2 July 2002

Bush to Chase After Corporate Evildoers?

Paul Krugman is quickly becoming one my favorite columnists. He's on the mark again, first with a column detailing the flavors of fraud, using an ice cream parlor analogy to explain the business scandals committed by Enron, WorldCom, Dynergy and Adelphia. His most recent column details Bush II's shady past as a corporate executive at Harken Energy who engaged in the same kinds of accounting "irregularities":

Now to the story of Harken Energy, as reported in The Wall Street Journal on March 4. In 1989 Mr. Bush was on the board of directors and audit committee of Harken. He acquired that position, along with a lot of company stock, when Harken paid $2 million for Spectrum 7, a tiny, money-losing energy company with large debts of which Mr. Bush was C.E.O. Explaining what it was buying, Harken's founder said, "His name was George Bush."

Unfortunately, Harken was also losing money hand over fist. But in 1989 the company managed to hide most of those losses with the profits it reported from selling a subsidiary, Aloha Petroleum, at a high price. Who bought Aloha? A group of Harken insiders, who got most of the money for the purchase by borrowing from Harken itself. Eventually the Securities and Exchange Commission ruled that this was a phony transaction, and forced the company to restate its 1989 earnings.

But long before that ruling — though only a few weeks before bad news that could not be concealed caused Harken's shares to tumble — Mr. Bush sold off two-thirds of his stake, for $848,000. Just for the record, that's about four times bigger than the sale that has Martha Stewart in hot water. Oddly, though the law requires prompt disclosure of insider sales, he neglected to inform the S.E.C. about this transaction until 34 weeks had passed. An internal S.E.C. memorandum concluded that he had broken the law, but no charges were filed. This, everyone insists, had nothing to do with the fact that his father was president.



Here's some more telling blurbs from the forementioned previous column ...

There are a couple of ominous things about this menu of mischief. First is that each of the major business scandals to emerge so far involved a different scam. So there's no comfort in saying that few other companies could have employed the same tricks used by Enron or WorldCom — surely other companies found other tricks. Second, the scams shouldn't have been all that hard to spot. For example, WorldCom now says that 40 percent of its investment last year was bogus, that it was really operating expenses. How could the people who should have been alert to the possibility of corporate fraud — auditors, banks and government regulators — miss something that big? The answer, of course, is that they either didn't want to see it or were prevented from doing something about it.

I'm not saying that all U.S. corporations are corrupt. But it's clear that executives who want to be corrupt have faced few obstacles. Auditors weren't interested in giving a hard time to companies that gave them lots of consulting income; bank executives weren't interested in giving a hard time to companies that, as we've learned in the Enron case, let them in on some of those lucrative side deals. And elected officials, kept compliant by campaign contributions and other inducements, kept the regulators from doing their job — starving their agencies for funds, creating regulatory "black holes" in which shady practices could flourish.

(Even while loudly denouncing WorldCom, George W. Bush is trying to appoint the man who drafted the infamous "Enron exemption" — a law custom-designed to protect the company from scrutiny — to a top position with a key regulatory agency. And some congressmen seem more interested in clamping down on New York's attorney general, Eliot Spitzer, than in doing something about the corruption he has been investigating.)

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