President Violates First Rule of Holes
In Effort to Save Self, Undermines Reform
Washington, D.C. - July 9 - 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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