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.