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There was no malfeeance [sic], nor attempt to hide anything. In the corporate world, sometimes things aren’t exactly black and white when it comes to accounting procedures.

—PRESIDENT GEORGE W. BUSH, JULY 8, 2002, ON ABSENCE

OF “MALFEEANCE” IN THE ALOHA SALE

“His name was George Bush,” said Harken’s founder, Phil Kendrick. “That was worth the money they paid him.” Oil-field losses followed GeeDubya the way that cloud of dirt used to follow Pig Pen in “Peanuts.” By 1989 Harken was booking big losses but Daddy was president. In February 1990 the company’s CEO, Mikel Faulkner, warned board members that a failed deal the previous year left the company “with little cash flow flexibility.” In the months that followed, Harken’s memos and board minutes should have been written in red ink. So the management team devised a scheme to obscure these losses.

See if you can follow this bouncing ball. Harken masked its 1989 losses by selling 80 percent of a subsidiary, Aloha Petroleum, to a partnership of Harken insiders called International Marketing & Resources for $12 million. Of that sum, $11 million came from a note held by Harken. Aloha was a small chain of gas stations and convenience stores in Hawaii, originally started by J. Paul Getty and acquired by Harken in a package deal in 1986.

When Harken sold Aloha in 1989, here’s how it did the accounting. Since Harken carried an $11 million note on the $12 million sale, the only money it got up front was the first $1 million. But Harken booked $7.9 million, using the mark-to-market accounting that Enron made so fashionable in the late nineties. In January 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.

In brief, Harken insiders borrowed money from their own company to buy a subsidiary at an inflated price. Then they booked sales revenue that didn’t exist as profit. Then they got rid of the loan that had provided the revenue that never really existed. This is the kind of deal that made Enron famous. It allowed Harken to declare a modest loss of $3.3 million on its 1989 annual report, and as a result the company’s shareholders had no clue how bad things were. And we all thought the smart guys at Enron invented those clever transactions.

By 1990 Harken’s management realized that the accounting in their sale of Aloha wasn’t quite right. Their thinking on the subject had been clarified after what they described as “discussions” with the SEC. Actually, the SEC flatly declared the sale bogus. When Harken applied the standard “cost recovery” method of accounting required by the SEC, its 1988 losses suddenly became $12.57 million. It is remarkable what can be achieved by just a little attention from a federal regulatory agency. The same standard accounting practices applied to 1989 showed the company had lost $3.3 million over the first three quarters, whereas the “aggressive accounting” originally applied by Harken gave them a $4.6 million profit for the period. Harken’s accounting firm was Arthur Andersen.

Any time an officer of a publicly held corporation sells stock, we ought to know within two days. We ought to know. We being shareholders and employees.

—GEORGE W. BUSH ON WALL STREET, JULY 9, 2002

Harken’s sham sale of Aloha was a shameful violation of shareholder trust, but it kept Harken’s share value up long enough to let Bush sell his stock before the corrected profit-and-loss statements were released in August. The press seemed to prefer the stock-sale story because it is easier to explain than the Aloha deal. As reporters began to press harder on the issue, even the unflappable Ari Fleischer began to flap. “The SEC has been well aware of the issue and the SEC has concluded that this is not anything that’s actionable,” said Fleischer in early July. Bush too became testy, telling reporters that if they wanted more information they should get the minutes of Harken’s board of directors’ meetings. Harken refused