Alaska Air Group Inc. Chief Executive Officer William Ayer and New York-based hedge fund Donald Smith & Co. are subjects of a U.S. insider-trading inquiry into well-timed bets on shares of Washington state’s biggest energy utility, two people with knowledge of the matter said.
The Securities and Exchange Commission is investigating whether the fund acted on confidential information in 2008 when it doubled its stake in Puget Energy Inc. just before state officials approved a $3.89 billion buyout that sent the utility’s shares up as much as 21 percent, said the people, who declined to be identified because the probe isn’t public.
The SEC is examining the role of Ayer, who was on Puget Energy’s board during the buyout and is now its chairman, the people said. Donald Smith & Co., which manages about $3.5 billion in assets, was Alaska Air’s largest investor in early 2008, filings show. Ayer is also chairman of the Seattle branch of the Federal Reserve Bank of San Francisco.
“I never provided any material non-public information about Puget Energy to Donald Smith & Co., or anyone else,” Ayer, 56, said in an e-mail in response to questions from Bloomberg News.
Donald Smith & Co. “increased our position in Puget Energy only after the stock collapsed to a valuation level that we considered attractive based on our in-depth research,” the company said in a statement. “We categorically state that at no time did we have any communication with Mr. William Ayer regarding Puget Energy.”
SEC spokesman John Nester declined to comment.
SEC Enforcement Director Robert Khuzami said in a Sept. 25 interview that the agency has honed its approach to insider-trading investigations to give it “better visibility into relationships between people” connected to suspicious trades, including board members, lawyers and accountants. He declined to comment on any specific investigation.
Alaska Air fell 4.6 percent to $46.50 yesterday in New York Stock Exchange composite trading.
“The Alaska Air Group board of directors has full confidence in Bill and his high ethical standards,” Marc Langland, the board’s lead independent director, said in a statement yesterday.
Donald Smith & Co., founded in 1983 by Donald G. Smith, who is now chief investment officer, increased its holdings of Puget Energy to almost 6 million shares that were valued at more than $160 million after the leveraged buyout was approved at the end of 2008. Other large investors, including Tradewinds Global Investors LLC and American Century Cos., sold almost all of their shares as state regulators questioned the deal and credit dried up after the collapse of Lehman Brothers Holdings Inc., SEC filings show.
Martha Monfried, director of corporate communications for Puget Energy, declined to comment. Lily Ruiz, a spokeswoman for the San Francisco Fed, said the agency doesn’t comment on directors’ outside business activities.
The people with knowledge of the investigation declined to say whether the SEC has interviewed or sent subpoenas to Donald Smith & Co. or Ayer as part of the probe. Donald Smith and Ayer haven’t been accused of wrongdoing.
Ayer, who holds degrees in economics and business from Stanford University and the University of Washington, has been chairman of Alaska Air Group since May 2003, according to the firm’s website. He joined the company in 1995 after founding Air Olympia, a Washington state commuter airline.
Donald Smith & Co. invests in stocks of out-of-favor companies that are selling below tangible book value, according to the firm’s website. As of June 30, the hedge fund held about $3.3 billion in stocks, according to an SEC filing. Its holdings included insurers, manufacturers and airlines. At the end of the second quarter this year, it reported holding more than 7 million shares in AirTran Holdings Inc., whose stock rose more than 60 percent when Southwest Airlines Co. announced it would acquire the airline last month.
Puget Energy came into play in October 2007 when an investor group led by Macquarie Bank Ltd., Australia’s largest investment bank, said it would pay $30 a share to take the Bellevue, Washington-based company private. Ayer was on Puget Energy’s board at the time. Shares rose to as high as $28.60 on the announcement after closing at $23.95 the previous day.
Two months after federal regulators approved the $3.89 billion deal, state officials fought to stop it. Washington Utilities and Transportation Commission staff members said in a June 2008 report that state regulators should reject the deal because it also included $1.6 billion in new debt that could force the utility to raise prices for consumers. The public counsel section of the state’s attorney general’s office, which advocates for consumers in utility rate cases, said the transaction would expose power customers to too much financial risk.
Shares tumbled by about 13 percent in June to $23.99, more than $6 below the price offered by the buyout.
After Lehman filed for bankruptcy on Sept. 15, 2008, credit markets contracted and borrowing costs soared, throwing mergers into doubt. Wall Street’s confidence in the Puget Energy deal continued to wane. On Oct. 28, the power company’s shares dropped to as low as $19.03 in intraday trading, almost $11 less than the investment group was offering.
Tradewinds Global Investors, one of the company’s biggest investors at the start of 2008 with more than 8 million shares, had dumped its stake by the end of that year. American Century and Lord, Abbett & Co., both of which held more than 6.5 million shares at the end of 2007, sold almost all of their Puget Energy investments.
Donald Smith & Co., which had been investing in Puget Energy since at least the first quarter of 2007, didn’t sell its stake. Instead, the hedge fund increased its holdings to 5.9 million shares in the fourth quarter of 2008 from 2.4 million in the previous three months, according to SEC filings.
Donald Smith had been cutting its stake in Alaska Air in 2008. The hedge fund held about 4 million shares at the end of 2007, when the airline’s stock traded at $25.01. Shares dropped as low as $10.10 by July 2008 because of soaring fuel prices. At the end of the year, Donald Smith held fewer than 600,000 shares.
Analysts were still questioning Puget Energy’s future in December 2008, when credit-rating firm Standard and Poor’s said regulatory support for the acquisition “continues to be a decisive credit factor as Puget continues through a period of high capital expenditure.”
To be sure, some analysts predicted the deal would succeed, saying the investor group had appeased its opponents by agreeing to increase its equity stake and reduce the amount of new debt needed to finance the deal to $1.45 billion from $1.6 billion.
On Dec. 30, 2008, the deal was approved by the state utility board by a 2-to-1 vote. Puget Energy shares jumped as much as 21 percent the following day.
Commissioners Mark Sidran and Patrick Oshie, who approved the deal, said in a statement it was “not a highly leveraged buyout.” Commissioner Philip Jones opposed the deal, saying further review was needed in light of “the reality of extremely adverse financial conditions that exist today.”
When the deal was completed on Feb. 6, 2009, Ayer was named chairman. At an earlier state hearing, Christopher Leslie, speaking for the Macquarie-led investor consortium, said the group chose Ayer because he’s based in the Northwest and would ensure the utility “remains aligned with the region’s needs.”