Harken’s Ivy League underwriter

Introduction

WASHINGTON, October 17, 2002 — The year 1990 started out on a high note for Harken Energy.

To the great surprise of industry analysts, the company won the exclusive rights to drill for oil in Bahrain, a tiny Arab nation ringed by some of the world’s largest oil deposits. At the time, Harken was known more for having a son of the president on its board of directors than for its international drilling abilities. The firm won the 35-year contract in a competition with much larger competitors, including Fortune 500 firms Chevron and Amoco, despite the fact it had never drilled a well in the region before.

But the good news did not last.

During the course of the year, the company’s finances became so dire, there was some doubt as to if it would be around long enough to sink a well. Harken was reeling from a number of setbacks, including a decision by a major shareholder to cash out $29 million in stock, a huge loss in its gasoline trading business, a failed public stock offering and a credit crisis.

Things were so desperate, that one internal company memo, posted by the Center for Public Integrity, warned the company would be unable to meet payroll by June 15 unless some new funding was found.

A week after that memo was written, George W. Bush, the company’s largest individual shareholder, cashed out, selling 212,140 shares for $848,560. Bush says he was unaware of the company’s financial condition, despite sitting on Harken’s audit board. (Bush was investigated for insider trading, but no charges were brought against him.)

Things got even worse when the company announced August 20 that it had a huge, unexpected loss of $23.2 million for the second quarter.

Fortunately for the troubled oil company, its largest investor helped the company stave off disaster. On December 3 of that year, Aeneas Venture Corp., the venture capital arm of Harvard Management Company, announced it was entering into a joint venture with Harken. Harvard Management invests Harvard University’s huge endowment.

Under the agreement, known as the Harken Anadarko Partnership, Harvard took an 84 percent stake and Harken 16 percent. The partnership allowed Harken to move $20 million in debt off the company’s balance sheet, making the company more attractive to investors.

The deal was offered for a vote by George W. Bush, a Harvard alumnus, at a company board meeting, according to minutes obtained by the Center.

The partnership pumped fresh cash into Harken, and helped move the stock from $1 up to near $8 a share, ultimately.

HarvardWatch, a group of school alumni and students, claims the off-the-books partnership bore a striking resemblance to deals made by Enron, another Texas energy concern with strong ties to Bush. The group also says Harvard sold over 1.6 million shares of Harken stock after the partnership arrangement had helped pump up the share price. Recently, citing the watchdog group, The Wall Street Journal and The Boston Globe ran stories on the partnership.

Harvard Management’s initial investment in Harken was its first private placement in an energy concern. Critics have contended that the company invested because of its relationship with Bush and his father, who was president at the time of the transaction.

In an October 9, 2002, statement, Harvard said that its investments in Harken had nothing to do with Bush’s connections. The role of the Harvard Management Company is not to curry political favor but to invest well on Harvard’s behalf, the statement read.

In a press briefing on the same day, White House spokesman Dan Bartlett said Harvard’s relationship with Harken predated Bush’s involvement with the company. Bartlett said Harvard and Harken began talks in April 1986, months before Bush joined the board. However, internal Harken documents obtained by the Center through Freedom of Information Act requests and other sources show that Harvard Management began to pump cash into the company two weeks and two days after Bush joined the company’s board.

George W. Bush became a member of Harken’s board of directors on September 29, 1986, after the company bought his ailing oil firm, Spectrum 7. At the time, Harken was very small, reporting about $4 million in revenue.

Its largest investor was billionaire fund manager George Soros, who hired the company to manage his own oil interests. The company’s president was Alan Quasha, a young New York lawyer with some deep-pocketed friends.

On October 15, 1986, Harken announced an agreement to sell more than 1.3 million shares of newly issued stock valued at $2 million to Aeneas Venture Corp. Aeneas agreed in principle to allocate $20 million to be invested with Harken in appropriate, separately negotiated acquisition of oil and gas reserves and energy related companies. The deal was completed on October 31. Harvard at the time had $3.5 billion in investments in its endowment. Donald Beane, a Harvard Management partner, was appointed to the Harken board.

On November 4, Harken stock began trading on the NASDAQ exchange.

On December 23, Harken announced another deal with Aeneas. The two firms joined to buy Kennedy & Mitchell Inc. (KMI) an independent oil and gas company in Denver. A new holding company was formed, owned 49 percent by Harken and 51 percent by Aeneas. Harken issued 785,000 shares of stock and Aeneas invested $1 million.

Also in December, Harken bought E-Z Serve, a retail gasoline chain with 900 stations, mostly in the Southwest.

The purchases were the first in a dizzying series of acquisitions by the company. The company went from $4 million in revenue in 1986 to reported revenues of $1.1 billion just three years later an increase of 27,400 percent. That same year, 1989, Harken began trading on the New York Stock Exchange.

The Anadarko and KMI deals were just two of many transactions that involved Harken and Harvard. On October 29 1987, Harken inked a $20 million production purchase joint venture with Aeneas Venture Corp. The $20 million will be used to fund the equity portion of purchases of oil and gas companies and properties which the company anticipates will become available over the next several months, the company announced.

A Pensions & Investment Age story published November 16, 1987 said that Aeneas, Harken and Soros planned to participate in a $15 million developmental drilling joint venture. The article said that the venture was the third major oil and gas investment by Harvard since undertaking a direct market approach last December. The first was with Harken, as well.

By March 1988, Aeneas owned a 29.8 percent stake in Harken, and was in a position to own more of the company by converting its shares and promissory notes from the KMI deal into 500,000 Harken shares.

There were other deals. On December 19, 1988, Harken issued 3 millions shares of preferred stock in a private offering. Harvard and its various affiliates purchased 500,000 shares for $5 million, according to documents. On March 30, 1990, Harvard exchanged a note in its possession for Harken stock. Galatea Associates, an affiliate of Aeneas, received 868,450 shares for $4,342,248 worth of stock in exchange for the note it held, according to financial documents.

One measure of the close connection Harvard had with Harken was on the oil company’s board. Directors Michael R. Eisenson and Donald D. Beane were both partners with Harvard Management and personally owned 10,000 Harken shares. When the board voted on the Anadarko partnership, minutes show the two men abstained, presumably because they were concerned about a conflict of interest.