THE HARMON ARBITRATION - PWBA Letter 1-12-1

Bobby N. Harmon, CPCU, ARM

January 12, 2001

Mr. Billy Beaver

U.S. Department of Labor

PWBA Los Angeles Regional Office

790 E. Colorado Blvd, Ste 514

Pasadena, CA 91101

Re: Kamehameha Schools Pension Plan

Dear Mr. Beaver:

This is to provide additional information regarding Kamehameha Schools’ Pension Plan.

As reported in the Honolulu Star-Bulletin on January 10, 2001:

Kamehameha pays $29 million tax settlement to IRS

by Rick Daysog

The Kamehameha Schools said today that it has paid the Internal Revenue Service $29 million to settle tax claims against the trust’s former for-profit subsidiary.

The payment by the $6 billion charitable estate covers back taxes and interests for Pauahi Holding Corp. through June 30, 1998. . . .

The estate’s previous trustees– Henry Peters, Richard “Dickie” Wong, Oswald Stender, Gerard Jervis and Lokelani Lindsey– aggressively transferred money-losing investments made by the trust to its taxable units to take advantage of tax credits.

The so-called “drop-downs” also allowed the former trustees to assume a more hands-on management of its money-losing ventures.

The IRS, as part of its three-year audit of the estate, questioned millions of dollars of such transfers, saying they were not made at arm’s length and were not in accordance with generally accepted accounting principles.

At the time, Pauahi’s investments included large stakes in Wall Street investment banker Goldman Sachs Group, Columbia/HCA Health Care Corp. and WCI Limited Partnership, a Florida-based residential developer.

In 1998 the trust, then known as the Bishop Estate, merged the assets of Pauahi into the Kamehameha Activities Association, or KAA, a nonprofit support organization controlled by the estate.

The IRS is investigating the investments held by KAA, but that audit does not include former Pauahi investments. . . .

I am familiar with this matter as I was the president of P&C Insurance Company, Inc., a wholly-owned subsidiary of Pauahi Holding Corp., from its incorporation date in 1994 until November, 1996.

In October, 1996, I met with representatives from Coopers & Lybrand (now PricewaterhouseCoopers), who were the auditors for P&C as well as for Kamehameha Schools/Bishop Estate, to discuss P&C’s annual financial statements. At this meeting, I informed the auditors of several alleged violations of “arm’s length” principles, conflicts of interest , falsification of claims reserves, improper claims procedures, and excessive and improper payments to Marsh & McLennan, Inc., the insurance broker for both entities.

At this same meeting I also told the auditors that I could not sign off on P&C’s annual financial statements due to these improprieties.

On November 20, 1996, I documented these allegations in a letter to Coopers & Lybrand, in which I enclosed numerous letters, invoices and other materials which provided evidence of these improprieties. A copy of this letter was sent to Wayne Metcalf, the insurance commissioner for the State of Hawaii.

Coincidentally, I was terminated as president of P&C by former trustee Henry H. Peters (who was also the Chairman of the Board of Directors of P&C) on this same date.

On December 27, 1996, I repeated these allegations in a letter to the five trustees– this time with additional information and further documentation. In the summer and fall of 1997, I went public with this information and also met with investigators from the IRS and the state Attorney General’s office.

Why do I bring up this matter in relation to the employees’ pension plan, now that the five former trustees are no longer there?

Because, many of the same top managers, the same accounting firm, and the same insurance providers who were directly involved in the improper practices that I reported to the authorities are, to the best of my knowledge, still employed or engaged as service providers by the estate.

To be specific, the top managers I am referring to include Nathan Aipa, Rodney Park, Wally Chin, Colleen Wong, Louanne Kam, Gilbert Ishikawa, and Yukio Takemoto. The outside service providers include Marsh & McLennan, Prudential Insurance Company and PricewaterhouseCoopers LLP.