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