The U.S. Department of Labor is investigating whether Aloha Airlines used employee pension funds to pay its bank loans.

Under federal law, an employer is barred from using workers' pension money to pay for the company's business expenses, including bank loans. Pension money must be used to pay for employee benefits designated by the retirement plans.

Aloha declined to comment on the investigation. The state's second largest airline emerged from bankruptcy last week. The investigation involves events before the bankruptcy when the airline was headed by former CEO Glenn Zander.

The Labor Department's investigation centers on the 2,400-member machinists union's defined-benefit plan.

The federal agency earlier this month subpoenaed First Hawaiian Bank, asking for loan records, investment agreements and other financial records relating to Aloha's management of machinists union pension.

The Labor Department said, in a copy of a subpoena obtained by The Advertiser, that it is requesting similar records from the Bank of Hawaii, American Savings Bank and Central Pacific Bank.

In a Feb. 3 letter accompanying First Hawaiian Bank's subpoena, Labor Department Deputy Regional Director Crisanta Johnson said the department is looking into possible violations of federal labor laws involving the management of the machinists union pension.

"This office is conducting an investigation of the abovereferenced employee benefit plan ... to determine whether any person has violated or is about to violate" federal law, wrote Johnson, who is based in the Labor Department's office in Pasadena, Calif.

First Hawaiian Bank spokesman Brandt Farias declined to comment, saying the company doesn't discuss pending investigations or customer matters. Bank of Hawaii, American Savings and Central Pacific also had no comment.

The four banks were part of a team of local lenders that provided financing for Aloha.

Aloha's management of its employees' pensions has been a major source of controversy for the local carrier during its 13-month bankruptcy.

As part of its cost-cutting measures taken during bankruptcy, Aloha decided to terminate defined pension benefits for about 3,000 of its union and nonunion employees. The decision was opposed by the airline's union members and the federal Pension Benefit Guaranty Corp., delaying the airline's emergence from bankruptcy for several months.

The airline eventually settled with the unions and the PBGC, allowing it to jettison the pensions.

The Labor Department's probe follows concerns raised during Aloha's bankruptcy proceedings by the carrier's smaller creditors.

The airline's unsecured creditors committee had been looking into the use of airline employee pension money to acquire Aloha stock issued several years ago by the airline. Proceeds from the stock sale went to the airline, which the committee said was used to pay bank loans.

The pension was left with Aloha stock, which became worthless during the bankruptcy.

In bankruptcy court filings, the creditors committee said it was considering suing one or more of Aloha's lenders, but the dispute was settled out of court just as the airline was exiting bankruptcy.

The terms of the settlement were sealed by federal Bankruptcy Judge Robert Faris.

The Labor Department's subpoena said its investigation is being handled by its Employee Benefits Security Administration division, which investigates misuse and mismanagement of pension and health plans run by private employers.

The division oversees about 730,000 pension plans and another 6 million health and welfare plans and investigates about 4,000 pension plans each year.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.