Gray Area Revisited

It is my understanding that Harken sold a chunk of its assets to a group that was controlled by the family of its CEO for $1 million and claimed a $7.9 million dollar profit on the deal. The SEC found out about this and made the company restate its books.


This is the deal about which President Bush commented, "Sometimes things aren't exactly black and white."


Indeed.

Please explain. Did he not say that dealings at Harken were complicated when he was entrusted with oversight of the company? Was he a meber of the audit committee for the company when this deal went through?

Here's the excerpt from the press conference. It is clear that the "deal" is exactly what Bush was referring to when he made his "black and white" comment.


Please do not accuse me of posting a "plain lie" unless you can back it up with facts. I do not lie. If I make a mistake, please show me where I am wrong.


Q: Let me ask a question from just before the sale of stock that you mentioned. Could you please explain your role when you were on the board of Harken and the sale of 1999 — 1989 of its Aloha Petroleum subsidiary, which later caused the SEC to require Harken to restate its earnings. The sale has been described as creating a phantom profit to hide large losses. How did you see it, sir? And do you think that this transaction hurts your credibility on corporate responsibility?


BUSH: This and all matters that related to Harken were fully looked into by the SEC. And in this case the system worked. There was an honest difference of opinion as to how to account for a complicated transaction. You're going to find that in different corporations. Sometimes the rules aren't as specific as one would expect, and therefore the accountants and the auditors make a decision.


And then it's the SEC's role to make the determination as to whether or not the accounting procedure used in this particular instance was proper or not. And — let me finish — and they made the decision that Harken ought to restate some earnings, which Harken did. And that's how the system is supposed to work.


Q: Mr. President, if I may ask you, right before the accounting — the sale itself of the subsidiary, did you favor that? Were you involved ...


BUSH: You need to look back on the director's minutes, but all I can tell you is is that in the corporate world sometimes things aren't exactly black and white when it comes to accounting procedures, and the SEC's job is to look and is to determine whether or not the decision by the auditors was the appropriate decision. And they did look, and they decided that earnings ought to be restated, and the company did so immediately upon the SEC's finding.

And I have the excerpt from the press conference in my "Where's the 'plain lie'?" post. I leave it for others to determines who's the plain liar.

You say "this is the deal about which" - as if it is now generally accepted that the deal was somehow criminal or dishonest - when Bush was referring to the accounting treatment of asset sales, not to the sales themselves. You are suggesting there is some theft, or something immoral inherent to the deal, but that Bush didn't see it that way.


Bush was referring to an accounting treatment of the deal. Was the deal done specifically because of the financial-accounting, or perhaps tax-accounting treatment (always two different sets of books)? That is not specified, nor was it asked. Would it be "wrong" to engage in a type of business activity in anticipation of a specific tax treatment? I don't know, a lot of people lean toward buying homes just for the mortgage-interest deduction.


Question, Andy: Did the SEC insist the assets be returned, and a refund be granted? Did the SEC insist on a transfer of ownership, or on any unmaking, or reshaping of the deal? Were the buyers or sellers charged criminally, or held civily liable to one another? If not, it would seem there was no disagreement as to the legality of the deal itself.


Yes, to a person who thinks and speaks in soundbites, this may sound like nitpicking. But when the specific objective is to try to paint Bush as having engaged in a dishonest or fraudelent deal, you're going to have to do better. Obviously, you are trying to paint it as Bush seeing immoral acts in shades of gray. But this is just a lie, Bush was stating a plain fact about financial-accounting reality.


So, in conclusion, the plain lie is that 1) a deal was done, 2) the SEC said the deal was illegal, and 3) whether or not it was illegal remained a "gray area" in Bush's nebulous morals. Either that, Andy, or you're saying that there are no "gray areas" in accounting-claim decisions, but I know you're not that stupid. Either way, if you're saying the "gray area" referred to the financial reporting claim, rather than the deal, then you're also attempting to mislead dumb people.


So, was there something wrong with "the deal" - and if so, what?


Or, are there no "grey areas" in financial accounting?


Which one are you suggesting?


eLROY

Andy,


You might want to read Joe Conasan's article "Notes on a Native Son" published in Haper's.

By "deal" I'm using the word in the dictionary sense of a business deal: "an agreement or business transaction."


The mission statements of the Securities and Exchange Commission contain the following:


"The laws and rules that govern the securities industry in the United States derive from a simple and a straightforward concept: All investors, whether large institutions or private individuals should have access to certain basic facts about an investment prior to buying it."


When a company sells assets to it's chairman's family for x and books the deal as an almost 8x profit, don't you think that the company is not providing basic information in a simple and a straightforward fashion? Isn't is using the gray areas of financial acounting, which you emphasize do exist, to cover up the company's losses?


The SEC made the company restate its books when it caught the flimflam. It is now generally accepted that the transaction was done to disguise the facts of Harken's ill health.


I said in my original post, "This is the deal about which President Bush commented, 'Sometimes things aren't exactly black and white.'" This is exactly what Bush was commenting on, the accounting gray area that allowed the company to disguise its losses. He was not talking about financial accounting in general, he was answering a direct question about the accounting used in the Harken transaction in question.


Yes, no one was actually charged with wrongdoing, everything was legal. Because the gray area of financial accounting was utilized. I am agreeing with Mr. Bush: sometimes things aren't exactly black and white."


For more information about Bush's gray area activity, see John Cole's post below.

Let me get this straight about Bush's sale of Harken stock:


1 -- He (Bush) sold the bulk of his holdings at the beginning of a quarter at $3.25 a share as an insider. I assume that he filed the paperwork stating of his intention to sell appropriately. My understanding is that in a legal insider sale insiders have to file paperwork stating their intention to sell and then report any sales thereafter.


2 -- Harken reports huge losses for the quarter and it drops by 24% and eventually goes $1.25 a share.


3 -- Bush files the paperwork reporting the details of his sale of stock 8 months after the dealine for doing the filing had passed.


No doubt about it this stench from this one is really bad. I voted for Bush but I'm certainly not going to apologize for this reprehensible and from what I can see at least highly questionable if not illegal behavior. No wonder the financial markets have given Bush a no confidence vote regarding his efforts to clear up the corporate management corruption that exists. He's part of the problem. I don't see any issue with accounting here. It's an issue of the legality of his insider trading transaction so I think his (Bush's) comment about accounting is obfuscation. Out.

There are two forms that get filed when an insider sells stock (I don't remember the form numbers and I'm too lazy to look them up right now.)


One of the forms is to be filed immediately upon the intention to sell- this Bush did. One of the forms is to be filed 30 days after the sale takes place - this is the one that was 8 months late. Most investment professionals consider the first form to be the more important indicator of an insider's "view" of the company's stock.


Next point. Bush sold his stock approximately 2 months before quarter-end financial info was available. It is possible, but not extremely likely, that Bush was trading in advance of adverse info. It seems more likely that he sold, as he said he did, to raise cash (I bleieve, for his investment in the Texas Rangers.)


Yes, the Harken stock price dropped after the announcement of a bad quarter. However, the stock price was back up to the $8 range in the next year. You could say that Bush lost money by not holding on for a little longer.


I'm not a Bush apologist and there's plenty to criticize (Steel tarriffs for one), but it's important to have accurate information in order to make believable criticisms.


Ron

This stock sale is a separate transaction from the transction about which Bush made his "black and white" comment. The transaction about which he made his comment involved the sale of a subsidiary of Harken to relatives of the CEO.


By saying financial accounting is not always blck and white, Bush admitted Harken worked in the gray area. It is evident they work in the gray area to inflate the value of the sale (from the $1 million they got upfront) to $7.9 million to disguise losses being sustained by the company. When the SEC discovered the accounting legerdemain, they made Harekn restate their earnings.


Bush has never seen anything wrong with working in the gray area when it came to making money.

...you are correct in that the 1st filing is the most important. It is this filing that is used for tracking and public reporting of insider sales.

"This stock sale is a separate transaction from the transction about which Bush made his "black and white" comment"


You are correct. I was commenting on what Tom Haley had said.


There's an old joke that goes something like this: "What's two plus two?" Accountant's answer - "What do you want it to be?" Like all good jokes this has just enough of an element of truth.


There ARE a lot of gray areas in accounting. One of the central tenets of accounting is the matching of time periods in which revenues and expenses are recognized. This tends to be the area with the most gray, especially with regard to intangible assets (patents, goodwill, etc.) There are not always hard-and-fast rules as to what should be capitalized and how fast to amortize. "Hmmm, will this patent generate revenue for 5 years, 10, 15?" It's a judgement call and some accountants will be more aggressive than others.


Another area of grayness is bad debt. Most companies recognize revenue when a sale takes place, even if they haven't been paid yet. This creates Accounts Receivable. Not all A/R will be collected and at the end of every period, the company has to estimate what won't be collected and charge it to an expense called Bad Debt. Again, it's a judgement call.


These are just a couple of the more easily understood areas of gray. But that's not what happened with Harken. I'm getting all my info from press accounts, not firsthand. I believe the concepts are correct, even if some of the details me be a little off.


Harken sold a business unit to a new company that was created by Harken executives and loaned the money to the new entity to finance the purchase. Selling assets and seller-provided financing happen every day. Selling assets to insiders isn't all that rare either. The question is whether or not the sale price was the same as it would be in an arms-length transaction. It has happened in the past that the sales are done at a bargain price, which enriches the insiders at the expense of the shareholders of the corporation, which is clearly wrong. Although, determining the arms-length price is not an exact science. It usually only raises concerns when the "bargain" is egregious.


In the Harken case, just the opposite happened. It appears that the insiders paid too much. This certainly benefits Harken in that they get to book a larger gain than appropriate. But why would the insiders overpay? It doesn't make sense. Apparently the SEC found something about the accounting for this transaction that they didn't like and made Harken take the gain back out of their financials.


These kinds of disagreements with the SEC happen all of the time. It's possible to challenge the them, but as a rule companies adhere to the "don't fight city hall" philosophy and do whatever the SEC says. It doesn't always mean that the SEC is always right (or always wrong, for that matter) just more powerful.


Ron

neil bush, s&l fraud, im sure you heard of that, all the bushes are fraudsters, even prescott was indicted for trading with the enemy in wwII. (maybe he wasnt indicted, i dont know exactly, i know his firm was in some trouble over it or something. )


the history is there.


brad

Thanks, Ron.


As I understand it, 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 Intercontinental Mining Resources, Limited for $12 million, $11 million of which was through a note held by Harken.

Thus, the transaction was financed through a seller-financed loan, but Harken declared the profit in its annual report as a cash gain. This effectively masked big losses by the company that year.


I'm not an accountant. The point I've been making all along is that Bush has operated, as a businessman, in the gray area. No one denies that this gray area exists. Politically, it was probably a mistake to make the black and white comment at the press conference, as it lends credence to the belieft that he has only gotten relgion now that the sh*t is hitting the fan on an almost daily basis.

"Thus, the transaction was financed through a seller-financed loan, but Harken declared the profit in its annual report as a cash gain. This effectively masked big losses by the company that year."


Yes...and no. Companies sell assets all the time when they run into difficulties in their operations. Nothing nefarious about this. And booking a gain on the sale is entirely appropriate. Prudent investors will look at a company's cash flow statement as well as the income statement and balance sheet and this transaction would appear in two places on the cash flow statement. The cash "in" from the sale would appear in the Cash Flows from Investing Activities and the cash "out" would also appear in the flows from investing section, but as a separate line item. The net cash flow would still be zero.


None of these things would cause the SEC to require financial statement changes. There was something else about the transaction they didn't like.


Ron

Maybe someone can help us out and let us know what it was that the SEC didn't like about the transaction. According to the Houston Chronicle of July 8:


"In the case of Harken, the company used what critics call deceptive practices to hide a growing debt. In 1989 the company sold a subsidiary, Aloha Petroleum, to a group of Harken insiders who relied on company backing to secure the purchases.


Harken then reported the sale as income, which the SEC then refused to allow because the company held the note on the sale."

Andy,


The article I posted the link to above looks at the timing of Bush's sale of stock and the advent of the Gulf War, for one thing. The author also mentions that the SEC Chairman was an ardent Bush (father) loyalist.