University’s role in Harken Energy bailout questioned

BY RANDALL JACKSON

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Recent news reports, along with a report released by the student watchdog group HarvardWatch, claim to have unrearthed previously undisclosed aspects of the relationship between Harken Energy and Harvard University’s investments. In particular, they have exposed an off-the-books partnership that Harvard set up with Harken during the period 1986 to 1993, when President George W. Bush was a Harken director.

Bush’s dealings as a director of Harken Energy have already been the subject of considerable scrutiny, as questions related to insider trading and dubious accounting have persisted. Specifically, Bush profited in 1990 from a sale of nearly a million dollars of his Harken stock shortly before Harken was forced to make a damaging restatement of its profits. The SEC forced the restatement after the agency uncovered a fraudulent insider sale that had significantly distorted Harken’s financials. Though Bush was never prosecuted for any of this activity, it is notable that this interaction with the SEC took place during the period when Bush’s father was President.

The most recent revelations in this matter have focused upon an aspect of Harvard University’s relationship with Harken. One month after Bush became a director, Harvard agreed to invest at least $20 million in Harken through its subsidiary, Aeneas Venture Corporation. Harvard eventually became Harken’s largest shareholder, controlling roughly 30 percent of Harken’s stock, and placing two representatives on Harken’s board. According to HarvardWatch, Harken was Harvard’s third largest equity holding. In spite of this fact, Harvard did not list Harken among its top equity holdings.

The HarvardWatch report also indicates that, in the years before 1990, Harken was facing both a liquidity crisis and a solvency crisis. In May 1990, in order to prevent Harken from going into bankruptcy, Harvard and another large investor lent Harken $46 million. This move temporarily prevented Harken from becoming insolvent but exacerbated Harken’s liquidity crisis because of increased interest payments.

The result of this move was the continued decline of Harken Energy, and the liquidity crisis the company faced seemed destined to bring about its failure. Harken’s working capital for 1990 was negative $7 million.

In November 1990, Harvard and Harken set up an off-the-books partnership called the Harvard Andarko Partnership (HAP). In that the partnership was owned by and transparent only to insiders, it bore a striking similarity to the partnerships used by Enron that have been most heavily criticized. The Enron partnerships have been strongly criticized by Bush and many others in his administration. White House spokesman Scott McClellan says that the HAP partnership was Harvard’s idea. However, according to board meeting notes recently obtained by the Center for Public Integrity, the creation of the partnership was approved in a motion made by Bush. According to Professor William Black, an expert on financial management and regulation at the University of Texas at Austin, HAP allowed Harken to avoid a liquidity crisis, boost its net worth, and keep many of its problems off of Harken’s books.

The terms of HAP seem perplexing when examined from a purely financial standpoint. Harken was allowed to bring to the partnership $20 million in debt and liabilities, plus a group of poorly performing oil-drilling assets valued at $26 million, for a net of $6 million. Harvard alternatively, contributed $64.5 million of its drilling assets, 91 percent of the investment. But in spite of this imbalance, Harvard agreed to accept just 84 percent of the Harken Anadarko Partnership’s earnings. A critical effect of this deal for Harken was that it removed large debts from Harken’s books and placed them in an entity that didn’t publicly disclose the debts.

According to the Wall Street Journal, the sweetheart deal for Harken also helped its cash flow dilemma in that Harvard subsequently pumped $100,000 a month into Harken through management fees and $3 million worth of drilling and servicing fees in the first year. Furthermore, at this point Harvard inexplicably allowed Harken to erase $16.2 million in debt that Harken owed Harvard from a previous venture. Harken was allowed to pay off this note with assets valued at just $14 million. The HarvardWatch report indicates that at this point Harken’s stock rose to unprecedented levels in its history, ultimately reaching an all-time high of $8 in 1991. This price represents a 540% increase from Harken’s stock price at the end of 1990. Rice University accounting expert Dala Bharan has indicated that “It seems to be a simple case of Aeneas bailing out Harken.”

During the period after the organization of HAP, when Harken’s stock price was temporarily inflated, Harvard sold 1.6 million shares of its stock. These sales generated $7.47 million.

Harvard ultimately bought out Harken’s remaining 12 percent stake in the partnership for $2.65 million in cash. This stake had generated $3 million in losses for Harken in 1991. At this point, Harken’s stock began to fall, and it never again recovered. After buying out Harken’s interest in HAP and securing Harken’s release from any liability to HAP’s creditors, Harvard sold HAP in 1993 to Cabot Oil and Gas for $34.5 million. The owners of Cabot Oil and Gas had strong ties to Harvard. Until 1991, a member of the Cabot family, Walter M. Cabot, was President of Harvard Management and its Aeneas investment arm.

There are other notable ties between Harken Energy and Harvard. According to the Wall Street Journal, the person with the most influence over Harvard’s endowment has been Robert G. Stone, Jr., a former senior fellow of the Harvard Corporation, and a businessman in the oil industry. Stone oversaw Harvard’s involvement in HAP. He has been a major political contributor to the Bush family since George H.W. Bush’s first presidential election. George W. Bush received an MBA from Harvard Business School in 1982.

A number of students at Harvard College and Harvard Law School are calling on the University to disclose all information about Harvard’s dealings with Harken. They are asking for an independent investigation, conducted by a committee of democratically chosen students and alumni, in order to develop proposals to prevent future conflicts of interest and ensure responsible investing. Some students have called for a more open, transparent investment policy. However, University officials have stated that they do not disclose such information.

George Farah, a 1L working to mobilize students to sign a petition containing these demands, said: “President Summers has an obvious conflict of interest. Robert Stone chaired the search committee that chose him as president, and Mr. Stone remains active in University administration.” Farah also pointed out that President Summers has emphasized the importance of transparency in talks he has given around the world.

Clifford Ginn, a 3L (who is also a columnist for The RECORD) is working to organize a student response. Ginn said that he believes the Harken story is symptomatic of a more fundamental problem in Harvard’s management structure. “The Harvard corporation has invested in apartheid in South Africa, employed sweatshop labor to make Harvard apparel, and used the endowment to further political ends, but I doubt it could get away with doing any of those things if Harvard had a more open and democratic governance structure.”

Current and past University officials have refused to comment on the details of the Harvard Andarko Partnership.

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