Harken
Energy And Insider Trading
by Stephen Pizzo,
Mother Jones, September / October 1992
None of George
Bush's offspring is more his father's son than George W. Bush. George
Jr., or "Shrub" as Molly Ivins refers to him, began his own Texas
oil career in the mid-1970s when he formed Bush Exploration. Like
the business dealings of his brothers, George's company was not a
success, and it was rescued in 1983 by another oil company, Spectrum
7, run by several staunch and well-heeled Reagan-Bush supporters.
But by mid-1986, a soft oil market found Spectrum also near bankruptcy.
Many oil companies
went belly-up during that time. But Spectrum had one asset the others
lacked -- the son of the vice-president. Rescue came in 1986 in the
form of Harken Energy, just in the nick of time. Harken absorbed Spectrum,
and, in the process, Junior got $600,000 worth of Harken stock in return
for his Spectrum shares. He also won a lucrative consulting contract
and stock options. In all, the deal would put well over $1 million in
his pocket over the next few years -- even though Harken itself lost
millions.
Harken Energy
was formed in l973 by two oilmen who would benefit from a successful
covert effort to destabilize Australia's Labor Party government (which
had attempted to shut out foreign oil exploration). A decade later,
Harken was sold to a new investment group headed by New York attorney
Alan G. Quasha, a partner in the firm of Quasha, Wessely & Schneider.
Quasha's father, a powerful attorney in the Philippines, had been a
staunch supporter of then-president Ferdinand Marcos. William Quasha
had also given legal advice to two top officials of the notorious Nugan
Hand Bank in Australia, a CIA operation.
After the sale
of Harken Energy in 1983, Alan Quasha became a director and chairman
of the board. Under Quasha, Harken suddenly absorbed Junior's struggling
Spectrum 7 in 1986. The merger immediately opened a financial horn of
plenty and reversed Junior's fortunes. But like his brother Jeb, Junior
seemed unconcerned about the characters who were becoming his benefactors.
Harken's $25 million stock offering in 1987, for example, was underwritten
by a Little Rock, Arkansas, brokerage house, Stephens, Inc., which placed
the Harken stock offering with the London subsidiary of Union Bank --
a bank that had surfaced in the scandal that resulted in the downfall
of the Australian Labor government in 1976 and, later, in the Nugan
Hand Bank scandal. (It was also Union Bank, according to congressional
hearings on international money laundering, that helped the now-notorious
Bank of Credit and Commerce International skirt Panamanian money-laundering
laws by flying cash out of the country in private jets, and that was
used by Ferdinand Marcos to stash 325 tons of Philippine gold around
the world.)
Stephens, Inc.,
also helped introduce the BCCI virus into US banking in 1978 when it
arranged the sale of Bert Lance's National Bank of Georgia to BCCI front
man Ghaith Pharoan. (The head of Stephens, Inc., Jackson Stephens, is
a member of President Bush's exclusive "Team 100," a group of 249 wealthy
individuals who have contributed at least $100,000 each to the GOP's
presidential-campaign committee.)
If any of these
associations raised questions in the mind of George Bush, Jr., he had
little incentive to voice them. Besides getting Harken stock through
the deal, Junior was paid $80,000 a year as a consultant (until 1989,
when his wages were increased to $120,000; recently they were reduced
to $45,000). He was also allowed to borrow $180,375 from the company
at very low interest rates. In 1989 and 1990, according to the company's
Securities and Exchange Commission filing, Harken's board "forgave"
$341,000 in loans to its executives. In addition, Junior took advantage
of the company's ultraliberal executive stock purchase plan, which allowed
him to buy Harken stock at 40 percent below market value.
Such lavish executive
compensation would suggest a company doing quite well indeed. But in
reality, Harken had little going for itself. One Wall Street analyst
called Harken's web of insider stock deals and mounting debt "a lot
of jiggery-pokery." Harken was not making money and could not have continued
into 1990 without at least some means of convincing lenders and investors
that the company would soon find a lot of oil.
Suddenly, in
January 1990, Harken Energy became the talk of the Texas oil industry.
The company with no offshore-oil-drilling experience beat out a more-established
international conglomerate, Amoco, in bagging the exclusive contract
to drill in a promising new offshore oil field for the Persian Gulf
nation of Bahrain. The deal had been arranged for Harken by two former
Stephens, Inc., brokers. A company insider claims the president's son
did not initiate the deal -- but feels that his presence in the firm
helped with the Bahrainis. "Hell, that's why he's on the damn board,"
the insider says. "...You say, 'By the way, the president's son sits
on our board.' You use that. There's nothing wrong with that."
Junior has told
acquaintances conflicting stories about his own involvement in the deal.
He first claimed that he had "recused" himself from the deal; "George
said he left the room when Bahrain was being discussed 'because we can't
even have the appearance of having anything to do with the government.'
He was into a big rant about how unfair it was to be the president's
son. He said, 'I was so scrupulous I was never in the room when it was
discussed.'"
Junior alternately
claimed, to reporters for the Wall Street Journal and D Magazine, that
he had opposed the arrangement. But the company insider says, to the
contrary, that Junior was excited about the Bahrain deal. "Like any
member of the board, he was thrilled," the associate says. "His attitude
was, 'Holy shit, what a great deal!'"
Through the Bahrain
deal, the ties between BCCI and Harken Energy grew tighter. Sheikh Khalifah,
the prime minister of Bahrain and brother of the emir, was also a shareholder
in BCCI -- and it was Khalifah who played the key role in selecting
Harken for the job. Sheikh Abdullah Bakhsh, in turn, was a business
associate of BCCI front man Ghaith Pharoan; he bought a chunk of Harken's
stock and placed his representative, Talat Othman, on Harken Energy's
board of directors.
Did Junior or
any of the other Harken Energy executives trade on the Bush name in
these speculative business deals? None of the principals will answer
questions. But this much is known: after the Harken-Bahrain deal was
settled, Othman was added to the list of fifteen Arabs who met with
President George Bush and National Security Adviser Brent Scowcroft
three times in 1990 -- once just two days after Iraq invaded Kuwait
-- while serving on Harken's board of directors.
The promise of
hitting it big in the oil-rich gulf was certainly critical for Harken.
News of the Bahrain deal kept investors buying stock and lenders making
loans. Still, Harken had nowhere near the capital required for such
a large offshore operation halfway around the world. This required real
money. But not to worry: The billionaire Bass brothers stepped up to
the plate and said they'd be happy to underwrite the cost of the drilling
in return for a piece of the action. (Robert Bass is a member of President
Bush's Team 100; he and other Bass family members have contributed $226,000
to George, Sr.'s, cause since 1988.)
But even well-heeled
friends like the Bass brothers could not protect Harken from the troubles
of the world. Just four months after the Bahrain deal was sealed, storm
clouds developed over the gulf region, threatening the oil-exploration
deal. In May 1990, the U.S. State Department sent a chilling but still
classified report to Scowcroft. The report warned that Iraqi president
Saddam Hussein was out of control and was threatening his neighbors:
May 16, 1990
SECRET Attached is a paper containing a list of options for responding
to recent actions and statements by the Government of Iraq. ...We ask
that you pass this paper to Robert Gates [CIA] for his review.
Under "options"
the memo suggested: Ban Oil Purchases: The largest benefit Iraq receives
from the US is through our oil purchases... PRO -- A total ban on oil
purchases would have some short-term impact. CON -- Such action might
also have an impact on US Oil prices.
Oil companies
had learned, during the years of the long Iran-Iraq war, that trouble
in the gulf hurts companies with oil interests because, for one thing,
at the first sound of a rifle shot in the gulf region, Lloyds of London
jacks up insurance rates on oil tankers and company installations. The
"wartime" rates are very high and cut deeply into company profits and
investor confidence. If things really get out of hand, pipelines are
destroyed and waterways are mined.
The secret memo
augured ill for Harken's fledgling venture. To compound matters, that
same month, Harken's own financial advisers at Smith Barney produced
a hand-wringing report voicing alarm at the company's rapidly deteriorating
financial condition. (A former company official told Mother Jones that
Harken owed more than $150 million to banks and other creditors at the
time.) Since Harken wasn't producing anything, it was hard to find a
revenue stream, unless you count the river of fees, stock options, and
salaries running into the pockets of Junior and other top Harken executives.
Junior, as a member of Harken's restructuring committee, could not have
been ignorant of the report, since the board had met in May and worked
directly with the Smith Barney consultants.
In June 1990,
Junior suddenly unloaded the bulk of his Harken stock -- 212,140 shares
-- for a tidy $848,560. A former business associate says that Junior's
motivation was his desire to buy an expensive new house in Dallas, for
which he wanted to pay cash. The June 1990 transaction was an insider
stock sale, and security laws required that it be reported no later
than July 10, 1990. But Junior filed no such report, at least not then.
Then, in August,
Iraqi troops marched into Kuwait, and Harken shares plummeted 25 percent.
Junior would have lost $212,140 if he'd waited to sell his shares until
then. Still, he didn't file his SEC disclosure until seven months later,
in March 1991 -- well after U.S. troops had finished fighting and the
gulf war had moved off the front pages. Harken stock rebounded briefly,
but quickly collapsed again.
Were government
secrets discussed, directly or indirectly, that would have given Harken
Energy a leg up in exploiting the Bahrain deal? The White House won't
say. If Junior traded on exclusive, nonpublic, insider information,
he committed a gross violation of SEC rules. Taken together, the company's
critical need for success in its Bahraini deal and a possible oil embargo
to be imposed by his father provided Junior with strong motivation to
bail out of Harken stock before the public discovered either piece of
news. (SEC spokesman John Heine says he is unaware of any enforcement
action pending.)
The folks at
Harken Energy weren't the only ones in Texas taking care of Junior during
the 1980s. He was appointed the managing partner of the Texas Rangers
baseball team, even though his partnership contribution was only a fraction
of the team's purchase price. Among those coughing up the money to buy
the Rangers were William DeWitt and Mercer Reynolds, major contributors
to the president's campaign who had also been in on the rescue of Junior's
oil company.
Junior doesn't
deny that being a Bush has helped him become a millionaire. "I recognize
what my talents are and what my weaknesses are," he told Texas reporters
last year. "I don't get hung up on it. Being George Bush's son has its
pluses and minuses in some people's minds. In my thinking, it's a plus."
Junior might
have been thinking that among the minuses were questions about his role
at Harken. As this article was being prepared -- and in the midst of
extensive interviewing of former and current Harken business associates
-- Junior announced a six-month leave of absence as a consultant and
member of the Harken board. His role in the presidential campaign, the
statement said, precluded Junior's active involvement at Harken through
the remainder of 1992.
In any case,
Junior is stepping away from a company in deep trouble. Harken stock
is trading near its all-time low. Recently, test wells in Bahrain turned
up dry and the company has not produced anything else. "Harken is not
hard to understand -- it's easy," says Charles Strain, an energy-company
analyst in Houston. "The company has only one real asset -- its Bahrain
contract. If that field turns out to be dry, Harken's stock is worth,
at the most, 25 cents a share. If they hit it big over there, the stock
could be worth $30 to $40 dollars a share. It's a pure crapshoot."
