Opinion ID: 781005
Heading Depth: 3
Heading Rank: 4

Heading: FAA Settlement Agreement

Text: 34 By May 1998, America West had begun secret settlement negotiations with the FAA. In a June 15, 1998 meeting, Goodmanson verbally promised FAA officials that America West would resolve its maintenance problems. The terms of the agreement were discussed in a series of meetings held on June 16, 18, and 24, 1998. 35 On June 23, 1998, the day after Continental sold its Class B stock, the Wall Street Journal reported that America West face[d] the prospect of substantial federal sanctions for failing to properly oversee the work of outside maintenance contractors on its jetliners. The [FAA] is seeking to impose at least $1 million in civil penalties. The article also stated that separate from the prospect of sanctions the FAA put America West on its `watch list' June 9 because of labor unrest among maintenance workers and flight attendants.... The airline spokeswoman said the enhanced surveillance hasn't turned up any `significant maintenance or operational problems.' On June 24, 1998, the Knight-Ridder Tribune Business News published an article entitled America West Brass Calls FAA Scrutiny `Routine.' In the article, Goodmanson stated that the increased surveillance was routine FAA procedure when an airline is involved in labor negotiations, and reiterated that no significant maintenance or operating problems had been discovered. Plaintiffs allege that these types of reassurances kept the stock value high. 36 On July 14, 1998, the FAA and America West reached a settlement agreement under which the company agreed to pay $5 million for violating the FAA's aircraft inspection and maintenance rules. The agreement stated that [b]oth the FAA and America West recognize that organizational changes are required to ensure that America West can conduct such operations at the highest level of safety. Under the terms of the agreement, America West was required to devise comprehensive corrective actions for problems discovered, at minimum, in the following areas: oversight of contract maintenance; performance of maintenance in accordance with appropriate procedures ...; minimum equipment list compliance, including deferred maintenance; [and] flight/ground training programs.... In carrying out these actions, America West was required to demonstrate that it had sufficient numbers of experienced maintenance and inspection personnel, quality assurance personnel, ground support personnel, materials, and equipment. 37 Plaintiffs allege that, during this period, America West continued to reassure the public and its investors that the FAA's actions would not have a negative impact on the company. Goodmanson and other America West officers assured multiple money and portfolio managers, shareholders, and analysts, that America West did not anticipate any major increase in maintenance costs or the cost of oversights. On the day that the settlement agreement was announced, American West issued a statement that problems cited have been fully addressed and that the settlement agreement's provisions will not have a material adverse affect on the Company's operations or financial results. In a July 21, 1998 conference call with analysts, managers, investors, and shareholders, Goodmanson stated that America West was not anticipating any major increase in maintenance costs or the cost of oversights going forward as a result of [the FAA settlement]. That same day, America West issued a release entitled America West Reports 80% Increase in Second Quarter Earnings; The Best Quarterly Results in Company History. The operating income was once again overstated by approximately 10% because of the adjusted maintenance costs. Plaintiffs allege that, in reality, America West deferred its maintenance and inspection costs, thus artificially depressing its operating costs in order to maintain higher operating income and to mislead investors.