Breaking: AAR Corp. Under Scrutiny From SEC and DOJ — FOIA Reveals Leadership Team Visited SEC Office the Same Month a Former Executive Found Guilty of Corruption

Based on Hunterbrook Media’s reporting, Hunterbrook Capital is short AAR Corp. (NYSE: $AIR) at the time of publication. Positions may change at any time. See full disclosures below.

AAR Corp. (NYSE: $AIR), an aircraft maintenance service provider, said in an SEC filing released on Monday that it continues to cooperate with inquiries by the U.S. Department of Justice and Securities and Exchange Commission, as well as the U.K. Serious Fraud Office, related to the company’s potentially illegal conduct in Nepal and South Africa.

AAR also confirmed “a former employee” and “an employee of a former business partner have each pleaded guilty to one count of conspiracy to violate the FCPA in connection with the matters under investigation.” 

The Foreign Corrupt Practices Act guilty pleas surround bribery schemes in which AAR and an affiliate were accused of paying off Nepalese and South African officials to favor or maintain AAR contracts. AAR self-reported its possible legal violations to the U.S. and U.K. governments in 2019.

A Hunterbrook Media examination of responses to FOIA requests reveals that scrutiny of the company’s practices may be heating up. 

On August 7, three members of AAR’s leadership team stopped by the SEC’s headquarters, according to visitor logs obtained through a Freedom of Information Act request and reviewed by Hunterbrook Media. 

The executives were Vice President and Chief Ethics and Compliance Officer Lori Knudson, Senior Vice President and General Counsel Jessica Garascia, and Board Member Marc Walfish. 

A group of attorneys from law firm Davis Polk & Wardwell LLP, including Partner Daniel Kahn, who formerly headed the DOJ’s Fraud Section and Foreign Corrupt Practices Act Unit, also appeared to visit the SEC that same day. 

In AAR’s most recent quarterly report, the company described an increase in expenses “primarily due to increased costs of $3.9 million related to the previously disclosed FCPA investigation,” among other items.

According to a document reviewed by Hunterbrook, after the meeting, on September 20, the SEC sent a letter denying a FOIA request for information related to investigations of AAR under Exemption 7(A) — which allows the agency to withhold records “compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement activities.”  

Denials under Exemption 7(A) are an “economically significant” indication that a company is under SEC investigation and “constitute an information signal that predicts future negative abnormal returns,” according to a 2020 post from the Duke Financial Economics Center’s FinReg Blog. 

In the denial letter, the SEC cautioned that “the assertion of this exemption should not be construed as an indication by the Commission or its staff that any violations of law have occurred with respect to any person, entity, or security.”

When Hunterbrook requested comment on whether AAR’s leadership team visited the SEC in relation to the bribery schemes — or whether it had to do with another inquiry entirely — AAR did not reply. Davis Polk & Wardwell also did not return Hunterbrook’s request for comment.  

Stanley Keller, a corporate and securities lawyer at law firm Locke Lord LLP, told Hunterbrook that companies make a “materiality judgment” when determining what they do or do not have to disclose in regard to SEC investigations, based on two main questions: “What is the likelihood of enforcement action?” and “What’s the likelihood of it being material?” 

He added that companies can take into account prior disclosures about the events underlying a potential investigation, particularly if there was self-reporting to government enforcement agencies. 

Earlier this year, AAR announced its board member, Anthony Anderson, had notified the company of his decision not to seek re-election. He had previously served as Vice Chair and Managing Partner of the Midwest Area at accounting firm Ernst & Young LLP and was the chair of AAR’s Nominating and Governance Committee. 

AAR said the resignation was “not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies, or practices.” 

Bribery Inquiries Take Flight

AAR’s alleged involvement in the bribery schemes is related to separate business dealings in Nepal and South Africa. 

In Nepal, AAR was awarded a $216 million deal in 2016 and 2017 to supply Nepal Airlines with two Airbus jets. Earlier this year, according to an AAR security disclosure, Nepal’s Commission for the Investigation of Abuse of Authority announced it had initiated a criminal proceeding against an AAR subsidiary, among other entities, in relation to the deal. 

The Nepalese agency claims that AAR violated public procurement law and “names a former AAR International, Inc. employee, as well as John Holmes in his capacity as president of AAR International, Inc. at the time of the alleged conduct,” according to the disclosure. 

AAR says it “does not accept or admit these charges, and neither AAR International, Inc. nor Mr. Holmes intends to appear before the Special Court for several reasons including because the Company believes that any proceedings before the Special Court would lack appropriate due process protections.” 

But in the U.S., Deepak Sharma, a former AAR executive, admitted to bribing Nepalese officials in order to favor AAR in winning the contract for the aircrafts in August. In the same case, Sharma also pleaded guilty to participating in the bribery scheme in South Africa.

The South African deal surrounds a joint venture between AAR and aircraft management company JM International, which won a $125 million servicing contract for a subsidiary of South Africa’s state-owned airline company. From 2016 to 2020, more than $5 million in bribes were paid to the South African entity. 

The South African government’s Judicial Commission of Inquiry into State Capture called the deal “unlawful, irregular, and unfair” in a report on fraud and corruption in the government. 

The Judicial Commission concluded that the money government officials received when AAR and JM international won the contract “were likely kick-back payments” and recommended the National Prosecuting Authority pursue local criminal actions as well as “engaging with the United States Department of Justice regarding the role played by AAR in this scheme.”  

Whistleblowers, False Claims, and Rounds at Trump Doral

The Nepal and South Africa corruption inquiries are part of a broader pattern of controversies related to AAR in recent years. 

In July 2021, AAR and its subsidiary, AAR Airlift Group Inc., agreed to pay the U.S. government $11 million to settle a whistleblower lawsuit filed under the False Claims Act. 

The whistleblower, Christopher Harvey, a lead aircraft conformity specialist with AAR, raised concerns about the company’s practices. The lawsuit alleged that AAR “knowingly failed” to meet safety and maintenance requirements for planes “used to transport U.S. troops and cargo,” mainly in Afghanistan and Africa.  

This included “failing to track and replace certain airplane parts that had a limited life expectancy” and certifying the aircrafts as “fully mission capable” when they should not have been. The company also agreed to pay the FAA a separate settlement for failing to properly maintain a group of helicopters.

The company also faced scrutiny for its procurement practices in the United States during Donald Trump’s presidency. According to a New York Times report, AAR significantly increased its lobbying expenditures and held executive retreats at Trump-owned properties in 2017 and 2018, spending over $120,000 at the Trump National Doral golf resort alone.

As of October 2020, AAR had won federal contracts totaling $1.35 billion under the Trump administration, according to the New York Times. In the last 10 years, the company and its subsidiaries have repeatedly been fined by the Federal Aviation Administration, the Occupational Safety and Health Administration, the Environmental Protection Agency, and other agencies for violating safety and environmental regulations, according to the nonprofit corporate watchdog Good Jobs First’s Violation Tracker.

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