QandO

June 21, 2004

Another Enron-Type Scandal
Posted by Dale Franks

UCLA Corporate Law Professor and blogger, Professor Bainbridge, notes that a new Enron-type corporate fraud scandal may be brewing. Investors cheated, fraudulent asset sales, shaky finances; it's another example of the lack of morals and ethics the Left constantly talks about when discussing business under George W. Bush's administration.

The newest corporate fraud? Air America, apparently.

According to today's Wall Street Journal article, available for free here, not only does the corporation have serious financial troubles, but the operation has been sold to a new company controlled by the investors.

Many of Air America's investors and executives say they thought the network had raised more than $30 million, based on assurances from its owners, Guam-based entrepreneurs Evan M. Cohen and Rex Sorensen. In fact, Air America had raised only $6 million, Mr. Cohen concedes. Within six weeks of the launch, those funds had been spent and the company owed creditors more than $2 million.

When the problems came to light, "we realized that we had all been duped," says David Goodfriend, the company's acting chief operating officer. Messrs. Cohen and Sorensen say they didn't mislead anyone about the company's finances. They say they planned to invest more over time but didn't because of cultural differences with other managers. Both resigned in early May...

Air America's investors created a new company, Piquant LLC, which bought the assets of the old company, named a new CEO and simplified its business plan. Rather than buying stations or leasing time, Air America is following a more conventional route, allowing local stations to pick up portions of the lineup. It's on the air in New York and 14 other markets including Portland, Ore., and Chapel Hill, N.C.

The trouble with this asset sale, as Professor Bainbridge notes, is that it looks like the company is making the sale to blow off its creditors. If so, that would be, as a former president once said, wrong.

Since it appears likely, based on the WSJ article, moreover, that the selling entities were de facto insolvent at the time of the transfer, the probability that a court would find a fraudulent transfer goes up significantly. The sellers will have to show that the selling entities received fair value and that the transaction had economic substance above and beyond merely stiffing their creditors.

Another option for the creditors would be to seek to pierce the corporate veil of the selling entities to hold their owners liable. Since the purchasing entity was owned by most of the same investors as the selling entities (another factor that will weigh in favor of finding a fraudulent transfer, by the way), the creditors may be able to recover from the individual investors.

And that's just the civil side. There is a potential criminal liability here, too, according to the professor.

The securities fraud claims by investors in Air America could lead to criminal charges by the Justice Department if Cohen and/or Sorensen willfully misrepresented material facts or omitted material facts they had a duty to disclose. The creditor claims of fraudulent transfer and/or veil piercing, however, would be purely a question of civil liability by which the creditors would be able to recover their losses either from the purchasing entity or the owners of the selling entities.

No doubt all of this happened because of the close, corrupting political relationship between Air America and George W. Bush.

Oh, wait a minute...

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