Papers Offer Details on Bush Knowledge
Motive for Stock Sale In '90 Remains
Mike Allen and George Lardner Jr.
Washington Post Staff Writers
14, 2002, Page A01
Washington Post Company
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.
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.
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.
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.
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
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
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.
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.
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.
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
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."
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.
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.
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."
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.
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."
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."
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.
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.
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.
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."
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
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."
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.
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.
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."
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.
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.
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
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.
did Bush know?
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."
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.
writer Lois Romano and staff researcher Madonna Lebling
contributed to this report.
2002 The Washington Post Company