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Halliburton issues may surface at VP debate tonight
Despite denials of any stake in the firm, Cheney still feels scrutiny over his old company

BY ANDREW METZ AND JAMES TOEDTMAN
STAFF WRITERS

October 5, 2004

The Vermont Democrat approached Vice President Dick Cheney, who was attending in his role as the head of the Senate. Leahy could have expected at least a nod from a politician as disciplined and practiced in the grin-and-grip as anyone in the Capitol.

What Leahy got instead was an obscenity-punctuated rebuke over comments he made earlier in the week suggesting the vice president's old firm, Halliburton, has been improperly profiting from government contracts in Iraq.

Go -- -- yourself," Cheney snapped and brusquely turned away.

Later, when the vice president had returned to his familiarly measured self, he told Fox News that Leahy "had challenged my integrity and I didn't like that."

Four years after relinquishing the helm of one of the world's largest energy companies, Cheney has been unable to shrug off persistent and growing criticism about his stewardship of Halliburton and its intimate involvement in the administration's most serious undertaking: the war in Iraq.

Cheney is widely regarded as the most influential vice president in history, yet he has become one of the Bush administration's most controversial components and his former company the lightning rod, drawing unwanted investigations and uncomfortable partisan attacks. As the June exchange during what Democrats had dubbed "Halliburton Week" shows, the company is perhaps the most sensitive spot in this tough and usually controlled politician's armor.

The vice president has tried to publicly distance himself from the corporation that is now integral to the war effort he helped engineer. He continues to receive deferred compensation as part of a lucrative severance package, but insists he has no ongoing financial interest in the company -- a persistent campaign-season issue and among the Halliburton-related topics that could surface Tuesday night at the vice presidential debate in Cleveland.

"I have no financial interest in Halliburton of any kind and haven't had now for over three years," Cheney told NBC's "Meet the Press" last September.

Still, in the final stretches of the campaign, Democrats have set the company and its former CEO in the crosshairs. In television ads, stump speeches and media reports, questions are still being raised about Cheney's compensation, about non-competitive contracts Halliburton has received, about overcharges for meals and fuel in the war zone and about allegations of bribes in connection with Iraqi oil field work.

Authorities around the globe are also investigating Halliburton's role in a separate multibillion-dollar bribe scandal in Nigeria. During Cheney's tenure from 1995 to 2000, the company used offshore branches to operate in Iran and Libya, which the U.S. had branded outlaw regimes. Last August, Halliburton agreed to pay $7.5 million to settle a Securities and Exchange Commission probe of misleading accounting practices under Cheney's watch. And the vice president's major achievement, the acquisition of Halliburton's competitor, Dresser Industries, has been badly tarnished: the firm had to assume Dresser's huge asbestos liability, putting its own finances in a precarious state despite new government business that has made it the Pentagon's top private contractor.

"Vice President Cheney made his personal fortune as the CEO of Halliburton. He still has deferred pension money and stock options, which means he has a financial interest in the company doing well ... The activities of Halliburton just seem to grow and we are still trying to get all the facts," said U.S. Rep. Henry Waxman, a Los Angeles Democrat and outspoken critic of the firm.

Cheney and his supporters have rejected the barrage of accusations as acts of desperation and misinformation. None of the investigations have singled Cheney out for wrongdoing. The vice president has complied with financial disclosure rules and promised to donate to charity any after-tax profits from company stock options he maintains. And the giant company, they point out, is among only a few worldwide able to perform the tasks in Iraq.

"For a presidential candidate to be attacking the vice presidential candidate is absurd. They can't turn the corner on Bush, so they are trying to get to Bush through Cheney," said Richard Bond, a former National Republican Committee chairman. "Cheney is a revered figure in the Republican Party. He's been an effective vice president and they ain't laid a glove on him."

Halliburton's CEO, David Lesar, told analysts last month, "We are the most scrutinized and high-profile company in corporate America and maybe in the world." The unremitting attention, at least in part, reflects the breadth of Halliburton's activities -- it has 100,000 employees working at 120 places -- the legacy of Cheney's five-year stewardship and the evolution of its relationship with the U.S. government.

As defense secretary during the first Bush administration, then as Halliburton CEO, Cheney has had a unique role in downsizing and reshaping the Pentagon. Since the end of the Cold War, the Defense Department has sharply reduced its size and its operations, from 59 percent of the federal budget in 1990 to 46 percent in 2001, farming out an ever-increasing share of support contracts to private companies like Halliburton. Cheney's corporate strategy included competing for those contracts, and Halliburton was a major supplier of ground services to NATO forces in Bosnia and Kosovo.

But the Pentagon portion of Halliburton's operations exploded with the Iraq War.

On March 8, 2003, a week before U.S. troops marched, Halliburton signed a no-bid contract for securing and rebuilding Iraqi oil fields, especially against expected attacks by Saddam Hussein's retreating troops. On the second day of the war, Halliburton workers showed up on the oil fields, the first of an estimated 34,000 employees and contract workers now in Iraq.

A Pentagon audit later found that Kellogg Brown and Root, Halliburton's engineering and oil field construction subsidiary, had overcharged $61 million for delivering nearly 57 million gallons of gasoline to Iraqi citizens, charging as much as $2.26 a gallon.

KBR officials argued that the price included costs of transporting the fuel from Turkey and Kuwait. Eventually, the contract grew to $2.5 billion before the Defense Department agreed to subject further work to competitive bids. In January, Halliburton retained a $1.2 billion contract for rebuilding damaged oil fields in southern Iraq.

The second major Iraq contract was for troop support. That means "we provide support whenever and wherever it is required," according to Alfred V. Neffgen, chief operating officer for Halliburton's Kellogg Brown and Root regional operation. Halliburton first won the contract in 1992, lost it to Dyncare in 1997, after inflating costs in Bosnia by 32 percent, then regained it in 2001.

The projected $13 billion deal was structured to protect the company's profits, even if work costs increase. On any given day, Neffgen said, KBR provides 475,000 meals and 2.3 million gallons of drinkable water, washes 16,000 bundles of laundry, hosts 40,000 patrons at Morale, Welfare and Recreation centers, collects 10,000 cubic meters of trash and operates a fleet of 700 trucks.

The contract, however, has come with a price -- the explosion of audits, investigations and criticism.

Last December, two employees took $6.3 million in kickbacks from Kuwaitis trying to divert a subcontract to a local firm. The payoff was uncovered by an internal Halliburton audit, and the two employees were fired. Government auditors found systematic overbilling, an estimated $27.4 million for meals at five bases in Kuwait that were never served over a nine-month period. Halliburton repaid the funds. Meanwhile, the investigation was expanded to 50 other locations in Iraq and Kuwait. Last month, Pentagon auditors said they could not reconcile Halliburton charges of $1.8 billion and withheld payment.

The embarrassment, the scrutiny and a very thin profit margin have prompted Halliburton to consider spinning off the KBR subsidiary. "The lack of profitablity, the ferocious criticisms on the part of Congress, both the representatives, and the staffs in Washington, has clearly colored the outlook for this company," said John Olson, chief investment strategist at Sanders, Morris, Harris in Houston, the largest regional securities firm in the Southwest and co-manager of Houston Energy Partners, an energy hedge fund.

Halliburton has also encountered internal problems beyond the Iraq theater, such as last month's SEC fine for changing its accounting system and overstating its profits. In 1998, when Cheney was chairman and CEO, Halliburton began counting as revenue payment for contract cost overruns that had not yet been received. That practice inflated its revenues by nearly $90 million, but Halliburton never notified the SEC or shareholders of the change. Cheney was interviewed by the SEC and exonerated.

Cheney got his top Halliburton job after impressing his predecessor, Thomas Cruikshank, with his experience and international connections on a 1995 salmon fishing trip to the Pacific Northwest. Once selected CEO, he expanded the company's government contracts and embarked on a series of acquisitions capped by the 1998 purchase of Dresser Industries.

The Dresser acquisition soon was overshadowed by roughly 435,000 pending claims for asbestos liability that has since cost Halliburton $4.2 billion to settle.

"I don't think anyone in their right mind would have taken on Dresser if they knew that it was a litigious trojan horse," said Olson.

There are yet other investigations confronting Cheney's old company. The SEC, the Treasury and Justice Departments are trying to determine whether Halliburton circumvented U.S. barriers against business with nations sponsoring terrorism. While Cheney was CEO, the company established subsidiaries in the Cayman Islands to contract business with Iran and Libya. Cheney had argued that the U.S. restrictions put American companies at a competitive disadvantage.

And the flak over his compensation refuses to abate. In July 2000, he sold virtually all of his Halliburton shares when the stock was trading at over $50 a share and netted $18 million. He also negotiated a severance package that deferred his 1999 salary and bonuses over the next five years. He has already received three annual payments totalling over $500,000.

In addition, he received three sets of stock options totaling 433,333 shares that can be exercised when prices pass $28.12, $39.50 and $54.50. Halliburton stock is trading at $33, its highest price in three years. The rising stock price has given the options value. These financial ties have revived Democrats' Halliburton-related attacks on Cheney.

"There is a definitive Halliburton factor," said Carroll Doherty, editor of the Pew Research Center for People and the Press. "I don't think that is the whole reason that he is more unpopular than he used to be. It is also the fact that this guy is a very partisan figure at a very partisan time."

Said Rep. Tom Davis (R-Va.): "Politics is driving this agenda, and I suspect that not even the truth will keep the detractors at bay."

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