Growing scrutiny of Bush business record

In June 1990, oil prices were bumping along at $17 a barrel and there was so much crude sloshing around that inventories hit an eight-year high.

As any Texan knew, it was not a good time to be in the oil and gas exploration business, but that's where George W. Bush had staked his future. He was a director and consultant to Harken Energy, a Dallas gasoline retailer and wildcatter struggling to stay afloat. Two months before the firm reported a big loss, Mr. Bush sold his shares, but it was 34 weeks – far longer than 31 days or less required by law – before regulators and other investors learned of the sale.

Now, even as the president puts new emphasis on corporate ethics, the administration itself is coming under close scrutiny. On Wednesday, Judicial Watch, a conservative group, sued Vice President Dick Cheney for what it claimed was past inflation of revenues by Halliburton, a company Mr. Cheney chaired from 1995 to 2000. Cheney and the company deny the charge. The White House insists there is nothing to the charge. Reporters are also now looking at Bush's own brush with the Securities and Exchange Commission (SEC) which apparently examined his Harken deals.

Bush, for his part,insists this ground has been covered, and nothing untoward found.

The media sleuthing comes only a few days after President Bush outlined a much tougher approach to wrong-doing by CEOs. The White House has shrugged off reports that show Bush himself engaged in some of the things for which he has castigated CEOs. For example, he took a company loan, a practice he is decrying. And he wants CEOs to disclose on a timely basis when they buy or sell their shares – which he did not do.

Private-citizen Bush had become an investor in Harken in the mid-1980s as his own oil company, Spectrum 7 Corp., was scraping along in debt. After investing $500,000 in Harken, Bush received $131,250 in stock options. By June of 1990, Bush had dumped most of his Harken stock, clearing $848,560. Just two months later, the firm reported a much larger loss than expected, and the stock dropped to $2 a share from where Bush sold it at $4.

After Harken's 1989 annual report came out in 1990, the SEC looked at it and saw a red flag. The firm had sold a subsidiary to its own management and booked it as a capital gain. "It's not an arms-length transaction when management is on both sides," says Chris Bebel, a former SEC attorney and federal prosecutor. "Related-party transactions are viewed with great suspicion," says Mr. Bebel, now at Shepherd, Smith & Bebel in Houston.

For Harken, this meant restating its earnings – similar to what WorldCom and Enron have had to do. Instead of reporting a loss of $4 million, the red ink swelled to several times that amount and the stock plunged. When he ran for governor of Texas, Bush was asked about the sale of the stock. Did he know in advance that the company was going to have a much larger loss? Was he trading on inside information? "I absolutely had no idea and would not have sold it had I known," he said during his 1994 campaign for governor.

If done today, such a sale would spark an SEC inquiry, prosecutors and attorneys say. "A large sale two to three months before very bad news ... will be looked at hard today by the SEC and the exchanges," says Christian Bartholomew, a former SEC senior trial counsel, now a litigator at Morgan Lewis in Miami.

When trying to decide if insider trading has occurred at a company, government attorneys look at what they call the "fact pattern." Are there memos that make passing reference to sensitive information that might lead a prosecutor to think a trader did more to find out what was in the memo? Was there a board meeting to discuss the information? What did the trader say to his or her broker?

"It's very much like a mosaic that you put together from small pieces of evidence from different sources," says Mr. Bartholomew. "There is very rarely a smoking gun. When there is, the cases are over very quickly."

To get this information, prosecutors go to all the sources, especially looking for discrepancies, says Tom Carlucci, a former assistant US attorney in San Francisco and now a white-collar crime specialist at Foley & Larnder. After all the interviews, the attorneys then go back to the person being investigated. "You confront them with the factual information you know – 'Look, these three people said you knew this. If you didn't, can you prove they are mistaken?' "

In Bush's case, he's changed his story about why he was so late in notifying the government about the sale of the Harken stock. In 1994, he said that the government had lost the information. More recently, he has said his lawyers had been late in making the filing.

The SEC apparently did look into Bush's stock sale, but the extent of the probe is unknown. The SEC's general counsel at the time was James Doty, who represented Bush in private practice. So far, the SEC has released only a few files relating to the investigation. "Inquiries into insider trading are kept secret," says Bartholomew.

But many attorneys in this field believe the event today would have resulted in a much more in-depth type of investigation. "It would have warranted serious review," says Kirby Behre, a former assistant US attorney, now with the Washington law firm Paul, Hastings. "Today is a different environment, a different level of inquiry."