The Truth About Bush and Harken Energy Corp

Special Report
NOW

I keep hearing about George W. Bush and his dealings with a company named Harken. What was his relationship with Harken?

In 1986, Harken Energy Corporation purchased Bush's failing oil company for approximately 212,000 shares of Harken stock, then worth about $600,000. From 1986 to 1993, Bush served on Harken's board of directors. In addition to director's fees, Harken paid Bush between $80,000 and $120,000 a year as a consultant from 1986 to 1993.

That's impressive. It sounds like our MBA president was well respected in the corporate world, and Harken management recognized that.

Bush's ties to Harken were less about his abilities than about his connections. With help from his friends and family in the late 1970s, Bush formed the oil company Arbusto Energy Inc., whose name was eventually changed to Bush Exploration Co. Although this oil venture proved unprofitable, Spectrum 7 Corporation acquired it in a merger in which Bush became chief executive officer.

In 1986, when Spectrum 7 was on the brink of insolvency, Harken bought it, paying Bush and his partners roughly $2 million in Harken stock — Bush's portion being the 212,000 Harken shares. Spectrum 7 had reported losses of $400,000 in the six months preceding the sale and was more than $3 million in debt. According to the Center for Public Integrity, Bush's name and connections were the main reasons Harken was willing to offer so much to purchase the otherwise ruined Spectrum 7 and pay impressive director's and consultant's fees to someone who had yet to launch a successful business venture.

Well, maybe Harken hired Bush on something other than his merit. But, that is not what the hoopla is all about, is it?

No. There are several details about Bush's relationship with Harken that are making headlines. One of them concerns insider loans, which Bush — after benefiting from such loans — now says he opposes. Even more serious questions, many of which have yet to be unambiguously answered, surround Bush's 1990 sale of his Harken stock.

Whoa, wait a second. In the first place, what's the big deal if Bush got a loan? I've gotten mortgage loans, student loans, and other types of loans myself.

Insider loans — loans extended to executives, directors or major stockholders by the organization with which they are affiliated — usually offer generous terms that are not accessible to the average person. Insider loans also make it difficult to accurately appraise the value of a company's stock since they are not always clearly disclosed on corporations' financial statements, which can put stockholders and pensioners in jeopardy. For example, Adelphia's books recorded the approximately $3 billion in loans made to the its founder and his family with nothing more than a cryptic footnote. Often, insider loans are forgiven, or if the CEO quits or if the company fails, they are never paid back to the company.

Insider loans are one of the many factors behind the recent spectacular corporate collapses and the subsequent hemorrhaging of the stock market and people's investment and retirement accounts. WorldCom and Adelphia, for example, transferred hundreds of millions of dollars to their executives in loans, while the companies neared financial collapse and their stocks and workers' retirement accounts plummeted.

Do you have details about Bush's insider loans from Harken?

In 1986, Bush borrowed approximately $96,000 from Harken to purchase 80,000 shares of Harken stock. This loan was part of a generous stock option program that was available only to the corporate brass. Harken did not require repayment on the principal for eight years and charged Bush only five percent annual interest, well below the then-prevailing prime rate of 7.5 percent. You probably could never secure such terms for your home mortgage or any other loan. To secure the loan, Bush pledged the 212,000 shares of Harken he already owned, in addition to the 80,000 shares he purchased. In 1988, Bush borrowed another $84,000 from Harken to purchase an additional 25,000 shares of Harken stock on similarly favorable terms.

In 1989, according to the New York Times, Harken released the original 212,000 shares as collateral from the 1986 loan and removed "any personal liability to " on that loan. So if the value of the 80,000 shares dropped to less than the amount of the loan, Bush would not lose a dime, since all he had to do was return the collateral — the 80,000 Harken shares he had purchased. Indeed, Bush later returned the stock he had acquired through the insider loans, whereupon Harken cancelled the indebtedness.

Is this the only reason that the media is probing Bush's corporate past?

No. In light of the current stock market and corporate credibility crises, more troubling is Bush's 1990 sale of Harken stock. As a result of this transaction, the Securities and Exchange Commission, the government agency charged with protecting investors and regulating the securities markets, investigated Bush for insider trading in 1991. Insider trading — i.e., an executive officer's or director's trading in her or his own corporation's stock on the basis of non-public information — is a form of securities fraud that is a federal crime.

What exactly was the problem with Bush's sale of Harken stock?

The controversy centered around the fact that he sold the stock shortly before the company announced major losses; after that announcement, the stock's value dropped by more than half. Here is the chronology according to various reports:

* June 6, 1990: Bush (who was at the time on Harken's board and a member of its audit committee) received the company's "flash report," which according to the Washington Post, predicted second quarter losses in the neighborhood of $4 million.

* June 8, 1990: According to the Los Angeles Times, Ralph Smith, a stockbroker, placed a "cold call" to Bush offering to purchase his Harken shares. Bush said he would reply within a couple of weeks.

* June 11, 1990: Bush attended a meeting at which a representative of Harken's audit firm, Arthur Andersen, warned of a loss that "could be potentially significant." Although no amount was specified in the meeting, the auditors indicated that the losses would surpass the $4 million forecast in the "flash report." (In fact, Harken would ultimately report a loss of $23 million.)

* June 22, 1990: Shortly after getting the transaction approved by Harken's lawyers, Bush sold 212,140 of his 317,152 Harken shares for $848,560.

* July 10, 1990: Under SEC requirements, this was the deadline for Bush to publicly report his sale of the stock. He failed to file the report until March of 1991. For reasons Bush has not explained, although he signed the form, he did not date it.

* August 20, 1990: Harken publicly announced second quarter losses of just over $23 million. The stock, which had opened at $3 per share, closed at $2.37.

* August 21, 1990: Despite the losses reported the day before, Harken's stock price rebounded to $3 per share. However, the overall trend was downwards, and by the end of 1990 Harken's share price had dropped to $1. (Today, Harken's stock trades for about the price of a candy bar on the American Stock Exchange.)

Wow, that looks fishy. Did the SEC go after him?

CONTINUED...

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