Executive Settles SEC Case Tied to Bid for O.C. Firm

A Hawaiian Airlines Inc. director agreed to pay $450,000 to settle charges that he profited by trading on inside information after overhearing colleagues on the airline’s board discuss plans for a merger involving an Orange County nursing home company.

The Securities and Exchange Commission alleged that William B. Lum learned that Sun Healthcare Group Inc. was negotiating a bid for Tustin-based Regency Health Services Inc. when he heard Regency’s chief executive--who also was on the Hawaiian Airlines board--talking about the possible takeover during a July 1997 dinner for the airline’s directors.

During the days after the board meeting, the SEC charged, Lum bought 30,000 Regency shares that he later sold for a $214,000 profit after Sun Healthcare, headquartered in Albuquerque, announced its acquisition plans. Lum, a psychologist and lawyer, agreed to settle the case without admitting or denying the allegations.

The case underscores the SEC’s efforts to pursue insider trading cases against people who aren’t literally insiders at the company whose shares were traded. The U.S. Supreme Court, in a 1997 decision, said the SEC can act when trading violates a trader’s legal obligation to the source or rightful owner of confidential information.

The SEC’s complaint was based on arguments that Lum violated a duty to Hawaiian Airlines by trading on information learned at a board gathering, even though the news didn’t involve the airline itself.

The SEC complaint said Hawaiian Airlines had a policy barring board members from trading on information they obtained as directors. At a board meeting the day after the dinner, the SEC charged, John Adams, who was chairman of both Regency and Hawaiian Airlines, admonished those present not to trade on information they’d heard the previous night.

Lum’s lawyer, Martin Auerbach, declined to comment, citing the terms of the settlement. A spokesman for Hawaiian Airlines also declined to comment, beyond saying the company wanted to emphasize that Lum’s activities had no effect on the airline’s shares.