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Mercury Air Directors Accused of Self-Dealing

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Times Staff Writer

Mercury Air Group Inc.’s chief executive and two other directors used a “sweeping pattern of self-dealing” to “loot” the Los Angeles-based supplier of jet fuel and other aviation services, a shareholder lawsuit alleges.

The suit, filed last week in San Diego County Superior Court in Vista, comes as Mercury is struggling with financial problems. The company is either in default or failing to meet terms on much of its debt. In addition, an investor group said Monday that it bought a 7.34% stake in Mercury’s depressed stock and might eventually consider proposing its own slate of directors to bolster its investment.

Mercury CEO Joseph Czyzyk and the two other directors used their partnership, CFK Partners, as the vehicle for “extracting millions of dollars from the company for their own interest,” thus reducing Mercury’s value for its remaining stockholders, the lawsuit alleges. CFK Partners is Mercury’s biggest investor, with a 31% interest.

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Mercury Chairman Philip Fagan Jr., a doctor who is not a Mercury executive, and another Mercury director, Frederick Kopko Jr., also are defendants in the suit brought by Andrew Chitiea, a Rancho Santa Fe investor.

Czyzyk declined to comment specifically Tuesday, saying he had not seen the suit. But he said transactions involving Mercury executives always have been approved by independent directors using third-party information.

The lawsuit alleges that the three used their influence on Mercury’s board to have the company repurchase nearly 525,000 of its shares from CFK Partners for a “windfall profit” to the partnership. Mercury bought the stock for $7.50 a share, or $3.9 million, a 53% premium above its market value at the time, the suit contends.

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Mercury’s thinly traded stock fell 9 cents Tuesday to $2.91 on the American Stock Exchange. The stock has dropped gradually since early 2000, when it stood above $8 a share.

CFK Partners also bought Mercury’s headquarters in January for $4.2 million and then “forced” the company to lease it back on “highly favorable” terms for the partnership, the suit alleges.

Kopko, a lawyer, said that he had not seen details of the suit but that CFK Partners had sold the stock back to the company at a loss. He said a “substantial portion” of the partnership’s stake cost the group $10 a share.

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He also defended the headquarters transaction, saying it reflected “fair-market-value terms based on independent third-party appraisals.”

Meanwhile, the group that acquired the 7.34% interest in Mercury said in a filing with the Securities and Exchange Commission that it bought the shares as an investment but might try to elect new directors or take other steps to boost the shares’ value. The group includes investors based in London and Bermuda.

Mercury sells jet fuel to airlines, provides refueling and hangar services for private and corporate aircraft, runs an air-cargo operation and manages aircraft services at U.S. military bases. Mercury also provides support services for the presidential jet, Air Force One, at various locations.

In its fiscal year ended June 30, Mercury reported a profit of $5 million on revenue of $383.3 million, but the earnings reflected an $8.9-million gain on the sale of assets. In its fiscal first quarter ended Sept. 30, the company lost $482,000 on revenue of $108 million, compared with earnings of $791,000 on revenue of $103.7 million a year earlier.

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