STAR-BULLETIN FILE / DECEMBER 2001
Former Hawaiian Airlines Chief Executive Officer Paul Casey had $28,500 in loans forgiven by the company, an action now prohibited under federal law
When Hawaiian Electric Industries head Robert Clarke needed a $1 million loan last year to buy a home on Hawaii Loa Ridge, he went to company subsidiary American Savings Bank to obtain a preferential 3.7 percent loan. Hawaiian Air loan would
be banned under new lawLoans to corporate executives
are barred by recent legislationBy Dave Segal
dsegal@starbulletin.com
Four years ago, Hawaiian Airlines dangled a $28,500 loan in front of Chief Executive Officer Paul Casey and said it would forgive the loan if Casey remained on the job for three more years. Casey, who left the airline June 30 of this year, stayed long enough to have the entire loan, including interest, stricken from the books.
Casey's loan would be prohibited under the recently enacted Sarbanes-Oxley Act, which overhauls corporate governance, tightens regulations involving disclosure, loans and auditing; and imposes penalties for securities law violations.
Clarke's preferential rate loan, however, would be permissible under an insider lending exemption that is included in that same act.
Either way, corporate executives are feeling more heat these days as federal regulators intensify efforts to crack down on questionable company practices and corporate malfeasance.
"I think (the Sarbanes-Oxley Act) is good to the extent that all these new laws are in effect," said Clarke, the chairman, president and chief executive officer of Hawaiian Electric. "For companies that play by the rules, I don't think it's a big problem. To the fact that it can increase investor confidence, I think it's good for everybody."
Among the provisions of the Sarbanes-Oxley Act is one that prohibits new loans to directors and executive officers under almost all circumstances and prohibits modification or forgiveness of currently outstanding loans.
The new loan laws, in essence, level the playing field to prevent executives from taking advantage of the system and receiving a benefit unavailable to the average citizen.
In Clarke's case, his $1 million first mortgage loan at 3.7 percent was nearly half the going rate at the time of 7.25 percent. However, it was within the rules then as well as now because preferential rates are available to all bank employees -- not just executives -- under insider lending restrictions of the Federal Reserve Act. Those restrictions apply to loans made by insured depository institutions.
Thus, not only did Clarke receive a preferential rate, but so did other American Savings Bank executives and employees.
According to HEI's proxy filed with the Securities and Exchange Commission, Constance Lau, president, CEO and director of American Savings Bank, had as much as $896,500 outstanding in 2001 on a 3.7 percent first mortgage loan as well as $50,000 at 4.2 percent on a second mortgage loan.
Director Jeffrey Watanabe, a partner in the law firm of Watanabe, Ing & Kawashima, had as much as $629,682 outstanding on a first mortgage at 3.7 percent. Director Diane Plotts, a business adviser, had as much as $289,679 outstanding on a first mortgage at 5.0 percent.
And Peter Lewis, vice president of administration and the corporate secretary, had as much as $158,093 outstanding on a first mortgage at 3.7 percent.
"When Congress was contemplating putting in prohibitions on lending to insiders, it had in mind commercial companies," a Federal Reserve official, who requested anonymity, said in a telephone interview last week. "It didn't really have in mind companies who are in the business of lending.
"With commercial companies who don't ordinarily make loans (such as WorldCom, Tyco and Adelphia Communications who are in trouble now), there's a presumption of strangeness if a company makes a loan and it happens to be to an insider. For banks, lending money is their business and it was felt that lending money to insiders should be treated differently."
Meanwhile, in Casey's case, he received his $28,500 loan on March 31, 1998. On that same date in the two subsequent years, $10,000 plus interest was forgiven each time. Then, on March 31, 2001, the remaining balance of $8,500 and accrued interest was forgiven.
"It was a bonus that needed to be earned over a three-year period," Hawaiian Airlines spokesman Keoni Wagner said. "It was part of his compensation plan and was designed to provide incentives for him to stay for the three years. If he had left the company before the three years was up, then he would have been required to pay the company back for the portion that had not amortized."
Amar Budarapu, a corporate attorney for Dallas-based Baker & McKenzie, said the type of loan made to Casey was not uncommon but that under the Sarbanes-Oxley Act companies won't be able to make loans like that in the future.
"You cannot make any more loans after July 30," Budarapu said. "Those that are existing are still OK as long as you don't make any material modifications to those loans. You just can't enter into new loans."
