It was Meulbroek's report on what happened to Harken's stock when the company announced its big second-quarter losses on Aug. 20 [1990] that tipped the scale.
If investors didn't view that report as "materially" affecting the company, and show it by selling off shares and driving down the price, there would be no case, the SEC lawyers concluded. And Meulbroek found that, in the end, it didn't.
Harken's stock on the American Stock Exchange opened at $3 a share on Aug. 20, her report stated. The earnings report came out at 9:34 a.m. that day. For three hours, nothing happened. Then, as the SEC's initial investigative documents indicated, the stock nose-dived by 21% in the afternoon, closing at $2.37.
But Muelbroek, reasoning that Harken was a thinly traded stock, decided to analyze the stock's movement on the following day as well, which was standard practice at the time. She discovered that the stock rebounded to recover all its losses of the previous day, closing at $3 on Aug. 21.
"Unless another reason exists for the price rebound on Aug. 21, the most likely explanation for the increase is that investors overreacted to the earnings announcement, recognized their error, and corrected it," her report said. "Such price reversals are rare but not unheard of."
The bottom line: The announcement had no "material effect" on the stock. So, even if Bush knew it was coming two months before, that knowledge was worthless, Meulbroek's findings concluded, although she said Friday, "We still don't know what caused the stock to rebound that day."
The critical paragraphs of this article:
The SEC did not exculpate Bush. Rather, its investigating attorneys concluded only that they lacked sufficient evidence to prosecute him for illegality or fraud.
Until today, not even Meulbroek is certain just why the stock didn't tank--one of the enduring mysteries in the case.
Who stepped up to buy Bush's stock, at a time when Harken was bleeding red ink and Bush was trying to raise cash to pay off the loan he used to buy into the Texas Rangers baseball team?
The mystery over the buyer's identity raises the question of whether someone was doing Bush a favor, and why.
In the end, two months after Bush's sale, when the company released its second-quarter 1990 report, it showed the far worse $23.2-million loss, which reflected write-downs related to the accounting of Harken's sale of a chain of Hawaiian gas stations that the SEC had ordered Harken to restructure.
Bush was a member of the audit committee and present that day when a representative of Harken's outside auditing firm told the members that "there was a potential write-down that might occur" during the quarter. That write-down "could be potentially significant, but the amount is not identifiable at this time."
We still don't know what caused the stock to rebound that day."
By the end of that year, Harken's stock had indeed tanked, selling as low as $1 a share.