. He also owned at least 10,000 shares of
Harken stock, which led the Harvard Crimson in 1991 to question whether he had a conflict of interest.
By January 1990, it appeared that Harvard's investment in Harken might pay off when the company got
the rights to drill for oil in the Persian Gulf nation of Bahrain. But by May 1990, it was clear the company
was in deep trouble. Led by Eisenson, the Harken board approved a plan to split off two entities, a natural
gas firm and a gas station chain, as part of a stock-rights offering. Around the same time, Bush needed
money to pay off a loan he used to invest in the Texas Rangers baseball team. On June 22, 1990, Bush
sold 212,140 of his 317,152 shares at $4 apiece and received about $848,000.
The sale has raised questions for years because the stock price dropped to $1.25 in the following six
months.
The name of the purchaser has never been disclosed.
''Harvard Management Company did not purchase Mr. Bush's Harken shares. We do not know who did
purchase the shares,'' Meyer said when asked whether anyone connected to Harvard Management or
Eisenson bought the shares.
Two months after Bush sold his stock, the company was still in serious financial trouble and the stock
price was dropping. Once again, Harvard Management came to the rescue. Eisenson developed a plan to
create a joint Harvard-Harken entity known as the Harken Anadarko Partnership. Bush, as a member of the
Harken board, made the motion to approve the proposal on Aug. 29, 1990. Under the deal, Harvard put
$64.5 million worth of unrelated energy properties into the partnership, while Harken contributed $26 million
in drilling operations. The benefit to Harken was that the deal took $20 million in liabilities off the company
books.
The Anadarko deal was risky for Harvard. It pushed the endowment's total stake in Harken to more than
$50 million, exceeding 1 percent of the total endowment, Meyer said.
The goal at the time, Meyer said, was to separate the drilling assets from the rest of Harken, which was
seen as troubled. Harvard wanted to focus on drilling assets, rather than gas stations or other oil-related
businesses, he said. ''We weren't interested in pumping more money into that.''
Meyer had much at stake personally. One of the first things he did when he took over the endowment in
September 1990 was insist that the private equity portfolio be valued by a third party and be accurately
reflected on the endowment's books. That meant taking the heat for a $200 million write-down, the worst in
the university's history. Nearly half of the fiscal 1991 write-down, or $92 million, was related to oil and gas
investments, including ailing Harken. Most of the other losses were in real estate.
Eisenson, former colleagues say, was dogged in his efforts to save Harken. There was his ego on the
line, as well as his own stake in the company and his Harvard paycheck. Meyer had instituted a system of
paying endowment managers handsomely, but only if certain benchmarks were met. Meyer said Eisenson
did what any serious institutional investor does with a deal that's in trouble: ''If he had not put in all that
work, we would have lost money with certainty.''
Harvard, in the end, made just shy of $20 million on Harken, according to an executive who worked on
the deal. That is a slim return considering that more than $50 million was invested over a period of 12
years. It wasn't until 1997 that Harvard cashed out 50 percent of its shares at a profit, Meyer said.
The Harvard fund's decision to invest in energy, including Harken, ''was a pretty good strategy,'' Meyer
said. ''But it was a decade too early.''
(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
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