Harken Papers Offer Details on Bush Knowledge

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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.

2002 The Washington Post Company

-- Cherri (whatever@who.cares), July 14, 2002

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