March 09, 2004

Bush's Insider Connections Preceded Huge Profit On Stock Deal

CONTEXT. If the "US mainstream news media" and its
propapunditgandists provided CONTEXT, there would be
angry mobs outside the White House. CONTINUITY. If the
"US mainstream news media" and its propapunditgandists
provided CONTINUITY, there would be angry mobs outside
the White House. Even without them providing any
CONTEXT or CONTINUITY, the _resident's poll numbers
(both the real numbers and the cooked numbers) are in
free fall...Why? Well, common sense and the
Internet-based Information Rebellion...Yes, CONTEXT
and CONTINUITY...Consider persecution and corporate
assassination of Martha Stewart in CONTEXT. For
example, Martha Stewart tried, convicted and soon to
be sentenced, CONTRASTED with Ken Lay, uh...Ken Lay?
Where is Ken Lay? More importantly, where is Ken Lay's
money? More CONTEXT: Martha Stewart tried, convicted
and soon to be sentenced -- for supposed misdeeds
related to alleged insider trading, CONTRASTED with
George W. Bush's 1990 sale of Harken Energy just
before its first reporting of huge losses...Nah,
nothing there, Nah...Oh really? Here's some CONTEXT
and CONTINUITY for you from and the
Center for Public Integrity...

Scott Galindez, 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?

Pardon Martha Stewart and/or Appoint a Special
Prosecutor to Investigate George W. Bush's Wheeling
and Dealing, Show Up for Democracy in 2004: Defeat
Bush (again!)

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

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

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

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

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

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

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-July, or after Bush’s stock

While the renegotiated contract clearly hurt
Harken’s bottom line, Halbert admits it clearly was
beneficial for Advance Petroleum.

Meanwhile, Bush was generating admirers among
Advance Paradigm’s insiders, the limited number of

In 1994, when the company was known as Advance
Health Care and Bush was making his first run for
Texas governor, those insiders gave him $23,700 for
his first gubernatorial run, including $14,500 from
Halbert, his brother, Jon, their father and their
wives. Virtually all the money came on the same day,
July 22.

“That was his first time around, and he was trying
to raise money any way he could,’’ recalled Halbert.

And, as has been the case throughout Bush’s career,
a long-time friend of the family came to his aid.

This time it was Benno C. Schmidt, the pioneering
venture capitalist and partner in J. H. Whitney & Co.
in New York. Schmidt, who died last October at age 86,
had been a director of Advance Health Care, and J. H.
Whitney had provided the firm with much needed capital
in 1993.

“Benno was an old friend of the Bush family. He
called me one day and said, ‘David, I think we ought
to do something for young George,’” Halbert recalled.
“He said, ‘I think we ought to have a fund-raiser.’”

So after a board meeting on July 22, Bush spoke at a
private little dinner attended by the directors and
their wives and walked away that night with $20,750.


Knut Royce is a senior fellow at the Center for
Public Integrity.


Posted by richard at March 9, 2004 10:23 AM