President Bush has said that when he sold more than 200,000 shares in Harken Energy Corp. in June 1990, he did not know the company was in bad financial shape. But memos from the company show in great detail that he was apprised of how badly the company’s fortunes were failing before he sold his stock — and that he was warned by company lawyers against selling stock based on insider information.

Less than two months after Bush sold his stock, Harken announced a $23.2 million loss for the second quarter of 1990. Bush maintains he did not know Harken was going to report the loss and thought he was “selling into good news, not bad,” as close Bush advisor Karen Hughes told the American Spectator in 1999, pointing to the announcement of a new drilling contract in the Middle East island nation of Bahrain. White House spokesman Dan Bartlett reprised the “good news” argument in an interview with the New York Times on Wednesday.

Company memos and SEC documents obtained by Salon offer more insight into what George Bush knew about the financial condition of Harken — where he served on the board of directors and the audit committee — in the weeks leading up to his sale of more than 212,000 shares in Harken stock. And clearly, not all of it was good news.

On April 20, 1990, just two months before Bush sold his Harken stock, Harken president Mikel Faulkner warned the board of directors, writing that “two events have occurred which drastically affect Harken’s current strategic plan with regard to seeking public funds to reduce our debt and provide equity for current capital opportunities,” and that the development “greatly intensifies our current liquidity problem.”

On June 7, two weeks before Bush’s stock sale, Faulker provided Bush with a summary of a June 5 meeting of the company’s executive committee held in New York. The memo warned of a “Harken International shutdown effective June 30, unless third party funding [is] obtained,” and discussed plans to lay off 40 employees. The memo said the company had lost $28.5 million in trade credit since Jan. 1, and another $11.8 million was “in jeopardy,” and said “most companies that have seen [the company's annual report] are nervous.”

Bush has said he sold the Harken stock to pay back the loan he used to purchase his stake in the Texas Rangers. Luckily for Bush, a buyer came calling. On June 9, according to the SEC’s later investigation of insider trading charges against Bush, Los Angeles broker Ralph Smith “cold-called” Bush and said an institutional client was interested in buying a large chunk of Harken stock. According to later SEC memos, Bush said he wasn’t interested in selling at the time, but that he “might be in a few weeks.”

Meanwhile, Bush and his Harken colleagues received a warning about selling based on insider information. On June 15, 1990, one week before Bush’s sale, Harken attorneys at the firm of Haynes and Boone sent a memo to Harken staffers with the subject line “Liability for Insider Trading and Short-Swing Profits.”

“If the insiders presently possess any material non-public information, a sale of any of their shares could be viewed critically,” the memo states.

On June 22, Bush sold 212,140 shares in Harken for $4 per share, netting him $835,807. Bush was eight months late filing the forms for that sale to the SEC. On Aug. 20, 1990, Harken posted a loss of $23.2 million for the quarter. The stock fell that day from $3 to $2.35, but regained that loss by the end of the next trading day.

But Bush maintains he sold his stock as the company was preparing to announce good news. On July 23, 1990, Harken entered into a joint operating agreement with Bass Enterprises Production Company, in which Bass agreed to fund the initial exploratory drilling off of Bahrain to the tune of $25 million. While providing a momentary spike, the announcement failed to boost Harken stock over the long term. By the time of the earnings announcement, Harken stock was trading at $3, down from the one-day, post-Bahrain spike of $4.50.

The SEC later investigated whether or not Bush traded his stock in light of insider information that may have had an adverse impact on the company’s stock price. An April 9, 1991, SEC memo found Bush had filed late insider-trading forms on four different occasions, and that SEC staff had opened an investigation “with respect to Bush’s sale of 212,140 shares to [sic] Harken stock prior to Harken’s announcement on August 20, 1990 of a loss of $23.2 million.”

The SEC found that Bush had erred in filing late forms, but decided not to prosecute a case against him. In an October 1993 memo, the SEC 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.” But the letter states 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.

While the case against Bush did not go forward, many questions remain unanswered. Smith, the Los Angeles broker, insists he was approached by a client who, in spite of the company’s problems, eagerly wanted a large chunk of Harken stock. Both Smith and the White House dismiss allegations that the purchase was made by an investor interested in bailing out the president’s son.

Just who bought the stock remains a mystery. Records show that during the second quarter of 1990, only two institutional investors purchased large quantities of Harken stock. One was Harvard University, which owned 30 percent of Harken. The school purchased 918,450 shares during the spring of 1990. The other was a mutual fund management company called Quest Advisory, which purchased 357,900 shares. But the buyer of Bush’s stock, meanwhile, remained anonymous.

White House spokesman Dan Bartlett told the New York Times that Bush never knew the identity of the buyer and said it was “very far fetched” to assume the buyer knowingly helped Bush in a moment of need.