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USA: In Effort to Save Self Bush Undermines Reform

The Daily Enron
July 9th, 2002

Washington, D.C. -- The White House tried an old debating tactic yesterday - "address and dispose." The idea is to steal your opponent's thunder by addressing his most damaging arguments before he gets a chance to bring them up, and then disposing them.

That's what the White House hoped to accomplish at Monday's unscheduled news conference. Over the long 4th of July weekend, stories about Bush's questionable behavior as an executive of Harken Energy became grist for the weekend talk shows. With today's Wall Street policy speech looming, the President and his men hoped that addressing the inevitable press questions about Harken the day before would take the steam out of the issue today.

The tactic backfired. In his attempt to explain away his own actions twelve years ago at Harken Energy, all Bush accomplished was to contradict his own "get tough" rhetoric on corporate scofflaws.

When Bush was asked to explain a controversial $10 million Harken deal during his tenure as a director - a deal that was later invalidated by the SEC - Bush responded, "That's the point. The system works. In accounting things are not always black and white. There are always shades of gray. It's the SEC's job to determine what is proper and what is not."

Bush proceeded to dig an even deeper hole, stating that not all things the SEC deems improper from an accounting standpoint are also illegal.

In seeking shelter from his Harken troubles, Bush provided the President of the United State's personal stamp of approval to what will certainly be the centerpiece-defense of the corporate executives his own SEC and Department of Justice now say they hope to prosecute.

Bush made several statements yesterday that need some follow up. He was asked if he backed calls for SEC Commissioner, Harvey Pitt's resignation. He said he did not. He said that Pitt was not part of the problem, but part of the solution. "Harvey Pitt has been working to clean up a mess he inherited," Bush said.

Inherited from whom? The insinuation was that Pitt inherited these problems from the Clinton administration. But, many of the problems he inherited were left behind by many of his own former law clients such as the Arthur Andersen and KPMG accounting firms Pitt represented before his appointment.

A quick examination of the President's recent explanations is needed in order to balance this story a bit.

Harken is old news: Twelve-years old to be precise. But back in 1990, corporate governance was hardly the stuff of daily headlines as it is today. Then, as now, Bush framed reports of his stock deal as opportunistic political attacks - and got away with it. But now, as the nation struggles with the biggest corporate upheaval since the Great Depression, questions about the President's behavior during his tenure at Harken are at the very heart of the issue. And, as such, they deserve a fresh look.

"I filed with the SEC my intention to sell my Harken stock":

True, but that filing does not satisfy either the spirit or intent of the SEC's insider stock sales rules. All Bush told the SEC when he filed his SEC Form 144 was that at some point in time he intended to sell some of his Harken shares. Form 144 did not say when. The "when" part is the most important information since it allows SEC to determine if an insider might have sold on "non-public information." The when question is answered on SEC Form 4, which is supposed to be filed no later than the 10th day of month following the actual sale. That's the form Bush says now he can't figure out why he failed to file until eight months later.

The Harken deals were investigated already:

Back in 1990, during his father's Presidency, the SEC did open an investigation of the stock sale, a fact that the President is quick to mention. "The folks who investigated this did so thoroughly and found there was no case," Bush said again yesterday. What he neglected to mention is who those "folks" were.

Bush's former personal attorney was the SEC general counsel at the time the commission cleared him of wrongdoing in the stock sale. (The attorney, James Doty, says he recused himself.) Doty had been private citizen George W. Bush's personal attorney who had negotiated Bush's purchase of the Texas Rangers baseball team. As for his investigation being "thorough" as the President described it, Doty closed his probe without ever interviewing Bush or a single other Harken director.

Harken's Audit Committee findings were not issued until after his Harken stock sale:

Well, of course. That's the very point. An insider, acting on non-public information, is what insider trading is all about. There may be a germ of truth to this explanation. At the time Bush sold his Harken stock, the audit committee on which he sat had been working for weeks with outside consultants from Smith Barney on a restructuring plan for the troubled company. The committee's report may indeed not have been completed by June 22, 1990, when Bush sold out.

But the only way Bush could not have known the committee's preliminary findings is through a failure to attend audit committee meetings. If that's the case, Bush should say so. Of course such an admission would raise new troublesome issues involving director Bush shirking his fiduciary duty to Harken and its shareholders.

Which is it President Bush? Either you attended the meetings and knew Harken was in trouble before you sold, or you were AWOL from those audit committee meetings.

When he sold the stock he got $4 a share. If he'd held for eight more weeks he would have gotten nearly twice that:

Well, maybe. Of course hindsight is a valuable asset real-time investors lack. When Bush sold his Harken stock there was no way he could have foreseen that the patient would briefly rally a few weeks later. After Bush sold his Harken stock and the company announced its dismal condition, Harken shares dropped 50% a share.

What caused the "dead cat bounce" in Harken stock to nearly $8 was the fortuitous appearance of the Texas Bass brothers who shored the company up by investing in Harken's struggling Bahrain drilling deal. Once the glow of that news wore off, the stock resumed its downward spiral. Today Harken is selling for under 50 cents a share.

The sale of the Harken subsidiary, Aloha Energy, was just a complicated deal, not a fraud:

Actually there was nothing complicated about it. Here is how it worked: In 1989, Harken was facing the unpleasant prospect of having to report a $23 million loss. In an attempt to soften that news, the company loaned Harken insiders $10 million so they could "purchase" the Harken subsidiary and the company could book a profit on the deal.

The only thing that made this deal "complicated" is that was not a "sale" under any accounting rules known to man. Anyone who has taken Accounting 101 knows why. The deal violated accounting rules on so many levels it's hard to know where to begin. First, it was hardly an "arms-length" transaction. Everyone involved was, well, involved.

Who set the fair market value? Who retained all the risk? (The answer is Harken did because it held the loan, which might or might not be repaid.)

The Aloha transaction calls to mind the abuses of Enron - but, in fact, it predated that scandal by more than a decade. And it's not that Harken's top executives did not know they were manufacturing a phony profit. The top layer of Harken management - including its CEO - had served as senior auditors for Arthur Andersen before joining Harken. Once the SEC learned the inner workings of the sale, they forced the company to remove the $10 million and revise their financial statements.

It seems President Bush never learned the first Rule of Holes: "When realize you've dug yourself into a hole, stop digging!" What we witnessed yesterday at Bush's press conference was a man still digging. In the process, he undermined the efforts of those really trying to cure what ails our system of corporate governance.





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