By Paul Krugman,
The New York Times, July 2, 2002
Arthur Levitt, Bill Clinton's choice to head the Securities and Exchange Commission, crusaded for better policing of corporate accounting -though he was often stymied by the power of lobbyists. George W. Bush replaced him with Harvey Pitt, who promised a "kinder and gentler" S.E.C. Even after Enron, the Bush administration steadfastly opposed any significant accounting reforms. For example, it rejected calls from the likes of Warren Buffett to require deduction of the cost of executive stock options from reported profits.
But Mr. Bush and Mr. Pitt say they are outraged about WorldCom.
Representative Michael Oxley, the Republican chairman of the House Financial Services Committee, played a key role in passing a 1995 law (over Mr. Clinton's veto) that, by blocking investor lawsuits, may have opened the door for a wave of corporate crime. More recently, when Merrill Lynch admitted having pushed stocks that its analysts privately considered worthless, Mr. Oxley was furious - not because the company had misled investors, but because it had agreed to pay a fine, possibly setting a precedent. But he also says he is outraged about WorldCom.
Might this sudden outbreak of moral clarity have something to do with polls showing mounting public dismay over crooked corporations?
Still, even a poll-induced epiphany is welcome. But it probably isn't genuine. As the Web site dailyenron.com put it, last week "the foxes assured Americans that they are hot on the trail of those missing chickens."
The president's supposed anger was particularly hard to take seriously. As Chuck Lewis of the nonpartisan Center for Public Integrity delicately put it, Mr. Bush "has more familiarity with troubled energy companies and accounting irregularities than probably any previous chief executive." Mr. Lewis was referring to the saga of Harken Energy, which now truly deserves a public airing.
My last column, describing techniques of corporate fraud, omitted one method also favored by Enron: the fictitious asset sale. Returning to the ice-cream store, what you do is sell your old delivery van to XYZ Corporation for an outlandish price, and claim the capital gain as a profit. But the transaction is a sham: XYZ Corporation is actually you under another name. Before investors figure this out, however, you can sell a lot of stock at artificially high prices.
Now to the story of Harken Energy, as reported in The Wall Street Journal on March 4. In 1989 Mr. Bush was on the board of directors and audit committee of Harken. He acquired that position, along with a lot of company stock, when Harken paid $2 million for Spectrum 7, a tiny, money-losing energy company with large debts of which Mr. Bush was C.E.O. Explaining what it was buying, Harken's founder said, "His name was George Bush."
Unfortunately, Harken was also losing money hand over fist. But in 1989 the company managed to hide most of those losses with the profits it reported from selling a subsidiary, Aloha Petroleum, at a high price. Who bought Aloha? A group of Harken insiders, who got most of the money for the purchase by borrowing from Harken itself. Eventually the Securities and Exchange Commission ruled that this was a phony transaction, and forced the company to restate its 1989 earnings.
But long before that ruling - though only a few weeks before bad news that could not be concealed caused Harken's shares to tumble - Mr. Bush sold off two-thirds of his stake, for $848,000. Just for the record, that's about four times bigger than the sale that has Martha Stewart in hot water. Oddly, though the law requires prompt disclosure of insider sales, he neglected to inform the S.E.C. about this transaction until 34 weeks had passed. An internal S.E.C. memorandum concluded that he had broken the law, but no charges were filed. This, everyone insists, had nothing to do with the fact that his father was president.
Given this history - and an equally interesting history involving Dick Cheney's tenure as C.E.O. of Halliburton - you could say that this administration is uniquely well qualified to chase after corporate evildoers. After all, Mr. Bush and Mr. Cheney have firsthand experience of the subject.
And if some cynic should suggest that Mr. Bush's new anger over corporate fraud is less than sincere, I know how his spokesmen will react. They'll be outraged.
Bush Faces Scrutiny
Over Disclosing '90 Stock Sale Late
By Elisabeth Bumiller
Mr. Fleischer could not completely explain the inconsistency, and he said he did not know when or why Mr. Bush changed his explanation about the reason the sale was disclosed late.
But he said that Mr. Bush's stock sale was examined by news organizations in 1990 and many times since and that the president had done nothing wrong.
"It's been used as an issue by every political opponent in every campaign in which he's run," Mr. Fleischer said. "When he ran for president, your investigative reporters all looked into this, and you have the documents."
At issue are 212,140 shares of stock in the Harken Energy Corporation, a Texas oil and gas company, that Mr. Bush sold for $4 a share, or $848,560, on June 22, 1990, when his father was president. Mr. Bush sold the stock to pay off a $500,000 bank loan he had used to help buy his share of the Texas Rangers.
Eight days after Mr. Bush sold the stock, on June 30, 1990, Harken finished the second quarter with a loss of $23.2 million, more than eight times the loss it showed for the second quarter of 1989. When the second-quarter loss was publicly reported on Aug. 20, the share price fell to $2.37.
Mr. Bush, who was on Harken's board of directors, has said he quickly realized that the stock's slide would raise concerns that he had sold based on inside information, a potential crime. The suspicions grew when the Securities and Exchange Commission said it did not have a document from Mr. Bush, a Form 4, that insiders must file when they sell stock. Mr. Bush did not file the Form 4, and officially report the sale, until March 1991.
Mr. Bush had promptly filed another required document, a Form 144, disclosing his intent to sell the stock.
In 1994, when Mr. Bush was asked why he had not filed the Form 4, he said that he thought he had and that the S.E.C. must have misplaced it. Today Mr. Fleischer said the fault lay with a "mix-up, a clerical mistake" by lawyers for Harken.
"The best explanation is the attorneys thought the form had been filed, which is what led George W. Bush to say he thought it had been filed and the S.E.C. had lost it," Mr. Fleischer said. "That was not the case."
The securities commission investigated the transaction, which Mr. Bush's lawyer Robert W. Jordan defended by arguing that Mr. Bush had not known about the impending loss when he sold the stock. Mr. Jordan also said Mr. Bush had sought the clearance of a Harken lawyer before the sale.
In an interview in 1999 when he was running for president, Mr. Bush also defended the sale. "Listen, I was the son of a president," Mr. Bush said. "I was very sensitive to the scrutiny. I felt like liquidating the stock for personal reasons, but I was also fully aware that any deal I did was going to be fully scrutinized."
In 1993, the securities commission dropped the investigation and in a letter to Mr. Jordan said that "at this time no enforcement action is contemplated."
In a speech about corporate responsibility this spring, Mr. Bush proposed that corporate officers be required to disclose sales of company stock within two days. White House officials say Mr. Bush would make stronger proposals in what they are billing as a hard-line speech about corporate responsibility next week, to be delivered to 1,000 people at a hotel in Lower Manhattan.
Mr. Fleischer said the president's speech would reflect "the faith he has in our free-enterprise system."