Flight Transportation Corp. was one of the hottest aviation stocks around, but -- when the federal investigators moved in -- they found a company that existed mainly on paper. So how had it managed to get through three public offerings without anybody blowing a whistle?
The subject of the investigation, hence the conversation, was drug trafficking. A low-flying business jet had landed and unloaded its illegal cargo one night on a short, unlighted runway at Flying Cloud Airport, a general-aviation facility on the bluffs of the Minnesota River southwest of Minneapolis. What the FBI wanted to know of Charles Aune -- an experienced flier himself -- was, what kind of plane, and what kind of pilot, could pull off a maneuver like that?
Aune, flattered, became the FBI's "aviation consultant." For several months in mid-1981, he brainstormed obligingly, if inconclusively, on the drug case. Then, in November, the pilot offhandedly suggested that "it might be worth looking into" Flight Transportation Corp. (FTC), his former employer.
In three years and two public offerings, FTC had gone from a moribund flight-training school to a full-service aviation company, with highly profitable sales, training, and executive- and group-charter operations. Its revenues, a scant $1.2 million just five years before, were skyrocketing toward a projected $85 million in fiscal 1982. But Aune -- who had been fired from his position as executive vice-president in charge of executive-charter operations for "personality conflicts" that seemed closely related to his inquisitiveness -- had reason to doubt the company's newfound wealth.
"No matter how I run those numbers in the prospectuses, they never match mine," Aune told the FBI agent. Could FTC be involved in drugs? the agent asked. Or money laundering? Aune hazarded no guesses. "All I know is, it's like there are two companies, and the one in the prospectuses isn't the one I worked for."
About seven months later, on Friday, June 18, 1982, FTC disappeared from the screens of the stock-quotation terminals scattered around the company's lavish headquarters. The Securities & Exchange Commission, acting on information from the FBI, had suspended trading of the over-the-counter stock just days after the closing of FTC's third -- and, at $25 million, its largest -- public offering. Citing "questions relating to the accuracy and adequacy of [FTC's] financial reporting," the agency had obtained a court order freezing the company's assets. A complaint filed that same day was more explicit, alleging securities fraud, check kiting, inflated revenues on nonexistent business, and diversion of corporate money for personal use. There was no mention of drugs.
The events came as a shock to much of the investment world. Until then, FTC had been one of Wall Street's most talked-about aviation stocks, reporting assets of more than $50 million, and earnings of $6 million on third-quarter revenues of $71 million. The company had grown 551% from 1976 to 1980, putting it 94th on INC.'s 1981 list of the 100 fastest-growing public companies in America; the following year, it rose to 31st place. The success of FTC's luxurious new executive-charter service heralded "the growing acceptance of the limousines-in-the-sky concept," Louis Ehrenkrantz, of the New York City brokerage firm of Rosenkrantz Ehrenkrantz Lyon & Ross, had declared. Financial World magazine had praised the "marvelously productive partnership" of FTC president William Rubin and executive vice-president Janet Karki. Other journalists and analysts had described them variously as "shrewd," "innovative," and "hard-working entrepreneurs."
Shrewd, innovative, and hard-working they may have been, but not -- it turned out -- at building a company. As the case against the pair unfolded, it quickly became apparent that FTC was a house of cards. The company's flight-training and executive-charter operations, investigators found, were break-even propositions at best. Accounts receivable had been inflated by more than 50%; cash was overstated by about $3 million; and assets proved to be worth about 25% of the $50 million claimed. But the most shocking revelation involved the group-charter service, which had supposedly accounted for the majority of FTC's revenue in fiscal 1981: As far as anyone could determine, the entire line of business was a figment of somebody's imagination.
All of this raised intriguing questions about Rubin and Karki, but the most intriguing question of all had less to do with the alleged masterminds of the fraud than with those who had failed to catch it. FTC was, after all, a highly visible company. It had been through half a dozen financial reviews, including two audits by its accountant, the growing national firm of Fox & Co. had lined up some $15 million worth of credit from Norwest Bank Minneapolis, one of the Midwest's leading lenders, and a Norwest affiliate. And it had raised an additional $33 million from the investing public over a period of 18 months, with the most recent offering having been underwritten by the prestigious New York City investment banking firm of Drexel Burnham Lambert Inc.
Now it appeared that FTC was a scam -- one that had been revealed, however, not through the due diligence of the underwriters, or the acuity of the accountants, but as the indirect result of inquiries made in the course of an unrelated drug investigation. The obvious question was: What had happened? How had FTC managed to slip undetected through the radar of the investment community? Why hadn't somebody, anybody, shot it down?
In some ways, Karki and Rubin seemed an unlikely pair to pull off the scam with which they were charged. They had come from nowhere -- outrageous in style, short on substance, yet irritatingly confident of their ability to succeed. Bill Rubin, now 37, with his loud sport coats and tinted eyeglasses; Jan Karki, 50, with her blonde beehive and diamonds -- "tacky" was one of the more polite words used by Twin Cities' businesspeople to describe these big-talking upstarts. The investment community, for its part, regarded them as "rubes" and -- in the beginning, at least -- doubted their ability to survive the maelstrom of economic woes that had downed so many other aviation companies. But it wasn't put off by the pair's appearances. The prevailing view on Wall Street, as one stockbroker later put it, was "if they look that crooked, they gotta be legit."
