Stock-dumping   -   Unsuspecting buyers hurt

 

(The Charleston Gazette - 3/10/04)

 

When a corporate insider learns of impending events that will send a firm's stock price plummeting -- or soaring -- it's a crime for the insider to cash in on this private information. If the insider sells shares just before bad news becomes public, unsuspecting buyers are stuck with the ensuing losses. If the insider buys shares before good news is known, unsuspecting sellers are robbed of gains that were just around the corner.

Homeware queen Martha Stewart has been convicted of using insider knowledge to dump her ImClone stock in 2001 the day before a major setback caused the price to plunge -- thus buyers who purchased her shares were cheated.

Most Americans don't know that President Bush was involved in a similar situation in 1990. Here's the story:

After graduating from Yale, Bush entered the Texas oil business, mostly using investment money from his father's wealthy Republican backers. The son was largely a failure. His first firm, Arbusto (Spanish for bush) Energy Inc., drilled numerous wells, but lost money. His rich backers wrote much of the loss off their taxes.

New backers put the younger Bush in command of another drilling outfit called Spectrum 7, which also lost money. He was heading for bankruptcy when more GOP bankrollers in Harken Energy absorbed his firm and gave him fat holdings. He was made a Harken director and named to the corporation's audit committee. Behind the scenes, calamity was growing inside Harken.

On June 11, 1990, Bush and other members of the audit committee met with the Harken president and auditors from Arthur Andersen & Co.  Eleven days later, on June 22, Bush sold all 212,140 of his Harken shares for $4 each -- reaping $835,307. Although federal law required Bush to notify the U.S. Securities and Exchange Commission of this insider sale immediately, he failed to do so for eight months.

Eight days after Bush sold his stock, Harken finished the quarter with $23.2 million losses. The public was informed on Aug. 20, and the share price fell, eventually losing three-fourths of its value.

Almost a year later -- while the elder Bush was president -- the SEC opened an investigation of the son. The younger Bush swore that he had no inkling that Harken was in trouble when he sold his stock. The SEC said it could find no evidence to contradict the president's son. Case closed.

However, various news reporters later found Harken memos which Bush had received before his sale, implying that Harken was about to take a fall. Salon.com reported that the corporation president warned directors on April 20 that new events "drastically affect Harken's current strategic plan with regard to seeking public funds to reduce our debt." His memo said the development "greatly intensifies our current liquidity problem."

On June 7, two weeks before Bush sold all his shares, a new memo from the president warned of a "Harken International shutdown effective June 30, unless third-party funding [is] obtained." Salon.com said the note discussed plans to lay off 40 employees.  It said the firm had lost $28.5 million in trade credit since Jan. 1, and $11.8 million more was "in jeopardy."  According to Salon.com, the insider memo said other companies that had seen Harken's annual report "are nervous."

A week later, on June 15, Harken's lawyers warned directors and executives: "If the insiders presently possess any material non-public information, a sale of any of their shares could be viewed critically."  But Bush sold everything a week later.

If anyone can explain how the current president's 1990 stock sale differs materially from Martha Stewart's 2001 sale, we'd like to hear it.