Unlike some off-the-books partnerships by bankrupt energy company Enron Corp., the 1990 Harken-Harvard partnership was disclosed in Securities and Exchange Commission filings.
But the arrangement apparently helped struggling Harken ride out a difficult financial stretch. With a cleaner balance sheet, Harken stock more than tripled in the early 1990s to about $8 a share. Harvard, which had invested $30 million in the then little-known energy company, sold 1.6 million shares.
"It's legal, but God, it smells rotten," said Bill Coyle, an accounting expert at Babson College. Coyle said Harken's only legal obligation was to disclose the existence of the partnership and any debts Harken had guaranteed for it.
Details of the arrangement were described in a report released Wednesday by HarvardWatch, a student and alumni group.
The university has said it made "a small profit" from Harken shares but has not provided details. The shares currently trade at around 20 cents.
Bush, a Harvard Business School alumnus and the Harken board member who made the motion to approve the partnership, did not benefit - he had just sold most of his Harken shares, in part to finance his purchase of the Texas Rangers baseball team.
"Harvard proposed the partnership and they also dictated the terms of the partnership," White House spokesman Scott McClellan said. He said Harvard's relationship with Harken predated Bush's tenure on the company's board.
McClellan dismissed any suggestion the situation was similar to Enron's off-the-books entities. "Even independent reports note that it was fully disclosed to investors and complied with accounting rules," he said.
Harken Chairman and Chief Executive Mikel Faulkner did not return a call seeking comment.
The university released a statement saying that its investments in Harken "were not inappropriate and were disclosed openly and properly."
"Harvard Management Company sold its Harken shares at a profit, consistent with its mission," the statement said. "The role of the Harvard Management Company is not to curry political favor but to invest well on Harvard's behalf."
At a July 1990 board meeting, Bush and the Harken board voted to establish the venture between Harken and Aeneas Venture Corp., Harvard Management's venture capital wing.
The partnership assumed $20 million in Harken debts and $26 million in oil-drilling assets that had appeared on Harken's balance sheet. Aeneas contributed $64.5 million in oil drilling assets.
Overall, Aeneas contributed 91 percent of the investment but accepted just 84 percent of profits, HarvardWatch said, citing SEC filings. The deal also improved Harken's cash flow, giving it $1 million a year to operate oil and gas operations.
By Justin Pope