Even in its glory days of rising sales and standing-room-only shareholder meetings,

Harken Energy

(HEC)

wasn't what you'd call a blue-chip investment.

More than a decade ago, the Texas-based energy company was making a big bet on a fiercely competitive business in which it had little experience. A dozen years and numerous setbacks later, with its $10 million market cap and well-established knack for losing money, Harken is the sort of penny stock that rarely interests investors.

That is, until you throw the stock sales of a certain former director -- President George W. Bush -- into the equation.

Suddenly, it doesn't matter that Harken is a tiny exploration-and-production company with a scant $5.5 million in latest-quarter revenue. Now Harken is in the headlines because years ago, Bush reaped a profit by selling thousands of shares just months before the company was hit by bad news.

If the sale itself was exceptionally well-timed, the renewed interest in its details comes at an inopportune moment for the president. In the wake of wealth-destroying corporate scandals at

Enron

and

WorldCom

, to name two, Bush is promising to crack down on corporate misconduct. But with its echoes of recent scandals, the Harken case now threatens to undermine the president's offensive against unethical behavior.

The Herald Angels

It may be tough to imagine, given the company's current state, but Harken was once so popular that Bush had to fight for a seat at the annual shareholder meeting -- a fight he actually lost, leaving him standing at the back of the room.

In 1989, a huge crowd of Harken's nearly 10,000 shareholders poured into a Dallas airport hotel to hear about the company's promising future. During the three short years since it had brought Bush aboard by buying out his struggling company, Harken had exploded from a tiny operation with only $4 million in sales to one expecting more than twice that amount in profits.

In fact, Harken was then on its way to delivering $1 billion in annual sales for the first and only time in its history. And that was even before January 1990, when Harken landed a coveted Middle Eastern drilling contract, beating out the likes of

Amoco

and becoming one of the hottest gambles of the time.

It was with this backdrop that in the summer of 1990, Bush sold most of his Harken stock -- then his largest asset -- to pay off a $600,000 loan he had taken to invest in the Texas Rangers baseball team. At the time of the stock sale, Bush was a director of Harken and was serving on a two-member "fairness committee" formed to study whether a major company restructuring would hurt ordinary Harken shareholders. (He also served on Harken's audit committee.)

The timing of Bush's insider sale -- which reduced his stake in Harken by two-thirds -- proved impeccable on two counts. It barely preceded Harken's report of an unprecedented $23.2 million quarterly loss that punished the stock. And it came just before Iraq invaded Kuwait, potentially jeopardizing the exclusive drilling opportunity in nearby Bahrain that made Harken such an exciting gamble for investors.

It's Curious, George
Events surrounding President Bush's Harken stock sale*

1. September 1986: Bush sells his fledgling energy company for $600,000 in Harken stock and becomes a director and paid consultant.

2. June 1989: Harken predicts it will achieve $1 billion in annual revenue -- and delivers that at year's end, along with a $12 million loss.

3. January 1990: Harken signs an exclusive 35-year production-sharing contract with Bahrain.

4. June 1990: Bush sells two-thirds of his stake in Harken for $835,807 -- but doesn't file a necessary disclosure form.

5. August 1990: Harken reports a $23.2 million loss and major restructuring plan.

6. October 1990: Bush mentions Harken stock sale in Dallas Morning News interview.

7. April 1991: The SEC receives official notice of Bush's 1990 stock sale.

8. Fall 1991: Harken reports revenues of only $5.35 million, and a $4.19 million loss, for the first nine months of 1991.

9. December 1991: Harken's stock climbs to $7, more than double its price of five months earlier, as investors gamble on Bahrain bid.

10. January 1992: Harken reports the failure of first drilling attempt in Bahrain.

11. June 1992: Bush takes a leave of absence from Harken.

12. February 1993: Harken strikes out on its second attempt in Bahrain and doesn't try again.

13. November 1993: Bush resigns his board seat at Harken.

*Prices adjusted for November 2000 1-for-10 reverse split.

Further raising eyebrows was the fact that a required filing with the

Securities and Exchange Commission

didn't reach regulators until more than eight months after the reporting deadline. Bush properly filed his intent to sell stock but failed to file the actual sale documents until later.

At least one newspaper reported the sale before the SEC got its document: In October 1990, the

Dallas Morning News

quoted Bush as saying he'd become a "small, insignificant" stockholder in Harken after selling 225,000 of his 345,426 shares in "June or July," at $4 a share. A White House spokesman said Bush sold the rest of his Harken holdings before becoming the Texas governor in 1995, but wouldn't be more specific.

(Unless otherwise noted, figures in this story reflect historical stock information. For the sake of clarity, share counts and prices haven't been recalibrated to account for a 1-for-10 reverse split the company effected in the fall of 2000 to boost its stock price.)

Changing Tunes

Further muddying the waters, Bush has given a variety of reasons for his delinquent stock sale notification. When the matter first arose in 1991 -- and again during his race for Texas governor in 1994 -- Bush blamed the SEC for misplacing his forms. He stood by that story two years ago during his campaign for president.

Then, last week, a Bush spokesman suddenly shifted the blame to Harken attorneys for committing a "clerical error" that delayed the filing. Since then, Bush has simply claimed ignorance, saying he really doesn't know what caused the supposed foul-up.

The timing of the disclosure aside, questions have long swirled about what Bush knew when he sold the stock. In the early 1990s,

U.S. News & World Report

concluded that Bush had had "substantial evidence" to determine that Harken was in dire straits and needed to make radical changes to recover. Bush has consistently denied any allegation that he improperly enriched himself through insider trading, or that he tried to hide transactions.

Bruce Day, a securities attorney with a background in both federal and state securities regulation, said he's not convinced Bush did anything terribly wrong. If Bush simply failed to file a Form 4 stock sale registration late -- even eight months late -- his misstep was a minor one, he said. As for the insider-trading questions, "I'm not aware that that really happened," Day said.

Whatever happened, Harken's stock took a hard hit in the months following Bush's sale. The stock finished 1990 at $1.25 -- down 76% for the year.

As it turns out, Bush could have actually profited more by selling his Harken stock at its real peak nearly 18 months later.

After dipping to its low of $1.25 in 1990, the stock took flight in mid-1991, against incredible odds. By then, Harken had spun off its most valuable assets, including a retail gasoline chain that once generated about 90% of revenue. That left nearly all of Harken's assets tied up in its wildcat drilling project off the coast of Bahrain. Harken had no experience drilling wells either overseas or in the water. In fact, some people believed the company landed the Bahrain contract only because Bush was the president's son.

But investors had just watched

Triton Energy

score big on its own highly speculative overseas project. And they didn't want to miss out again.

So they overlooked Harken's dismal numbers, including revenues that had trickled to a measly $5.35 million during the first nine months of 1991, and a $4.19 million loss for the same period. They gobbled up the stock, sending it to $7 a share.

And they held their breath and waited.

Dry Hole

The following year, Harken's shareholder meeting attracted only 11 people, including three from the media and four from the company itself. Bush, who'd just begun a leave of absence days earlier, was nowhere around.

The meeting started late, at 5 p.m. in a hotel near Chicago's O'Hare airport, and lasted just under 10 minutes. The company's prospects in Bahrain were barely mentioned.

Harken's first drilling expedition off the shore of Bahrain had ended in a dry hole. The company's second -- and final -- try in the area would meet the same fate the following year.

On the day the second failure was announced, in February 1993, Harken's stock plummeted 29% to $1.50 a share. It was the sixth most heavily traded stock on the American Stock Exchange.

Seven months later, Bush ended his profitable eight-year stint with the company by officially resigning from his seat on the board.

Salary and Perks

At the height of Bush's Harken career in 1989 -- when the company pushed past $1 billion in revenue -- Bush raked in $121,000 as a paid consultant and $131,250 worth of stock options. Like other directors and officers, he was allowed to exercise his options at a 40% markdown from market prices, using low-interest company loans to boot.

Despite 1989's milestone in sales, Harken lost $12 million by year's end. It lost $40 million in 1990 -- when shareholder equity plunged to $3 million, down from $70 million just two years earlier. But even then, Harken's generous executive compensation remained virtually unchanged.

As the losses mounted, Bush's consulting salary finally dropped to $50,000 in 1991 and $42,000 in 1992. Still, by 1993 -- the year Bush exited the company -- he had amassed a personal net worth of more than $4 million.

Except for a brief rebound in 1997-98, Harken's stock traded mostly in the low single digits following the company's failures in Bahrain. This year has been among Harken's worst, with its stock failing to fetch much more than $1 a postsplit share and slipping below 50 cents this week.

Due to low energy prices, Harken has curtailed much of its exploration and production activity. It still has operations in the U.S. and abroad, but it is now seeking to grow through mergers and acquisitions.

Sixteen years have passed since Harken adopted a similar strategy, snatching up companies -- including Bush's -- on the path to its brief moment as a $1 billion company. In exchange for his company, near foreclosure at the time, Bush received Harken stock valued at $600,000.

He collected $835,807 for the sale of two-thirds of that stock less than four years later. At today's prices, the stock would be worth just over $10,000.