ACT 221

Watch poor Hawaii taxpayers get Wiped-Out in Blue Crush !


Sightings from The Catbird Seat

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November 27, 2009

UH analysis calls Act 221 a 'mistake'

No way to tell if Hawai'i benefited, economists say

BY GREG WILES, Advertiser Staff Writer

An analysis of Hawai'i's high-technology tax credits done by three University of Hawai'i economists has found the credits were poorly designed and that it is difficult to quantify their benefit to the state in terms of jobs and bringing in out-of-state investors.

The study looked at what are considered the most generous technology tax credits of any state and found it was difficult to determine whether the state achieved the desired goals of the tax credit, which can return 100 percent of investments to investors

"We conclude that it was a mistake to initiate a generous tax credit program without adequate monitoring by public agencies or disclosures of how public funds are being used by recipients," wrote Andrew Kato, Sumner LaCroix and James Mak, economists from the University of Hawai'i Economic Research Organization.

The authors noted it is difficult to determine how much out-of-state investment was attracted into local high technology firms, or how many jobs were created by an estimated $657.5 million of tax credits. The research is to be published in State Tax Notes, a national tax journal....

"Do we know how much additional capital Hawaii's high technology tax credit program attracted to Hawaii relative to the amount that would have occurred without the nation's most generous tax incentive program? The answer is 'no,' " the paper said.

"Do we know how many additional high technology jobs were created by the tax credit program? Again the answer is 'no.' "...


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Continued at Act 221 - Wiping out Hawaii Taxpayers



August 13, 2007


Maui Energy Group

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We thank Hawaii Venture Capital Association for their support on Act 221 / 215, and their efforts with the Legislature to continue to support these very important Tax Credits for the continuance of High Technology Development in Hawaii....

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Visit our web site for a Video of President Bush, Karl Rove, Secretary of Energy Samuel W. Bogman, our Phoenix Motor Car SUT on the South Lawn of The White House and the President's message about our new Electric Vehicles and the Importance for our Future National Security and Economic Independence....

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April 1, 2007

ACT 221 / 215...

This is the most Progressive and Generous Investment Tax Credit Law in the US.

The Hawaii State Legislature adopted ACT 221/215 as a means to encourage investment in high technology businesses, provides a 100% investment income tax credit to investors, and is deductible from the Hawaii taxpayers Net Income Tax Liability. This also applies to the licensing fees paid by the Banks and Insurance Companies. The maximum amount is $2 million annually, per investor, per QHTB. We expect to have four (4) QHTB's under management in the next 18 months.

Maui Energy Group L.L.C. qualifies under Non-Fossil Fuel Technologies and Services. (Non-fossil fuel energy-related technology)...



March 23, 2004

Audits find tech-tax abuse

The state tax director says up to 20 percent
of Act 221 claims reviewed are fraudulent

By Nelson Daranciang, Honolulu Star-Bulletin

Up to 20 percent of high-technology tax credits claims that have undergone state audit or review are fraudulent, state Tax Director Kurt Kawafuchi said yesterday.

The Tax Department has already consulted the state attorney general and expects to submit cases for civil or criminal legal action within a year, he said. But because tax information is confidential, only those cases that go to court will be made public....

Kawafuchi’s proclamation alarmed state lawmakers.

“If there’s abuse, we need to stop it immediately, and we need to crack down on it immediately,” said Rep. Brian Schatz (D, Tantalus-McCully), House Economic Development and Business Concerns Committee chairman.

Gov. Linda Lingle tried unsuccessfully last year to convince the state Legislature to repeal the law....

Kawafuchi said his estimate of Act 221 “abuse” is based on audits and reviews of claims made for 2001 and 2002.

Schatz questioned Kawafuchi and state Department of Business, Economic Development & Tourism Director Ted Liu why the administration never mentioned the possibly fraudulent claims earlier.

Liu said lawmakers never asked for that information....

Earlier this month, Kawafuchi said he was looking into whether a local insurance company turned a $2,000 investment into a $3.4 million claim for tax credits.

He said the state can reject claims for tax credits if the investment lacks business purpose and economic substance....

Honolulu Star-Bulletin


March 23, 2004

Up to 20% of Act 221
claims may be illegal

By Sean Hao, Honolulu Advertiser

An estimated 15 to 20 percent of all claims for the state’s Act 221 high-technology tax credits could violate criminal or civil law, and prosecutions of claimants could begin within a year, the state Department of Taxation said yesterday.

Lawmakers, who are considering extending the tax credit program for an additional five years, said they were surprised by the disclosure which came from state tax director Kurt Kawafuchi.

“You’ve just said something very alarming,” said state Rep. Brian Schatz, D-25the (Makiki, Tantalus), chairman of the House economic development committee. “It’s just astonishing that we’re at this stage of the legislative session and this is just coming out.”...

Kawafuchi said the types of questionable transactions involve:

>        Drop-down subsidiaries, where companies move information technology operations to a separate business.

>        Companies selling slightly altered off-the-shelf software and calling it high technology.

>        Other deals that don’t result in actual investments or new jobs.

Kawafuchi said there had been no prosecution yet because “we want to be very careful and thorough and make sure it’s a solid case.”...

Among changes to Act 221 being discussed in the Legislature are limiting research credits to high-tech companies and providing guidance meant to curtail investment tax credit returns that in some cases have been higher than intended. There’s also debate over disclosing the identities of companies and certain investors that benefit from the program.

Those most opposed to changing Act 221 include the Hawaii Technology Trade Association and the Hawai`I Venture Capital Association. Bill Spencer, president of the HVCA, said despite Kawafuchi’s claims, there still are no known examples of abuse that would justify drastic changes.

“I just think they haven’t done their homework,” he said. “These estimates are at best ‘guestimates.’”


March 19, 2004

AIG Hawaii leverages Act 221
for new tech division

By Terrence Sing, Pacific Business News

AIG Hawaii President Robin Campaniano has taken the first steps toward bringing a piece of the parent company’s $600 million software-development business to Hawaii.

Campaniano hopes to capture about $80 million of AIG’s software-development business now spread among four offices in Asia and two on the mainland.

He’s relying on Act 221, the state’s technology tax law, to pull it off. AIG Hawaii has invested about $4 million in a newly formed tech-development center at its Restaurant Row headquarters. The tech tax law not only has saved the division’s existing staff of 25, whose jobs were set to be disbursed to the other tech centers, but also added 10 new positions since last year, Campaniano said....

AIG Hawaii created a limited liability corporation to be eligible for the tax credit. Insurance companies and banks have been labeled part of the problems surrounding Act 221 for taking advantage of the act by creating new divisions, claiming they were tech-related and then writing them off under Act 221 to avoid paying taxes.

Campaniano says AIG has avoided dubious investment schemes clearly meant to avoid paying taxes and instead is creating new jobs and investing in high-tech infrastructure.

“We are not looking for a tax writeoff,” he said. “This deal was to create jobs and create a tech industry. In my little way I can help push that cause.”

(A curious Catbird query: If you’re not looking for a tax writeoff, Robin, why are you taking advantage of Hawaii’s taxpayers under Act 221 ?)

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For much more about AIG, GO TO > > > The Allied World Assurance Group; Kajima: Blood, Bribes & Brutality; The Un-American Insurance Group


February 22, 2004

Insurers among investors that
got Act 221 breaks

By Jim Dooley, Honolulu Advertiser

Eleven Hawai'i insurance companies, including one closely tied to the state's two largest public employee unions, avoided paying $19 million in state taxes in 2001 and 2002 by investing in high technology ventures, including the "Blue Crush" teen surf movie.

The state won't identify the firms or reveal full details of their investments because of Tax Department secrecy laws now being questioned by some in Gov. Linda Lingle's administration and the state Legislature.

But government records, court documents and a local insurance executive identify the Royal State Insurance group of firms as a central player in a hui that invested in the Blue Crush production in 2001, generating millions in controversial state tax credits.

Repeated attempts to reach Royal State chief executive Melvin Higa for comment were unsuccessful. Russell Okata, head of the 40,000-member Hawaii Government Employees Association and chairman of the board of directors of Royal State Corp., declined to comment other than to say through a spokesman that he "had nothing to do with any Royal State business decisions regarding investments."

Documents contained in a state court lawsuit over distribution of the "Blue Crush" tax credits provide glimpses into the deals worked out in government and business circles over a bonanza of tax breaks available to Hawai'i investors under the 2001 law commonly called Act 221.

These details raise further questions about the public benefit of the tax credits, which cost the state's general fund $21.9 million in 2001 and are expected to cost $48.4 million this fiscal year and $76.7 million in fiscal 2005, according to state estimates.

The law says every dollar invested in qualifying high technology ventures, including film and television productions, can be used to reduce state tax obligations by $1. The tax credits are spread over a five-year period and are capped at $2 million per investment.

Proponents of Act 221 argue that the credits are a valuable economic tool for promoting business growth and creating new jobs in a state overly dependent on tourism and military dollars. Act 221 supporters also argue that disclosure of who benefits from the credits would be detrimental to the program.

State Rep. Brian Schatz said exposing the identities of investors receiving Act 221 tax credits could discourage further investment.

"I just don't see the need to know the name. I need to know the numbers," he said. "I think there are some legitimate reasons that certain investors wouldn't want their names out there, and it's not simply a matter of them wanting to hide."

Critics say the credits are overly generous, have failed to produce tangible economic benefits for the state and have been shrouded in secrecy preventing public accountability.

State Sen. Colleen Hanabusa, D-21st (Nanakuli, Makaha), who opposed passage of Act 221, said she was "stunned and fascinated" by the identification of union-affiliated Royal State as a "Blue Crush" investor.

"That's the kind of information the public should have," she said.

"I believe if you receive a tax credit from the state of Hawai'i then Hawai'i taxpayers should know who you are."

Lowell Kalapa of the Hawaii Tax Foundation, said it was ironic that Royal State Insurance, with its connections to Hawai'i's public worker unions, is reducing its state taxes by investing in a venture like the "Blue Crush" film.

Public workers are paid from state tax collections.

"It's like these guys are sucking their own well dry," Kalapa said.

The identities of some of the "Blue Crush" investors are contained in an Act 221 tax credit lawsuit filed in 2002 by April Masini, a film and television industry figure active in Hollywood and Hawai'i, against the prominent Hawai'i law firm Cades Schutte Fleming & Wright and a partner in the firm, Vito Galati, who had helped draw in investors for "Blue Crush."

(The firm regularly provides legal representation to The Advertiser but was not involved in the preparation or review of this story.)

Masini claims that she was wrongfully denied "Blue Crush"-generated tax credits after she worked in 2001 to convince Universal Studios to film the movie in Hawai'i.

Masini said she worked with Gov. Ben Cayetano and his high technology adviser, Joseph Blanco, to obtain tax credit approvals for the project and searched for local investors willing to put money into the production.

The law firm and Galati deny any wrongdoing.

Masini said in her suit that she helped pitch the movie tax credit proposal to Hawai'i land-holding giant Damon Estate and two local banks with "high net worth clients" who would be interested in substantially reducing their state taxes.

In one proposal, heirs of the Damon Estate, which at the time owned more than 116,000 acres of property on O'ahu and the Big Island and 13 percent of First Hawaiian Bank, were to receive $11.2 million in tax credits after investing $8.5 million in the "Blue Crush" production, according to court records.

Making a profit in tax credits is one of the controversial aspects of Act 221. The law allows out-of-state investors, who don't need Hawai'i tax credits, to give, sell or otherwise transfer their credits to Hawai'i taxpayers.

The law also may have created an underground market in the secrecy-shrouded credits, according to paperwork filed in the Masini suit.

The proposal to Damon Estate contained a provision that Masini and a Mainland partner had the right to purchase tax credits from the estate "for resale to third parties."

Masini's lawsuit said the estate and banks eventually turned down the "Blue Crush" proposal and the ultimate investors were "insurance companies" brought in by Galati, the Cades law firm partner.

The insurance companies are not identified in the court case because of state tax laws prohibiting public release of "taxpayer information," according to paperwork filed by Masini's lawyer, Philip Brown.

However, the Masini suit does list a number of local insurance companies and executives as witnesses to be called — if and when the case goes to trial. A trial date has been tentatively set for next year.

Companies identified

Among the witnesses listed by both the plaintiff and defendants in the suit are executives of four Royal State-affiliated companies, including the Performing Arts Investors and Royal Management that were formed in mid-December 2001 when the Blue Crush investment was being finalized.

According to state business records, HGEA's Okata was chairman of the board of Royal State at the time the Blue Crush investments were made.

Royal State is listed as the parent company of Royal State Investment Corp., which in turn is listed as the agent for Performing Arts Investors and Royal Management.

Also on the Royal State board with Okata at the time of the "Blue Crush" investment was Gary Rodrigues, then head of the 12,000-member United Public Workers Union, which represents mostly blue-collar state and county employees.

Rodrigues was sentenced last year to more than five years in federal prison in a union fraud and embezzlement case that involved Royal State and a related firm called Voluntary Employees Benefit Association of Hawaii.

Both Rodrigues and HGEA's Okata were on the board of trustees of VEBAH.

Rodrigues is no longer affiliated with UPW. Acting union administrator Liz Ho could not be reached for comment.

Another local insurance company executive listed as a witness in the case is Colbert Matsumoto, chief executive of Island Insurance Co. Ltd.

Matsumoto wouldn't discuss many details of his company's investments, but acknowledged that Island Insurance has made "several investments" in high technology ventures, including the "Blue Crush" production.

Matsumoto said "an investment entity" was formed to receive money from various insurance companies for the "Blue Crush" venture. Asked if the investment entity was Performing Arts Investors, the limited liability company operating from Royal State Corp.'s Beretania Street offices, Matsumoto said: "That sounds right."

Other executives of insurance companies listed as witnesses in the Masini suit did not respond to repeated requests for comment on "Blue Crush" investments.

The companies include Zephyr Insurance, supplier of much of the hurricane insurance coverage written in Hawai'i, Pacific Guardian Life Insurance, and DTRIC Insurance.

Royal State owns a partial interest in the DTRIC insurance business in Hawai'i, according to state business records.

First Insurance Co. of Hawaii was invited to participate in the "Blue Crush" venture but declined, said company spokesman Steve Tabussi.

"We had a look at the proposal," Tabussi said. "It didn't fit our investment needs."

According to figures compiled by state Insurance Commissioner J.P Schmidt, some local insurance companies quickly took advantage of Act 221 tax credits.

A chart prepared by Schmidt for The Advertiser shows nine insurance companies claimed $6 million in Act 221 tax credits in 2001, the first year the credits were available. The following year, 11 companies reduced their state taxes by $13 million using the credits, a 117 percent increase.

Schmidt said he couldn't reveal the names of the companies because of Tax Department confidentiality laws. But the numbers make clear that some insurance companies made multiple Act 221 investments or acquired extra credits from other sources in 2001-2002.

Under an annual percentage formula set in Act 221, the maximum allowable tax credit per investment each year is $700,000. But three companies claimed between $890,000 and $1.3 million in credits for the 2001 tax year, showing that they invested in more than one project or bought or otherwise acquired additional credits from other sources.

In 2002, two insurers reduced their state tax bills by more than $2 million each and another three companies avoided more than $1 million in state taxes apiece through Act 221 investments.

Changes to law sought

The state Tax Review Commission, which reviews state tax policies every five years, has called for changes to Act 221.

In a report last year, the commission said: "Every business receiving $2 million in high-tech investment (credits) should report back to the Legislature to justify the investment costs upon which the credit is based, account for all the credits taken, and demonstrate that the cost-benefit has been achieved."

Kalapa of the Hawaii Tax Foundation said Act 221 credits have left the public with little means of judging their effectiveness.

"We're all left to wonder if jobs are being created. We don't know who's getting the credits so there's no real way to measure the economic benefits," he said.

State Tax Director Kurt Kawafuchi said his department is still studying the economic effects of Act 221 and audits of companies that claimed the tax credits in 2001 to 2002 may be under way.

But the law says that Act 221's provisions must be "liberally construed" by the tax department. Even if audits determine that tax credits were improperly received by Act 221 investors, the law says only 10 percent of previously awarded credits can be "recaptured" by the state.

Information about any recaptures would be confidential, according to Kawafuchi.

Bills to tighten Act 221 eligibility criteria and extend the program another five years beyond its present 2005 expiration date are pending at the Legislature. Provisions that would publicly identify tax-credit recipients have been dropped from the measures.

Ted Liu, director of the state Department of Business, Economic Development and Tourism favors disclosure. "Sunshine is the best disinfectant," Liu said.

Tax Director Kawafuchi, however, said he sees good arguments on both sides of the secrecy issue and is looking for a "middle ground" solution.

Reach Jim Dooley at jdooley@honoluluadvertiser.com or 535-2447.

© COPYRIGHT 2004 The Honolulu Advertiser, a division of Gannett Co

< < < UPDATE > > >

July 14, 2004

Lingle Oks Act 221 tax credit
extension, criticizes lawmakers

By Dan Martin, Star-Bulletin

Gov. Linda Lingle signed a bill yesterday that extends and tightens Hawaii’s controversial high-technology tax credits for five years and establishes a state private investment fund to provide venture capital for cash-hungry local tech companies.

The extension of the credits, known as Act 221, has raised hopes for a wave of fresh funding for Hawaii technology companies now that uncertainty over the future of the credits has been resolved.

“That extension of (Act) 221 was really important. It removed a big question mark and will probably spur a lot of venture capital off the fence,” said Bill Spencer, president of the Hawaii Venture Capital Association.

Act 221 was revised to tighten the criteria for qualifying for the credits after it emerged last year that some companies with flimsy technology premises may have abused the spirit of the act, costing the state millions in tax revenue. The tax credits were intended to help high-tech firms lure investment and create jobs.

But Lingle said the bill could cause Hawaii to lose still more technology companies because it delays the implementation of the state private investment fund by a year.

“Instead of just talking about creating quality, high-paying jobs, we need to take bold action,” Lingle said. “This Legislature’s delay in implementation may result in successful Hawaii companies moving to the mainland to obtain the financing they need.”

The Democrat-controlled Legislature declined to appropriate funding for the fund’s implementation, which means the Republican governor will have to go back to lawmakers during the next session to work out establishment of the fund.

Rep. Brian Schatz (D, Tantalus-Makiki) said the delay was necessary to allow the state to figure out the final shape of the fund.

“This is one of the most complicated policy issues I’ve ever seen and it’s not something that anybody involved is prepared to rush through. We all need more time to do our due diligence,” he said.

A study released last month by Enterprise Honolulu said Hawaii companies need about $233 million over the next five years.

With the investment fund, the state would borrow tens of millions of dollars, which would be placed with venture capital funds. Those funds would be invested to help kick-start promising start-up companies or help established firms expand.

“There are a number of models that work well and many that do not. We need to look at what is the right model, how it should be governed, and the criterion for investments,” said Schatz.

He said one remaining question mark is how the state Taxation Department’s certification process will work. The revised legislation requires Act 221 claimants first to obtain certification from the state tax director that their claim is legitimate. To do so, they will have to supply the tax department with detailed information on their business.

The tax department has said it was working on certification guidelines.



January 22, 2005

Unity House case detailed

By Jim Dooley, Honolulu Advertiser

A wealth of new information about how Tony Rutledge Sr. operated Unity House Inc. was unsealed in federal court yesterday, including grand jury testimony that the tax-exempt Unity House “sold” Hawaii tax credits to wealthy local investors and allegations that Rutledge used the organization’s money to gain “political influence.”

The information contained in a sworn statement from an Internal Revenue Service agent and a preliminary report on Unity House finance from the court-appointed receiver now running the $42 million nonprofit labor organization, was discussed during a hearing on a motion by Rutledge’s attorneys to declare the government’s December seizure of Unity House illegal.

Chief U.S. District Judge David Ezra denied the motion and issued an injunction allowing the government’s takeover of Unity House to continue until criminal fraud and conspiracy charges against Rutledge and his son, Aaron, are resolved. Trial in the case is set to begin May 10....

New details about Unity House’s activities were contained in a sworn “declaration” from IRS agent Gregory Miki that formed the basis for the government’s Dec. 14 seizure. The declaration had been sealed from public view but was released yesterday, with sections blacked out because of an ongoing criminal investigation of Unity House, according to U.S. Department of Justice attorney Edward “Ted” Groves.

According to Miki and the appointed receiver, Anthony Pounders, Unity House invested $1 million and Rutledge invested $200,000 of his family’s money in Hoana Medical, a local company developing state-of-the-art medical sensory equipment. Hoana Medical investors qualified for state tax credits available to “high-tech” business ventures under Act 221, a controversial law passed in 2001.

The generous tax credits - each dollar invested in a qualifying high-tech venture allows an investor to reduce personal or corporate Hawaii taxes by one dollar over a five-year period - are a valuable tool for creating business growth and new jobs in Hawaii, proponents argue.

Critics have questions the true economic value of the tax credits, in part because the identities of individuals receiving them are shrouded in secrecy, making the benefits of the program to the state difficult to measure.

And provisions of Act 221 that allow well-to-do investors to sell, barter or otherwise exchange tax credits have created an underground market in the tax credits, according to a 2002 Circuit Court lawsuit.

Miki’s statement said Rudy Tam, a Unity House investment consultant, testified before the federal grand jury that Unity House “sold the tax credits” it received from the Hoana Medical investment to other, unspecified Hawaii taxpayers.

Kurt Kawsfuchi, state tax department director, also testified before the federal grand jury, saying that “Unity House is a tax-exempt charitable organization not entitled to the Act 221 tax credit and thus could not sell it to wealthy investors,” Miki’s declaration said.

Kawafuchi declined comment yesterday, saying that “information about a specific taxpayer is confidential.”

Tam could not be reached for comment. His attorney, Eric Seitz, said Tam has served as a Unity House investment adviser and testified before the federal grand jury about his work for the organization and Tony Rutledge....

Tam, who is on the board of directors of Hoana Medical, has been “tied to several failed business investments made by Unity House,” Miki said in his declaration.

Tam does not have a personal bank account because of unpaid federal tax liens and child-support obligations, Miki said in his sworn statement.

Patrick Sullivan, head of Hoana Medical, could not be reached for comment yesterday. Hoana official Ian Kitajima said he was not privy to the details of the Unity House and Rutledge investments or Tam’s involvements in them....

Miki’s sworn statement also said the grand jury investigation has included testimony about political activities of Unity House when it was controlled by Rutledge. “The unchecked use of Unity House contracts and monies have resulted in political influence that has opened doors from which Rutledge has benefited personally,” the statement said.

Those activities included “contributions to individuals such as Robert Awana (Gov. Linda Lingle’s chief of staff), Romeo Mindo (a former state representative who was a Unity House employee) and (state Sen.) Colleen Hanabusa.”

Awana received a “generous consulting contract from Unity House to survey the members” from 1999 to 2000, according to Miki.

“The survey included questions to the members on whom they would vote for in the upcoming mayoral election,” Miki said.

After Lingle was elected governor in 2002, Tony Rutledge “had eleven meetings with the Chief of Staff for the Governor of Hawaii,” Miki said in his sworn statement....

Hanabusa, D-21st (Nanakuli, Makaha), said yesterday that she is Awana’s attorney and that he “testified freely before the grand jury and was told from the beginning of the investigation that he was not a target of the grand jury.”...

Hanabusa said she did not know why she was named by Miki as a recipient of “contributions” from Unity House, pointing out that her political campaign is one among many that have received donations from the organization.

According to the criminal indictment of the Rutledges, Mindo introduced legislation in 2003 that allowed Unity House to transform itself from a “membership-based” organization to a “nonmembership-based” one that was directly controlled by Tony Rutledge. Mindo received an unsecured, $40,000 Unity House loan January 2004.

Seitz, who is also Mindo’s lawyer, said the loan was for home repairs and was unrelated to Mindo’s sponsorship of the Unity House legislation.

Lingle signed the bill into law in May 2003. Awana told The Advertiser last month that Unity House employee Michael Tanaka called him about the Mindo bill after it had been approved by the Legislature....

Awana said he did not speak to Lingle about the bill or tell her about Unity House’s interest in it.

Lingle herself worked for Unity House founder Arthur Rutledge in the mid-1970s and was named by the senior Rutledge to the board of directors of the Hawaii Pacific Cinema Development Foundation in 1981, resigning after she was elected to the Maui County Council.

The new criminal charges against Tony Rutledge allege that he improperly diverted $50,000 from the Cinema Foundation for a movie project in which he had a personal financial interest.

Awana said last month neither his past work for Unity nor Lingle’s more remote connection to the nonprofit affected their consideration of the worthiness of the Mindo bill.


March 25, 2005

Local 5 Sues Unity House

By Jim Dooley, Honolulu Advertiser

The Hawai’i hotel-restaurant workers union has filed a civil racketeering lawsuit against Unity House Inc., charging that former president Anthony Rutledge Sr. and other officers used Gov. Linda Lingle’s chief of staff Robert Awana, former state Rep. Romeo Mindo and others to divert millions of dollars of Unity House money for the personal benefit of Rutledge, his family members and associates.

The lawsuit, filed in federal court last weekend, does not name Awana as a defendant but calls him a “co-conspirator and/or wrongdoer” in an alleged scheme to defraud the nonprofit labor organization of assets.

Awana could not be reached for comment yesterday. His attorney, state Sen. Colleen Hanabusa, D-21st (Nanakuli, Makaha), yesterday said, “I don’t know anything about the suit. I can’t comment.” Hanabusa said in January that Awana testified before a federal grand jury investigating Unity House but was told he was not a target of the investigation.

Mindo’s attorney Eric Seitz said he hadn’t seen the suit and had no comment on it. He has previously said Mindo, a former Unity House employee, committed no wrongdoing.

The racketeering lawsuit was filed Sunday by the union and Eric Gill, head of the Hotel Employees and Restaurant Employees Union Local 5 and a longtime opponent of Tony Rutledge. Fourteen other officials and members of Local 5 are plaintiffs in the suit seeking unspecified monetary damages from the senior Rutledge and other defendants.

The lawsuit repeats many allegations in a criminal fraud case against Tony Rutledge and his son Aaron, a former Unity House executive. That case is scheduled to go to trial in federal court in May. Some of the allegations contained in the suit are also drawn from records introduced in court after federal agents seized control of Unity House Dec. 14.

IRS agent Gregory Miki said in a sworn statement justifying the Unity House seizure that, “The unchecked use of Unity House contracts and monies have resulted in political influence that has opened doors from which (Tony) Rutledge has benefited personally.”

One example cited by Miki was a “generous consulting contract” that Unity House gave Awana in 1999-2000 to survey union members. The Local 5 lawsuit said the value of the contract was $250,000 and the survey “included questions on whom they would vote for in the upcoming mayoral and other elections.”

The suit also repeated an allegation from Miki that Rutledge met with Awana 11 times after Awana became Lingle’s chief of staff in 2002.

Jeff Rawitz, defense attorney for Tony Rutledge, declined comment on the lawsuit other than to note that it was filed for Local 5 by T. Anthony Gill, brother of Eric Gill.

“That has the appearance of a conflict of interest because the brother who filed the lawsuit stands to make money from it regardless of the merits of the case,” Rawitz said.

T. Anthony Gill declined to respond to Rawitz’s statement.

Brian DeLima, attorney for Aaron Rutledge, said he had not seen the suit and could not comment on its contents....

Prominent Honolulu criminal defense attorney Michael Green, a former Unity House director, is also named as a defendant in the lawsuit. His office said yesterday Green was out of state and unavailable for comment.

David Louie, an attorney who represents another defendant, former Unity House director Arlene Hae, was unavailable for comment yesterday on the lawsuit.

Hae this month filed a legal protest against the government’s “usurpation of control” of Unity House, saying the takeover “impairs and impedes” the ability of Hae and other officers and directors to protect the rights and assets of Unity House.

In response, Anthony Pounders, the receiver appointed by federal court to run Unity House while the criminal case against the Rutledges is pending, said: “Even if some members of the prior management were not directly involved in any corporate mismanagement or malfeasance, I have found no evidence of any attempts to expose, investigate or otherwise stop such mismanagement or malfeasance.”

Pounders said the net worth of Unity House declined from $49 million at the end of 2001 to $31 million today, owing largely to bad investments.

He also said Unity House last year was billed $793,000 in legal expenses to defend the Rutledges in the federal criminal investigations.

Unity House has paid $50,000 a year for insurance coverages of its officers and directors but “failed to make a claim” for insurance coverage* of the legal bills, Pounders said.

“Instead, Unity House used its own money to pay Anthony Rutledge Sr.’s attorneys’ fees,” said Pounders.

Rutledge lawyer Rawitz yesterday declined comment on Pounders’ statements...

* (Catbird Note: Hmm.... An organization not filing claims when they have insurance? Attorneys Eric Seitz and Michael Green? Smell familiar? Go sniff out Claims By Harmon, Confessions of a Whistleblower, and Dirty Money, Dirty Politics & Bishop Estate)

~ ~ ~

For more on Governor Linda Lingle, Colleen Hanabusa, Robert Awana, and Eric Seitz, GO TO > > > Predators in Paradise; The Grand (and dirty) Ko Olina; David C. Farmer, Trustee vs. Harmon

< < < FLASHBACK < < <

October 23, 2002

Attorney sued over movie financing deals

By Tim Ryan, Star-Bulletin

In a lawsuit revolving around financial incentives for film and television productions to work in Hawaii, April Masini is suing a local tax attorney and his law firm for malpractice and fraud.

Masini, owner of Hawaii-based Masini Television and Film Enterprises and Masini Enterprises in Los Angeles, filed a lawsuit in Circuit Court charging attorney Vito Galati and Honolulu firm Cades Schutte Fleming & Wright with breach of fiduciary duty, gross negligence, intentional interference of contractual relations, misrepresentation, fraud and unjust enrichment. Masini’s attorney is Philip R. Brown.

The suit alleges Masini had retained Galati for assistance in creating a business to secure film and television production work in Hawaii, with the lure being Act 221, a state law that provides tax incentives for certain high-tech investment, including film and TV production.

According to the suit, Galati would use his tax expertise to explain to Hollywood productions how Act 221 is structured and how to qualify while Masini would market the statute’s benefits to networks, distributors, studios, and producers in Hollywood.

Galati began representing Masini in Hawaii as her attorney beginning in fall 2001, the suit says.

The suit says one of the main reasons Masini retained Galati was to obtain “a comfort letter” from state Tax Director Marie Okamura assuring investors that participating studios or production companies were qualified for the incentives.

The suit alleges that once Galati received the letter he never forwarded it to Masini, not only thwarting her marketing efforts in Los Angeles but using it for his firm’s gain. Masini allowed Galati to approach several potential investors, including Bank of Hawaii and several local insurance companies, on her behalf because even as late as February this year she believed that the attorney was working for her, the suit says.

Galati in numerous e-mails to Masini acknowledges their partnership though apparently no written agreement exists, the suit says.

Masini and Los Angeles attorneys Adam Fields and John La Violette convinced Universal Pictures to use Act 221 for its “Blue Crush” film production, which Galati was expected to structure, the suit says.

When a deal with Bank of Hawaii to invest in the film fell through, Masini and Fields turned their attention to Damon Estate participation, but that also failed....

When Galati created the final “Blue Crush” transaction, Masini was no longer a party but an “agent” – though Galati’s role had “greatly increased,” the suit claims.

Cades moved Masini out of the ‘Blue Crush’ deal to gain an increased role and compensation for itself and its other clients,” the suit says.

In January, Galati allegedly sent Masini a new agreement that drastically altered her and Fields’ fee for the “Blue Crush” efforts and effectively put her in competition with Galati’s other clients for selling the tax credit structure and receiving the benefit of the sale.

“Galati had completely abandoned Masini but continued to use (her) contacts ... to establish his position in the industry at Masini’s expense,” the suit says. Since partnering with Masini, Galati has been retained by other productions seeking Act 221 incentives.

Galati was not available for comment. In a written statement, the law firm said the lawsuit is “completely without merit” and they “intend to vigorously defend ourselves.”...



July 3, 2003

What's wrong with Act 221 in Hawaii (the state tax credit for investment in high tech)?

A. It's a wonderful law, but most tax laws need to be refined. There are unintended consequences. I've been in the venture capital business since 1980, and every state at some point has tried to create a law like this. Every one of them has either gone away or been radically modified because people do try to take advantage of it. What it creates is an investment for tax purposes. The best companies don't get funded. The best tax deal gets funded.

What happens is you create mediocre companies ... unless the tax law is defined in a way that puts limits on what you can get from a tax shelter standpoint. But the Hawai'i law has no limits.

Q. Why does Act 221 have the support of the Hawai'i Technology Trade Association, the Chamber of Commerce, Enterprise Honolulu and many Democratic legislators?

A. There are a number of people who represent those organizations who are very well meaning. They want to build a high-tech community in Hawai'i and they want to diversify the economy. I think what they are focused on is a fear that if the law is changed, nobody will know how it will be changed. They would rather have what they have than take a risk on some thing that is unknown.

The danger is ... they have never been in a position — at least to my knowledge — of ever having to raise big venture funds. The biggest venture funds in Hawai'i are $30 million to $40 million. In Silicon Valley, we are a midsized fund. We have $509 million. In my own career, I've raised close to $2 billion. I know how hard it is.

The bad side of Act 221 is that it discourages the formation of a large pool of capital here. Why? Because most of the venture capital money in the United States — about 50 percent — comes from pension funds. They looked at Act 221 and say people are creating companies that are not necessarily great companies; they are good tax schemes. So why should we invest?

It's a good law, but it needs fixing. Then we can go to the trusts and the endowments and the pensions and create a large pool of capital — $100 million. There will be enough now to support the better companies, not on their tax deals but on the quality of their companies — which is what the pension, trusts and the endowments want.

Q. What changes need to be made to Act 221?

A. There are three things that need to get done.

There is no other state that gives you as much as a 100 percent rebate, so if you invest a dollar you get a dollar back. In Hawai'i, there are deals where you can invest $1 and get $10 back. There is no cap. The cap should be at least at 200 percent and maybe less.

The second thing is that some companies form subsidiaries. You spin the computer department out and create a company, and now people can invest in that company and get a tax break. That's not creating any new industries. It's not creating any new jobs. It's just transferring a division out to do the same thing they were doing before, and now you get a tax break. That's shouldn't be allowed.

The third thing that shouldn't be allowed is called an escrow account. They raise the money but the money doesn't actually go into the company. It sits in a limited partnership and instead of the company having use of the money, it's dribbled into the company on a monthly basis.

So the company stays alive for a four- or five-year period, so they can get the five-year tax break independent of whether the company is a real company or not. There are a couple where they are just shells. One or two people.

Q. Who are the companies that are abusing Act 221?

A. That's where it gets really tricky, because I've been warned about liability. I don't come to Hawai'i to get in fights with individual people, so I would rather stay away from that.

Q. Who is making the most money off Act 221?

A. My personal opinion is that the lawyers and accountants who are structuring the deals. They can charge a lot of money for these deals because there are millions of dollars involved. I think they are also being shortsighted. If they create great companies, they will be with those companies for a very long period of time. Right now they are getting transaction fees, but they are not building long-term great companies. They are doing very well right now. In my own personal opinion, a number of them belong to some of the organizations that you mentioned and have absolutely a lot of influence in those organizations.

Q. Are they driving a lot of the support for Act 221?

A. I think so. I can't prove that.

Q: What about Barry Weinman? What do you have to gain in this?

A. I'm in the period of my life where I'm getting ready to retire. I want to move to Hawai'i and I would like to see Hawai'i's economy (grow). I've been very active in the community in Silicon Valley. People ask me to help them do this. I don't need the money.

Q. But you are still in the game, aren't you?

A. I like to be around entrepreneurs, and I like them to succeed. A lot of people have great ideas, work hard and really understand what they are doing, but they don't know how to raise money because they have never had to do that.

Q. Why not make Hawai'i the restful place and leave the business in California?

A. Well, now you sound like my wife. I didn't want to do this. What happened was Bill Richardson (general partner of local investing firm HMS Hawaii) is a personal friend. He asked if I would come over and meet David McClain, who is dean of the business school (also UH vice president for academic affairs), and he tried to talk me into helping the University of Hawai'i create an entrepreneur center. I said if we do that these guys will have to go to Silicon Valley to work. Why don't we create some entrepreneurial companies.

Me, personally — what do I get out of it? Satisfaction. Most people don't believe that.

The chief investment officer at ERS (the state Employees Retirement System) believes nothing I tell him because he says, "I just know that there is a hidden agenda here." I say, "OK, explain to me what it is."

He says, "I think it is world domination." So we kid about it a lot.

I say, "OK, the first step in world domination, we have to dominate Hawai'i." I guess that's the noose I wear around my neck. I really just kind of fell into it. But then if you do it, you might as well do it right.



November, 2002

Tanonaka picked to head PBEC

Hawaiian Hard Drive

Dalton Tanonaka has been named as the new president of the Pacific Basin Economic Council (PBEC). PBEC represents more than 1000 international companies across 20 nations who have a total work force of 10-million people and revenues exceeding $4 trillion.

“Dalton’s experience and skills are exactly what we need to move PBEC’s agenda forward,” said PBEC Chairman S.R. Cho. “His credibility and ideas will help us reemphasize our role as the business voice of the region.”

Tanonaka worked at CNN International where he served as a main news anchor and recently left that position to run unsuccessfully for Lieutenant Governor. He has also worked as the City and County of Honolulu’s Economic Director.

Some Tanonaka’s goals include generating more interest from Far East Countries to do business here in the state, positioning Hawaii as the Pacific’s economic hub and convincing local business and government leaders of the importance of keeping PBEC based in Honolulu....

For more on Jeremy Harris and Dalton Tanonaka, GO TO > > > Predators in Paradise ...and www.pritchettcartoons.com/expert.htm

For more on PBEC, GO TO > > > Broken Trust; The Indonesian Connection; Paradise Paved; Vultures of the Sandwich Isles; Yakuza Doodle Dandies ... and www.keithpr.com/pacificall

For more on Cades Schutte ... , GO TO > > > Buzzards of Paradise; Claims By Harmon; Dirty Money, Dirty Politics & Bishop Estate


March 20, 2004

Hawaii Business Leaders Seek
Changes To Act 221

By Sean Hao, Honolulu Advertiser

The state’s high-technology tax credit – which generated $112 million in investment in its first two years without an equal impact on the local technology industry – needs to be tightened, business leaders said.

State lawmakers are considering a five-year extension of the controversial Act 221 tax credit, which was set to expire next year. The recent disclosure that the tax credit led to $112 million in investment in 2001 and 2002 has left many business leaders wondering where that money went, given the small size of the state’s technology sector.

Many now believe that at most $50 million actually went to companies such Hoku Scientific, Hoana Medical, Firetide and other high-tech startups intended to benefit from the program.

If all $112 million was pumped into high-tech companies, “I would think it would be a lot more visible,” said Mike Fitzgerald, president and chief executive of Enterprise Honolulu. “It just can’t be accounted for.”

Proponents of Act 221 argue the credits promote business growth and create new jobs in a state dependent on tourism and the military. Critics contend the credits are overly generous, have failed to produce tangible economic benefits for the state and have been shrouded in secrecy that prevents public accountability....

Act 221 cost the state’s general fund nearly $60 million in its first two years. The cost to taxpayers is expected to reach $48.4 million this fiscal year and $76.7 million in fiscal 2004, according to state estimates.

Where much of the investments generated by those incentives went is unclear, though it’s likely at least a portion went to companies that took advantage of the act by shifting certain technology-related work into subsidiaries that could qualify for the credits. Though legal under the law, such transactions don’t necessarily result in new investment or jobs.

“Here’s where the critics of Act 221 may be right,” Fitzgerald added. “If there’s lots of companies that are just shifting things to qualify, that could be the answer to why it’s so high. If that indeed is happening then it is being abused because that is not new research that is happening.”

The Lingle administration, the Hawaii Technology Trade Association and others are mulling ways to rein in the act while extending it through 2010. However, just what changes are required is a subject of disagreement as is the level of alleged abuse....

Most business leaders and lawmakers agree Act 221 was intended to benefit startup, high-tech companies....

“Intended is always in the eye of the beholder in some ways,” said David Watumull, president and chief executive of Hawaii Biotech, which raised as much as $5 million in 2001 and 2002 with help from Act 221. “In some cases these (subsidiaries) are legitimate and in a number of cases they’re not.”...

The most restrictive changes are being proposed by Honolulu corporate attorney Greg Kim, who represents several technology companies, including Hoku, AssistGuide and Hoana. The Lingle administration and HTTA are proposing less-restrictive changes. 

“I don’t know where that ($112 million) went,” Kim said. “It didn’t go to our clients. I’d be surprised if it all went into startups.”

Kim suspects some of that money went to artificial companies created with the intent of providing tax breaks....

The concern is some companies took advantage of Act 221 to give investors a two-times or greater return on their money through tax credits without doing much to create technology jobs.

That makes it more difficult for traditional technology companies that take a conservative approach to the program, said Dustin Shindo, president of Hoku, which raised $1.6 million in Act 221 investments in 2001 and 2002 and is developing fuel cell technology for Sanyo Electric Co.

“I’ve seen that there’s a lot of those going on, but it’s difficult to quantify,” Shindo said.


April 25, 2004

Local tech firms
defend outsourcing

by Dan Martin, Honolulu Star-Bulletin

James Kerr sits down in front of his laptop and types in the Web address of www.rentacoder.com, a virtual marketplace for freelance software programmers around the world. His face brightens as the page loads.

“Is this unbelievable or what?” asks Kerr, president of computer-services company SuperGeeks, while scrolling wildly through the bios of some of the 71,000 programmers – many of them in underdeveloped Asian countries that can offer ultra-competitive rates.

“I’m like a kid in a candy store.”

Others are less enthusiastic about the site’s possibilities. With an election approaching, outsourcing has become a political football due to concerns about the wholesale export of American IT jobs, and several states are considering legislation to staunch the flow.

That leaves small local IT entrepreneurs like Kerr feeling like they’re between a rock in a hard place. They don’t like being painted as anti-American, yet outsourcing is a crucial weapon for staying competitive in the increasingly cutthroat and globalized IT industry....

For Kerr, the numbers speak for themselves. Software programmers in the U.S. charge anywhere from $60-$300 an hour.

“I couldn’t take on a top-notch in-house local programmer for $60,000-$100,000 a year without a ton more work,” he says.

As a result, much of Kerr’s work goes to people like Ricardo Budianto, a programmer in Indonesia who does “coding”, or software programming, for just $15 and hour, a tidy sum in that country.

The flow of jobs to cheaper overseas workers has grown rapidly in the past couple of years as American firms outsource everything from data entry operations to call centers. A recent report by global consultants Ernst & Young LLP said the outsourcing sector in India – a hotbed of outsourcing due to its low-cost, English-educated workforce – grew by 50 percent for the second straight year in the 12 months that ended March 31.

“You can’t go into this type of business these days without that international leverage,” said Kevin Horio, a Maryknoll High School graduate who founded locally based software services firm Dimensia Inc. in 1996. The firm, which crafts software mainly for East Coast clients, began outsourcing programming work to Asian countries about four years ago in order to stay competitive....

Horio said efforts by the state to spur the growth of Hawaii’s high-tech sector, such as the Act 221 tax credit for technology firms, are helpful. But in order for local companies to stay nimble in the ultra-competitive hi-tech field, they need to jump feet-first into outsourcing....

Local entrepreneurs involved in outsourcing admit being stung by the growing anti-outsourcing sentiment.

But that sentiment flies in the face of 15 years of American trade policy, said Virendra Nath, founder of HDEP International, which employs overseas workers to perform data entry and transcription work for mainland insurance companies.

“We’ve put great pressure on other countries to open up their markets. If we now close off the outsourcing market, other countries might shut off their industries again,” he said.

Nath, who now has 650 workers in the Philippines and his native India, founded his company in Hawaii in 1983 to serve insurance companies that could not find stable or dedicated American employees....

It’s a trend that will continue as other countries catch up to the U.S. in technical skills, said Dieter Ernst, an East-West Center expert on the impact of globalization and information technology on economic growth....


For more on outsourcing, GO TO > > > Marsh & McLennan’s Mercer Consulting

$ $ $

April 25, 2004

AIG experiments in reverse outsourcing

By Dan Martin, Star-Bulletin

It seems like a computer glitch.

As a growing number of American companies outsource work to cheaper countries, insurance firm AIG Hawaii has turned that trend on its head by bringing a team of Indian software experts to its Restaurant Row headquarters.

They have come to help launch a new technology wing at the company in a case that illustrates both the challenges and opportunities afforded by cross-border outsourcing.

AIG’s local technical development operations had been on the chopping block as its mainland corporate headquarters sought ways to consolidate some functions in the giant company, said AIG Hawaii president and CEO Robin Campaniano.

Effectively, the Hawaii operations were going to be outsourced to the mainland....

To avoid that, Campaniano used the Act 221 high-technology tax credit for new enterprises to set up a new operation called the AIG Hawaii Development Center, which now competes with six other such AIG centers around the world for software development and database management projects both in-house and from outside the company.

The move has saved 25 jobs and added another 10, Campaniano said. But to make the operation truly viable, AIG had to call on the same sort of Indian computer expertise that has caused many American technical jobs to flow East.

The six Indians now working for AIG Hawaii are here for at least a year to train AIG’s local workers in Java programming language and to implement a more advanced technology platform.

Like a growing number of other Indian computer engineers, Krishnan and his group work for an Indian consulting firm that hires out technicians to American firms like AIG eager for the combination of low prices and increasingly savvy computer skills to be found in India.

The loss of jobs to overseas outsourcing has caused a hue and cry this campaign season, but Krishnan said the AIG Hawaii case shows that ths issue is not so cut and dried....

Campaniano acknowledged the use of the tax credit leaves AIG open to criticism. Concerns have been raised that firms like AIG Hawaii have abused the act, which is aimed at encouraging the creation of new jobs by offering a one-dollar tax break for every dollar invested in a new high-tech venture.

But Campaniano said the proof is in the pudding.

“We’ve save a bunch of jobs and created new ones. If that’s wrong, then I don’t know what the detractors want out of the act,” he said....

Campaniano hopes the technical advancements instituted by Krishnan’s group will help turn the operation into a new profit center for AIG Hawaii. He said an estimated $600 million of technical upgrades will be needed by the company worldwide over the next few years.

“If we can compete evenly with the other centers and get even one-sixth of that, we’re going to need to hire a lot more people,” he said.

(Catbird catcall: What he didn’t say is how many of those people are going to come from foreign countries.)

For lots more on AIG, GO TO > > > The Un-American Insurance Group


July 28, 2004

Venture capital hits $16M in Islands

Honolulu Advertiser

Hawaii companies raised $16.3 million in venture capital during the first six months of this year, surpassing the total of $15.6 million raised for all of 2003, according to figures released yesterday.

The bulk of this year’s money – $13.6 million – was raised in the second quarter by Firetide Inc., a wireless computer networking company. The remaining $2.7 million was raised by Hawaii Biotech in the first quarter, according to a survey from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

Firetide, a beneficiary of Act 221 state technology investment tax credits, said the follow-on financing will be used to expand sales and marketing as well as for product development.

Firetide moved its headquarters from Honolulu to Los Gatos, Calif., in February in an effort to attract more investment, but the company maintains offices in Honolulu....

< < < FLASHBACK < < <

October 22, 2003

Tech Exodus Continues

By Tim Ruel, Star-Bulletin

Here we go again.

Tareq Hoque, former head of Adtech in Hawaii, is now the former head of Firetide Inc., a wireless networking technology firm that is moving its management to California from Honolulu.

Hoque, who co-founded Firetide two years ago, is resigning immediately as president and chief executive, though he will remain on the company’s board and have a significant stake in the company’s future....

The pickle is that Firetide, a private company, needs to raise millions of dollars in venture capital on the road to offering its stock publicly. Over the past several months, the company has found there’s not enough venture capital for Firetide in Hawaii, but there is in California, Hoque said.

It’s the same story the state has seen before. Digital Island moved to San Francisco before it went public in 1999 (the company was later sold). Venture capitalists based in California want to be close to their investments, not a five-hour flight away.

Many in Hawaii’s fledgling tech industry have cried out for more money for years, appealing to the state’s vast institutions. The venture capital deals that do happen here – though relatively small – draw fanfare simply because there’s not much going on.

One exception was Internet data center firm Pihana Pacific, which attracted $236 million in venture capital, but closed headquarters here last year in a merger.

Firetide has raised $3.2 million, but it needs more. Hawaiian Electric Industries Inc. has invested in Firetide, but so has Menlo Ventures of Menlo Park, Calif.

It is a story that Hoque is painfully aware of. He’s the former head of the Hawaii Technology Trade Association, which has lobbied the state for high-tech incentives. In 2001, Hoque quit as president of high-tech firm Adtech shortly before the company moved assembly jobs to California.

Hoque said the ability to launch companies in Hawaii has improved, thanks in part to high-tech tax credits, but the ability to keep them is constrained.

He noted that Firetide is also looking for management that can take the company public....

Hoque said the decision to resign was made over the past several weeks between him and Firetide’s board. Only four months ago, Firetide announced it planned to hire bunches of workers in Hawaii....


August 12, 2003

Biotech Venture Poised for Success

By Sean Hao, Honolulu Advertiser

By locating atop the former Gold Bond building on Ala Moana, Tissue Genesis Inc. hopes to be close to the business opportunities generated by the University of Hawaii’s planned $150 million medical center in Kakaako.

Tomorrow, the biotech company will bless its new office and lab on the 11th floor at 677 Ala Moana. The move represents a $3 million to $5 million investment and one of what’s hoped will be many such ventures that will collaborate with the John A. Burns School of Medicine, which is expected to open its new site nearby in the spring of 2005.

Formed in 2001, Tissue Genesis is developing tissue replacement products to improve survival rates for trauma injuries, cardiovascular diseases, cancer and metabolic diseases. Anton Krucky, Tissue genesis president and chief executive, said the company moved from Honolulu high-rise Harbor Court to 677 Ala Moana specifically so it could share researchers and facilities with the university....

The company’s main product, called the Bio-Optimization System, is a way of creating an engineered environment for cell and tissue growth ...

Tissue Genesis’ work is partially financed by a $5 million a year tissue engineering grant from the Defense Department, as well as investments fostered by technology industry tax incentives such as Act 221, Krucky said....

Krucky was pragmatic about Tissue Genesis’ future, which relies on continued government grants, an infusion of investment capital and attracting additional business partners....

For more on the John A. Burns School of Medicine, GO TO > > > Kajima


March 20, 2003

Is Hawaii’s High-tech Tax Credit Broken?

By Kelli Abe Trifonovitch, Hawaii Business

Our story begins with a loud and rancorous argument, but it doesn’t have an ending, yet. It’s either brimming with urban legend, or a classic Greek tragedy, depending upon who you talk to. Some see it as a battle for Hawaii’s future, and for the hearts and minds of our high-tech community and policy makers. The main characters are:

Barry Weinman, a part-time Hawaii resident, a venture capitalist since 1980 and the managing director of Allegis Corp., which has more than $600 million under active management.

Jeffrey Au, managing director of PacifiCap Group LLC, Hawaii’s largest venture fund with $30 million under active management. Au is an attorney by training and has been a Hawaii-based financial advisor since 1995.

Both men are active in the Hawaii high-technology scene. Weinman is the president of the business accelerator HiBEAM. In 2001, he and his wife, Virginia, donated $1 million to the University of Hawaii to endow the Barry and Virginia Weinman Chair of Entrepreneurship and E-business.

In 2000, Au formed PacifiCap Group LLC with partner Rick Cho. A third partner, Theodore Liu, was appointed last January by Hawaii Gov. Linda Lingle to head the state Department of Business Economic Development and Tourism (DBEDT).

Liu resigned from PacifiCap after the appointment, because the Hawaii Strategic Development Corp. (HSDC), an agency attached to DBEDT, uses state monies to invest in local venture firms, including PacifiCap Group.

The Au-Weinman conflict centers upon the long-term effects of Act 221, Hawaii’s historic tax credit for the high-tech and entertainment industries. Act 221 was enacted by the Hawaii state Legislature in 2001 to nurture the nascent high-tech industry through capital formation. It provides for a 100 percent tax credit (maximum $2 million) over five years for companies that invest in a Hawaii Qualified High Technology Business (QHTB). The law ends or “sunsets” in 2005.

While much of the controversy surrounding Act 221 has focused on film deals, the issues run deeper and broader. In December 2002, Weinman and Au attended a meeting for Enterprise Honolulu’s Act 221 committee. The committee was formed to market Act 221's investment opportunity and to rally the support of the high-tech community. Weinman was a co-chair at the time.

Accusations flew, tempers flared and the decibel level rose. Two days later, Weinman resigned. Weinman says, “I am on record for saying that the abuses of Act 221 need to be addressed very quickly. If they are not fixed, then I think the act should be repealed – it will soon do more harm than good.”

Au says, “The best defense to Act 221 and the best defense to all these urban legends is getting good companies funded and having good companies succeed. We’ve gotten a bunch of good companies funded this year.” He says that PaciCap led the investment in seven Act 221-qualified companies in 2002. Those companies raised a total of more than $20 million.

Weinman, on the other hand, sees: “abuses” that are inconsistent with the intent of the law; deals with investors who get high multiples of their investments in tax credits; and complex financing structures, including investor-controlled reserve accounts and questionable subsidiaries. He says, “The abuses have people and tax-paying corporations thinking about tax shelters, not the quality of the entrepreneur and the upside of the startup’s equity.”

According to Weinmann, “Some early buzz in Silicon Valley is that Act 221 is a tax scheme and that any company with Act 221 money is borderline dishonest and should be avoided.”...

Weinman says three changes to Act 221 (either legislative or administrative) are needed to support Hawaii’s high-tech entrepreneurs: 1) cap the tax write-off at 200 percent or two times (2X) the Hawaii taxpayer’s investment; 2) no investor-controlled reserve accounts; 3) no questionable subsidiaries....

Au’s partner at PacifiCap, Rick Cho, says the firm’s average deal is less than 2-to-1....

A Case Study

Weinman’s Allegis Capital and Au’s PacifiCap Group are both investors in hotU Inc., a Hawaii startup. Weinman resigned from hotU’s board of directors in March 2002. HotU’s president, Laurie Foster, followed that April.

Foster remembers having to compete with other companies that were offering high multiples on tax credits in late 2001. She says, “I remember my first reaction was, ‘This is cheating. This is abuse.’ ...”

View From The Trenches

One of the act’s architects, former state tax director Ray Kamikawa says, “... there is going to be growing pains, and people must recognize that. You do not condemn an initiative as far-reaching as Act 221 on the basis of a few vocal dissenting voices.”

PacifiCap is also an investor in 4Charity Inc., another QHTB. President Tracy Pettingill declined to comment on PacifiCap. She did say, “There are people out there who are finding ways to use the tax credit opportunities in ways that are not necessarily in the intent of the law.”

Gregory Kim, head of the Hawaii Venture Lawyers Group says, “One of the things I’m really concerned about is if we try to appease the people doing these complex structures for whatever reason, we may even start losing people like Barry....

Fuel-cell developer Hoku Scientific Inc. raised $1.5 million last year, without giving better than a 100 percent tax credit, no multiples. Chief Executive Officer Dustin Shindo says, “I know for certain that most of [the 17 investors] wouldn’t have invested if it wasn’t for Act 221, so it was a big part of it....”

Another startup, International Financial Services LLC, received $1 million in 2002. Randall Preiser, chief executive officer, says one local institutional investor got better than a multiple of four-to-one in tax credits. (A 5X multiple means if the investor put in $200,000, they got a $1 million write off.)...

Longtime Hawaii venture capitalist Bill Richardson, a partner in HMS Capital, says, “I think that it is a critical point for Hawaii to maintain its discipline on venture-capital investment.

Rob Robinson leads the UH Angels investment group and holds the chairmanship at the UH organization that bears Barry Weinman’s name. He says the angel group has been investing on a straight 1-to-1 basis and probably invested a total of $2 million into Hawaii companies last year.

Robinson says while he’s generally against changing Act 221, he supports amendments that could add clarity. “It’s kind of like pornography,” he says. “Some people’s pornography is another person’s art. One person’s abuse is another person’s careful financial engineering.”

Some Of The Big Guys

Island Holdings Inc., the parent company of Island Insurance, was approached with about 20 deals last year. Island Insurance Cos. chairman and chief executive officer Colbert Matsumoto, says that the company’s private equity investments of around $2.5 million are about 1 percent of its assets. Matsumoto says the highest tax-credit multiple his company received on any investment last year was 4X, or 400 percent....

Matsumoto says he initially was skeptical about what he calls, “highly leveraged deals,” but has changed his views. “What’s happening is that more money is entering the private-equity marketplace from outside of Hawaii that might otherwise occur were it not for the fact that you have this kind of leveraged deal situation,” he says.

Island Holdings has also invested about $400,000 in creating its own QHTB subsidiary. Hoike provides a number of services to Island Holdings companies and outside companies, including software development and Web hosting. Hoike President Riki Fujitani says the company has about 30 employees....

Another large local institution, AIG Hawaii, has begun forming its own QHTB subsidiary to develop software for the insurance industry. President Robin Campaniano says he would be interested if someone waived tax credits in his face, but so far has made no private-equity investments outside of AIG.

Campaiano says, “We’re not interested in just making investments for the sake of generating tax returns, which is the way that a lot of people are hyping this right now. We’re more interested in looking at whether or not we can make a substantive investment in the QHTB we’ve developed.”

Island Holdings’ Matsumoto adds: “I think lawmakers have to be careful in how they approach changes in the law, so that if they tweak it or tighten it appropriately, they don’t throw out the baby with the bath water.”

Ultimately, Government Will “Fix” It, or Not

Speaker of the House Calvin Say says, “(Economic Development chair Brian Schatz) just wants to give Act 221 a chance. I’ll support the chair at this point in just leaving it the way it is and having the department promulgate the guidelines for all applications.”

Sen. David Ige, chair of the Science, Art & Technology Committee says, “Is there a way to tweak the law and yet continue the momentum that has been started? I guess that’s the delicate balance that we’ll probably be taking up this year.”

Former state tax director Ray Kamikawa says, “I think we should permit the new administration to give us much-needed guidance.”

Gov. Linda Lingle had not yet appointed a tax director at press time, but deputy director Kurt Kawafuchi had created a draft of administrative guidelines for Act 221. Kawafuchi says, “If you do something, and you’re not really after the investment, you’re after just the tax credits and you get, for example, more than a 2-to-1 write-off, ... then we have concerns about those credits.”...

He says not doing anything will cause Hawaii to lose credibility in the global markets. “If we try to curb the abuses, but we foster the legitimate investments and capital formation, I think we send a much better signal,” he says.


January 25, 2003

Court ousts Summit management

A trustee will reorganize the finances of the
Honolulu telecommunications firm

By Tim Ruel, Honolulu Star-Bulletin

A U.S. Bankruptcy Court judge has ordered the management of Honolulu telecommunications firm Summit Communications Inc. to be replaced by an appointed trustee who will attempt to reorganize Summit's finances while it remains in bankruptcy.

In a hearing yesterday, U.S. Bankruptcy Judge Robert Faris rejected an assertion by management that Summit's immediate ability to do business would suffer under a trustee. Faris said there were big risks in not appointing a trustee.

The decision brings to an end to a growing dispute between Summit's management, some of its shareholders and its largest creditors - the state of Hawaii and the U.S. government - over the appointment of a trustee.

The argument goes back to revelations that the company once owed more than $1 million in back taxes, including penalties and interest. Taxes receive a high priority for repayment in bankruptcy. Since Summit's assets would yield little in a liquidation, the only way to pay the taxes and other creditors is for the firm to stay in business.

The government has long sought the appointment of a trustee, alleging that Summit's management is made up of essentially the same people that led the company to such a major tax problem.

Summit, which provides call-center and telephone services, was founded in 1996 by Harry Johnston, a former executive of Hawaiian Telephone, and Richard Ichikawa, a former engineer of Hawaiian Telephone.

The firm's tax problems started in late 1997 and worsened over the next several years, though Summit's board of directors was not told about the tax liability until late 2001, according to sworn court declarations by Ichikawa and Alan Brown, who were board members at the time.

Harold Johnston resigned as president and was replaced by his son, Grant Johnston.

Ichikawa left Summit's board shortly before the company filed Chapter 11 reorganization bankruptcy a year ago, though Ichikawa still owns one-quarter of Summit. Ichikawa initially opposed the appointment of a trustee, because he was afraid the firm would be liquidated, but eventually changed his mind.

The government's call for a trustee was backed by an examiner's scathing report of Summit in December. The report said the company had kept poor track of its finances, even in bankruptcy and that several questionable thousand-dollar payments had been received by Grant and Harry Johnston, which should be investigated by a trustee....

Following disclosure of the examiner's report, Summit convened a board meeting and discussed several options, including liquidation, though that was ruled out, Grant Johnston said.

In a court document, Summit said the examiner, Mark Yee, focused on matters that happened before Harold Johnston stepped down, which provided an inaccurate picture of Summit's situation.

Summit said Yee's report was based on a superficial review of records, in which the company was not given a chance to give its side of the story. Summit later deposed Yee.

In court yesterday, Summit attorney Steven Guttman said there was no major problem with how Summit presented its finances after filing for bankruptcy.

Judge Faris noted that the examiner did his job as spelled out in an agreement last year between Summit and the government.

In court, Summit conceded that it needs investment badly to stay in business, but said it had found an investor who was willing to put in $500,000.

Judge Faris pointed out that $500,000 would not likely cover the outstanding amount of the tax claims.

After yesterday's court ruling against the company, Grant Johnston said, "Obviously we're disappointed because I felt that our argument was compelling."

The U.S. Trustee's Office will appoint a trustee to Summit shortly, after talking with all sides in the dispute....


May 14, 2003

Summit loans questioned

Money loaned to the bankrupt firm's CEO resulted
in improper payments, a new lawsuit contends

By Tim Ruel, Honolulu Star-Bulletin

A politically adept telecommunications company financed primarily by the federal government has several connections to troubled firm Summit Communications Inc., including a $456,793 loan that is being questioned by a bankruptcy trustee.

Sandwich Isles Communications Inc., headed by Al Hee, loaned the money in March 1998 to Summit through Summit's then-chief executive and part-owner, Harold C. Johnston, according to a lawsuit. In 2001, Harold Johnston received $8,400 in interest payments from Summit for the loan.

Harold Johnston denied loaning the money to Summit.

Summit filed Chapter 11 reorganization bankruptcy in February 2002, owing more than $1 million in federal and state taxes, including penalties and interest.

Because of revelations over Summit's tax problem, the company's management was removed by the U.S. Bankruptcy Court. Now, the trustee in Summit's Chapter 11 bankruptcy case says Summit's dependency upon Sandwich Isles was not disclosed to the company's board of directors.

The trustee, Derek J. Sakaguchi, filed a lawsuit April 30 in U.S. Bankruptcy Court against Harold Johnston and his sons Grant Johnston and Chad C. Johnston, who were all officers of Summit.

The five-count suit said Harold Johnston misled some of Summit's directors, investors and creditors about the relationship with Sandwich Isles, which allowed the company to continue to operate under the status quo when it was in trouble.

The lawsuit also accuses the Johnstons of receiving excessive compensation and benefits....

Hee, president of Sandwich Isles, and Harold Johnston confirmed that Sandwich Isles made a loan to Johnston. "Whatever happened between me and Sandwich Isles is a private and personal matter," Johnston said.

They declined to answer any questions about the loan, including its status or its purpose.

However, the lawsuit said: "A loan for $456,793 to SCI made in March of 1998 was shown on SCI's financial statements as a loan made by Harold Johnston. In fact the $456,793 was loaned and funded by Sandwich Isles."...

The loan was secured by a pledge of Harold Johnston's stake in Summit, the lawsuit said. Harold Johnston owned 37.7 percent of Summit as of January 2003, while Ichikawa owned 25.1 percent.

Sandwich Isles is working on a $500 million fiber-optic cable telecommunications system that would link all Department of Hawaiian Home Lands residents who lack telephone service.

Of that, $400 million will be paid through a loan from the U.S. Agriculture Department's Rural Utilities Service, which will be almost entirely repaid by the Federal Communications Commission.

The federal funds are meant to pay solely for the construction of the telecommunications network, a Sandwich Isles spokeswoman said.

Al Hee is brother to former Office of Hawaiian Affairs Chairman Clayton Hee.

Robert Kihune, trustee of the Kamehameha Schools, is chief executive of Sandwich Isles.

Al Hee said the loan to Johnston did not involve any federal funds.

Claiborn Crain, spokesman for the Rural Utilities Services in Washington, D.C., said yesterday he was not aware of any problems with the Sandwich Isles' federal loan.

Sandwich Isles has another connection to Summit Communications. Summit, founded in 1996, began providing technical services to Sandwich Isles around April 1998, the lawsuit said. That was around the same time that Sandwich Isles loaned the money to Johnston.

Also around that time, Johnston stopped spending time with Summit and became general manager for Sandwich Isles.

Sandwich Isles soon provided nearly half of Summit's total annual revenue through the technical services arrangement, nearly $1 million a year, the lawsuit said.

But the money began decreasing "dramatically" in the fall of 2001, a few months before Summit filed for Chapter 11 reorganization bankruptcy, the lawsuit said.

Summit has other sources of revenue. Another large source was a contract to provide call-center services to the Hawaii Visitors & Convention Bureau, starting in May 2000, which brought $30,000 to $50,000 in revenue for Summit each month. The bureau said it is negotiating a new contract with Summit....

When asked why Sandwich Isles cut back on its business with Summit, Hee said the decision was handled by his operations people. Hee declined to give their names.

After Harold Johnston began working for Sandwich Isles, Chad Johnston became responsible for day-to-day operations at Summit.

During this time, the company expanded too quickly, misused corporate funds, failed to pay bills and didn't keep the board informed, the lawsuit said.

In a letter to Summit shareholders, Harold Johnston said he was not aware until January 2001 that Summit was not paying its taxes.

Harold Johnston said an outside accountant had been handling those affairs, and was terminated. He declined to name the accountant.

The court-appointed examiner has described Summit's pre-bankruptcy books as worthless....

Johnston said he accepts some responsibility for Summit's financial problems, but he did not commit fraud or other misdeeds.

The lawsuit seeks repayment of the $8,400 in interest that Harold Johnston allegedly pocketed from the loan to Summit, as well as repayment of a $50,245 loan Summit allegedly made to Harold Johnston. The lawsuit also seeks actual damages and punitive damages.

For more, GO TO > > > Vultures of the Sandwich Isles


June 9, 2001

State sues tech firm
to recoup losses

By Tim Ruel, Star-Bulletin

The state is suing one of Hawaii's former high-tech star companies over an outstanding $810,000 government loan and is seeking to foreclose on the Oahu properties of the firm's founders.

The lawsuit, filed yesterday in First Circuit Court, is over a 1995 loan of $580,000 to WorldPoint Interactive Inc. under the Hawaii Capital Loan Program, which seeks to help businesses having trouble finding capital. Interest added $230,000 to the initial amount.

The state is suing to get whatever payment it can for the loan.

WorldPoint translates Web sites into different languages for companies....

During the last five years, the state and WorldPoint discussed converting WorldPoint's debt to an ownership stake for the state.

The talks dragged on, however, because of disagreements over WorldPoint's value as a company, especially after the Nasdaq stock market dropped below 1,700 points earlier this year from a March 2000 high of more than 5,000 points.

The venture capitalists that manage the state's investments were against the idea of investing in WorldPoint, a state official said at the time.

The company is privately held, although it had thought about going public before the high-tech bubble burst.

Meanwhile, WorldPoint obtained $14 million in private investments and moved its headquarters to the penthouse of 1132 Bishop St. from the state-run Manoa Innovation Center.

At an October 1999 banquet, WorldPoint received an award from City Bank for carving a niche in a billion-dollar high-tech industry.

However, in February of this year, WorldPoint announced it was firing the bulk of its employees and closing offices in Zurich, Dallas and Hong Kong.

WorldPoint President and Chief Executive Massimo Fuchs issued a statement yesterday that said, "If legal action cannot be avoided by the state, as it now appears it couldn't, which I personally regret, our objective is to resolve any such action as quickly as possible to the mutual satisfaction of all parties involved."

WorldPoint has paid $4.5 million in total wages in Hawaii and state taxes of $300,000, which should be seen as an excellent return on the state's investment, said Fuchs, a native Swiss banker who joined WorldPoint as chief financial officer in 1996.

The state's suit also names two of WorldPoint's founding directors, Larry Cross and Robert Peterson, who are alleged to have backed WorldPoint's loan with the equity in properties that they own on Oahu.

The state is seeking to foreclose on their homes to help pay off WorldPoint's loan.

Peterson, a local plastic surgeon whose property is located in Waialae Iki, was on the mainland and could not be reached for comment yesterday.

Cross, president and chief executive of the Economics Institute at the University of Colorado at Boulder, said yesterday he was surprised by the suit and that he was disappointed the matter was not resolved.

WorldPoint's board meets once a year to discuss strategy, Cross said, and he had been told that WorldPoint's debt would be converted to an equity stake without a problem.

"I'm sort of surprised and chagrined," Cross said. "For sure, it's not good news."

His property, located near Kalaheo High School in Kailua, was where he and his wife raised their four children.

"There's a lot of memories tied up with it," said Cross, who once was president of Hawaii Online, an Internet service provider now known as GST Hawaii OnLine.

Jerry Fuqua, who briefly worked for WorldPoint in 1995, was also surprised by the suit. The state is seeking to foreclose on the home where he lives in Kaneohe.

"This is amazing," Fuqua said, noting that he is frustrated both with WorldPoint and with the state.

"Essentially, WorldPoint has not communicated with me or the other parties that had left."


July 13, 2001

WorldPoint evicted;
CEO stands alone

Prabha Natarajan and Terrence Sing, Pacific Business News

How do you say "virtually out of business" in 15 different languages?

The only company in town that could tell you doesn't exist in real-time anymore. WorldPoint Interactive was booted out of its offices at 1132 Bishop St. on Monday and has taken refuge in cyberspace.

"WorldPoint is functioning 100 percent virtually," says Massimo Fuchs, president and chief executive officer of WorldPoint.

Fuchs blames a state lawsuit against it for causing the eviction and loss of potential business. The state claims it supported WorldPoint, but not after the company reneged on its loan agreement.

Fuchs maintains he isn't giving up. WorldPoint will not file for bankruptcy or close shop. The company's zero cash balance and the $811,000 state claim are issues that could be dealt with if they are given more time by the state, Fuchs says.

However, former employees claim the nadir for WorldPoint was of its own making. They blame poor management and lavish spending for the company's downfall.

WorldPoint, which once had more than 100 employees, now has no one besides Fuchs on staff. Fuchs says the two who had been working for deferred salaries quit on Wednesday.

WorldPoint's first phase of funding, worth nearly $13 million, came from private investors, directors, officers and employees. The company's major backers were Larry Lacerte, a Texas businessman, and Marty Tenenbaum, founder of industry association CommerceNet.

Among its directors was Intel executive Claude Leglise.

Fuchs, who had worked with the Union Bank of Switzerland and Credit Suisse, was brought on board in 1996.

Rob Peterson of Athena Clinics, one of the early investors, resigned from the company's board June 25.

The new chairman is Larry Cross, also an initial investor.

Investors claim they never received financial reports or updates on the company's status. One mainland investor, who put in $30,000, says he was brought in by Peterson, the former chairman of the board.

"I'm very disappointed," says the investor, who preferred to remain anonymous. "I was up at their offices a year and a half ago and I was impressed by what I saw. Others have put in more money than I have."...

Last month, the state Attorney General's Office filed a lawsuit against the company to recover its initial loan of $580,000, which with interest is now $811,000.

"We believe we owe the state nothing," Fuchs says....

The state lured WorldPoint, says Fuchs, with the carrot of wanting to convert the loan to equity for five years, but when the Nasdaq Stock Exchange tanked the state wanted cash. He alleges the state also failed to approve a merger with San Diego-based Pacific Coast Software that included $25 million in venture capital funding. However, the state's failure to move quickly cost them the deal.

"This is another typical preposterous lawsuit driven by political reasons, simply to demonstrate that the state's loan program is not as badly managed as it truly is," Fuchs says....

© 2001 American City Business Journals Inc.


August 17, 2001

WorldPoint shareholder claims
fraud in suing state

The plaintiff, facing foreclosure on one of
her homes, is the spouse of the chairman

By Tim Ruel, Honolulu Star-Bulletin

A SHAREHOLDER of high-tech firm WorldPoint Interactive Inc. has countersued the state, saying the government breached its fiduciary duty, interfered with WorldPoint's business and committed fraud.

Aikahi resident Karen Cross, spouse of WorldPoint co-founder and Chairman Larry Cross, is seeking to collect an unspecified amount of damages to recover the value of her stock in WorldPoint, which is now virtually worthless.

Cross became the firm's chairman after Robert Peterson, another WorldPoint founder, stepped down two months ago.

Karen Cross filed the countersuit Wednesday in First Circuit Court.

The state sued WorldPoint in June to collect $810,000 from a government loan issued to the firm in 1995, when WorldPoint called itself Universal Resource Locator Inc. WorldPoint has offered to settle the case, and has until the end of the month to answer the suit.

The company has said it is running out of money. One of its creditors is its own legal counsel, bankruptcy firm Wagner Choi & Evers.

Karen and Larry Cross were both named in the state's suit, because one of their homes in Kailua was listed as collateral for the state loan. The state is seeking to foreclose. In response to the state's suit, Karen Cross admits she signed over her home, but denies that the state has the right to foreclose.

Cross claims that the state legally can't collect on the loan because the state once agreed with WorldPoint to convert the debt to an equity stake in the company.

WorldPoint stopped making payments on the loan in 1996. Fuchs, a native Swiss banker, joined WorldPoint in July 1996 and started talking with the state to covert the loan to an equity stake....

WorldPoint Chief Executive Massimo Fuchs said that the company has lost business because of the state's lawsuit, which he calls unreasonable. In 1998, the state failed to approve WorldPoint's merger with Pacific Coast Software Inc. of California, the countersuit says.

The state Attorney General's Office declined comment. WorldPoint, meanwhile, has battles on other fronts.

An auction firm hired to sell WorldPoint's assets has sued the company, primarily as a defensive maneuver after items were removed prior to the sale and the auction yielded far less than expected. Fuchs said he plans to countersue.

The state's Securities Enforcement Branch said earlier this week that it is looking into complaints against WorldPoint by two of its investors and three of its former employees. The company fired all 100 employees, except Fuchs, earlier this year in an effort to cut costs.

The two investors are claiming the company committed securities fraud, while the former employees say they bought into a stock option plan that never existed. WorldPoint representatives have dismissed the claims, saying they amount to sour grapes following the collapse of the once-hot market for technology issues. The company's stock was available only to sophisticated investors who sported $1 million in net worth and $200,000 in regular income.

WorldPoint has since closed its headquarters at the penthouse of 1132 Bishop St. Fuchs continues to run the firm alone from his home in Aina Haina, but he won't be doing that for long. He's in a rent dispute with the landlord of the beachfront property.

The owner is WorldPoint's largest investor, Japanese businessman Hiroshi Teramachi....


May 17, 2002

WorldPoint ordered liquidated

U.S. Bankruptcy Court requires the high-tech firm's
assets to be used to pay creditors

By Tim Ruel, Honolulu Star-Bulletin

U.S. Bankruptcy Court yesterday ordered the liquidation of WorldPoint Interactive Inc. to pay the high-tech company's creditors, marking the beginning of the end of a peculiar legal saga.

WorldPoint's largest investor, Japanese businessman Hiroshi Teramachi, sued in March to force WorldPoint into Chapter 7 bankruptcy. Teramachi claims his family is owed $4.9 million by WorldPoint for convertible promissory notes that have become due.

U.S. Bankruptcy Judge Lloyd King yesterday ruled WorldPoint will be liquidated because the company failed to respond to Teramachi's suit within a court deadline of 20 days.

A year ago, WorldPoint closed its worldwide operations, including its Honolulu headquarters in the penthouse of 1132 Bishop St., and laid off 70 employees, making it one of the larger dot-coms in Hawaii to fail. The company's main business was translating Web sites into foreign languages.

Massimo Fuchs has been running WorldPoint virtually from his home at the Harbor Court downtown condominium for the past several months.

Fuchs was served with the bankruptcy lawsuit March 12 and contacted attorney Bradley R. Tamm more than two weeks later, on March 28.

Tamm missed the April 1 deadline, and WorldPoint was placed into bankruptcy by the court. A hearing yesterday gave Tamm the chance to argue for an extension of the answer period, which would have released the company from bankruptcy.

In court filings, Tamm said he was late in answering the suit because of an electronic communications breakdown when Tamm moved his offices on the weekend of March 30.

Shortly before ruling against Tamm, King noted the lawyer was aware of the court's deadlines.

Meanwhile, Tamm has asked the court that he be allowed to withdraw as attorney for WorldPoint, because a third party failed to pay his retainer, records show.

Tamm declined comment yesterday. Fuchs could not be reached for comment.

It's not clear exactly how much WorldPoint has in terms of assets and debts. The company has until the end of the month to file a financial statement with the court.

Attorney Mary Lou Woo has been appointed to round up the company's assets and dispense payments.

But there's a hitch in dealing with WorldPoint: The company has two conflicting boards of directors, one led by Fuchs and another led by company co-founder Larry Cross, according to a court filing. The firm's May 7 meeting of creditors was postponed because Cross lives in Colorado and Fuchs didn't show up. Cross supported putting WorldPoint into bankruptcy, while Fuchs opposed it.

"Whether Mr. Fuchs even has the authority to act for (WorldPoint) is a point of debate," said an April court statement signed by Jim Evers, former attorney for WorldPoint.

WorldPoint assets include $100,000 that has been sitting in an escrow account after some of the firm's office items were auctioned last year. Other office items and company records have been stored in a Sand Island warehouse for several months because of a lawsuit filed by the company hired to do the auction. Mark Glen Auctions said it sued after Fuchs removed equipment from WorldPoint's offices before the auction could take place. The auction yielded less than $100,000.

Much of the money recovered from WorldPoint's bankruptcy will go to the lawyers who have been dealing with the company's legal troubles, observers said.

Wagner Choi & Evers, WorldPoint's former law firm, has a superior claim for payment of its legal fees, which total more than $100,000, according to a filing by Wagner Choi & Evers.

Plus, money will be needed to pay for Woo's expense of administering the bankruptcy estate.

As such, the liquidation may lead to little payment for many creditors, including the state of Hawaii, which sued last year to recoup $800,000 outstanding from a loan to WorldPoint. The state has received some payment of its claim by reaching settlements with WorldPoint officers who had backed the loan with their Hawaii properties.

Critics, including Fuchs, say the state Department of Business, Economic Development and Tourism dropped the ball by failing to deal with the loan when it went past due in 1996. The state then drove up legal expenses by fighting with Wagner Choi & Evers over claim to WorldPoint's assets.

More than 70 people, including Teramachi, invested a total of $13.5 million into WorldPoint through convertible notes, the company has said....

For more, GO TO > > > Pointing the Finger at Worldpoint!


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Originally posted: February 26, 2004, by The Catbird

Last updated November 28, 2009, by The Catbird