UNITED STATES OF AMERICA
In the Matter of
JOHN W. ADAMS and AIP, LLC,
|ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934|
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against John W. Adams ("Adams") and AIP, LLC ("AIP") (collectively "Respondents").
In anticipation of the institution of these proceedings, Adams and AIP have submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondents' Offer, the Commission finds1 that:
1. This matter involves a June 2002 issuer tender offer in which Hawaiian Airlines, Inc. ("Hawaiian") repurchased $25 million of stock from its shareholders while failing to disclose that the company had suffered a significant economic downturn. Hawaiian's then-Chairman and Chief Executive Officer, John W. Adams, proposed the tender offer, in part, so that Hawaiian's majority shareholder, a partnership managed by Adams, could cash out a portion of its Hawaiian holdings. Majority shareholder AIP tendered its shares and received over $17 million in the offering. Adams failed to disclose to Hawaiian's minority shareholders that, prior to the closing of the tender offer, the company experienced two months of financial results falling far short of Hawaiian's internal projections and impacting Hawaiian's future solvency. Had the adverse information been disclosed, a higher proportion of Hawaiian's shareholders reasonably could have decided to tender their shares, reducing the cash available for AIP. Instead, non-tendering shareholders retained their shares to their detriment; nine months later, Hawaiian filed for bankruptcy.
2. John W. Adams, age 60, resides in New York, New York. Adams served as Hawaiian's Chairman since February 1996, and as Hawaiian's Chief Executive Officer and President from May 2002 until May 2003, when the bankruptcy court ordered that a trustee be appointed to operate Hawaiian and the trustee removed Adams. Throughout the relevant period, Adams was a minority co-owner and the sole general partner of AIP.
3. AIP, LLC (known as Airline Investors Partnership, L.P. at the time of the tender offer) is a Delaware corporation with its principal place of business in New York, New York. AIP owned a majority of Hawaiian's outstanding common stock at the time of the tender offer, and currently owns about fourteen percent of Hawaiian Holdings' outstanding common stock. AIP is co-owned through several companies by Adams and several individuals.
4. Hawaiian Airlines, Inc. is a Hawaii corporation headquartered in Honolulu, Hawaii. Hawaiian is an airline engaged primarily in the scheduled transportation of passengers, cargo and mail. During the relevant period, Hawaiian's stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and was listed on the American Stock Exchange and Pacific Exchange. In August 2002, Hawaiian restructured and became a wholly owned subsidiary of Hawaiian Holdings, Inc. ("Holdings"). In the restructuring, each share of Hawaiian was traded for a share of Holdings, which began trading on the American Stock Exchange and Pacific Exchange. Hawaiian filed for bankruptcy protection under Chapter 11 in March 2003, and continues to operate. Holdings did not file for bankruptcy, and its shares continue to trade in the market.
5. In 1996, AIP purchased over 18 million of Hawaiian's outstanding shares (or about 46% at the time) for approximately $20 million. Under the terms of the purchase agreement, AIP received the right to nominate six of Hawaiian's eleven board members. As sole general partner of AIP, Adams selected the AIP-nominated directors. In 1996, the newly constituted board elected Adams chairman of Hawaiian's board. As a result of several open-market stock repurchases by Hawaiian of its own stock, which reduced the total number of Hawaiian shares outstanding, AIP's percentage ownership of Hawaiian increased to about 53% by the time of the tender offer in mid-2002.
6. After experiencing net losses in four of five years from 1996 to 2000, Hawaiian experienced significant financial hardship as a result of the terrorist attacks on September 11, 2001. In late 2001, Hawaiian received $25 million in payments from the federal government to compensate air carriers for losses related to the attacks.
7. In December 2001, Hawaiian announced a merger with Aloha Airlines ("Aloha"), which competed with Hawaiian for interisland passengers. The merger would have provided AIP a substantial return on its initial investment in Hawaiian. In mid-March 2002, however, the merger between Hawaiian and Aloha fell through. After the merger terminated, Adams became CEO of Hawaiian.
8. When it became clear that the merger with Aloha might fall through, Adams explored other ways that AIP and Hawaiian's other shareholders could receive a return on their investment. In May 2002, Adams proposed to Hawaiian's board a $25 million issuer tender offer, in which Hawaiian would purchase just under six million shares from the company's shareholders at $4.25 per share. At that time, Adams and AIP disclosed to Hawaiian's board their intention to tender all of their shares subject to the condition that AIP would retain over fifty percent of Hawaiian's outstanding shares after the tender offer. In the event that more than six million shares were tendered, Hawaiian would purchase the shares on a pro rata basis.
9. On March 25, 2002, Hawaiian's outside legal counsel informed Adams that under Section 414-111 of Hawaii's Business Corporations Act Hawaiian could purchase its shares only if, after giving effect to the tender offer: (i) Hawaiian's assets would exceed the sum of its liabilities; and (ii) Hawaiian would be able to pay its debts as they became due in the usual course of business (together, the "solvency test"). Hawaiian's outside legal counsel advised Adams that the solvency test should be measured at the time of the distribution of the tender offer proceeds, and that Hawaiian's balance sheet was expected to show a deficit at that time. Hawaiian's outside counsel further advised Adams that instead of relying on Hawaiian's balance sheet, Hawaiian could retain an expert to provide an opinion to Hawaiian's board as to an alternative method of measuring the assets and liabilities of Hawaiian. Adams agreed to hire an outside firm to provide an opinion that the tender offer would not violate the Hawaii statute.
10. Adams and Hawaiian's then-CFO provided the valuation expert with certain internal projections that had been prepared in April 2002. In mid-May 2002, relying on these projections, the expert informed Adams that it would be able to issue an opinion that Hawaiian could conduct the tender offer without violating Hawaiian law.
11. On May 29, 2002, Adams convened a telephonic meeting of Hawaiian's board for the special purpose of considering the tender offer. Hawaiian's expert, relying on the company's April projections, informed Hawaiian's board that the $25 million tender offer would not render the company insolvent under Hawaii law. Hawaiian's board voted to approve the tender offer subject to further review of Hawaiian's financial condition at a board meeting on June 14, 2002. The board authorized Adams to file the appropriate tender offer documents with the Commission and further authorized him to file any necessary amendments.
12. On May 31, 2002, two days after Hawaiian's board voted to approve the tender offer, Hawaiian publicly announced the tender offer and Adams filed tender offer documents with the Commission. The terms of the tender offer required Hawaiian shareholders to tender their shares by June 27, 2002. Hawaiian could, at its option, rescind the tender offer up until June 27, 2002, if it experienced, or would likely experience, a "material adverse effect" in its income or operations. Further, Hawaiian stated in its tender offer documents that it was required by the federal securities laws to disclose any material changes in the information that it provided to shareholders concerning the offer.
13. Hawaiian's Offer to Purchase statement ("OTP") disclosed that Adams and AIP intended to tender all 18 million of their shares. The OTP further stated that Hawaiian's board made no recommendation as to whether shareholders should tender or refrain from tendering their shares. However, the OTP represented that: (1) Hawaiian's board believed the "Offer is a prudent use of Hawaiian's financial resources"; (2) the board had conducted a review of Hawaiian's financial position and had determined that Hawaiian could complete the tender offer and still pass the solvency test under Hawaiian law; (3) Hawaiian's remaining cash would "still provide sufficient working capital for our operations for the foreseeable future"; and (4) shareholders who did not tender might receive a benefit because they would own a larger interest in Hawaiian.
14. Between the May 31st tender offer announcement and the June 27, 2002 closing date, Adams and AIP (but not Hawaiian's minority shareholders) learned that the company's financial condition had significantly deteriorated. In preparation for a June 14, 2002 board meeting, Hawaiian prepared final financial results for April 2002 and "flash" financial results for May 2002. The April results reflected a $7.7 million net loss for that month compared to a projected net loss of only $500,000 as provided to Hawaiian's expert in the April projections. The flash May results reflected a likely operating loss for May of $7 million, in contrast to the $2.3 million projected loss contained in the projections relied upon by the expert. Based on the April and May results, Hawaiian revised its financial forecast for fiscal year 2002 downward. The revised forecast projected a $9.3 million operating loss for 2002, rather than the $12 million operating profit as reflected in the projections provided to and relied upon by Hawaiian's expert.
15. In response to concerns by one of Hawaiian's directors about whether the tender offer was still prudent in light of Hawaiian's deteriorating financial condition, Adams called a telephonic board meeting for June 25. During the meeting, Adams informed the board that in his opinion the revised projections given to the board at its June 14, 2002 meeting continued to support the viability of the tender offer. Adams further stated that the company should not withdraw the tender offer because it might suffer embarrassment and Hawaiian's stock might decline in value if Hawaiian had to disclose its poor April and May operating results. Adams recommended that the board approve proceeding with the tender offer. The board agreed to do so.
16. Prior to the company's June 14 and June 25 board meetings and the closing of the tender offer, Adams did not consult Hawaiian's expert or inform it that the company's April and May results fell short of the projections relied upon in providing the solvency opinion. Neither Adams nor Hawaiian filed a notice of material change to inform minority shareholders that the prior representations about the company's solvency were based on projections that did not reflect two months of disappointing financial results.
17. The tender offer closed on June 27, 2002. Of Hawaiian's nearly 34 million outstanding shares, over 26 million shares were tendered. Because the tender offer was oversubscribed, Hawaiian accepted the tendered shares on a pro rata basis. Of the nearly 6 million shares accepted, Hawaiian accepted over 4 million shares from AIP for proceeds of over $17.1 million. These proceeds represented 70% of the total proceeds distributed pursuant to the tender offer. As one of four owners of AIP, Adams received $342,000 of AIP's tender offer proceeds. In addition, Adams tendered shares he owned personally for proceeds of nearly $29,000.
18. Had those Hawaiian shareholders who declined to tender their shares been informed that the continued solvency of the company was far less certain than represented in the OTP, and opted instead to tender their shares, a proportionately smaller number of AIP's and Adams' shares would have been accepted by the company. Hence, AIP and Adams profited at the expense of non-tendering shareholders who were unaware of the company's financial decline.
19. Hawaiian's financial condition continued to deteriorate after the tender offer closed. On March 21, 2003 (less than nine months after funding the tender offer), Hawaiian filed for reorganization under Chapter 11 of the Bankruptcy Code.
20. Section 13(e)(1) of the Exchange Act prohibits an issuer from purchasing its own shares in an issuer tender offer if to do so would violate rules and regulations adopted by the Commission. Rule 13e 4(j)(2) thereunder prohibits an issuer from making a self-tender offer unless it complies with, among other things, the disclosure requirements in Rules 13e 4(c), (d) and (e).
21. Rules 13e 4(c)(3), (d)(2), and (e)(3) of the Exchange Act require an issuer conducting a self-tender offer to disclose promptly any material changes in the information provided to securities holders. Adams and AIP (through Adams) were aware of Hawaiian's deteriorating financial condition, and knew that the statements in the OTP were, in part, based on an outside consultant's review of projections that did not reflect the company's actual results, yet Adams failed to take steps to determine whether the solvency determination remained valid or to disclose the changed circumstances to Hawaiian's shareholders.
22. As a result of the conduct described above, Adams and AIP caused Hawaiian's violations of Section 13(e)(1) of the Exchange Act and Rule 13e-4(j)(2) thereunder.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondents Adams's and AIP's Offer.
Accordingly, it is hereby ORDERED pursuant to Section 21C of the Exchange Act that:
A. Respondents Adams and AIP cease and desist from causing any violations and any future violations of Section 13(e)(1) of the Exchange Act and Rule 13e-4(j)(2) thereunder;
B. Respondent AIP shall pay disgorgement in the amount of $2,229,193 and prejudgment interest in the amount of $237,094, for a total payment of $2,466,287;
C. Respondent Adams shall pay disgorgement in the amount of $3,782 and prejudgment interest in the amount of $402, for a total payment of $4,184; and
D. Pursuant to an escrow agreement not unacceptable to the staff of the Commission, Respondents shall, within 20 days of the entry of this Order, pay the disgorgement into an escrow account. The escrow agreement shall, among other things: (1) require that all funds in escrow be invested in short-term U.S. Treasury securities with maturities not to exceed six months; (2) name an escrow agent who shall be appropriately bonded; and (3) provide that escrowed funds be disbursed only pursuant to an order of the Commission. Respondent shall be responsible for all costs associated with the escrow agreement
By the Commission.
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