Former Hawaiian executive sued
By Deborah Adamson
Advertiser Staff Writer
The bankruptcy trustee of Hawaiian Airlines yesterday sued the carrier's former chief executive and companies he controlled to recoup $28 million allegedly "improperly diverted" from the ailing carrier.
Joshua Gotbaum, the trustee appointed by the bankruptcy court, is accusing John Adams, Hawaiian Holdings, AIP LLC, Airline Investor Partnership LP and Smith Management of a scheme to "defraud existing and future creditors" of the airline, according to a lawsuit filed yesterday in U.S. Bankruptcy Court.
The allegations center on a $25 million tender offer in which $17.1 million went to Adams and other shareholders and an additional $3 million paid to company insiders for consulting services and other compensation. The distributions were approved "despite clear and alarming" signs that Hawaiian Airlines' condition had "dramatically deteriorated," the trustee's lawsuit said.
Adams could not be reached for comment last night. But he had defended the tender offer in the past as one that enhanced shareholders value.
Gotbaum said in a statement that his investigation into the events resulting in the airline's bankruptcy "led me to conclude that funds had been improperly diverted from Hawaiian Airlines, funds that could help the airline and its creditors."
Hawaiian's tender offer, a buyback of shares, has long been controversial since it came as other airlines were cutting expenses and conserving cash in an attempt to ride out major losses in the wake of Sept. 11.
According to the lawsuit, Adams proposed a tender offer in which Airline Investor Partnership LP would sell nearly 6 million Hawaiian Airlines shares back to the carrier for $25 million in May 2002. Airline Investor Partnership LP is the Adams-led group that invested $20 million in the carrier in 1996. The sale would still leave the investment group with a greater than 50 percent stake in the airline.
The offer was priced at $4.25 a share, or 31 percent higher than what the stock was trading for at the time, the lawsuit said.
On May 29, 2002, the 11-member board of directors — six of whom were appointed by Airline Investor Partnership — approved the tender offer.
The next day, Hawaiian Airlines told one of its airplane lessors, Boeing Capital Corp., that it was seeking $20 million in contract concessions and modifications because of financial difficulties stemming from Sept. 11. Bookings in the summer of 2002 had fallen by as much as 40 percent from the year before, the trustee's lawsuit said.
An outside consultant, CBIZ Valuation Counselors, gave an upbeat opinion of the airline's future. But the lawsuit said the consultant's growth projections were overly optimistic given the challenges faced by the travel industry after the terrorist attacks. As such, the tender offer would not have been financially feasible.
Moreover, $2 million was paid to Smith Management, which Adams and Randy Smith controlled. Smith Management also received $75,000 a month for 10 months in consulting fees.
The tender offer's payouts to Adams, his companies and other shareholders were made shortly after the carrier got $30 million in "stabilization funds" from the federal government. The money was intended to help the airline industry get back on its feet after the terrorist attacks, the lawsuit said.
In addition to the tender offer, the carrier resisted the belt-tightening of other airlines and continued on with expansion plans that included signing "expensive" leases for new aircraft, the lawsuit said.
But skittish lenders soon pulled back credit that had been extended to the airline, limiting Hawaiian's access to cash. Several top executives left, leaving Adams to become chief executive and president in May 2002.
Three days later, Adams proposed the tender offer, arguing that shareholders who invested in the airline after its 1993 bankruptcy and stood by the carrier should be given an opportunity to recoup their investment.
By August 2002, the board had approved a reorganization that made Hawaiian Airlines a subsidiary of Hawaiian Holdings, a Delaware corporation. Adams remains chief executive of the holding company.
Shareholders of Hawaiian Airlines exchanged their shares 1-to-1 for those of Hawaiian Holdings. Airline Investor Partnership LP, the majority owner of the airline, became AIP LLC, majority owner of Hawaiian Holdings. Hawaiian Holdings is the parent of the airline but is not in bankruptcy and does not manage the carrier.
In October, Hawaiian Holdings disclosed that it was under investigation by the Securities and Exchange Commission.
Hawaiian Airlines filed for Chapter 11 bankruptcy in March 2003.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
