 |
||||||||
 |
||||||||
|
||||||||
|
Bush built success on Harken sale
© St. Petersburg Times Twelve years and 30 days ago, George W. Bush sold most of his stock in Harken Energy Corp. Now the echoes of that deal are undermining his campaign to rein in corporate wrongdoers, calm investors and revive plummeting stock markets. The basics of Bush's entanglement with the Dallas oil exploration company can be told in three paragraphs: In 1986, Bush joined the board of Harken when the struggling oil exploration company bought out another money-losing oil company that had, in turn, bought his troubled Bush Exploration Oil Co. Bush was paid in Harken stock, consulting fees, discounted stock options and low-interest-rate loans by the company. In June 1990, a fateful month for Bush, he sold more than 200,000 Harken shares for nearly $850,000. But he neglected to file a required form with the Securities and Exchange Commission until eight months later. When Harken soon reported an unexpectedly big loss and Iraq's Saddam Hussein invaded Kuwait, company shares plummeted from $4 to as low as $1.25 before the year was out. That's when those questions -- the same critical ones being asked this summer -- began to arise. Did Bush know bad news was coming when he sold? Did Bush just forget to file some of the disclosures required by the SEC when directors sell shares in their companies? Or was this some glitch caused by the inattention of Harken lawyers? Bush filed an initial disclosure with the SEC indicating his intent to sell shares. But he has given several explanations for the 34-week delay in filing a report on the specific sale. "I still haven't figured it out completely," Bush said this month. Why did Bush sign off on the same type of loss-hiding accounting that ruined Enron and WorldCom? Bush was a director in 1989 when Harken booked a cash gain after selling its Aloha Petroleum subsidiary to insiders who used money borrowed from Harken. That deal caught the eye of the SEC, which in 1991 forced the company to restate its earnings and show a big loss for 1989. The sequence of events poses another dilemma. When Bush sold his Harken stock in 1990, it was the year after the company cooked the books and a year before the SEC demanded a restatement of earnings so Bush was selling when the stock was artificially inflated. The stock sale is important for another reason. The profits from the Harken shares allowed Bush to join the investor group that bought the Texas Rangers baseball franchise. When Bush and his co-owners sold the major league team in 1998, then-Texas Gov. Bush reaped $15-million, setting the financial stage for his run for president. "My pet belief, and I think it's grounded in some good research and reality, is that George W. Bush would not be president of the United States today if not for that starting point of this controversial Harken sale," Bill Minutaglio, author of the Bush biography, First Son: George W. Bush and the Bush Family Dynasty, said on ABC's Nightline Thursday. Since delivering his "corporate responsibility" speech July 9 on Wall Street, Bush has faced these and tougher questions each time he talks of cracking down on corporate fraud and accounting scams. The president's supporters scoff at efforts to turn the long-ago Harkin deal into an Enron scandal -- or another Whitewater affair. But critics ask whether Bush can provide the leadership needed to fix corrupt corporate business practices when he has had dubious deals of his own. Then there's Vice President Dick Cheney, whose past job was as CEO of Halliburton Co., which is under SEC investigation for accounting shortcuts. And there's Army Secretary Thomas White, the former Enron executive, who sold $12-million in Enron stock prior to the company's bankruptcy and allegations of phony accounting. More than 67 percent of those surveyed in a New York Times/CBS News poll last week said the administration was more keen on protecting the interests of large companies than those of ordinary Americans. That concern was expressed by more than a third of Republicans and most Democrats. Bush insists his Harken dealings are old news and were investigated by the SEC with no action being taken against him. "Everything I do is fully disclosed," he said. "It's been fully vetted." The Harken dealings received some attention in Texas during Bush's campaigns for governor, but they were little-known nationally until now. And even if there's no smoking gun of Bush wrongdoing, Harken is worth studying because it played a key role in transforming Bush from a failing Texas businessman to a multimillionaire on the political fast track. In the late 1970s, three years after graduating from Harvard Business School, Bush decided to follow in his father's energy business footsteps. He returned home to Midland, Texas, where he incorporated his oil-drilling venture called Arbusto (that's "bush" in Spanish) Energy. About $3-million poured into Bush's business from uncle Jonathan Bush, a Wall Street banker; grandmother Dorothy Bush; Rite-Aid drugstore chairman and influential Republican Lewis Lehrman; William Draper III, a corporate executive and family friend who would soon be appointed to head the federal Export-Import Bank; and James Bath, a Houston aircraft broker who fronted as an investor for several Saudi Arabian sheiks. By 1982, with his father serving as the country's vice president, Bush changed the Arbusto name to Bush Exploration Oil Co. with plans to take it public. But oil prices were falling and the company soon ran into financial trouble. Several wealthy benefactors helped with money, including Philip Uzielli, a friend of James Baker III, a family confidante serving as chief of staff in the Reagan White House. Uzielli bought 10 percent of Bush Exploration for $1-million, though the company was valued at less than $400,000. Bush insists this was no bailout. Uzielli had invested for the "romance" of energy and, perhaps, the chance to buy low, Bush told Time magazine. Uzielli recalled in 1999 that the investment was a major money loser. "Things were terrible," he said. By the mid 1980s, Bush Exploration was again in money trouble. Enter two Cincinnati investors -- William DeWitt Jr., son of the former owners of the Cincinnati Reds baseball team, and business partner Mercer Reynolds, who controlled a small energy business called Spectrum 7. They merged with Bush Exploration and chose Bush as chairman and CEO. Though more money was raised, losses at Spectrum 7 grew. In 1986, struggling Spectrum 7 was acquired by the larger Harken Energy, a Dallas company known by industry figures as a "bottom feeder" and run by Republican fundraiser Alan Quasha. Harken's major investors included billionaire currency speculator George Soros, Ivy League university fund investor Harvard Management Co., and, after Bush joined the board, Saudi investor Abdullah Taha Bakhsh. As part of the Spectrum buyout, Bush received Harken stock and was named a Harken director and paid consultant. He also gained membership in a group of Harken officials who could exercise options to buy company stock at a 40 percent discount, an unusual perk. Bush later received two low-interest loans from the company -- a corporate practice Bush now says should be stopped -- that were worth $180,375 by 1992. It wasn't Bush's oil expertise that earned him these financial gains. Harken viewed Bush's famous name as an important asset. "It's obvious why they kept George Bush," Harken founder Phil Kendrick has been quoted as saying. "Just the fact that he's there gives them credibility." Harken directors believed having "George's name there would be a big help to them," said Spectrum 7's former president, Paul Rea. In 1988, Cincinnati investor DeWitt called Bush to tell him that aging oil executive Eddie Chiles, the owner of the Texas Rangers and a Bush family friend since the 1950s, was looking for a buyer. Bush and DeWitt, passionate baseball fans, assembled an investor group. At first, the group lacked deep pockets and enough local Texas participants to please Major League Baseball commissioner Peter Ueberroth. To ensure the Rangers stayed in Texas, and to bolster a pet project of the oldest son of the new U.S. president, Ueberroth recruited Fort Worth financier Richard E. Rainwater, the former hotshot money manager for the billionaire Bass brothers, to take charge. Rainwater agreed to invest millions, but only after his trusted associate, Edward "Rusty" Rose, was installed as general managing partner. With new money, the group bought the Rangers from Chiles for $86-million. Though Bush scraped together only $606,000 to invest, he was made a managing partner. The Rangers investors tagged Bush, with his now-famous name, to serve as the group's face to the public. That role suited the affable Bush perfectly. In turn, the Texas baseball team (and soon, a brand new taxpayer-subsidized stadium in Arlington, near Dallas) gave Bush a base -- after a decade of failures in the oil business -- to start building a political image in the state. If the Rangers deal looked like a home run, Harken was a foul ball. As a member in 1989 of Harken's audit committee, Bush signed off on a deal, similar to recent shenanigans by Enron, that inflated company earnings. Here's how it worked: Harken decided to lend money to a partnership of company insiders, which used the money to buy Aloha Petroleum, a Harken subsidiary that owned gas stations in Hawaii. By Harken's way of accounting, the twisted transaction created a multimillion-dollar instant "profit." Harken then recorded a gain of $7.9-million and finished the year with a modest $3.3-million loss. That was a good performance year for Harken. In reality, the loss was much worse. The SEC later would demand that Harken restate its earnings. By 1990, Harken's luck had changed for the better. In a decision that shocked industry experts, Bahrain dropped its negotiations over offshore oil and gas rights with international energy giant Amoco. Instead, the tiny Persian Gulf nation handed a 35-year contract to the struggling and inexperienced Harken. Bush denied he was a factor in Bahrain's unusual decision, and Harken board members said Bush voiced doubts about whether Harken had the means and expertise for such a distant oil play. Later, Harken executives acknowledged that Bahrain officials were quite aware that the son of the U.S. president was a director. One result of the Bahrain contract was immediate. Harken stock rose from $4.50 to more than $5.50 a share. But an unprepared Harken lacked cash and had to bring in the Bass brothers as equity partners to finance the drilling. Several years later, after two exploratory wells were drilled in Bahrain and found dry, the Bass partners told Harken they were pulling out of the Bahrain joint venture. On June 22, 1990, Bush sold $848,560 worth of Harken stock, about 21/2 times its original value, for just more than $4 a share. Even with a $180,375 loan to pay back, Bush realized $668,185 on the sale. He still owned more than 100,000 Harken shares. This is the stock sale that would pay for most of Bush's stake in the Texas Rangers. A fascinating mystery: Who bought Bush's shares in Harken? Ralph Smith, who was then an institutional trader for Sutro & Co. in Los Angeles, said he called Bush on the off chance he might want to sell Harken shares. Smith, retired from Sutro, told the Los Angeles Times this month that Bush said he would check to see if "he could legally sell" his shares before agreeing to do so. The institutional buyer has never been identified, and Smith won't say. In what would become Bush's most enduring business controversy, the Harken director filed a Form 144 with the SEC announcing his intention to sell a large block of stock. But he also was supposed to file a Form 4 after the sale that documented the specific transaction. The filing did not occur for 34 weeks, until April 1991. At first, Bush blamed the late filing on the SEC for losing his paperwork. But now he says the fault lies with Harken's lawyers. Bush failed to file required followup reports with the SEC on four separate Harken transactions over several years. After joining Harken's board, the company gave Bush a $96,000 loan at 5 percent interest, with an eight-year holiday on principal repayments, so he could buy 80,000 shares of company stock. Bush missed SEC deadlines for giving notice of both these acquisitions by nearly four months. Bush got a second loan of $84,375 in 1989 to acquire 25,000 shares. This time, Bush missed the SEC filing deadline by 15 weeks. In August 1990, two months after Bush's big sale of Harken stock, the company disclosed an unprecedented quarterly loss of $23-million. The same month, Hussein invaded oil-rich Kuwait. Both events drove Harken shares down to $3, then to $1.25 near the end of the year. Bush, a member of Harken's audit committee, denied he knew of the upcoming quarterly loss when he sold his shares. But before the June sale, Bush served on Harken's "fairness committee" to determine whether a corporate restructuring would hurt shareholders. The committee met in May (the month before the stock sale), had access to details of Harken's big financial problems and worked closely with financial adviser Smith Barney, which concluded at the time that only drastic action would save Harken. How bad off was Harken? By the end of 1990, the company posted a $40-million annual loss. Its shareholder equity had plunged to $3-million, down from more than $70-million in 1988. In 1991, the SEC had completed its investigation of Harken's funny accounting for the sale in 1989 of its Aloha Petroleum subsidiary. The agency ordered Harken to restate its 1989 earnings, meaning that the company's $3.3-million loss was larger: $12.6-million. Asked this month why Bush and other members of Harken's audit committee didn't see that this Enron-like deal would not pass SEC review, the president responded: "In the corporate world, sometimes things aren't exactly black and white when it comes to accounting procedures." By April 1991, Bush's long overdue Form 4 filing of his stock sale in 1990 had arrived at the SEC. The tardy filing and suspicious timing of the sale shortly before Harken reported a heavy loss prompted the SEC to open an investigation of Bush's transaction. That Bush sold Harken shares in 1990 at a price propped up, in part, by faulty 1989 accounting has never been addressed by the SEC. The SEC investigation of Bush ultimately would be closed without action being taken against the president's son. But the major players in the 1991 SEC inquiry read less like investigative watchdogs and more like an invitation list to a Bush family picnic. SEC chairman Richard Breeden, appointed by President George Bush, was a former Baker & Botts attorney and longtime Bush administration aide. The SEC's general counsel was James R. Doty (he recused himself in the Bush matter), the same lawyer who earlier represented George W. Bush in his purchase of the Texas Rangers. Doty, too, is a partner with Baker & Botts. Defending Bush in the SEC investigation was Robert W. Jordan, another lawyer with the Baker & Botts law firm and a former partner with Doty. In October 2001, Jordan would be confirmed as President George W. Bush's choice as U.S. ambassador to Saudi Arabia. And James Baker III, secretary of state under the first President Bush, is the current "Baker" in Baker & Botts. Bush agreed to be interviewed by the SEC, but investigators did not take him up on it, provoking skepticism from some government officials about their thoroughness. Bruce Hiler, SEC associate director of the enforcement division, later said he faced no political pressure in the investigation. "Of course we were aware we were dealing with the president's son," he said. "But it wasn't intimidating at all." Hiler, who left the SEC in 1994 for private practice, now represents Jeffrey Skilling, the former CEO of bankrupt Enron Corp. By the fall of 1993, the SEC ended its inquiry. Hiler sent a letter to Bush's attorney saying "the investigation has been terminated as to the conduct of Mr. Bush, and that, at this time, no enforcement action is contemplated with respect to him." With the SEC inquiry over, Bush resigned in late 1993 from the Harken board to pursue his successful run for governor of Texas. By 1998, Bush had served four years as Texas governor and was preparing for a second term. He also was ready to unload his stake in the Texas Rangers. After buying the team for $86-million in 1989, Bush and his co-owners sold the franchise in 1998 to media mogul Tom Hicks for $250-million. Bush, who held a mere 1.8 percent stake in the Rangers, was paid 12 percent of the sales price in 1998. That unusual boost dramatically enhanced the deal's return to Bush, an elected official. On a borrowed $606,000 investment that should have returned $2.5-million, Bush received $15-million. His transformation from business failure to success was complete, with help from family friends all along the way. Said Bush, in a favorite line about his wheeling-and-dealing era in private business: "I was a pit bull on the pant leg of opportunity." -- Information from Times wires was used in this story. Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.
 © 2006 • All Rights Reserved • St. Petersburg Times
490 First Avenue South • St. Petersburg, FL 33701 • 727-893-8111 
|
From the Times wire desk
From the AP |
