Direct Air surprised some Punta Gorda officials in 2012 when it abruptly canceled flights, leaving some 93,000 people nationwide with unused tickets.
Now, more than six years later, the federal government has begun its sentencing of three company executives from the bankrupt company, formerly based in South Carolina.
On Nov. 29, a federal judge in New Jersey sentenced airline co-founder Kay Ellison, 58, to nearly eight years in prison for her role in raiding a company escrow account, according to the airline’s hometown paper, Myrtle Beach Sun News. The New Jersey bank account held funds for tickets that were bought but not yet used. This is required by federal law, and the airline cannot use the funds until the travel date has passed. Direct Air’s fund had $1 million in it, when it should have held $30 million, federal prosecutors said.
“Kay Ellison stole tens of millions of dollars of passenger money in a brazen scheme that put a veneer of success on a failing company, and left others holding the bag — until today,” Assistant U.S. Attorney General Brian A. Benczkowski said in a statement after the sentencing. “Her sentence sends a powerful deterrent message — especially to corporate executives — and demonstrates the commitment of the Criminal Division and its law enforcement partners to uncovering and vigorously prosecuting corporate fraud wherever it is found.”
The sentencing appears to be part of a trend toward increasing criminal prosecution of corporate executives rather than seeking large civil fines. The trend is described in a 2017 article in the Columbia University Law School blog.
Other co-founders, Chief Executive Officer Judy Tull and Chief Financial Officer Robert Keilmann, are the next to be sentenced. Ellison and Tull, Edenton, North Carolina, natives, were found guilty in a trial that ended in March. Keilmann, of New Jersey, pleaded guilty in 2015 and has been cooperating with the prosecution.
All the executives faced charges including wire fraud, bank fraud and related conspiracy charges.
The actions behind those charges are that the executives submitted false documents to the New Jersey bank, allowing Direct Air to use the unused ticket funds. The executives were also accused of withdrawing cash payments that they never deposited. And they were accused of double dipping, by telling the bank some of the funds were membership fees and withdrawing those funds. Then, later, after the tickets were used, they withdrew the same amounts again.
As the company struggled to stay afloat, the escrow funds dwindled. Direct Air posted notice at Punta Gorda Airport in March 2012 that its flights were cancelled, but it would resume flights in May that year. Soon after that notice, however, the U.S. Department of Transportation advised the public that Direct Air was not allowed to resume business, and that its escrow fund was under investigation.
Punta Gorda Airport was left with $64,000 in unpaid fuel bills. Direct Air told passengers with unused tickets to contact their credit card companies. Those credit card companies as of 2017 were trying to sue the New Jersey bank for the money.
Pam Seay, Charlotte County Airport Authority Commissioner then and now, said no one saw any big signs that Direct Air and its executives were in trouble. She said she met the company executives but did not know them. One thing she noticed was that they were slow to pay their bills, but they would eventually pay.
“My feeling was, they were new at this,” she said. “We were giving them the benefit of the doubt.”
She flew their flights, which involved chartered planes as Direct Air did not own its planes. They seemed highly competent, she said.
Despite the fiasco for that particular airline, Seay noted that their decision to use Punta Gorda as a destination opened the door to future airlines to follow a similar model. Allegiant Air started using Punta Gorda in 2009, the year after Direct Air, and was the smaller operation until Direct Air closed. Allegiant took on many of Direct Air’s small airport destinations and continues with that model, on a much larger scale.
At its peak in 2011, Direct Air in Punta Gorda had 177,929 passenger arrivals and departures combined with Allegiant at 111,951, according to airport reports. Today, Allegiant’s numbers dwarf Direct Air’s past with nearly 6 million passengers arriving and departing before the year is up.
Unlike Direct Air, Allegiant owns its own airplanes. It recently replaced a large number of its aging planes that were reportedly having mechanical problems.
Direct Air executives do not seem to have gotten rich off their venture. Tull recently applied for a court-appointed lawyer, meaning she could not afford her own. A trustee seeking compensation for the bank reported that Tull had no work, no assets and was living on social security payments. The trustee is going after $841,758 in fees and payments to Keilmann. And Ellison now owes $19.6 million in restitution.