Harvard Investors Call Harken Deal Clean

Following months of accusations of financial improprieties surrounding Harvard’s investment in an oil firm tied to George W. Bush, the president of Harvard’s investment firm denies that the University did anything wrong.

During his first in-depth interview with The Crimson on the subject, Jack Meyer, president of Harvard Management Company (HMC)—the arm of the University responsible for investing the endowment—called recent allegations by a watchdog group “absurd.”

Harvard’s connection to Harken first drew major attention last spring, when HarvardWatch—a student-alumni watchdog group—suggested the University’s ties to the poorly performing energy corporation were prompted by Bush’s relation to the company.

Bush served as a director of Harken from 1986—the year Harvard began investing in the company—until 1993.

Speculation has since ensued that in June 1990 Harvard, seeking to satisfy political interests, purchased from Bush 212,140 Harken shares—holdings valued at $848,560 and comprising about two-thirds of Bush’s investment in the company.

The scrutiny continued early last month, when HarvardWatch released a report detailing a partnership formed in December 1990 between HMC’s then-venture capital division, Aeneas Venture Corporation, and Harken called the Harken Anadarko Partnership (HAP).

The report, comparing the partnership to those employed by Enron, charged that the partnership “was controlled by and transparent only to Harken insiders, and likely was used to artificially brighten the company’s business projects.”

But Meyer told The Crimson that all allegations regarding the Harvard-Harken relationship “are either absolutely false or pointless”—a statement backed up in interviews with other people involved in HMC’s investment in Harken.

Initial Attraction

The story of Harvard and Harken dates back to 1986, when the HMC Board of Directors—in charge of setting HMC policy but not specific investment decisions—viewed the energy business as a wise investment opportunity.

Led by HMC director and former Harvard Corporation member Robert G. Stone Jr. ’45, the board decided that HMC should allocate five percent of its endowment investments to the energy business.

The price of natural gas had fallen sharply in the period before Harvard began investing—down from $2.82 per million BTUs (MMBtus) to $1.45 per million in October 1986—and HMC saw the market as overly depressed and hoped to invest at the bottom of the dip.

HarvardWatch charges that the decision to invest in Harken stemmed from political ties between Stone, who is involved in the energy business, and the Bush family.

Stone, who has been travelling in recent weeks, was not available for comment.

However, Meyer says that HMC directors are never involved in making individual investment decisions.

Once the board sets the policy, it is up to HMC analysts and investors to decide how to parcel out the endowment into specific investments.

Several HMC analysts who worked at HMC during the period in question agreed with Meyer, saying that they had never discussed a specific investment with a director.

In fact, Meyer explains that HMC’s interest in Harken was not piqued by Stone, but rather by the chair of the Harken Board, Alan G. Quasha ’72.

Beyond the Stone-Bush connection, the HarvardWatch report cites the timing of HMC’s investment in Harken as an indicator of Bush’s influence on the investment.

Harvard first invested in Harken in 1986 within 30 days of Bush joining the company.

Meyer, who joined HMC in September 1990 but is familiar with the Harken investment, says that Bush had nothing to do with HMC’s decision to invest. That decision had already been determined before Bush ever came to Harken, Meyer said.

Michael R. Eisenson, a top HMC investment manager when HMC began investing in Harken, wrote in an e-mail that Bush’s involvement with Harken was unrelated to HMC’s investment decision.

“The decision was motivated not by political considerations but by the prospect of positive investment returns in an energy company, an area of interest to HMC at the time,” Eisenson writes.

But Emma S. Mackinnon ’04, a member of HarvardWatch, says she still questions HMC’s motives for investing in Harken.

“I don’t think we’re saying Bush was necessarily the reason Harvard got involved, but the fact Harken wasn’t doing well [when HMC invested in it] does call into question what Harvard’s motives were,” says Mackinnon, who is also a Crimson editor.

Nothing Unusual

In addition to questioning motives for the initial investment, HarvardWatch and others have also questioned the magnitude of Harvard’s investment in Harken.

By 1991, Harvard was investing about $28 million, or one percent of the endowment, in Harken.

Despite this large investment, Meyer says that HMC’s relationship with Harken is actually quite typical of its relationships with the companies in which it invests.

“This was larger than our typical investment, but not the largest. And we are quite often heavily involved in individual companies,” Meyer says.

Eisenson agrees that there was nothing unusual about the investment.

“HMC’s investment in Harken Energy Company was larger than many of its individual investments at the time it was made, but was by no means HMC’s largest investment,” he writes. “The HMC Board was at all times aware of the Harken-related investments and was comfortable that they were within prudent diversification limits for the portfolio.”

Although HMC’s private equity investments are no longer handled internally, Meyer says that until the split in 1998, “it was quite common for HMC to own more than half of the shares in a company.”

Meyer declined to comment on other companies in which Harvard has a significant stake, saying that it is HMC policy not to discuss individual investments.

According to Meyer, the only reason he has provided so much detail about HMC’s involvement with Harken is to defend HMC against false allegations.

Eating the Cooking

At the same time Harvard was investing in Harken, two of its investment managers were serving on Harken’s executive board and owning personal shares in the company—a situation which HarvardWatch has criticized as a conflict of interest.

The Crimson reported in July that Eisenson and Donald D. Beane held positions on Harken’s Board of Directors with Bush and personally owned 10,000 shares of common stock in the company.

But Meyer says that HMC investors in private equities frequently join the boards of the companies in which they invest—and, more importantly, perhaps, during the 1980s investors were encouraged to buy personal stock in companies in which they placed money for HMC.

The practice, called “eating your own cooking,” helped investors build a personal stake in ensuring good investments for their companies.

“In the 1980s, HMC employees were encouraged to own stock in the companies they were investing in on behalf of Harvard, provided their individual transactions did not front-run Harvard and subject to the specific approval of the HMC Compliance Committee,” Eisenson writes. “This was not uncommon among investment firms at the time and was thought to align interests.”

“Eating your own cooking” has since fallen out of favor in Wall Street firms, and Meyer says that he ended the practice at HMC soon after he took over.

“There are good aspects, but there are also potential conflicts,” Meyer says.

Buying and Selling

At the same time Harvard was increasing its shares in Harken, another stock owner—Bush—was selling his.

The buyer of Bush’s 212,140 Harken shares in June 1990 remains unknown, although The Boston Globe has reported that Ralph D. Smith, the broker in the sale of Bush’s shares, says the buyer was an “institutional client.” A Globe story this month determined that the buyer was likely the New York investment firm Quest Advisory.

Meyer vehemently denies that Harvard was the buyer of Bush’s shares, and says that he does not know who the buyer was.

Although Harvard did increase its holdings in Harken during 1990, Meyer says all of that stock came from the company directly as part of loan deals and other transactions.

And Meyer says speculation that HMC would want to offer a political favor to Bush is “absurd.”

“There is no rationale [at all],” he says.

Partnership

As Harvard became more heavily invested in Harken, it took on an even larger role as an investor when it helped to create Harvard Anadarko Partnership (HAP) in December 1990—a move which helped Harken to remain solvent and which HarvardWatch has compared to the off-the-book shadow companies and partnerships used at Enron.

Meyer, for his part, describes the partnership as the “antithesis” of Enron’s partnerships.

Meyer says HMC formed HAP because it only wanted to focus on Harken’s oil and gas properties, and not its other businesses—including convenience stores for gas stations and gas pipelines.

“This was set up with a legitimate business purpose,” Meyer says.

At the same time, unlike the fake companies set up by Enron executives, the formation of the partnership made HMC liable for the debt associated with Harken properties, Meyer says.

Meyer adds that unlike Enron, “all material aspects of the partnerships and economic arrangements between the partnership and Harken” were included in SEC filings.

HarvardWatch claims in its October report that “following the transfer of Harken’s debts into HAP, Harken experienced the largest increase in its stock price for the six-year period between 1988 and 1994.”

However, that stock price bump did not come until almost 18 months after the partnership was created and, in the year following HAP’s creation, Harken’s stock price in fact declined.

Meyer posits that Harken’s stock price rose following a surge in the natural gas price, which rose nearly 60 percent in the same time as the stock spike.

“There’s no doubt the debt removal was a good thing for Harken, but we didn’t set up HAP to inflate the stock price,” he says.

Selling Out

Despite its efforts to strengthen the company, HMC decided to sell most of its Harken shares in 1993 to Cabot Oil and Gas Corporation after the stock prices began to increase.

HarvardWatch considers this sale evidence of the unethical nature of HAP.

“The reason Harvard was able to sell high seems to be because of a bubble in Harken’s share price generated by the partnership,” Mackinnon says.

Meyer maintains that the stock price rise was generated by the rising oil prices, and that it is normal for HMC to sell stock after the price rises.

“[The investment] wasn’t going as well as we wanted it to go, and we thought Cabot could do better with it,” Meyer says.

In total, Harvard invested about $50 million in Harken and made a small profit off the investment, he says.

Meyer explains HMC’s investment decision as poor timing, since oil prices did not begin to rise significantly until the mid-1990s.

“Our basic strategy was fine,” Meyer says. “But it was a decade too early.”

—Staff writer Alexander J. Blenkinsopp contributed to the reporting of this story.

—Staff writer Jenifer L. Steinhardt can be reached at steinhar@fas.harvard.edu.