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July 10, 2002 8:45 a.m. |
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ecently Senate Majority Leader Tom Daschle was asked whether President Bush's 1990 sale of stock in the Harken Energy Corporation undermined his credibility in dealing with today's corporate scandals. Daschle did not answer directly but said, "I think the president would do well to ask the Securities and Exchange Commission to release the file — release it all. Let everybody see just what is there. There have been some real questions, I think, about what happened."
On Monday, after the president's news conference in which he faced a long series of questions about Harken, Democratic National Committee chairman Terry McAuliffe joined Daschle's call. "Every day, more questions arise," McAuliffe said in an e-mail to reporters and activists. "President Bush should stop refusing to release his SEC files and let the American people, and not his lawyers, decide what is relevant."
The calls for SEC disclosure are the latest tactic in the Democrats' attempt to tie Bush to the issue of "corporate greed." While such statements are intended to suggest that Bush is covering up his role in the Harken matter, they ignore one important fact: There are already many SEC documents about Harken available to the public. The documents deal with the critical issues raised by Bush's stock sale, and they reveal the reasoning behind the SEC investigators' decision not to take any action against Bush or Harken. A close review of the documents supports statements made by the president and answers most, if not all, of the questions raised by his Democratic critics. Together with other publicly available information on Bush's business career, they suggest that Bush was correct when he told the press that as far as Harken is concerned, "there's no there there."
THREE QUESTIONS
In the 1980s, Bush ran an energy company called Spectrum 7. By 1986, with the oil market in a deep slump, the firm was in serious financial trouble. That year, another company, Harken Energy, which specialized in buying distressed oil properties, purchased Spectrum 7. Harken's management wanted Bush on its team — his father was then vice-president, and he had extensive connections, as well as knowledge of the oil and gas business. But Harken's officers did not offer Bush an executive role, instead giving him a seat on the board, a chunk of stock worth at least $500,000 at the time, and a consulting contract.
It was not a full-time job, and in 1987 and 1988 Bush devoted much of his energy to his father's presidential campaign. The next year, Bush got involved with a group of investors who were trying to buy the Texas Rangers baseball team. When the sale went through in March 1989, Bush borrowed $600,000 to purchase his stake in the team. At that time, his biggest single asset was his Harken stock, and he decided to sell the stock to pay off the baseball loan.
On June 22, 1990, Bush sold 212,140 shares of Harken at $4 a share, for a total sale of $848,560. Nearly two months later, on August 20, Harken announced a much larger than expected loss for the quarter that ended on June 30. In the months that followed, Harken's stock price drifted downward, hitting $1.25 per share by the end of 1990. When word of Bush's sale became public, Democrats charged that he had used inside information — he also served on the Harken board's audit committee — to sell the stock while he could still make a lot of money.
Bush denied any wrongdoing, but the allegations led to an SEC investigation. Commission experts looked into three questions: One, did Bush know in advance that Harken was going to post an abnormally large loss in August, 1990? Two, did Bush sell the stock with the intent of getting out while the getting was good? And three, did Harken's loss announcement lead to a stock downturn that hurt ordinary investors who had no inside knowledge of the company's workings?
According to several internal SEC memos written in 1991 and 1992 — they are available on the website of the public-interest group the Center for Public Integrity — investigators examined thousands of pages of documents given to them by Bush and Harken, interviewed several witnesses, and met with lawyers for Bush and the company (Bush waived attorney-client privilege to allow the SEC to interview the lawyers). On the first question, whether Bush knew in advance about the losses, the SEC investigators found that "the evidence establishes that Bush was not aware of the majority of the items that comprised the loss Harken announced on August 20." Most of that loss, according to the SEC, resulted from write-downs and expenses that occurred after Bush sold his stock — events that he did not know were coming. In addition, the investigators found that Bush played a "relatively limited role in Harken management." In that role, he usually did not receive what were called the Weekly Flash Reports on the company's financial condition; those reports were given only to the board of directors' executive committee. The result, according to an SEC investigative memo, was that Bush was not particularly up to date on the company's finances:
The staff's investigation indicates that, at most, Bush was aware that Harken was forecasted to lose approximately $4.2 million in the second quarter. [The actual loss eventually turned out to be more than five times that] Harken's financial reporting was on about a 45-day delay, so that in mid-June the numbers reflecting Harken's actual results in April would be available. Consequently, by June 22 (the date when Bush sold) no actual revenue or loss information was available for the second two months of the quarter ended June 30. Bush, however, did see the Weekly Flash Report for the week ended May 31, 1990, which reflected a projected net loss for April of $1,875,00, a loss for May of $2,029,000, and a loss for June of $327,000 (for a total of $4,231,000)....Flash reports for the first two weeks of June, which would have been in existence prior to June 22, were only circulated to the members of the Harken executive committee (of which Bush was not a member).
On the second question, whether Bush sold the stock deliberately to avoid losing money before bad news was made public, the SEC found that Bush made the sale after being contacted by a stockbroker who had an institutional client who wanted to buy a large block of Harken stock. When Bush decided to sell, he checked with Harken's in-house counsel, as well as the company's chairman, plus another director, and, finally, the company's outside counsel, to see whether there were any reasons the sale could not go through. No one raised any objections. "In light of the facts uncovered, it would be difficult to establish that, even assuming Bush possessed material nonpublic information, he acted with scienter or intent to defraud," the SEC concluded.
On the third question, whether the news of Harken's unexpectedly large loss hurt the company's investors, the SEC examined Harken's share price just before and just after news of the loss was made public. The announcement came at 9:34 A.M. on August 20, 1990. When the market opened that morning, according to the SEC, Harken's stock was selling at $3 per share. It stayed at that level until after noon, when it began a slow slide to $2.375 per share. The next day, however, it rebounded to $3 per share. If the loss announcement had been a bombshell, SEC investigators reasoned, the stock would most likely have fallen immediately and stayed down. "The conclusion of the Office of Economic Analysis is that, because the price of Harken did not immediately react to the earnings announcement and there is no news that explains Harken's return to its pre-announcement price of $3 on August 21, 1990, the earnings announcement did not provide investors with new material information," the SEC said. Furthermore, even though Harken stock moved down for the rest of 1990, it recovered its value — and more — the next year, when it hit $8 a share.
FORM 144 VS. FORM 4
In addition to the questions that have been raised about Bush's decision to sell his stock, there are also questions about when he informed federal regulators of the sale. Last week, New York Times columnist Paul Krugman wrote, "Oddly, though the law requires prompt disclosure of insider sales, [Bush] neglected to inform the SEC about this transaction until 34 weeks had passed. An internal SEC memorandum concluded that he had broken the law, but no charges were filed. This, everyone insists, had nothing to do with the fact that his father was president."
The documents tell a somewhat different story. Although Krugman did not mention it, Bush was required to file two disclosure forms with the SEC. One, which was known as a Form 4, was due the month after Bush made the sale. The other, known as a Form 144, was due at the time of the sale. Bush filed the Form 4 several months late, but he filed the Form 144 on time. In the view of some experts, the Form 144 was the more important of the two.
Bush filed the Form 144, officially known as a "Notice of Proposed Sale of Securities," on June 22, 1990, the day of the sale. In the form, he listed, among other things, how many shares he intended to sell, when he had originally acquired them, how much they were worth, and which broker would handle the transaction. "The 144 is probably the more market-informative form," says Edward Fleischman, who was an SEC commissioner between 1986 and 1992. "It gives market-watchers an indication of what is coming." In contrast, Fleischman says, "The Form 4 is totally retrospective and was originated for a very different purpose, to keep track of dates and prices." If the purpose of disclosure was to make regulators and investors aware of Bush's insider sale, then the Form 144 was the more important document.
Still, the law required that the Form 4 also be filed, and even though he had apparently done everything by the book up to that point, Bush did not file the form until March 1991, nearly 34 weeks late. Why did he wait so long to file? At various times through the years, Bush's advisers have suggested that he thought he filled out the form and believed it might have been lost, either inside Harken or the SEC. After Krugman raised the issue last week, White House spokesman Ari Fleischer attributed the late filing to "a mix-up with the attorneys." Then, at his news conference on Monday, the president admitted, "As to why the Form 4 was late, I still haven't figured it out completely."
Whatever the reason, the fact that the report was filed late, while a violation of SEC rules, does not seem particularly damning in the absence of any underlying wrongdoing that a late filing might have been intended to conceal — and especially in light of the fact that the Form 144 was filed on time. In addition, it appears that at the time Bush sent his form to the SEC, late filing was not seen as a very serious offense. "If it had come to the SEC's attention back then, somebody would have said, 'Get the bloody form filed,' and that would have been it," says Fleischman. "There was precious little attention paid to a timely or tardy filing of Form 4."
ALOHA, ALOHA
There is one last question about Bush's role in the Harken matter, a question which, like some of the allegations of insider trading itself, has come to the fore in the columns of Paul Krugman. In a July 7 article, Krugman wrote that Harken had engaged in Enron-style financial misdeeds while Bush was a company director. When Harken ran into money troubles in the late 1980s, Krugman charged, it "concealed its failure — sustaining its stock price, as it turned out, just long enough for Mr. Bush to sell most of his stake at a large profit — with an accounting trick identical to one of the main ploys used by Enron a decade later":
A group of insiders, using money borrowed from Harken itself, paid an exorbitant price for a Harken subsidiary, Aloha Petroleum. That created a $10 million phantom profit, which hid three-quarters of the company's losses in 1989. White House aides have played down the significance of this maneuver, saying $10 million isn't much, compared with recent scandals....But for Harken's stock price — and hence for Mr. Bush's personal wealth — this accounting trickery made all the difference.
Unlike the claims that Bush engaged in insider trading, which are convincingly refuted by the available evidence, there is not enough public information to know precisely what happened in the Aloha situation. But from what is known, it's possible to draw some preliminary conclusions about Harken and Aloha — and those conclusions do not support accusations that Bush engaged in wrongdoing.
Krugman writes that Bush either knew about the Aloha situation from the beginning or found about it when the SEC ordered Harken to restate its earnings. It is hard to know which is true; at his news conference Monday, the president himself said he didn't know. But the fact that the SEC ordered Harken to restate its earnings indicates that the Aloha matter had come under commission scrutiny. And the absence of any other SEC action against Harken indicates that, after that scrutiny, the commission's investigators believed that the Aloha situation did not merit any enforcement action against Harken.
According to people familiar with the workings of the SEC, questions about earnings are relatively common in the corporate world. When doubts are raised about a company's earnings, the SEC often enters into an extended exchange of letters in which it asks the company to defend its statement of earnings. At the end of that exchange, the SEC and the company often find themselves with a difference of opinion over how earnings should be counted; at that point the company, like Harken, usually agrees to do things the SEC's way. According to the those familiar with the situation, anywhere between 35 and 50 companies amend their annual reports each year after such dialogues with federal regulators.
In the Harken/Aloha case, the SEC's deliberations remain confidential, but it is known that the matter never reached the level of an SEC enforcement action against the company. If the commission's reviewers had concluded that Harken had done something clearly wrong, they would have most likely escalated the matter from a businesslike dialogue into a full-scale investigation. After that, they might have recommended some sort of civil, or even criminal, action against the company.
But that didn't happen. Instead, Harken, like many other corporations, restated its earnings as the SEC demanded. Despite some suggestions to the contrary, that was a far different situation from a case like WorldCom, in which the immense size of the earnings restatement prompted a far-reaching criminal investigation. From the circumstantial evidence that is publicly available, the charge that the Harken/Aloha matter is somehow of a piece with the worst of today's corporate scandals simply doesn't seem plausible.
MAKE MORE PUBLIC
That is what is known about George W. Bush and Harken. Although the story has attracted a lot of attention lately, it's not exactly news. As Bush's defenders have pointed out, over the years there have been a number of meticulous examinations of the issue, not only by the SEC but also by Texas newspapers and, later, the Washington Post, the New York Times, and several other national publications. Beyond that, Bush's political opponents have tried mightily to use the issue against him during campaigns in 1994, 1998, and 2000, with no success.
But the fact that the available evidence strongly suggests there is no merit to the Democratic allegations does not mean that Tom Daschle and Terry McAuliffe are wrong in their calls for more information. The documents that are available now were not formally released by the SEC, or by anyone else, but instead found their way into the public domain through back channels — perhaps through a congressional office, perhaps from some of those involved in the investigation, or perhaps from leaks inside the commission. The release of more information in a systematic way would undoubtedly help us know more about what went on inside Harken and the SEC.
But it would not, in all likelihood, change the basic story. We have seen the SEC documents in which investigators outlined their reasons for declining to take action against Bush, and it seems only reasonable to believe that if there were smoking-gun documents pointing to wrongdoing on Bush's part, the investigators would have reached a different conclusion, or at least dealt with those issues when they summarized the evidence. And even if they didn't, it seems likely that smoking-gun evidence would have emerged during the decade of politically charged scrutiny the issue has received.
Even so, it's probably safe to expect the president's opponents to keep hammering away on the Harken issue. Just because it's never worked before doesn't mean they'll stop trying.