President Bush's uncle, William H.T. Bush, was among a group of directors of a defense contractor who reaped $6 million from what federal regulators say was an illegal five-year scheme by two company executives to manipulate the timing of stock option grants, documents show.
Bush, known as "Bucky," is the youngest brother of former President George H.W. Bush. He was an outside, non-executive director of Engineered Support Systems Inc., a defense contractor whose profits were bolstered because of the Iraq war. The St. Louis-based company, a supplier of equipment and electronics to the military that was acquired last year by another defense contractor, has been under investigation by federal prosecutors and the Securities and Exchange Commission concerning the alleged options backdating scheme.
Bush and the others who sat on the board of Engineered Support Systems, known as ESSI, were not accused of any wrongdoing in the SEC's civil lawsuit filed Tuesday against the company's former chief financial officer and former controller, accusing them of enriching themselves and others with the backdating scheme. Bush made about $450,000 selling some of the stock in 2005.
It was the third case by the agency since last summer involving alleged improper options backdating, in a scandal in which more than 100 public companies are under investigation by the SEC and the Justice Department, more than $5 billion in profit has been erased by restatements and 18 CEOs have been swept out of office.
The SEC said in its suit that the former finance chief, Gary Gerhardt, told the former controller, Steven Landmann, to give the outside directors backdated options for 132,000 shares of company stock that exceeded what they were authorized by shareholders to receive.
"The company never disclosed to shareholders that it had awarded this additional compensation" to the directors, said the suit filed in federal court in St. Louis. The directors "realized approximately $6 million in unauthorized compensation from the exercise of their additional stock options," it said.
Altogether, employees and directors of ESSI received around $20 million in unauthorized compensation as a result of the backdating, according to the SEC.
William H.T. Bush was not immediately available to comment Thursday, an aide at the former president's office in Houston said.
Officials of the SEC, whose investigation of ESSI continues, declined comment.
Improper backdating coupled with immediate vesting
The SEC said in its suit that from 1997 through 2002, Gerhardt instructed Landmann to make company stock options more lucrative by backdating their exercise price to a historically low point in the stock's value. Usually, a stock option's exercise price coincides with the market value at the time of a grant to give the recipient an incentive to drive the price higher.
Backdating options can be legal as long as it is disclosed properly to investors and approved by the company's board or shareholders. If companies backdate options without accounting for the move, it can cause profits to be overstated and taxes to be underpaid.
In the ESSI case, the improper backdating was worsened by the fact that the options vested immediately -- enabling the recipients to instantly cash in, the SEC said.
William H.T. Bush made about $450,000 in January 2005 by exercising his company stock options and selling shares, his filing with the SEC shows. When questioned by reporters about the sale at the time, he said he had not pulled any strings in Washington for ESSI.
Five other ESSI executives and directors also cashed in on the company's rising stock price at the time, which was bolstered by record income stemming mainly from increases in the company's military contracts -- including adding armor to military trucks, refurbishing trailers the Army uses to haul tanks, and supporting satellite communications for troops. The biggest windfall went to Gerhardt, who made nearly $7.5 million from selling stock on Jan. 31.
The SEC said in its suit that Gerhardt and Landmann reaped $1.9 million and $518,972, respectively, from the options backdating scheme. Landmann, without admitting or denying the SEC's allegations, agreed in a settlement to pay a $259,486 civil fine and $627,071 in restitution plus interest. He also was barred from serving as an officer or director of, or as an accountant for, any public company. The SEC's case against Gerhardt is still pending.