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THE NATION

As a Board Member, Bush OKd a Deal Like Enron's

Business: The SEC rejected the 1989 sale of Hawaiian gas stations by Harken Energy Corp.

July 12, 2002|WARREN VIETH | TIMES STAFF WRITER

WASHINGTON — In early 1989, George W. Bush and his fellow board members at Harken Energy Corp. were presiding over a company that was headed south in a hurry. The Dallas-based oil firm had lost millions of dollars placing bad bets on commodity futures. Debt was piling up; red ink was beginning to flow.

Harken's executives came up with a novel plan to ease the pain. They would sell a small chain of Hawaiian gas stations called Aloha Petroleum to a group of investors that included Harken's chairman and one of its directors. The buyers would pay $1 million up front, but the accountants would record an immediate $7.9-million profit, enough to erase most of Harken's losses for the year.

They made a point of seeking the approval of directors who were not participants in the investor group. Bush, a member of the board's audit committee, signed off on the deal, according to Harken documents. So did the company's outside auditor, Arthur Andersen & Co.

But the government challenged and ultimately overturned the accounting method used by Harken to post a gain on the sale. Aloha was sold a second time, and the new buyer extracted big concessions from the company. The initial profit recorded on the sale morphed into a big loss. In the midst of all the maneuvering, Bush sold most of his Harken stock in June 1990.

Based on a review of publicly released Securities and Exchange Commission filings, meeting minutes, memos and correspondence from that period, there is no evidence that Bush, or any of the other directors, raised objections or expressed concern about the Aloha deal.

Experts on corporate governance say that as an independent director and one of only three members of the audit committee, Bush was in a position to exercise an important oversight role but apparently failed to do so.

An audit committee's primary responsibility is to ensure that the company's outside auditors conduct a thorough examination of the financial records without interference from officers and employees.

The White House on Thursday declined to comment on the SEC documents pertaining to Bush's actions as a director.

As the president tries to respond to the wave of accounting scandals sweeping corporate America, the events of 12 and 13 years ago have come back to haunt him.

The Aloha sale was so similar to what Enron Corp. did to hide its losses that Harken could have served as a model for the now-disgraced company, one accounting expert said.

"The people at Enron could have gone to school on this thing," said Alfred King, former managing director of the Institute of Management Accountants, vice chairman of Milwaukee-based Valuation Research Corp. and former advisor to the Financial Accounting Standards Board.

"They sold to themselves and recorded a profit," King said. "That's exactly what Enron did on a number of those off-balance-sheet transactions. On this one transaction at least, it's almost identical."

Bush rejects the comparison to Enron, a far larger Texas energy firm that cooked its books on a scale never before seen. He insists his actions at Harken were thoroughly investigated by the Securities and Exchange Commission.

"In the corporate world, sometimes things aren't exactly black and white when it comes to accounting procedures," Bush said when asked in general about Aloha at a news conference this week.

It's up to the SEC, Bush said, "to determine whether or not the decision by the auditors was the appropriate decision. And they did look, and they decided that the earnings ought to be restated, and the company did so immediately."

Bush's father was vice president in 1986 when Bush's previous company was purchased by Harken and he became a member of the board. Bush's sale of his Harken stock in 1990 was an issue in his 1994 gubernatorial campaign and 2000 presidential bid.

But Harken's sale of Aloha received little public attention until Enron's spectacular collapse and parallels were noted between the Aloha deal and Enron's practice of inflating its earnings and shoring up its balance sheet by hiding massive amounts of debt in partnerships consisting of company insiders.

The magnitude of Enron's collapse is many times greater than Harken's financial travails. Moreover, Enron's top officers are facing criminal charges for their actions. Although the SEC required Harken to revise its financial results for 1989, it did not refer the case to its enforcement division for prosecution.

"If the division of corporate finance had believed the purpose of the [Aloha] transaction was to generate a phantom profit, there is little question that it would have made a referral," said Jacob S. Frenkel, a former SEC enforcement attorney who heads the white-collar crime group at the Gambrell & Russell law firm in Washington.

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