Bush's Uncle Profited from $20 Million Defense Contractor Fraud

President Bush's uncle, William H.T. "Bucky" Bush, was on the Board of Directors of a defense contractor company that has been accused of reaping millions from an illegal stock-option timing scheme.

The Securities and Exchange Commission filed a civil suit this week against the company's former Chief Financial Officer and former Controller, accusing them of engaging in a six-year long scheme to grant undisclosed backdated stock options to themselves and to other officers, executives, and employees.

All together, $20 million in unauthorized compensation was involved, with $15 million of that going to the top executives and to the directors.

Backdating options involves manipulating the value of the options by using a date in the past, when the stock market was lower, as the date that the options were granted. It is the lack of disclosure that is key to making this transaction a fraudulent one. Options backdating is not necessarily illegal. In order to be legal, though, the backdating must be properly disclosed, which was not done here.

While the SEC did not accuse Bush's uncle and the other directors of wrongdoing, the directors did benefit from the scheme. Bucky Bush made about $450,000 in 2005 by exercising his stock options and selling his shares. Together, the directors made about $6 million from the scheme.

SEC Enforcement Director Linda Thomsen said, "Our actions against [former Chief Financial Officer] Gerhardt and [former Controller] Landmann demonstrate the commission's ongoing commitment to addressing fraudulent stock-option practices and ensuring full and fair disclosure of executive compensation."

The SEC and the Justice Department are currently investigating more than 100 companies for suspected illegal options backdating.

Bucky Bush's company, Engineered Support Systems Inc. of St. Louis, sold equipment and electronics to the military. The company benefited financially from the Iraq war. At the time that he sold his shares, Bucky Bush told a reporter from the Los Angeles Times that "he had not pulled any strings in Washington to win Iraq war contracts."

Bucky Bush is not the only one in the family to be involved in a multi-million dollar options-timing scheme. Last week, a class action shareholder suit against HCC Insurance Holdings was filed that accused the President's younger brother, Marvin Bush, of making $2.2 from backdated options.

Sources

Bush's uncle profits from options scheme, by Marcy Gordon, Feb. 8, 2007, Associated Press

Bush's uncle linked to options lawsuit, by Los Angeles Times staff and wire, Feb. 9, 2007, L.A. Times

UPDATE 2-SEC charges former execs of ESSI with backdating, Feb. 6, 2007, Reuters

Options Backdating, Wikipedia

Backdating of Executive Stock Option Grants, Erik Lie, University of Iowa, www.biz.uiowa.edu

Lawsuit alleges backdating of stock options at HCC, by Purva Patel, Feb. 2, 2007, Houston Chronicle