Did George W. Bush
Evade Income Taxes
on His Harken Loans?

Bob Fertik
August 16, 2002

George W. Bush's questionable activities and profits during his years as a director of Harken Energy Corp. (1986-1993) have come under a fair amount of scrutiny from the media. Mr. Bush has thus far avoided responsibility for those activities, thanks to a compromised investigation by the SEC during his father's presidency, as well as Mr. Bush's stubborn refusal to provide details of those deals.

But an investigation by Democrats.com has uncovered the possibility that one Harken transaction - the cancellation of an estimated $230,375 in debt in 1993 - may have been structured to help Mr. Bush evade income taxes. Further analysis by The Anonymous CPA suggests that Mr. Bush may have filed false tax returns every year between 1986 and 1993. Income tax evasion and filing false returns are both crimes.

Democrats.com therefore calls upon Mr. Bush to release his tax returns for 1993 and 1994, and to provide the other documents required to fully understand this shady deal.

Bush's Questionable Dealings at Harken Energy Corp.

George W. Bush's $848,000 profit from the sale of his Harken stock in June 1990 has received considerable media attention. Most of the coverage has focused on whether Mr. Bush had inside knowledge of the company's financial woes, which caused Harken's stock price to drop shortly after his sale. The issue of insider trading has been making headlines in the case of Martha Stewart's sale of ImClone stock. But the charges against Mr. Bush are much more serious, since Stewart was not an ImClone insider - while Mr. Bush was a Harken director and a member of its well-informed Audit Committee. Thus, Mr. Bush's apparent crime is much closer to that of ImClone CEO Samuel Waksal - and Enron chairman Ken Lay - than to Martha Stewart.

When the issue of insider trading was raised during his 1994 gubernatorial campaign, Mr. Bush denied any knowledge of Harken's financial troubles: "I absolutely had no idea and would not have sold it had I known." In 1999, Bush spokeswoman Karen Hughes said Bush "was selling into good news, not bad" - the expected announcement of a drilling contract in Bahrain (see below). In July, spokesman Dan Bartlett said Bush saw good news in an expected investment by the Bass family. But the "good news" alibi has been contradicted by recent revelations that Mr. Bush received warnings of serious financial problems two months before he sold his stock, and again two weeks before the sale. And there is evidence that Mr. Bush knew his sale was illegal, and tried to hide it by waiting 8 months to notify the SEC, and then uncharacteristically leaving the notification undated.

Mr. Bush claims the suspicious timing of his sale is a pure coincidence, and he was simply taking advantage of a perfectly-timed anonymous offer. This offer was relayed through a California stock broker who refuses to identify the buyer, but insists the buyer was not trying to bail Bush out - or buy political influence with the then-President's son. So far, that buyer has only been identified as "Lee". (Democrats.com has suggested the buyer could be Lee Teng-hui, the former President of Taiwan who was recently implicated in a global influence-buying scheme using a Taiwanese government slush fund. (1)

Mr. Bush's sale of Harken stock was allegedly investigated by the SEC. Luckily for Mr. Bush, his own father was President at the time. The head of the SEC, Richard Breedon, was his father's appointee and his former Vice Presidential counsel, and a protege of the Bush family advisor, James Baker. The SEC's general counsel, James Doty, was Mr. Bush's personal lawyer in his Texas Rangers deal. Contrary to false statements from the current White House, George W. Bush was never actually cleared of the insider trading charges; the SEC just sat on its hands and refused to prosecute the President's son. The SEC also ignored Mr. Bush's failure to file required documents in time on four separate occasions.

Senator Tom Daschle, Ralph Nader, and many in the media have asked Mr. Bush to provide additional details about the 1990 sale. So far, Mr. Bush has adamantly refused.

The SEC also investigated Harken's 1989 "sale" of its Aloha Petroleum subsidiary, which Harken used to conceal its losses from investors. Harken's accounting fraud was similar to those of Enron and other companies that have gone bankrupt this year. The SEC rejected Harken's fraud, and ordered the company to revise its financial reports. Mr. Bush recently denied any wrongdoing by declaring "sometimes things aren't exactly black and white when it comes to accounting procedures" - a statement that could be used to justify virtually all financial frauds.

Other questions have been raised about sweetheart loans issued by Harken to Mr. Bush and other directors (see below) for purchasing Harken stock options. These loans were issued at interest rates well below market rates, without any collateral beyond the stock options themselves. Although Mr. Bush now wants such loans to be banned, his spokesman Dan Bartlett called Mr. Bush's loans "totally appropriate."

Finally, questions have been raised about Mr. Bush's involvement with a remarkable deal between Harken and the government of Bahrain on the eve of the Gulf War in 1990. In January 1990, Bahrain chose Harken to explore its offshore oil, despite Harken's utter lack of experience overseas. Then Bush's father chose Bahrain as the principal allied military base in the Middle East. Was President Bush's base selection a payoff to Bahrain for choosing George W. Bush's company? This story has received far less coverage than it deserves, because it involves foreign policy dealings with a country few Americans have heard of.

Taken together, Mr. Bush's activities at Harken raise serious legal issues, far beyond the accusations against Bill Clinton in Whitewater. Indeed, many observers believe these issues should be examined by a Special Prosecutor. In July, Rep. John Conyers (D-MI), the top Democrat on the House Judiciary Committee, became the first Member of Congress to support a Special Prosecutor.

Possible Tax Evasion for Forgiven Harken Loans

Mr. Bush is fighting tenaciously to avoid further examination of his Harken activities through careful spinning and quiet stonewalling. But there is one financial crime that might be considerably easier to prove, both in the court of public opinion and in a court of law - namely, tax evasion.

After all, that is how the government finally stopped Al Capone, the most infamous gangster in history. This same crime could trip up George W. Bush, the most powerful man in the world.

The question of possible tax evasion by George W. Bush first arose in July, when reporters began examining Mr. Bush's $848,000 profit from his Harken stock sale. NY Times reporters Jeff Gerth and Richard Stevenson discovered that Mr. Bush's 212,000 shares of Harken stock were originally pledged as collateral for 80,000 additional stock options that Mr. Bush "bought" in 1986 with a Harken-financed loan of $96,000. Since Mr. Bush's 212,000 shares were already pledged, he should not have been able to sell them in 1990.

But as happened at every point in his life, Mr. Bush got a special break available only to well-connected insiders. Mr. Bush was a member of Harken's board, so in 1989 Harken simply changed the terms of Mr. Bush's 1986 loan. According to the NY Times,

In 1989, Harken relaxed the terms of the 1986 loan to remove any "personal liability to yourself," the company's lawyer wrote to Mr. Bush on Oct. 5 of that year. The change had the effect of freeing Mr. Bush's original 212,000-share block of Harken stock, which he sold the next year.

Thus, Mr. Bush got his cash and moved on to his high-profile role with the Texas Rangers, which allowed him to bury his catastrophic career as an oilman and reinvent himself (under Karl Rove's tutelage) as a successful baseball owner, just in time to run for Governor in 1994 - and six years later, for President.

But what ever happened to the $96,000 loan?

Democrats.com commissioned a team of financial experts to conduct a thorough investigation of Mr. Bush's stock options. Their analysis is difficult to follow without a sophisticated financial background. So here is a quick summary:

  • In 1986, Mr. Bush "bought" options for 80,000 shares of Harken stock priced at $1.20 per share for $96,000, financed with a 5% loan from Harken. (Bush waited five months to report the purchase to the SEC, and suspiciously backdated the purchase date in his letter.)                                  
  • In 1988, Mr. Bush "bought" another 25,000 options priced at $3.375 for $84,375, also with a 5% loan from Harken. (Bush waited more than four months to report this purchase to the SEC.)                                
  • In 1989, Harken relieved Mr. Bush and the other directors of any obligation to repay their loans, allowing them to quit Harken and let Harken pick up the tab for their unpaid loans.                             
  • In 1993, with Harken's stock price sagging - and Mr. Bush planning to leave the Board to run for Governor - Harken decided to cancel the outstanding loans and to issue new stock options through a complicated transaction that was intended to be a "wash" from the point of view of both Harken and the directors. (The transaction was designed by a consulting firm which has never been identified.)                                 
  • That transaction effectively cancelled approximately $230,375 of Mr. Bush's debt.

This details of this remarkable loan - from beginning to end - raise a crucial legal question for Mr. Bush: did he pay his income taxes?

The Anonymous CPA has identified a series of transactions which benefited Bush - and appear to be fully taxable.

  • Mr. Bush was allowed to purchase Harken stock at a 40% discount in 1986 and 1988. This discount was taxable as ordinary income - $38,400 in 1986 and $33,750 in 1988.    
  • In 1989, Mr. Bush was relieved of the obligation to repay the loans - turning the loans into a taxable "sham transaction," and turning the previously untaxed 60% into taxable income of $108,225. (Since there is no statute of limitations for fraudulent sham transactions, the IRS could still assess Mr. Bush for these amounts.)    
  • Since the loans were below market rate, the interest rate discount (the difference between the market rate and Mr. Bush's rate of 5%) is also taxable for every year from 1986 to 1993.    
  • When the entire loan was cancelled in 1993, the accumulated 5% interest charges became taxable as well.    
  • If Mr. Bush did not report each of these transactions in the year in which they occurred, then he filed false returns in those years - a crime for which Leona Helmsley was convicted - and committed perjury when he signed the returns. 

We have not yet verified this analysis. But even if the Anonymous CPA is completely wrong, we must still consider the ultimate cancellation of debt totaling $230,375 - and the loan forgiveness of $118,760. This is a bit complicated, so to help make our analysis clear, we offer a simplified analogy.

Let's say you are hired as a consultant to a bank, and placed on its board of directors. The bank encourages you to buy a home for $96,000, which it finances with a loan at 5%, which is well below market rates. Three years later, the bank encourages you to add a wing to the home, with another loan of $84,375 at 5%. You never make an interest payment, so you accrue additional debt of approximately $50,000. Three years later, the value of the property falls to only $111,615, but you still owe $230,375 in interest and principal. Because of the terms of the loan, the bank lets you walk away without further payment, and simply takes back the house. Under a normal mortgage arrangement, the IRS would require you to report the value of the forgiven loan - $118,760 - as income on your tax return. You have, after all, had the use of the house for all of those years.

Even though Mr. Bush's case involved stock rather than a house, the tax rules are the same. When Mr. Bush left Harken on October 26, 1993, the terms of the loan allowed him to return the stock and walk away from his outstanding debt, with Harken covering the cost of the forfeited loan. When George Bush and the other lucky company officers surrendered their stock in August, those same facts applied. In Mr. Bush's case there was a difference of $118,760, just as if he were leaving the company.

So the question we ask is this: did George W. Bush commit the crimes of filing false tax returns - and evading taxes - between 1986 and 1993?

Why Mr. Bush Should Release His Tax Returns

Unfortunately, we have no way of answering this question, because Mr. Bush has not made his tax returns public. We therefore call upon Mr. Bush to release his returns from 1986 to 1994, and to urge Harken to release other key documents essential to a full understanding of these loans, as specified in the attached analysis.

It is not unusual for politicians to release their income tax returns. Indeed, Mr. Bush released his returns for 19982000 and 2001 - although only in summary form (other Presidents have been much more forthcoming). Jeb Bush also released his returns during his gubernatorial campaign.

Of course, some politicians resist public demands for their income tax returns. But when the voters suspect a politician is trying to hide something, pressure from the public - and the media - has often forced politicians to come clean. Indeed, Vice President George H. W. Bush's opponent in the 1984 election was forced to go through an exhaustive income tax examination by the media which made headlines for days - the opponent, of course, was Geraldine Ferraro. The same issue is now making headlines in California's gubernatorial race, where Republican millionaire Bill Simon Jr. has been accused of fraud.

But the issue of George W. Bush's possible tax evasion goes beyond ordinary politics. The very core of Mr. Bush's presidential campaign was to "restore honor and integrity" to the White House. Without that promise, Mr. Bush would never have left Texas. This promise requires Mr. Bush to not only talk about "honor and integrity," but to prove it.  

This leads to the fundamental issue of honesty. If Mr. Bush did evade income taxes for his Harken loans, then he should state the truth in plain English. When the Harken scandal hit the headlines earlier this year, Mr. Bush claimed there was no "malfeance" - a non-existent word - and said his actions were "vetted" - a deliberately misleading word. If Bill Clinton was impeached for lying, Mr. Bush should tell the whole truth - and nothing but the truth. And the media, which supported the Republican impeachment jihad, should settle for nothing less.

In addition, there is the crucial issue of credibility. Mr. Bush has responded to this year's massive corporate accounting scandals - and the resulting collapse of the stock market - by trying to portray himself and his administration as the "good guys" who will put an end to such fraud by locking up the "bad guys." But if Harken's board designed the 1993 transaction to allow Mr. Bush (and the other Harken directors) to evade taxes, then Harken's board committed fraud - and they are the "bad guys." Mr. Bush's credibility has already been badly damaged by his many top appointees who have been accused of corporate fraud - especially VP Dick Cheney (Halliburton), Army Secretary Thomas White (Enron), and even the head of Bush's Corporate Crime Task Force, Larry Thompson (Providian). The public and investors need to be reassured that Mr. Bush is not a crook, in order to give some credibility to Mr. Bush's fight against corporate fraud, which is essential to reviving our failing economy. 

Finally, as impeachment czar Henry Hyde famously declared, "the law is the law." This month, Mr. Bush signed a law requiring corporate executives to take full responsibility for their company's financial statements - under penalty of prison. While this is a new requirement for corporate executives, it is not new for personal income tax filers. When Mr. Bush signed his 1993 tax return, he did so with full understanding that misleading the IRS was a crime that could put him in "the pokey", as White House spokesman Ari Fleischer has warned corporate crooks.   


The analysis below represents an impartial examination by financial experts which raises questions that need to be addressed, both fairly and honestly, by Mr. Bush himself.

Bush and the Harken Stock Options
by Robert Reynolds and Jim Mooney

The appendix below argues that Mr. Bush may have filed false tax returns between 1986 and 1993 as a result of the uniquely favorable terms of the Harken loans. (2)

Tax Consequences of Bush's Harken Loans
by the Anonymous CPA

If you are confused by some of the analysis, browse our FAQ.

If you have additional questions for the authors, please join our moderated discussion at http://groups.yahoo.com/group/dem-harken/

This article can be found at http://democrats.com/harken

Post-publication Notes

1. A reader writes: "I read with interest your statement that the buyer of Bush's Harken stock was "Lee," and that this person may have been Lee Teng-Hui. Did it strike you that Lee was the one world leader Bush was able to identify when quizzed by that Boston reporter in 1999? It seemed strange to me at the time that he could identify the leader of Taiwan. I mean, he's clueless. No idea who leads India, but he knows the president of Taiwan? But of course, if Lee saved Bush from another embarrassing business failure, he would remember him." Absolutely!

2. This appendix was not available to the author when the article was first published on 8/15/02. The article was revised on 8/16/02 to incorporate this information.

3. "The Anonymous CPA" (TAC) wrote another blockbuster in MakeThemAccountable.com: that George W. Bush evaded $3 MILLION in taxes when he sold his share of the Texas Rangers for over $15 million in 1998. Bush reported the income as a capital gain, which allowed him to pay a rate of only 20% ($3 million), compared with the 39.6% rate for ordinary income ($6 million). TAC's analysis is based on the case of Illinois Gov. Otto Kerner (D), who was convicted in 1972 of income tax fraud for treating a gain of $180,000 in race track stock as capital gains, rather than ordinary income. Jim Thompson was the prosecuting US Attorney, a Republican appointed by Richard Nixon who later became Governor. Thompson convinced a jury that Kerner corruptly used his political influence to increase the value of his race track stock. That's exactly what Bush did, when the man he appointed to run the $9 billion endowment of the University of Texas bought the Rangers for $250 million.

4. StickingItToTheMan.com points out that tax evasion played a key role in bringing down Richard Nixon and Spiro Agnew. "By the spring of 1974, Tricky Dick (President Richard Nixon) was in a great deal of trouble. Not only had the House Judiciary Committee turned up the heat on its investigation into Watergate, but Nixon was also facing serious questions about his tax history. In 1973, word leaked out that Nixon had been paying taxes commensurate with an annual income of $15,000; as president, he had in fact earned $200,000 a year. Duly suspicious, Congress marshaled a probe into Nixon's fiscal affairs. The president conceded that a few of his deductions might in fact be cause for controversy, and handed over his tax statements to the House committee in December of 1973. After intensive review and deliberation, the committee ruled that Nixon owed the IRS $476,431. And, on April 3, 1974, Nixon agreed to pay $432,787.13 in back taxes for the past three years." And in September 1973, VP Spiro Agnew resigned after pleading no contest to a charge of income tax evasion.

Media Coverage

The Daily Enron 8/16/02: Bush Harken Loans Raise Tax Questions 

The Reynolds/Mooney report comes at an awkward moment for the President who has spent the last couple of months condemning companies that gave and forgave loans to insiders while shareholders lost millions. Harken Energy was losing money in 1986 when it granted Bush the first low interest loan. Harken was still losing money when it granted him additional funds in 1989. And Harken was losing even more money when the company forgave all of Bush's loans in 1993. (Harken shareholders lost money all along the way.) The very least Americans can ask of the President now is to at least assure us that he paid taxes that might have been due on the deal.



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