Did Dick Cheney Sink Halliburton (And Will It Sink Him?)
His record as CEO of the Texas-based oil-field-services giant has been marred by a government investigation into allegations that he fudged the books. His critics say it's another case of corporate malfeasance. But the worst thing the vice president was guilty of was mediocrity.
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The real problem for Halliburton and Cheney lies in the timing and the method of the disclosure to the SEC. "Much of the noise is because the first time we did it was 1998 but we reported it later," executive vice president and chief financial officer Douglas L. Foshee told a group of analysts in a July 24, 2002, conference call. "With perfect hindsight, could someone disagree with that conclusion? Yes." Foshee says that the reason the company did not disclose the change in its 1998 10K is because it was such a tiny percent of revenues (around one half of one percent). The eventual disclosure amounted to a few lines in a hundred-page report that did not address the reason for waiting a year to do it. Foshee says it mentioned the change to be "extra conservative."
While it is unlikely that the SEC will find anything wrong with Halliburton's accounting change, it might well find fault with its disclosure. This is where the inquiry has been concentrating, according to Lesar. "It has really been a disclosure issue," he says. Though the SEC does not comment on any aspect of an ongoing investigation, Halliburton says it is providing the commission with documents, including Arthur Andersen's work papers, and that no senior executives at Halliburton have been contacted by SEC investigators. Nor has Vice President Cheney been contacted, according to his spokesperson, Jennifer Millerwise.
If the SEC finds that Halliburton violated a disclosure rule, what might it do? "There is a range of penalties the SEC can assess, depending on the facts," says John Heine, of the SEC, without specific reference to Halliburton. "We could go to court asking for an order prohibiting certain activities. We could seek to bar accountants from practicing before the commission or to bar people from serving as officers and directors. Then there is a range of civil monetary penalties." For Halliburton, this would likely amount to fines of between $50,000 and $500,000 per violation assessed against the corporation and $5,000 to $100,000 per violation against individuals, assuming the SEC found the company guilty of deceit for failing to make a timely disclosure. But that is pure speculation. It is impossible to know what the SEC will do, though a criminal referral to the Justice Department on a delayed disclosure of an accounting change affecting less than one half of one percent of revenue seems unimaginable.
BY FAR THE BIGGEST AND most shattering effect of the Dresser merger came from something Cheney and his staff did not see at the time: a mountain of asbestos liability from products and services both Halliburton and Dresser had provided—particularly from a company that Dresser had sold in 1992. Cheney knew about the claims against Halliburton and Dresser; he did not know about the liability that lay dormant in Harbison-Walker Refractories, the company Dresser had sold. He did not know in early 1998—no one did—what was about to happen to asbestos claims nationally. At that time, asbestos litigation of the sort that had run rampant in the seventies and early eighties was no longer considered the threat to corporate survival it had once been. Aggregate numbers of suits were declining. More than twenty years had passed since companies had stopped making most asbestos products, and potential victims were dying off. Cheney knew the company had a total of 70,500 open asbestos claims after he bought Dresser. Halliburton's insurance would cover most of these, and the company could easily manage the rest. Cheney and Lesar did not believe they had any post-1992 liabilities from Harbison-Walker, a Pittsburgh-based maker of high-temperature equipment: They had agreements in place that appeared to protect them.
They were wrong. Between 1998 and 2001 asbestos litigation swelled to unprecedented levels in the United States, driven mainly by a 1997 Supreme Court decision saying that victims of asbestos exposure could not bring class-action lawsuits because each exposure was unique. "That led to an explosion of new individual cases," says CFO Foshee. "And there was a group of defendants who decided that, rather than fight, they would just agree up front on amounts claimants would be paid and avoid the costs of litigation. The lawyers didn't have to go to trial, didn't have to prove much of anything. You saw a machine get created. Ninety percent or more of new claims are unimpaired, meaning the claimant alleges exposure to asbestos but has no symptoms or previous medical problems."
The result was astonishing, even by the high-stakes standards of American mass tort litigation. Since January 2000, the avalanche of new claims has forced sixteen major companies to seek the shelter of bankruptcy. Among them are multibillion-dollar corporations such as chemical manufacturer W. R. Grace, insulationmaker Owens Corning, auto-parts conglomerate Federal-Mogul, and boilermaker Babcock and Wilcox. These are otherwise viable, profitable firms. Halliburton saw the number of open claims it faced for asbestos rise from 70,500 in 1998 to 274,000 by the end of 2001 and 312,000 today. A series of jury verdicts in late 2001 involving claims against Harbison-Walker—$122 million between October 30 and December 10—sent Halliburton's stock price tumbling: On December 7 alone it fell 42 percent. On January 4 Halliburton's stock price, once as high as $64, hit $8.60. On January 23 Moody's Investor's Service cut the company's long-term credit rating. In February Harbison-Walker was forced into bankruptcy, jeopardizing Halliburton's own insurance and putting more downward pressure on the stock price. Obviously, Wall Street was beginning to wonder if the company could survive.
It was this price drop, which continued through the spring of 2002 and which was made worse by the revelation of the SEC investigation, that made Cheney's $30 million stock deal suddenly seem so suspicious to so many people. It looked, on the surface, as though he had done what so many other executives had done in the past few years: used his insider's knowledge to cash out just before the bubble burst and stick other shareholders with the losses. Criticism of Cheney comes in two buckets: first, that he should have known better than to buy Dresser; second, that by August 2000, when he joined Bush on the campaign trail, he did know better and that he was therefore dumping the stock of a company that was about to get into trouble.
But it is difficult, if not impossible, to make the case that Cheney ultimately had any control over the disposition of his stock. At the time he accepted Bush's offer to join him on the Republican ticket, Halliburton's stock was trading in the mid-fifties. This was a good price, by recent standards, reflecting the company's modest rebound from the doldrums of 1998 and 1999 and prospects for better times in the oil industry. Though Halliburton's earnings of $438 million were still 22 percent below the $558 million it had earned in Cheney's first full year, oil rig activity was increasing, the company seemed to be assimilating the Dresser merger, and things were looking up. Asbestos liabilities were on the rise—evidenced by larger sections of the company's 10K now devoted to it—but at this point no one, including Wall Street, was alarmed.
Cheney had once said, in response to an interviewer's question, that he would be taking a "financial bath" by giving up his job at Halliburton. That was an interesting comment, to say the least, since his departure netted him $30 million. He made that money selling stock and stock options for $54 a share, and though he was technically free to keep most of his stock, in reality he faced a Hobson's choice, made evident by the outcry from his political opponents when he balked at giving up $3.9 million in options that would vest in 2001 and 2002. The truth was that, having decided to join Bush on the ticket, Cheney had no choice but to liquidate his stake in Halliburton. That he sold that stock for a good price was a fortuitous coincidence. We will never know whether, if Halliburton's stock had been trading at $8.60 when Bush asked him to join the ticket, Cheney would have declined for purely financial reasons. In any case, Cheney's critics cannot have it both ways: They cannot insist that he sell his stock and forsake his options to avoid conflict of interest, then castigate him for selling out at the right time and making millions.
Two years later, Halliburton seems to have weathered the worst of the asbestos storm. In early 2002 the company hired an independent consulting firm to assess how much money in asbestos claims it would have to pay out over the next fifteen years. The estimate: about $2.2 billion, of which $1.6 billion is covered by insurance, leaving a net liability of $602 million. In July Halliburton took a $483 million charge to raise its total reserve for asbestos payments to $602 million. By all indications, Wall Street bought it. By early September the stock was up nearly 40 percent; of thirty leading analysts on a Web survey, most were recommending "buy," and the average price they believed the stock would be trading at in twelve months was $30. The company's lingering problem is Harbison-Walker, whose bankruptcy has temporarily stayed some 200,000 claims against Halliburton. "The big question is, Can Halliburton come to the table and negotiate a global resolution?" says Alan Rich, an attorney with Baron and Budd in Dallas, one of the leading asbestos plaintiffs law firms. "If they don't do a deal, they'll be kneecapped, the injunction will be lifted, and the 200,000 or so suits will start grinding forward again, and the market will beat 'em to death." Not surprisingly, Halliburton executives disagree with that assessment; they are continuing to negotiate a settlement with Harbison-Walker and its plaintiffs.
WHAT IS DICK CHENEY'S REAL legacy at Halliburton? Certainly, the company's hard luck in the stock market is related directly to the enormous media coverage it has received. In the nineties Halliburton's foreign business got a huge lift from Cheney's stature as a world statesman; since he left, the company's shareholders have paid dearly for that stature. By most estimates, Cheney did a decent, if unspectacular job of running Halliburton. He had the good fortune to hit an industry boom when he arrived at the company and the misfortune to hit a major downturn in 1998 and 1999—years in which he failed to get a bonus. By Wall Street standards, Cheney's performance was lukewarm at best. From December 31, 1995, to December 31, 2000 (before either the asbestos verdicts or the SEC inquiry), Halliburton underperformed the S&P 500 by 31 percent and the S&P Energy Composite stock index by 33 percent. Company executives estimate that asbestos alone has knocked $15 off the price of its stock, or 100 percent of its current value. On the other hand, the company is in a better competitive position. The merger with Dresser was probably necessary, and the acquisition of Landmark Graphics was superb: The company has performed brilliantly. Halliburton is now on the whole well capitalized, relatively debt-free, holding its market share against competitors, and potentially immune to the worst effects of the asbestos-litigation crisis. It is, however, no longer the world's largest oil-field-services company; after divesting Dresser's equipment group, it is again number two, behind Schlumberger. Perhaps more important, in assessing Cheney's performance, few people inside the company fault him for the company's stock price or the landslide of bad press. "The big question around the office is, How did we get here?" says a Texas-based project engineer with a Halliburton subsidiary. "But I have never once heard anyone blame Cheney for it. I would say in evaluating his legacy that it is not extraordinary and it is not poor." In the end, the worst that can be said of Dick Cheney is not that he is a cheat or a crook but that he was just ordinary.
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