Harken Energy Scandal
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The Harken Energy Scandal refers to a series of transactions entered into during 1990 involving Harken Energy. These transactions are alleged to involve either issues relating to insider trading, or influence peddling.
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[edit] Spectrum 7 Purchase
George W. Bush was a member of the Board of Directors at Harken Energy during the late eighties. This company was then owned by Khalid bin Mahfouz. At the time of the later Harken scandal (Refer Harvard connection below), Bush was a consultant to Harken Energy. George Soros was a major investor in Harken when it bought Bush's ailing oil venture, Spectrum 7 in 1986.
On September 22, 1986, Harken announced it had bought Spectrum 7, and George W. Bush joined the board of directors. Bush publicly said that Spectrum 7 would continue to operate in Midland, Texas, as a wholly owned subsidiary of Harken and that he would become an active member of Harken's board of directors.
He was given an US$80,000-a-year consulting contract (which was raised to US$120,000 in 1989), US$500,000 in Harken stock, and options valued at US$131,250.
During the course of his employment with the company and his tenure as a board member, he managed to acquire an additional $600,000 in Harken stock as member of Harken's Non-qualified Incentive Plan.
While on the board, Bush had accepted two loans from Harken totaling $180,375. He received them in 1986 and 1988 at a below-market interest rate of 5%. Bush used the money to buy stock in Harken under an incentive plan for board members. He later converted his stock holdings into stock options. The White House stated that Bush never exercised the options. These types of loans were an issue in the Worldcom and Tyco accounting scandals during the next decade.
There have been allegations that Spectrum 7 was not worth the money Harken paid for it. An April 1986 New York Times story described Spectrum 7 as less concerned with recovering oil than in creating tax shelters. The company specialized in selling limited partnerships, which generated generous write-offs before the tax laws were revised in 1986.
It was generally assumed that a premium had been paid for having George Bush Sr.’s ‘kid’ on the board. This was confirmed by David Corn (the Washington editor of The Nation magazine) in a short interview with George Soros who at the time was a part owner of Harken. Corn asked, “[C]an I ask you about some ancient history? . . What was the deal with Harken buying up Spectrum 7?” Soros answered, “I didn’t know him. He was supposed to bring in the Gulf connection. But it didn’t come to anything. We were buying political influence. That was it. He was not much of a businessman.”[1]
Had the White Knight Harken, not appeared, Spectrum 7 would have probably ended up in bankruptcy.
[edit] Debt Swap Transaction
In 1990, the US energy company Harken Energy entered into a business partnership called Harken Anadarko Partnership (HAP) with Harvard University which ultimately became the vehicle by which Harken Energy could transfer $20 million in debt to Harvard.
Harvard contributed $64.5 million worth of property. Harken contributed drilling operations valued at $26.1 million, which also carried $20 million of bank debt and liabilities. Harken held a 16% interest in the Harken Anadarko Partnership (HAP); Harvard owned the remaining 84%. The actual operation remained under Harken’s control, however. From 1990 until 1993 the Harvard-run HAP paid Harken about $1 million per year to operate the partnership's oil and gas.
Though made public, investors did not directly equate the transferred debt as a decrease in equity, allowing the share value of Harken stock to rise, and senior Harken managers liquidated their shares. See market liquidity.
Harvard Management, an independent fund that manages the university's endowment, invested heavily (almost $30 million) in Harken beginning in 1986 around the same time Bush was made director, at one point giving the fund one-third control of Harken. Bush, a graduate of Harvard Business School, could well have been what made Harken (a relatively little oil company in Texas) so attractive to Harvard Management.
[edit] Conflict Of Interest
Michael R. Eisenson, the former Harvard Management official who dealt directly with the Harken investment for it, not only dealt with Harvard's Harken investment, he also invested his own money in the company. Eisenson owned at least a few thousand shares of the company's stock and was given a position on the Harken board.
The Harvard Crimson raised questions about whether Eisenson had a conflict of interest in owning stock at the same time he was overseeing the investment for Harvard Management. In a May 1, 1991, editorial, The Crimson criticized what it said was Eisenson's ownership of 10,000 shares, saying that "traders cannot be trusted to make objective decisions about Harvard's investments when their personal interests are tied to the same companies."
[edit] Harvard Watch Reports
HarvardWatch - a coalition of Harvard students and alumni that monitors governance at the university - has published a series of reports that document the way in which the Ivy League university helped the oil firm Harken fashion Enron-type deals that hid debt and artificially elevated earnings.
It is seemingly identical to the modus operandi of most recent US corporate accounting scandals, though a Bush spokesperson denied any connection to Enron's practices, citing that Harken did not conceal its partnership with Harvard.
[edit] Bush's Stock Sale
During the early 1990s Harken continued to suffer cash flow problems. On May 20, 1990 an internal Harken memo warned that its financial position was such that it may not be able to meet the June 15 payroll.
On June 8, 1990, Ralph Smith, a trader for Sutro & Co., called Bush on behalf of an institutional client interested in buying a large block of Harken stock. Smith asked Bush if he was interested in selling. Bush said no, but added that he might be interested in about two weeks.
On June 15, 1990, lawyers from the firm of Haynes & Boone, which worked for Harken, sent a warning about selling on insider information. The memo to Harken staffers had the subject line Liability for insider trading and short swing profits.
A week later, Bush contacted Smith, and sold 212,140 Harken shares for $4 per share, netting $848,560. Despite having been put on notice by the company lawyer of the importance of filing timely insider reports only a few months before, Bush waited eight months before filing the required forms on the sale with the SEC. Bush used the money to repay a loan used to acquire his interest in the Texas Rangers, a baseball franchise.
Bush says he was unaware of the company's financial condition, despite sitting on Harken's audit board. Bush was investigated for insider trading by the SEC, but no charges were brought against him.
Things got even worse when the company announced on August 20, 1990 that it had a huge, unexpected loss of $23.2 million for the second quarter and its stock tanked 20% that day.
[edit] SEC Investigation
According to SEC documents, investigators concluded that neither Bush nor the rest of the company's hierarchy were aware of the magnitude of the loss at the time Bush sold his stock. The investigation was criticized on several grounds, including the fact that the subject of the inquiry, Bush, was never interviewed by the SEC.
A pertinent point here is that the SEC Commissioner had been appointed by President George H. W. Bush Sr., and its counsel had worked for Bush Jr. negotiating the purchase of the Texas Rangers.
On Oct. 18, 1993, an SEC memo declared 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. The letter also stated that the investigation's termination must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the investigation.[citation needed]
[edit] References
- Lewis, Charles. The Buying of the President 2004 : Who's Really Bankrolling Bush and His Democratic Challengers--and What They Expect in Return, Harper Paperbacks (2004), 528 pgs., ISBN 0-06-054853-3
- The Nation, "W.'s First Enron Connection: Update on the Bush Enron Deal," David Corn, April 3, 2002
- New York Times, "Corporate Conduct of the President: Bush Calls for End to Loans of a Type He Once Received," Jeff Gerth and Richard W. Stevenson, July 11, 2002
- The Boston Globe, "Harvard fund poured millions into Bush-connected oil firm: Family connection raised as factor", Michael Kranish, Page A12, July 18, 2002
- 1 David Corn's Blog at The Nation
