Does crime pay?
Wall Street Crime and Punishment is a weekly series by Benzinga’s Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed takes them in the wrong direction.
From the 1920s through the early 1950s, Howard Hughes was one of the most provocative and invigorating figures on the public scene, commanding attention for his work in the aviation and entertainment industries.
Whether he was breaking flight records with a 91-hour around-the-world flight or breaking box office records with movies including “Hell’s Angels,” “Scarface” and “The Outlaw” — or even breaking a taboo by aggressively challenging a 1948 Senate committee hearing that scurrilously insinuated he was ripping off the government in his defense industry contracts — Hughes was a larger-than-life figure.
He was always considered something of an eccentric, but by the mid-1950s Hughes appeared to transition from mild quirks to genuinely disturbing behavior regarding his health and hygiene. He also retreated from the public eye, going to great lengths to avoid being seen.
Hughes’ behavior set off a chain of events that resulted in seismic shifts within the airline industry that resulted in an effort by the federal government to put the billionaire behind bars.
Changing Planes: Hughes had acquired a majority ownership stake in Trans World Airlines (TWA) in the mid-1940s, and by 1960 he possessed more than three-quarters of the company’s shares.
Although he never held an executive position in TWA, Hughes controlled operations through his most trusted aide, Noah Dietrich, who served as the company’s chief executive.
But as the 1960s dawned, the TWA board of directors became increasingly apprehensive over Hughes’ ability to run the company. His refusal to allow TWA to purchase 707 aircraft from Boeing Co (NYSE: BA) and a feud with Dietrich over a compensation dispute created tumult within the company, and several banks refused to loan TWA money while Hughes was in a controlling position.
Despite his majority stakeholder position, the TWA board ousted Hughes from the company and then sought to further exorcise him by filing a lawsuit against Hughes Tool Company.
Hughes’ reclusiveness was so acute that he refused to appear in court, thus ensuring the TWA management would score a legal victory over him. Hughes was eventually forced to sell his TWA shares.
In 1962, Hughes sought to get back into the airline industry by acquiring Northeast Airlines, a regional carrier. But he quickly became unsatisfied with the company’s prospects and sold his ownership stake two years later.
Hughes spent most of the 1960s focusing on his other business interests, most notably the Las Vegas hospitality industry, before getting his interest in the airline industry piqued anew by David Charnay, a television industry executive who became acquainted with Hughes during the latter’s final years as the head of the RKO Pictures studio.
Charnay directed Hughes’ focus on Air West, a new carrier created in April 1968 through the merger of three small airlines focused on the West Coast and Rocky Mountain markets.
Hughes quickly became interested in acquiring Air West and merging it into his Hughes Tool Company. But there was one major obstacle in his path: Air West was publicly traded, which created the need to convince both shareholders and company executives to accept an acquisition. And this is where things became a little dicey.
Putting On Pressure: In the autumn of 1968, Air West’s leadership was shocked to receive an offer from Hughes’ office to purchase the airline for $22 a share, or roughly $90 million. Considering the company had only been in its newly merged state for a few months, there was little enthusiasm from the Air West executives to surrender what they created.
To add pressure on the company, James Snyder, a flamboyant Las Vegas bookmaker who billed himself as Jimmy the Greek, was hired by Hughes to generate favorable publicity about the deal. Snyder’s gift for grabbing headlines and his ability to influence several prominent Nevada legislators to talk up the transaction added to the pressure on Air West.
The Air West executives put Hughes’ proposals to the shareholders, who voted in favor of the billionaire’s bid. But the airline’s board voted 13 to 11 against the offer. Alas for the Air West executives, they did not anticipate was the presence of Hughes’ agents within their ranks.
Large shares of Air West stock were owned by two of Hughes’ trusted allies, Las Vegas Sun publisher Hank Greenspun and George Crockett, an airline industry executive and president of the National Aviation Trades Association. Robert Maheu, the chief executive of Hughes’ Nevada operations, instructed Greenspun and Crockett to sell off their shares in Air West following the board’s vote. Charnay had also quietly purchased a substantial number of shares by this time and he was part of the plan.
The combined selloff by Greenspun, Crockett and Charnay — a total of about 46,000 shares, or slightly more than 1% of all shares outstanding — occurred shortly before Christmas in 1968 and caught Wall Street off-guard. A mini-panic erupted and Air West’s stock went into a tumble as investors quickly lost faith in the company.
Another Offer: Before 1968 came to a close, Air West’s executives received another call from Hughes’ office. The billionaire was still interested in buying the airline, but in view of its ongoing stock problems, there was a new offer on the table. Hughes would buy Air West for $8 a share, or roughly $41 million.
The company executives realized something foul was taking place, but they seemed powerless to act — especially when Hughes’ small army of lawyers began filing litigation against the board of directors. In view of circumstances they could not control, six of the 13 directors who voted against the acquisition switched sides when a new vote was taken, thus handing Air West to Hughes.
Under federal law, a change in ownership for a U.S.-based carrier with international flights needed the approval of the White House, and Air West had routes into Canada and Mexico, which put it under this mandate. The Nixon administration had no trouble with Hughes’ taking sole proprietorship of Air West — and, perhaps not coincidentally, this vote of approval came at the same time that Hughes’ office made two $50,000 contributions into Republican campaign funds operated by Nixon aide Bebe Rebozo.
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The Trials That Never Were: Shareholders who found themselves receiving much less than Hughes’ initial bid and Air West directors opposed to the deal vented their frustration with the U.S. Securities and Exchange Commission. After a lengthy investigation, the SEC sought to bring charges against Hughes, Charnay, Maheu and two other Hughes associates.
The prospect of having Hughes brought into a courtroom electrified many reporters, who speculated on whether Hughes would finally be seen in public after an absence of many years or whether he would flee to his properties in foreign countries that did not have extradition treaties with the U.S.
But a funny thing happened on the way to justice. In January 1974, U.S. District Court Judge Bruce Thompson dismissed all nine federal charges sought against Hughes and his associates. Thompson called the indictment effort the worst he had ever seen and stated that no illegal action occurred that would justify allowing the case to proceed.
The Justice Department tried to file the charges again that excluded Hughes, but a federal grand jury refused to vote for an indictment. Hughes was returned to the charges filed in November 1974, with Thompson tasked to judge the case again.
For the second time, he dismissed the case, acknowledging that Hughes and his cronies exercised “reprehensible misuse of the power of great wealth” but stressed that nothing they did was against the law.
End Of The Ride: Without the SEC to back them, the Air West shareholders pursued a class action lawsuit. The case was settled out of court in January 1979 with $30 million going to the aggrieved parties.
While the federal government could not get Hughes to come out of hiding, writer Clifford Irving forced him to make one final foray into public.
Irving had secured a book deal on what he presented as a ghost-written autobiography of Hughes. On Jan. 7, 1972, Hughes spoke from his retreat in the Bahamas through a conference call speaker to seven reporters in a Hollywood hotel suite, in which he denounced Irving’s work as a fraud.
When asked about the stories of his allegedly deteriorating health, Hughes told the reporters, “I certainly don’t feel like running around a track at U.C.L.A. and trying to break a record, I can tell you that. But my health is tolerable, that’s certain and probably better than I deserve.”
Hughes spoke wistfully of returning to flying and film production. He stated that he planned to stay in the Bahamas pending the resolution of several ongoing lawsuits against his company, adding a return to his Las Vegas home meant he would spend “the rest of my life in a courtroom.”
Hughes never returned to the U.S. during his lifetime. He died of renal failure on April 5, 1976, while in flight on a jet ambulance transporting him from Acapulco to Methodist Hospital in Houston.
As for the airline at the center of the brouhaha, its operations under Hughes’ management almost seemed like an afterthought. It was renamed Hughes Airwest and its aircraft were painted in a bright banana yellow hue that made it stand out at the airports. Republic Airlines acquired Hughes Airwest in 1980 for $38.5 million.
(Photograph of Howard Hughes in 1938 before the National Press Club, courtesy of the Library of Congress.)
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