Bush's Insider Trading......
Knut Royce
Bush's Insider Trading......
Mon Mar 8 23:09:57 2004
64.140.159.51

Editors Note: Martha Stewart may be heading to prison because she sold stock after learning that a company was failing for a reason that was out of her and other company officials control. Martha Stewarts Company was playing by the rules, a product they invested a lot of money in failed to be certified as safe by the Government so they knew the stock would fall. If the following allegations are true, George Bush's profit was due to underhanded accounting practices inflating the value of the stock, before selling at a huge profit. Who should be in jail? Martha Stewart for selling before her stock tanked for legitimate reasons? Or George Bush for profiting from selling stock that’s value was inflated by Enron style accounting practices? --smg

Go to Original - http://www.truthout.org/docs_04/030904A.shtml

Bush's Insider Connections Preceded Huge Profit On Stock Deal
By Knut Royce
The Center for Public Integrity

Sunday 07 March 2004


> It has been widely reported that Texas Gov. George W. Bush made money over the years with a little help from his friends. But new details show that he served on an energy corporation’s board and was able to realize a huge profit by selling his stock in the corporation because an accounting sleight-of-hand concealed it was losing large sums of money. Shortly after he sold, the stock price plummeted. That profit helped make him a multimillionaire.
>



The year 1986 was very good for George W. Bush.

After a decade of striking Texas brown dust instead of oil, his luck finally turned that year when go-for-broke Harken Energy Corp. bought his failing oil exploration firm for stock. Four years later the company concealed large losses just before the GOP presidential hopeful unloaded those securities for a nice profit. That, in turn, helped finance his stake in the Texas Rangers baseball club and catapult him into the ranks of multimillionaires.

And it was in 1986, too, that Harken’s CEO introduced Bush, the company’s new director and consultant—as well as son of then-Vice President George Bush--to a little startup health-care company. He put in a modest investment, and a few years later walked away with a six-figure windfall.

There also was a little benefit on the side. In 1994, when Bush was running for Texas governor, and scrambling for campaign cash, insiders in that health-care company, now known as Advance Paradigm, contributed $23,700.

Bush’s sale of the Harken stock in 1990 attracted the attention of regulators and the national media because he was tardy in filing the required public disclosure, and because the trade came shortly before the company reported for the first time that it was incurring huge losses.

Hemorrhaging Concealed

But The Public i has found that Harken was bleeding profusely even before Bush unloaded his stock. Harken effectively concealed the hemorrhaging by selling a retail subsidiary through a seller-financed loan but recording the transaction in its 1989 balance sheet as a cash sale. Securities and Exchange Commission records suggest that Bush, a company director who sat on Harken’s audit committee and was a paid consultant to the firm, may nonetheless have been unaware of the sleight-of-hand accounting or, for that matter, other significant company actions Nevertheless, SEC accountants cried foul when it discovered Harken had recorded the 1989 sale as a capital gain.

But it was months after Bush’s June 1990 sale of the stock at $4 a share, for a total of $848,560, that the SEC directed Harken to recast its 1989 annual report and to publicly disclose the extent of its losses that year, according to records reviewed by The Public i.

It is unclear how a timely acknowledgement of the true losses would have affected the value of the stock when Bush sold. But most investors look at a company’s balance sheet, among other indicators of corporate well-being, before parting with their money.

Two months after Bush’s sale, Harken reported for the first time in a quarterly report that it was losing a lot of money, and the stock dropped to $2.37 a share. By the end of the year, it was trading at about $1.

Harken masked its 1989 losses when in mid-year it sold 80 percent of a subsidiary, Aloha Petroleum, to a partnership of Harken insiders called International Marketing & Resources for $12 million, $11 million of which was through a note held by Harken. By Jan. 1, 1990, IMR, in turn, sold its stake in Aloha to a privately held company called Advance Petroleum Marketing, and the Harken loan was effectively transferred to Advance, though garanteed by IMR.

‘George and I Became Friends’

Advance Petroleum was headed by a Texas entrepreneur, David Halbert, who had been a friend and business partner of Harken’s CEO, Mikel Faulkner. In 1986, Faulkner had introduced Harken’s newest director, Bush, to Halbert. Harken, in a stock swap, had just acquired the ailing Spectrum 7 Energy Corp., where Bush had been CEO and a significant shareholder.

“George and I became friends,’’ recalled Halbert in a telephone interview with The Public i. Halbert said that at the time Faulkner introduced Bush to him he had just formed a little home-health-care firm, Allied Home Pharmacy, and was in the process of raising $250,000 in seed money.

“Mikel said (to Bush), ‘Hey, you might want to invest in this,’” Halbert recalled. “I said fine. I don’t remember how many people we brought in, but it wasn’t that many. Maybe 25 or 30 . . . It was sort of friends and family, and George invested.’’ So did Faulkner. Halbert said Bush also put in a little more money in an offering to existing shareholders in 1991.

Halbert said he did not recall how much Bush invested in the company.

Allied Home Pharmacy became known as Advance Paradigm, one of the nation’s leading pharmacy benefits management companies, when it went public in 1996. Two years later, Bush’s trust sold his stock in the firm.

Public records give no precise amount of how much he earned on the Advance stock sale, but Bush’s financial disclosure form made public last year shows that he realized a capital gain, or profit, of as much as $1 million on the sale. Asked how much the Texas governor paid for the stock and how much he profited from the sale, spokesman Scott McClellan referred all questions to the manager of Bush’s blind trust, Robert McCleskey. McCleskey declined to discuss his client’s investment in the Advance stock. He said that under the terms of the Texas blind trust—a legal requirement for the governor but less rigorous than the blind trust that applies to federal executive branch officers—he cannot tell even Bush how much profit he made on the sale.

SEC Probe Was Limited

The SEC’s division of enforcement launched a probe of Bush’s sale of his Harken stock the day after the Wall Street Journal on April 4, 1991, reported that he had been eight months late in filing the required insider-trading form with the regulators. This investigation was separate from the earlier division of corporation finance probe that resulted in Harken’s recasting its 1989 balance sheet.

SEC enforcement investigators focused on whether Bush dumped his stock on June 22, 1990, because he knew that the company’s second-quarter report, announced on Aug. 20, would show a $23.2 million loss and depress the stock. Part of that loss was $7.2 million that Harken wrote off because it was being pressed by a nervous bank and renegotiated the Aloha sale to generate quick cash. Aloha’s buyer, Advance Petroleum, was a clear winner in the renegotiated deal.

The SEC probe was limited to whether Bush had inside knowledge of the red ink that would be reported in the August filing and concluded that he did not.

It is unclear whether Bush, who holds a master’s degree from the Harvard Business School, knew that the company, after five straight years of profits, began to bleed profusely in 1989, its first year of being traded on the New York Stock Exchange, though in its annual report for that year it had declared a net loss of only $3,300,000.

Even that small loss would have surprised readers of the January 1990 issue of National Petroleum News, a trade publication. Interviewed some time during the fourth quarter of 1989 for a lengthy and glowing article on Harken, company president Faulkner said that based on the strong earnings during the first three quarters, he expected that year to be the most profitable yet. “We made $6 million last year (1988) . . .We’ll certainly be ahead of last year.’’

Alas, a year later, in an amended 1989 annual report filed on Feb. 5, 1991, the company reported that after “discussions” with the SEC, which insisted that Harken use the traditional “cost recovery’’ method of accounting, it was revising its declared 1989 net loss of $3,300,000 fourfold--to $12,566,000. Harken also filed an amendment to its third quarter report for 1989 revealing that over the first nine months of that year it had lost nearly $4 million, rather than the $4.6 million profit it had declared.

Faulkner, now Harken’s chairman, did not return repeated calls from The Public i seeking comment on the Aloha sale and the subsequent public filings.

Company Directed to Correct Reports

The SEC can prosecute company officers for willfully filing fraudulent reports. But in the Harken case, as in most similarly questionable filings, the investigation was conducted by the agency’s accounting staff, which did not believe there was intent to defraud and therefore did not refer the matter to the SEC’s enforcement division. Instead, the agency directed the company to publicly correct its reports, according to a retired SEC official familiar with aspects of the case.

It is also clear that Harken did not draft the misleading 1989 annual report, filed with the SEC on April 16, 1990, merely to buttress the value of Bush’s stock. The filing date was two months before the company reported it became aware that Bush wanted to sell.

In its 1989 annual report, Harken recognized a profit of $8 million on the sale, which allowed it to limit its declared losses to only $3,300,000 for the year. But the SECobjected, saying that the income can be recognized only as the principal of the loan is reduced—that is, when real cash comes in.

A corporate accountant interviewed by The Public i agreed with the SEC’s claim, saying he found it “unusual’’ for a company to declare an earning on the sale when it is contingent on a loan. The accountant, who asked to not be further identified, said he knew of no other instance when a company declared full gain on a sale based on a loan.

Why Harken initially sold to IMR is unclear. But a senior tax lawyer who works for a leading auditing firm told The Public i after reviewing portions of the SEC filings that he believes Harken wanted to show a cash infusion to mitigate the 1989 losses.

“It looks like the sale was done (to IMR) in order to show a book gain of $7 or $8 million,’’ said the attorney, who also asked not to be further identified. “That would have eliminated a good part of their loss during that time. Given the fact that the sale was to a related entity, I would guess they were just trying to show a better financial statement at that time.’’

Advance’s Halbert said that he believes IMR bought, and then quickly sold, Aloha because of a sudden change of heart. “I think it had something to do with IMR wanting to own it [Aloha] but there was some concern about the affiliate relationship [between Harken and IMR],’’ he said.

The SEC, too, was curious about the transaction, according to agency records obtained under the Freedom of Information Act.

Six weeks before Harken publicly announced in January 1991 that it was revising its 1989 losses upward, the SEC asked the company to explain “whether the sale of Aloha to Advance was contemplated at the time IMR purchased Aloha from Harken.’’ In a letter, it also asked Harken to explain why the company and its independent accountants concluded it could declare a capital gain on the sale.

The SEC declined to provide Harken’s responses to The Public i.

Conflicting Accounts Offered

In its public filings to the SEC, Harken gave conflicting accounts of who sold Aloha, who bought it, and even when the sale occurred.

In its 1989 annual report, for example, it declared that it sold Aloha to IMR on June 30. In one passage of the report, it says that IMR then sold Aloha to Advance on Jan. 1, 1990; in another it says IMR sold on March 30.

But in its 1990 report, Harken declared that it was its subsidiary E-Z Serve Holding Co. that sold Aloha to IMR.

Adding to the confusion, E-Z Serve, which shortly after the transaction was spun off as a separate publicly traded company, claimed in its 1991 annual report that it had sold Aloha to Advance Petroleum—not IMR—in 1989.

Harken was notorious during that period for filing confusing reports. In 1991, Harken founder Phil Kendrick told Time magazine that the company’s annual reports “get me totally befuddled.’’Quoted in the same article, Faulkner had this advice to those trying to figure out the company’s financial statements: “Good luck. They’re a mess.’’

The corporate fog did not, however, obscure the fact that by the time the SEC directed Harken to recast its 1989 report, Bush already had already sold his stock in the company.

The bulk of the $848,560 went to pay off a bank loan he had taken out in 1989 to buy a partnership interest in the Texas Rangers for $600,000. He received nearly $16 million for his stake when the team was sold two years ago.

Bush’s run of financial good luck starting in 1986 is in stark contrast to the woeful performance of his previous oil ventures, which he had launched in 1977. Though he had little difficulty in rounding up investors for his Arbusto, Bush and Spectrum 7 oil exploration firms, they were all money losers.

Even as Harken in late 1989 and early 1990 appeared to be trying to minimize its losses, its bankers were clamping down because the company was having trouble meeting its loan payments.That led to a renegotiated loan agreement in May 1990, which required Harken to come up with fresh cash, raised the interest rate, required new guarantees from major shareholders and featured stricter terms overall.

“After closure (on the sale of Aloha) Harken discovered they had trading losses on gasoline purchases and they came back to us and said, ‘We really need some cash,’” Halbert recalled.

Cash Raised in Nick of Time

Halbert said he was able to raise the cash in the nick of time—just three days before Iraq invaded Kuwait, setting in motion huge gasoline-price increases that drove numerous small distributors out of business.

Under the original contract, Harken had given Advance an option to purchase the remaining 20 percent of Aloha, or 60,000 shares, for $50 each, or a total of $3 million.

By the time the contract was renegotiated in August, Advance agreed to pay off the $10 million note by the following year, which it did, instead of in March 1993 as stipulated in the original contract.It also relieved Harken from picking up the cost of fixing leaking underground tanks to meet environmental standards.

In turn, Advance got the $3 million of Aloha stock for $1. Harken also forgave $5 million in loans it had made to Aloha and about $1 million in interest payments.

The renegotiated contract reduced Harken’s bottom line, and the SEC clearly believed the write-off might have helped depress the stock. During its investigation of whether Bush benefited from insider information when he sold his stock, the SEC on July 25, 1991, asked both Bush and Harken to disclose when the company’s officers and directors “first became aware . . . that the Advance note . . . was going to be renegotiated; and that Harken intended to write down its investment in Aloha.’’

Unaware of Magnitude

After the SEC ended its investigation, according to one of its memos, the regulators concluded that Harken and Bush were unaware of the magnitude of the write- downs until at least mid-Jul
 


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