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.
Questions have also resurfaced about Bush's late filing of the insider-trading form when he sold his Harken stock. Though he made the sale in June 1990, the SEC did not receive his notice -- known as a Form 4 -- until March 4, 1991, eight months after the sale.
Bush's inconsistency in answering questions about the sale, and the late filing, have only raised more questions. Ten years ago, Bush blamed the SEC, saying the commission lost the Form 4. But when questions about the probe resurfaced last week, Bush spokesman Ari Fleischer said it was a "mix-up" by the Harken's lawyers. When asked again about the late filing at a press conference Monday, Bush said, "As to why the Form 4 was late, I still haven't figured it out completely. But nevertheless, the SEC fully looked into the matter. They looked at all aspects of it, and they did so in a very thorough way. And the people that looked into it said there is no case."
The White House has shrugged off the Form 4 fudging as no big deal, but memos from Harken attorneys to Bush indicate the lawyers thought otherwise. An Oct 5, 1989, memo from Harken counsel Larry Cummings to Bush states: "I could not find where Form 4 had been filed covering the 25,000 shares you purchased this year ... If you have no record of filing one, please sign the enclosed 5 copies of a Form 4 and return them to me."
A Form 4 is required by the SEC whenever corporate insiders sell or purchase stock. In his corporate accountability plan outlined in the wake of the Enron collapse, Bush himself noted the importance of filing such forms promptly, stating, "Corporate leaders should be required to tell he public promptly whenever they buy or sell company stock for personal gain."
The White House has countered criticism of Bush's apparent hypocrisy by saying, in essence, that the Form 4 is a red herring. But their explanation has changed about why the form was not filed on time. Bush once blamed Harken lawyers for misplacing the Form 4, but another memo makes clear just how important Cummings thought the forms were. A Jan. 19, 1990, memo from Cummings to Bush notes changes in SEC laws regarding the forms. "Probably the most outstanding feature of changes in this rule will be the requirement that a disclosure be made by the company in its proxy or 10K concerning late Form 3 or 4 filings ... Please examine your records and files to be certain that this information is current concerning your beneficial ownership of Harken stock and there have been no other transactions since such date which have not been disclosed."
Bartlett has said that Bush's late filings of the Form 4s amount to a minor traffic offense -- "doing 60 in a 55." But California securities attorney Michael Aguirre, who once worked as an investigator for Sen. Sam Nunn, D-Ga., says Bartlett's assertion is "outrageous. I didn't realize some laws were more important than others when it came to SEC filings."
Others familiar with securities law say that Bush's late filing may be more rote procedure than smoking gun. "That sounds to me more like a bureaucratic screw-up than an intentional fraud," says James Sottile, a partner with the Washington firm Baach, Robinson & Lewis and a former staff attorney in the Division of Enforcement of the SEC. "If you were really intending to commit a fraud you wouldn't have filed the Form 144. The Form 144 would tell you that an insider was selling."
But Aguirre says it looks as though Bush deliberately tried to hide his sale. Unlike other forms filed by Bush, the one filed in early 1991 was not dated, a possible indication, Aguirre says, that the decision not to file the form was a deliberate attempt to mask Bush's insider trade.
The White House counters the argument by pointing out that Bush notified the SEC of his intent to sell -- by filling out a form known as Form 144 -- back in June 1990. But Aguirre says Form 144 is not an actual notice of intent to sell, it's simply a way of keeping someone's options open. Aguirre says market watchers looking for clues on insider actions will look at the Form 4, which must be filed not more than 30 days after an insider trade, not the 144.
But Sottile, for one, doesn't believe Bush intentionally misled the SEC. "I'm a Democrat, and not particularly a George Bush fan, but this one seems to be a stretch. You'd have to be a real conspiracy theorist to conclude that someone is committing a fraud, not by failing to file a form, but by filing it late," says Sottile. "What's the idea, that he was hoping to avoid notice by filing it late after he already filed the form saying he was going to sell? The filing of the 144 leads me to believe there can't be any evil intent on the late filing of the Form 4. Just doesn't make sense to me."
When asked why the form was undated, Bartlett said he did not know.
But the missing date was an aberration for Bush. The Form 144 filed by Bush on June 22 was dated alongside his signature. Similarly, a Form 3 filed on April 13, 1987, was dated properly, as was a Form 4 filed on April 2, 1987, as was a Form 4 received by the SEC on Oct. 6, 1989, announcing Bush's decision to exercise 25,000 options.
Bush has also changed his story about why he sold the stock. In 1994, Bush told the Dallas Morning news he "needed to liquefy" his Harken stock in order to pay off a loan he got to invest in the Texas Rangers. By the time the presidential campaign rolled around, he had changed his story, telling the Washington Post, "I didn't need to pay it off ... I did it because I just don't like to carry debt."