Ex-Hawaiian
Air chief settles
SEC charges

John Adams and his shareholder
group will pay $2.5 million over
a $25 million stock buyback

Former Hawaiian Airlines Chairman and Chief Executive John Adams and the shareholder group he managed have agreed to pay $2.47 million to settle Securities and Exchange Commission charges over a $25 million stock buyback in 2002.

Adams, who was removed from his positions by a federal Bankruptcy Court judge due to his role in that buyback and other actions, agreed to pay $3,782, plus $402 in interest, for a total of $4,184. AIP LLC, the former controlling shareholder of Hawaiian Airlines parent Hawaiian Holdings Inc., agreed to pay $2.23 million plus $237,094 in interest.

"We are pleased to have settled this matter with the SEC and hope that this settlement will help Hawaiian Airlines focus on its successful emergence from bankruptcy," Adams said.

In another settlement, Hawaiian Airlines trustee Joshua Gotbaum and the SEC announced an agreement that the federal agency will not file a claim against the airline. The Hawaiian-SEC agreement was filed yesterday in Bankruptcy Court and Gotbaum requested that it be approved without a hearing if no objections are filed within 15 days.

Gotbaum said neither settlement eliminates a $28 million lawsuit still pending by the airline against Adams and his affiliate groups.

The SEC, in its settlement with Adams and AIP, said they were charged for their role in failing to disclose important negative financial information to other Hawaiian shareholders in a stock buyback from which they both benefited. Adams and AIP received more than $17 million of the $25 million that was distributed.

"The specific violation was that he didn't provide updated information," said Marc Fagel, assistant district administrator for the SEC in San Francisco. "The information he produced was that the company remained solvent and that it was a prudent use of cash. After saying that, he learned they had had two really bad months. I think shareholders would have liked to have considered that when deciding whether to tender their shares."

The SEC said after a proposed merger between Hawaiian and Aloha Airlines fell through in March 2002, Adams had been exploring ways in which AIP, which had invested $20 million in the airline in 1996, and Hawaiian's other shareholders could receive a return on their investment.

Hawaiian began the buyback shortly after it began receiving $30.1 million from the federal government to help recover from the 9/11 attacks.

In its investigation, the SEC said that during the buyback period Hawaiian revised its financial projections for 2002 from a $12 million operating profit to a $9.3 million operating loss. Hawaiian didn't notify shareholders of the change, the SEC said.

Adams and AIP learned of the company's deteriorating financial condition between the May 31, 2002, buyback offer and its closing date of June, 27, 2002, the SEC noted. Yet, the SEC said, Adams recommended that the board proceed with the offer despite concerns from one of the company's directors.

The SEC also said that AIP stood to profit if fewer shareholders tendered their shares, because Adams and AIP would be able to receive a premium price for more of their shares.

Hawaiian Airlines filed for bankruptcy on March 21, 2003, but Adams has stated that it was not the buyback but rather Boeing Capital Corp.'s reluctance to restructure aircraft leases that led to the bankruptcy. But Boeing Capital has countered that it would have renegotiated leases if Adams and AIP had returned the tender offer money.

Fagel said the Bankruptcy Court's earlier decision to remove Adams had no bearing on the settlement and that the SEC conducted its own investigation.

"We did not charge him with fraud. We did not assess a penalty," Fagel said. "Our concern in this was making sure that shareholders who relied on information that we believe was inaccurate are made whole."

Fagel said the money will go into an escrow account to be paid out to shareholders who did not tender their shares.

Shareholders who accepted the tender offer were paid $4.25 a share, a 31 percent premium over the stock's price at the time of $3.25.

Adams no longer has any financial interest in the airline. In June, he and AIP sold 10 million shares for $41.4 million to investment group RC Aviation LLC, which subsequently teamed up with Gotbaum and the Hawaiian Airlines unsecured creditors' committee to file one of three reorganization plans for the airline. Adams said he received less than $2 million from that transaction. AIP retains 4.2 million shares of Hawaiian Holdings' stock.

"We cooperated fully in the investigation, and made every effort to give the SEC a clear picture of the facts surrounding the tender offer," AIP attorney Thomas Fritsch said. "We're obviously pleased that the SEC concluded its investigation without finding that Mr. Adams or AIP engaged in any fraudulent behavior and without their admission of any wrongdoing."

Fagel said that while there might be an appearance that Adams received a slap on the wrist, he said the SEC's order addresses actual losses to investors.

Still, he added, "I would not underestimate the impact of someone being named by the SEC in an enforcement action that violated federal securities law and failed to provide information to shareholders. We wouldn't consider that to be a minor thing."