THE HARMON CHRONICLES - 1988 - 1996
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A Sighting from The Catbird Seat
11/??/88 BH hired by KSBE. He was hired by Gil Tam, who was at the time Dir. of Personnel [Ltr]
??/??/89 The responsibility for KSBE’s safety program was added to BH’s functions.
??/??/89 Trustees approve the McKenzie Methane deal, with trustees, managers, family members, contractors, etc., co-investing their own money.
Various BH re: The Kona Enterprises, Wayne Rogers et al claim. When the first lawsuit in this case was filed in North Carolina, it was apparently so "sensitive" that Aipa did not report the claim to United Educators, the E&O carrier. Consequently, the insurance company did not pay any defense costs in the North Carolina case. As these costs were paid out of the OGC account, and not the insurance account, I do not know how much this omission on the part of Aipa cost the estate in lost recoveries from the insurance carriers.
I did get word of a second lawsuit filed in Utah and gave notice of the claim to UE. Aipa assigned Lyn Anzai to handle the claim directly with the carrier.
In a letter to Anzai dated 08/13/93, UE's claims adjuster, Joseph McCullough, points out:
"As we discussed, the plaintiff has made allegations and seeks certain remedies which fall outside the coverage of the insurance policy..."
"Several of the trustees of the Bishop Estate also made individual investments and became shareholders in Kona. While your investigation indicates that they did not act outside of the scope of their duties to the Estate, should it be determined that they did act outside this scope, the United Educators policy would not be able to indemnify for that liability."
“The policy also excludes any loss arising out of any insured gaining a profit or advantage to which they were not entitled."
"It is further alleged that the Bishop Estate violated Rule 10b-5 of the Securities Exchange Act of 1934. The policy excludes damages arising from a willful violation of a statute or governmental regulation and the policy will not apply to any damages arising out of this allegation."
"The policy will respond to the defense of the lawsuit and any damages arising out of covered allegations, in excess of the retention. The retention applies to both defense costs and damages combined."
"Under the terms of your policy, you have the right to select defense counsel subject to our approval. Our approval is predicated on defense counsel agreeing to work within the parameters of the enclosed Defense Counsel Guidelines..."
"We will not be able to credit the retention or pay any amounts which are incurred without our prior approval. Until we receive a legal budget we can only authorize up to $25,000 for counsel to protect your interests..."
A 3rd lawsuit was filed in Hawaii. Despite UE’s warnings, Aipa retained attorneys Michael Hare of Cades Schutte Fleming & Wright, as well as William Raper of Womble Carlyle Sandridge & Rice in North Carolina, without the required prior consent of the insurance company..
With Aipa's knowledge, the Cades firm continued to disregard UE's Guidelines. This resulted in fees and expenses that UE questioned and would not approve. Consequently, Aipa began paying the Cades firm from his General Counsel's account rather than from my insurance account.
A memo from McCullough dated 03/21/96 said that many of the Cades fees were disallowed due to noncompliance with the policy terms. The Hawaii case was settled in KSBE's favor, but was appealed to the 9th Circuit.
I don’t know the total defense costs in this case, or how much UE has paid. But if the original lawsuit had been reported, and if UE's Guidelines and policy conditions had been followed, the total defense costs to KSBE should have been limited to the self-insured retention of $250,000. I know that the Cades firm alone had billed approx $760,000 as of 09/30/96. (Note: Cades also billed approx. $13,000 for a review of the Master's inquiries into this litigation.)
Various BH re: Politics and political favors. Even before I accepted my position with KSBE, I was advised by Gil Tam that KSBE was "a very political organization." At the time, I had no idea what this really meant. I began to get an inkling when I was "invited" by Tam to attend a political fund-raiser for Milton Holt, a KSBE employee. The fund-raiser was held at Bishop Museum, a non-profit, tax-exempt organization founded by Charles R. Bishop. The trustees for the C.R. Bishop Estate are the same trustees as for Bishop Estate. On another occasion I was "invited" to attend a fund-raiser for Bob Herkes, an employee of KIC. This was also held at Bishop Museum.
On one occasion I was invited by Mr. Tam to "waive signs" for Henry Peters who was running for re-election to the State House of Representatives. Although I was not even a resident of Peters' district, I "volunteered". Luckily, for me, the demonstration was called off on account of rain.
Rocco Sansone personally met with Peters, to ask his assistance in getting "wrap-up" insurance legislation passed in the 1996 session. This legislation is expected to greatly benefit the large brokers who are experienced and equipped to handle these large multi-insured programs - at the expense of the small agents who are not so equipped...
Various - BH re: The Environmental Protection Act Intentional Violations. Staff members in the Asset Management Group expressed concern in some of our meetings that, given all of Bishop Estate's property holdings, it would cost too much to comply with the regulations. If the properties were undeveloped, suggestions were made that KSBE should wait until there were plans for development; then the developer could pay to remedy the environmental hazards. The advice of in-house attorneys at these meetings was that we should not try to identify problem locations because "if we knew about them we would have to correct them." The advice of the Legal Group prevailed. Consequently, for several years little was done in the way of identifying, remedying or insuring potential environmental hazards. The responsibility for managing environmental risks was assigned by Aipa to Alan Yee. As with many of these "sensitive" matters, one purpose of this assignment was to maintain the attorney-client privilege. As a result I often was not given information about environmental issues until I learned of them through other sources or an actual problem arose.
An example is the Nationwide Industries’ acquisition. Colleen Wong and Alan Yee were responsible for performing due diligence for mergers and acquisitions. Nationwide had a chemical manufacturing plant in Pandora, Ohio, which had known problems with chemical leaks or spills. Ms. Wong and Mr. Yee either failed to determine this in their due diligence, or else did not disclose it to me as risk manager. I learned about it after the acquisition through discussions with management at Nationwide. During the years when RHSCI owned Nationwide, no remediation of the site was done. Even after Nationwide/SNAP Products was sold, RHSCI retained the liability for clean-up of the site. I do not know if clean-up was ever performed.
Another example is the Waterpark Tower site. I learned of this through an article in the June 12, 1995 issue of the Pacific Business News, which reported: “We are just about to start our environmental clean of our site, said Neil Hannahs, manager of Bishop Estate's Kakaako development.” It was only after contacting Neil that I learned that the environmental remediation contracts had already been signed (and incidently back-dated) and work was already under way. Stay & Sons, Inc. was awarded the contract for clean-up. As KSBE's liability insurance policy does not afford protection for environmental claims involving remediation work, I advised Neil that in order to protect KSBE we should make sure that either the contractor(s) or KSBE obtain this coverage. As Neil had only recently taken over this project from John Peterson, he expressed surprise that I had not been apprized of the situation earlier by Alan Yee, who been given the responsibility for handling the contracts. After reviewing the so-called “contract” with Stay & Sons, Inc. and other information I wrote memos on July 19, August 1, August 22 and September 5, 1995 to Neil Hannahs. No action was taken, so the final result was that KSBE had no environmental liability insurance protection for the project, potentially exposing the estate to millions of dollars in environmental liability claims. I attempted to obtain the Bid Specs for the project, and found there were none. I searched the yellow pages for Stay & Sons, Inc., and could find no listing. I called the Contractors' Licensing department of the State, and was told they did not have a listing under Stay & Sons, Inc. or Robert Stay. I called Stay & Sons' insurance agent and learned that they were unaware that their insured was doing this type of work (they were told he was doing composting work). I called other bidders for the job to inquire if their Miscellaneous Charges had included environmental liability insurance, and was advised that they did. However, I was advised by one contractor that the bid was basically, "done over the phone." When trying to get a copy of Ed Tabangay's independent consultant" contract with our Legal Group, I found there was none. I also learned that Trustee Lindsey's stepson worked for Stay.
??/??/89 - BH re: Non-bid Insurance Contracts and Conflicts of Interest. At the time I joined KSBE, the insurance agent was the wife of KSBE’s Financial Asset Mgr. The person responsible for the purchase of ins. at that time was Doyal Davis who can verify the pressures placed upon him to keep the ins. program with this agent. Obtaining competitive bids for the ins. program on a periodic basis is considered to be a good risk management practice in order to "keep the broker honest." I requested proposals from a number of reputable local general agencies. MMI submitted, and I recommended, a competitive proposal which improved coverages and reduced the costs of insurance to KSBE. For this I was commended by Gil Tam and received an "Outstanding" performance rating with a corresponding increase in pay. This was the only time the insurance program was put out to competitive bid until Hobbs Group presented its proposal for the Property ins. in mid-1996.
11/02/89 - M&M Ins Mgt Services, Inc. sent info entitled “Outline of Mgt Resources for a Hawaii Captive.”
12/22/89 - Memo from Rocco Sansone M&M re Captive Mgt Fee Structure - Gives hourly rates for captive mgt contract & estimated hrs required for services. No mention of a flat fee that was later charged.
10/16/90 - KSBE signed a business agreement with AutoFuel Co. (AFCO), and the Bank of Hawaii and the Bank of New York signed a revolving credit agreement and loan agreement with AutoFuel.
Various - BH re: Americans with Disabilities Act (ADA). The ADA became effective 01/26/92. The issue of compliance with the ADA impacted on discussions regarding the high costs of compliance. On 11/14/91, for example, Colleen Wong sent Allen Young a letter re Americans with Disabilities Act - Public Accommodation. Wong stated that re your inquiry whether KSBE is exempt from Title III (Public Accommodations) requirements because of Judge Alan Kay's ruling that Kamehameha Schools is a religious institution. We answer in the affirmative. There is an exemption for `religious organizations or entities controlled by religious organizations, including places of worship.' We believe, based on the Federal decision concerning Kamehameha Schools as a religious educational institution, that it should fall into this exemption. This advice was given to KSBE’s engineering dept despite an earlier opinion given to Stan Hioki by Chas. Ching of the law firm of Perkin & Shimizu. In his letter of 12/11/90, Ching stated that the ADA has a sweeping application and extends to both the KS campus as well as commercial properties owned by KS/BE. In describing the scope of coverage of ADA Title III, a Senate report specifically stated that "private schools, including elementary and secondary schools, are covered by this title." On 01/07/92, Rosemary Fazio of the law firm of Ashford & Wriston sent a letter to Aipa providing information about the Act, and stated that one of the reasons they had prepared this letter was their concern about the impact of the rather strong remedies and penalties provided for in the Act. On March 3, 1992, Allen Young arranged a meeting re ADA for Kamehameha Schools, with guest speakers, Colleen Wong, Cindy Winegar of Watanabe, Ing & Kawashima, and Peter Fritz, Esq. Attendees included Sam Hata, Ed Tabangay, Jim Holt, Mike Lum, Bob Stender, Lena Young, Charlee Kowalski, Clifford Kobashigawa and myself. These attorneys again stated their opinions that KSBE, as a religious institution, was exempted from the act. On 10/06/92, I sent a memorandum to Aipa, Colleen Wong, Gil Tam, Sandie Wicklein, Tony Sereno, Richard Wong (RHSC), and Wally Tirrell (KIC) enclosing two articles from the CPCU Journal: 1) Risk Management Implications of the ADA; 2) The ADA and Workers Compensation. I advised that KSBE's Educators Legal Liability insurance policy provided certain coverages for discrimination; however, the willful violation of a statute or government regulation or ordinance committed by or with the knowledge or consent of an Individual Insured is excluded. Also, I advised that payment of any governmental fines or penalties was not covered. On 07/15/93, Ed Tabangay sent a memo to Tony Sereno, Nathan Aipa, Mike Chun and Gil Tam regarding an "Organizational Wide KS/BE ADA Action Plan". In the memo he stated that there had been several meetings within the past weeks regarding the ADA and that an ADA Action Plan was essential. Tabangay noted that KSBE's exposure to civil lawsuits for noncompliance was a major concern. He recommended that KSBE establish compliance goals, which would serve as evidence of a good faith effort to comply. This would help safeguard KSBE from legal and risk management concerns. On 02/14/95, an ADA Action Plan was presented to all KS supervisors by Bob Ramsey and Bruce Clark for information and action. Engineering was given responsibility for implementing the plan. However, as late as 10/02/96, Sam Hata stated that he was concerned about the lack of compliance with the ADA. I remarked that I thought a master plan had been submitted a long ago and that we had taken action. Sam replied that, yes, the plan was drafted, but Trustees never approved the funds for implementation.
Various - BH re: Failure to act in good faith with KSBE's insurance and bonding companies; fraud; deceptive practices in financial and regulatory reporting; discrimination; conflicts of interest; breach of fiduciary responsibilities; non-bid contracts; political favors; improper actions for personal gain or profit; and other wrongful acts. Aipa's philosphy was that "sensitive" issues, financial information, etc. should not go outside the company, or even outside the Legal Group, if possible. Consequently, when it came to completing insurance apps that requested "sensitive" information such as financial statements, knowledge of any pending claims or future potential claims, this information was often not disclosed, or was provided only after repeated requests.
It is apparent that Aipa found my philosophy of dealing in good faith with the insurance carriers too "open" in contrast to his philosophy of keeping everything "confidential". It is also apparent that he found someone that was willing to go along with his method of operation: Marsh & McLennan, Inc. Aipa went to great lengths to control information. Central Files and Documentary are under his supervision. All staff reports are reviewed by the Legal Group. Information provided to the Master is provided by Aipa. The Tax Dept is under Aipa.
12/??/91 - AutoFuel signed a stock pledge and security agreement with KSBE.
03/??/93 - B.M. McKenzie and McKenzie Methane Corporation filed a lawsuit in Texas for $2,300,000,000 against the Trustees under the Will & Estate of B.P. Bishop and Kamehameha Schools/Bishop Estate. Additional defendants were: HAK Partnership I, II, III, IV and V; Smith-Gordy Methane Co.; SG Methane Co., Inc.; Gordy Oil Co.; L.H. Smith; R.D. Gordy; D.A. Barras; Lee H. Henkel, III; Mitch Gilbert; Royal Hawaiian Shopping Center, Inc.; Maralex, Inc.; M. O'Hare; Kukui, Inc.; JGI Resources, Inc.; and Northwestern Mutual Life Insurance Co.
BH: Aipa does not file a D&O Liability insurance claim although Trustees and other employees apparently have coverage. BH is not advised of the lawsuit, and it goes unreported to the insurance carrier, United Educators, for approximately five months. Apparently the lawsuit is also glossed over by the auditors, Coopers & Lybrand, and the co-investments by KSBE trustees, employees, friends and relatives are not reported to the Master, the Probate Court or the AG’s office.
07/22/92 - BH letter to Gil Tam re William Rosehill’s potential wrongful discharge claim. This was 1st claim under United Educators’ D&O policy. Legal Group refused to follow U. E.’s guidelines — kept BH and Mullen out of the loop in dealing with attorneys. Nathan Aipa and/or Colleen Wong engaged Watanabe, Ing and Kawashima to handle lawsuit, w/o obtain required approval from the insurance company. Neal Seamon at John Mullen set up appt to meet with James Kawashima. C. Wong canceled meeting, saying reason was “political”. KSBE contact at the law firm was Douglas Ing. Wong said that Ing might be the next Trustee.
05/??/93 - BH was transferred from the Administration Group to the Legal Group. The staff report recommended that the trustees approve a joint request by the Admin and Legal group heads to transfer the risk/insurance and safety management dept function and staff from the Administration group. [Ltr]
08/??/93 - In gathering information for the D&O renewal, BH first learned of the McKenzie lawsuit and filed a claim with KSBE’s insurance carrier, United Educators (a company M&M helped form). Aipa takes "control" and refuses to give any information regarding the case to me or the insurance carrier.
09/16/93 - A letter from UE's claims manager, Joseph McCullough, to Nathan Aipa states:
I would like to acknowledge receipt of the fax from Marsh & McLennan advising us that there is a law suit filed in Texas by M. McKenzie and McKenzie Methane Corporation against Royal Hawaiian Shopping Center, Inc. among others. This fax was our first notice of claim. This fax does not contain enough information for us to determine the allegations being made and therefore we are unable to advise you of what coverage, if any, is available under the KS/BE policies with United Educators.
I have made at least 6 phone calls to you in an effort to get information about this claim. I have talked to Bobby Harmon who advises you are the person with information about this case. I have asked that if anyone else in the legal department has the necessary information, that they contact me. To date, I have been contacted by no one from the legal department. I have attempted to get additional information from Marsh & McLennan but they advise they have no additional information.
I must advise you that the policy requires that insureds cooperate with the company in reporting and investigating claims. Failure to cooperate may result in coverage that may otherwise be available may be lost to an insured.
The first notice received indicated that `settlement discussions are currently in progress'. While I currently have no idea whether there is any coverage available to any of the defendants in the lawsuit, United does not consent to any settlement that is entered into with out our informed consent.
Therefore, if you believe that any defendant is entitled to coverage under any of the policies issued by United Educators to Kamehameha Schools/Bishop Estates, your failure to cooperate with the carrier is jeopardizing such coverage. . . .
02/16/94 - UE’s McCullough informed Aipa by fax re the McKenzie claim:
In deference to your request, United Educators, in an effort to us of the investigation and pleadings arising from this lawsuit based on your belief that the case would settle and that you would not be seeking coverage for the settlement under the KS/BE insurance policy with United. With the settlement not being finalized and the trial scheduled for May of this year, we requested that you overnight information on this case on 2/1/94.
That was 2 weeks ago and we have not received any information...
...I strongly urge you to cooperate with us and provide the information I have been requesting immediately. I must inform you that your failure to provide this information may have already prejudiced United with respect to this claim, and that the longer you withhold information, even if we have not yet been prejudiced, the more likely it is that we are prejudiced.
Based on the fact that United does not have information for the matter, we must iterate our position that this request is to determine what coverage, if any, may be available to the defendants... On the contrary, we have absolutely no information on which to determine whether there is any coverage under the terms of the policy or whether any prejudice exists based on late notice or failure to provide information.
Based on the above, I will wait to hear from you. If, in a reasonable period of time, additional information is not forthcoming, I will simply close our file. In that way, you won't be inconvenienced with having to contact me if in your opinion that is not necessary.
BH: Aipa did not respond to McCullough's letter and UE closed their file without any payments being made. No defense costs were paid from my insurance account, so I do not know the total costs incurred in this long and complex lawsuit, but I estimate that defense costs could have exceeded $1 million. Defendants included subsidiaries and individual employees in addition to KSBE and its trustees. I question whether or not these subsidiaries and individuals were properly advised by Aipa of the fact they had potential protection under UE’s policy, and that these coverages were essentially waived by Aipa's failure to cooperate. I also question if these subsidiaries and individuals paid their fair share of these defense costs, or did all funds come from the estate?
08/09/94 - Ltr fm Mark McConoghy, Price Waterhouse to Myron Mitsuyasu (KSBE Legal Group):
“Over the past few months you have had several conversations with myself and various different people from our office regarding KSBE's formation of a captive insurance company. Many of our earlier discussions were based on the captive insurance company proposal submitted to you by Marsh and McClennan (MM). . . . you indicated that MM believes there are a number of non-tax reasons to form a captive, such as:
- A captive would provide more stability in the areas of worker's compensation, property, general liability and auto liability insurance since those particular insurance markets are unstable in Hawaii;
- The captive would be used as a long term planning objective;
- The captive would provide stability and predictability in cash flows and investment income;
- The captive could, in the future, provide pollution and environmental liability insurance;
- The captive would have direct access to the re-insurance market as a means of reducing costs.
A large portion of our discussions revolved around the implications a captive insurance subsidiary may have on the tax-exempt status of KSBE. We discussed that in order to preserve KSBE's tax exempt status, it is important that the captive does not create a situation where a private individual receives a benefit from KSBE's involvement in the captive. Arm's-length relationships between KSBE and the captive would be absolutely necessary to prevent private inurement (benefits flowing to insiders such as trustees and directors) and/or private benefit (benefits flowing to third parties such as other subsidiaries) from becoming a problem. In this context, for example, premiums paid into the captive by all the entities involved would need to be actuarially appropriate in order to prevent the IRS from taking the position that KSBE is improperly subsidizing a for-profit subsidiary. While the IRS may take the position that this might result in private inurement, we do not agree.
It is necessary that the corporate governance (i.e. the board of directors and the corporate officers) be independent, in order to maintain the corporate separateness between KSBE and the captive subsidiary. It is important to keep the captive's business activities separate from the tax-exempt activities of KSBE, so as not to create a situation where the captive's activities could be collapsed into the activities of KSBE.
An independent board of directors would also show that KSBE does not control the captive. Some KSBE employees may be directors on the board. However, it is important to maintain a balance between outside independent board members and employee board members. We would recommend that a majority of the directors be outsiders.
At your instruction, we did not have our insurance actuaries review the financial projections of the captive insurance project. Our comments are based on our discussions over the past few months with both KSBE and MM personnel and the text materials provided in the MM proposal.
Unknown In a Legal Dept. meeting with Nathan Aipa a section of what appeared to be draft staff report to the Trustees, believed to have been prepared by Price-Waterhouse recommended alternative policies which would improve upon the arms-length relationship between KSBE and its for-profit affiliates:.
-- Formalize and Employ Proper Channels and Methods of Communication between KSBE and its Corporate Affiliates and with Outside Parties to Avoid Treating KSBE's Affiliates as Merely Alter Egos of KSBE. Written Communications Should be on Appropriate Letterhead and Addressed to the Proper Parties, Including Pertinent Position Titles. RHSC or any other subsidiary should not use KSBE letterhead for communications with KSBE or any other party. In investments in which a subsidiary is the direct investor, primary communications regarding the status of the investment, financial reporting, etc. should be directed to that subsidiary with the necessary cc’s to KSBE. (For example, Goldman Sachs' quarterly and other financial reports regarding RHSC’s partnership investment should be addressed to RHSC rather than to KSBE.) In situations where KSBE's subsidiary is involved in litigation, bankruptcy proceedings, or negotiations with 3rd parties, it must be made abundantly clear to the 3rd party that the subsidiary itself control’s the negotiations and litigation and not KSBE, and that all correspondence and communications from the 3rd party should be directed to our subsidiary rather than to KSBE.
-- Identify and Delineate the Roles of KSBE and its Corporate Affiliate When Participating Jointly in a Multi-Level Transaction or Project. Often times, KSBE's investments are multi-leveled with debt financing provided by KSBE and equity investment by a subsidiary. in such cases, the record should reflect that proper due diligence had been conducted by KSBE in its role as lender, and by the subsidiary in its role as equity investor. The equity investment should be in line with the investment philosophies of the subsidiary rather than at the request of KSBE. All financing provided by KSBE to its subsidiary, or to any entity in which KSBE's subsidiary has an equity interest, should be on terms similar with the market. Investments transferred from KSBE to a subsidiary should be consistent with the operational goals and objectives of the subsidiary, and should be justifiable for business and economic reasons and not solely for tax reasons. If a subsidiary's debt to a 3rd party is credit enhanced by KSBE, the subsidiary should properly compensate KSBE at market fee rates for providing such credit enhancement.
-- Establish a Cost-Sharing Procedure for Support Services Rendered by KSBE Staff to a Subsidiary. Most of the departments within KSBE have provided professional and other services to KSBE's subsidiaries. These include legal advice and consultation, engineering and appraisal services, etc. Perhaps the simplest & most cost effective way to continue to provide these services while maintaining an arms-length relationship is to develop a cost-sharing arrangement with the subsidiaries. Staff at KSBE would need to keep accurate time sheets to record all time they devote on subsidiary matters so that the cost of these services may be charged back to the subsidiaries.
-- The Current Directors and Officers of Each KSBE Subsidiary Should be Reviewed in order to Maintain the Integrity of an Arms-Length Relationship Between KSBE and its Subsidiaries: The majority of the directors of a subsidiary should not be Trustees or employees of KSBE. The CEO of a subsidiary should not be a Trustee or an employee of KSBE. The directors and officers of a subsidiary should not be dominated by or subject to the control of individuals who are Trustees, officers or directors of KSBE.
-- Establish Meaningful Consulting Agreements for Management Services Rendered by KSBE Staff for Subsidiary Matters. To the extent that KSBE staff is called upon or needed to assist in the management of a subsidiary's project such as investments transferred by KSBE to a subsidiary, KSBE should be reimbursed by the subsidiary for the consulting services provided by KSBE's staff. As an alternative, if such consulting services are expected to consume an inordinate amount of KSBE's staff's time, then transfer of such staff employee from KSBE to the subsidiary might be considered. KSBE should be careful not to allow consulting agreements between KSBE and a subsidiary to proliferate to the point that KSBE is essentially managing the day-to-day operations of its subsidiary.
– Establish a Subsidiary Compensation Policy for Directors and Officers of Subsidiaries. To the extent that subsidiaries are operating entities, its directors and officers acting on behalf of the subsidiary should be compensated appropriately by the subsidiary in order to demonstrate the separateness between a subsidiary and KSBE. The shareholders of the subsidiary, rather than KSBE's Trustees, should establish the compensation of the directors of the subsidiary. The directors of the subsidiary, rather than the Trustees, should establish the compensation of the officers and employees of the subsidiary. The employment practices of each subsidiary (e.g., hiring, determination of wage scales, employee benefits, pension plans, disciplinary actions, etc.) should not be controlled or managed by KSBE or its personnel department. Any indication of control or management by the parent of a subsidiary's employment practices would be pivotal in the determination of an arms-length relationship
-- Maintain Arms-Length Relationship with Captive Insurance. KSBE is now contemplating the establishment of a captive insurance company for KSBE and its affiliates. Since this captive insurance company will be an affiliate of KSBE, it is important that KSBE maintain an arms-length relationship with this captive insurance company. As reflected by the HIG insurance case, failure by KSBE to maintain an arms-length relationship with its captive insurance company may render KSBE liable for all claims against and debts of the captive insurance company. KSBE should comply with all state regulatory requirements in forming the captive. The board of directors of the captive should have a majority comprised of individuals who are not Trustees or employees of KSBE. The chief executive officer of the captive should not be a Trustee or employee of KSBE. Management of the daily operations of the captive insurance company, including claims administration and investing of the captive's capital, should be largely free of influence or control by KSBE’s Trustees and staff.
The foregoing alternatives/policies would likely operate to improve the arms-length relationship between KSBE and its affiliates, and thereby further KSBE's mission of perpetuating the legacy of Bernice Panahi Bishop by protecting its assets and maintaining its tax exempt status.
Little, if any, costs or expenses are expected to be incurred if the foregoing alternatives/policies were adopted. These alternatives/policies are intended to correct certain routine practices of KSBE and its affiliates which can be easily corrected without significant costs to KSBE. On the other hand, failure to implement appropriate policies to maintain an arms-length relationship between KSBE and its affiliates may result in significant adverse impact and costs to KSBE.
10/01/94 - As a result of the advice of Price Waterhouse, BH drafted "arms length" guidelines:
GUIDELINES - P&C INSURANCE COMPANY. INC. - ARMS-LENGTH RELATIONSHIPS
The following are certain guidelines which should be utilized to maintain arms-length relationships between P&C Insurance Company, Inc. and its Parent and Corporate Affiliates:
1. Written communications should be on appropriate letterhead and signed by the proper parties, including pertinent position titles (e.g., any correspondence concerning business matters of P&C Insurance Company, Inc. must be on P&C letterheads and signed by the Captive Manager or by an Officer or Director of the corporation).
2. P&C should not invest any of its funds in any subsidiary of the Parent, nor in any entity in which the Parent or any subsidiary has a substantial financial interest. Primary communications, financial reporting, etc., must be between P&C and the investment firms.
3. In situations where P&C is involved in litigation, bankruptcy proceedings, or negotiations with third parties (e.g., John Mullen & Co.), it must be made abundantly clear to the third party that P&C itself is in control of the negotiations and litigation and not KSBE or Pauahi Holdings Corporation (PHC), and that all correspondence and communications from the third party should be directed to P&C rather than to KSBE or any subsidiary.
4. All financing provided by PHC to P&C should be on terms similar with the market.
5. Any services provided to P&C by KSBE or PHC personnel should be charged back to P&C.
(BH Note: This was never done!)
6. The majority of the directors and majority of officers of P&C should be persons who are not Trustees or employees of KSBE or PHC.
7. The Chief Executive Officer of P&C should not be a Trustee or an employee of KSBE.
8. The directors and officers of P&C should not be dominated by or subject to the control of individuals who are Trustees, officers or directors of KSBE or PHC.
9. To the extent that KSBE or PHC staff is called upon or needed to assist in the management of a P&C project, a Consulting Agreement should be entered into aud P&C should reimburse KSBE or PHC for the consulting services provided by their staff. As an alternative, if such management consulting services is expected to consume an inordinate amount of KSBE’s staff's time, then transfer of such staff employee from KSBE to the subsidiary should be considered. (P&C should be careful not to allow consulting agreements with KSBE or PHC to proliferate to the point that KSBE or PHC is essentially managing P&C's day-to-day operations.)
10. A Compensation Policy should be established so that P&C's Directors and Officers are compensated appropriately by P&C in order to demonstrate the separateness between P&C and KSBE and PHC. The shareholder(s) of P&C should establish this compensation.
11. The employment practices of P&C (e.g., hiring, determination of wage scales, employee benefits, pension plans, disciplinary actions, etc.) should not be controlled or managed by KSBE or PHC. (Any indication of control of management by KSBE or PHC of P&C's employment practices would be pivotal in the determination of an arms-length relationship.)
12. P&C must comply with all state regulatory requirements, including by not limited to sufficient capitalization and appointment of a qualified, licensed agent to manage the operations of the captive insurance company.
13. Management of the daily operations of Pac, including claims administration and investing of P&C's capital, should be largely free of influence or control by KSBE's (or PHC's) Trustees and staff.
14. In general, P&C should not reinsure its risks with any reinsurer on whose boards of directors KSBE (or its subsidiaries) has representation. (In the event this should occur, however, KSBE's representative on the board should recuse himself from voting on any matter which may come before the reinsurer's board concerning the captive insurance company.) Since P&C Insurance Company, Inc. is an affiliate of KSBE and PHC, it is important that both KSBE and PHO maintain arms-length relationships with P&C at all times. (As reflected by the HIG/HEI insurance case, failure by KSBE or PHC to maintain an arms-length relationship may render KSBE and/or PHC liable for claims against, and debts of, the captive subsidiary.)
The foregoing policies should operate to establish and maintain the appropriate arms-length relationships.
94/95/96 - BH: During the period when the formation of the captive insurance company was under discussion, I recommended to Aipa that I be transferred from KSBE to the captive in large part due to the arms-length issues. I drafted a staff report for this transfer which was submitted to Aipa for review and approval. My recommendation was that I be transferred to P&C and KSBE contract with P&C for risk management services... I included an estimated $200,000 in the initial budget for P&C to establish and operate a separate office. This staff report was never presented to trustees by Aipa.
Aipa directed that I make changes to these staff reports... He indicated that he had discussed the report with Peters, and that Peters seemed to be in favor of the transfer. However, the staff report was never presented to the full board of trustees by Aipa. I placed this proposal for my transfer to P&C on the agenda for P&C's 1996 Annual Board of Directors Meeting. During discussion on the issue, Peters indicated that the matter should be presented first to the estate's trustees for approval, so the board's decision was deferred. Aipa still would not present my staff report to trustees.
Little concern was shown by Aipa re work being performed for P&C by KSBE management and staff at no charge to the subsidiaries. I spent hundreds of hours on KSBE time performing work for P&C which was never charged to it Others providing "free" services included Virginia Mau, David Dunnigan, C. Wong, Kam and Aipa. According to Price Waterhouse's letter, this might be considered by the IRS as "improperly subsidizing a for-profit subsidiary.”
06/??/94 - Investor’s Equity Life Insurance Co. declared insolvent and placed in receivership by the Insurance Commissioner, State of HI.
09/??/94 - P&C Insurance Co., Inc. (“P&C”) chartered as captive insurance company in Hawaii, a for-profit subsidiary of Pauahi Holdings Corporation (“PHC”), which is a for-profit subsidiary of KSBE.
10/20/94 - P&C wrote its first insurance policies.
11/??/94 - Harmon named President of P&C. Peter Lowe, M&M, is V.P.; William Richardson is Sec/Treas.; Nathan Aipa is Asst. Sec/Treas. Board of Directors: Henry Peters, Chairman; William Richardson; Gil Tam.
01/31/95 - INSURANCE MANAGEMENT AGREEMENT between M&M Ins Mgt Services, Inc. and P&C signed by Peter Lowe and B. Harmon. Key agreements: “Whereas, P&C has received authority from the Commissioner of State of Hawaii Insurance Division (the “Commissioner”) under the provisions of Chapter 431, Article 19, Hawaii Revised Statutes to engage in the underwriting of various classes of ins. and reins. As a captive insurance company; and Whereas, in conjunction with such underwriting P&C will require management, administrative and consulting services and IMS in willing to furnish such services; and Whereas, the parties desire to enter into an agreement whereby IMS will render itself or through others retained by IMS, management, administrative and consulting services with regard to the operation of P&C. . . . 1. IMS’ SERVICES. IMS will render the following services with regard to the business of P&C . . .a) Underwriting of Insurance . . . b) . . . Policy holder Services. . . . IMS shall issue and endorse policies . . . and issue notices of cancellation. IMS shall bill, receive and render receipts for premiums due . . . IMS shall have full authority hereunder to take whatever action it deems necessary or appropriate to attempt to collect premiums . . . 2. OFFICE RECORDS . . . BOOKS . . . c) Reports and Examinations. All federal and state reports, other than federal tax returns, and all other applications and reports as shall be required by Chapt. 431,Article 19, HRS shall be prepared and filed by IMS after review by P&C. . . . g) Authority of IMS. IMS shall have all the power and authority necessary or desirable to carry out its duties and obligations under this Agreement, which shall include the right to engage, as an independent contractor, any person, corporation or other organization to perform any functions to be performed hereunder by IMS. The authority granted hereunder shall specifically include the right to engage other operating units within Marsh & McLennan, Inc., or any subsidiary or affiliated company thereof, to perform such functions. 3. RELATIONSHIP BETWEEN PARTIES; LIMITATION OF RESPONSIBILITY. a) Independent Contractors . . . b) Compliance with Laws. IMS shall use its best efforts to advise P&C regarding compliance with the insurance laws of the State of Hawaii. . . c) Scope of Services. The obligations of IMS hereunder are limited to the good faith performance of the services to P&C set forth herein and IMS shall have no liability to P&C or any other person for any action taken pursuant hereto other than as a result of its wilful misconduct or gross negligence. d) Indemnification. P&C shall indemnify and hold harmless IMS, its officers, directors, employees, agents and affiliates from and against any losses, claims, damages, liabilities, cost of expenses, including reasonable attorney fees and expenses of investigation (collectively, “Losses”), to which IMS may become subject in connection with the services it provides hereunder; provided, however, that P&C shall not be liable under the foregoing indemnity in respect of an Losses to the extent that a court having jurisdiction shall have determined by a final judgment that such Loss resulted from IMS’ wilful misconduct or gross negligence. The provisions of this section shall survive the expiration or termination of this Agreement, including any extensions thereof . . . f) Entire Agreement. All prior negotiations and agreement between the parties hereto relating to the subject matter hereof are superseded by the Agreement, and there are no representations, warranties, understandings or agreements other than those expressly set forth herein, except as modified by an instrument signed by the parties hereto. . . g) Waivers. . . . Any waiver by either party of any breach of any provision hereof shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver or modification of the provision itself, or a waiver or modification of any other right under this Agreement. . . . COMPENSATION AND EXPENSE PROVISION . . . (A) Annual Fee. In consideration for the services to be performed by IMS, P&C agrees to pay IMS a fee on a time and expense basis. . . .(D) Billing and Payments. IMS shall render, within 30 days after the end of each month, a statement to P&C setting forth the reimbursable costs and expenses incurred during the immediately preceding month. . .
BH: Nothing in M&M’s original proposal or this Management Contract mentioned anything about a FLAT ANNUAL CHARGE OF $200,000 from M&M to P&C for any type of services. The additional $200,000 charges were apparently fraudulent and arranged through a conspiracy between Peters, Aipa, Kam, Sansone and Lowe. There was a conflict of interest as Lowe was SR. V.P. for M&M IMS, as well as V.P. for P&C. Lowe had a duty of loyalty to P&C to make sure that P&C was obtaining competitive bids from independent contractors (including M&M), and that the company was not being defrauded by being sent false invoices for services not rendered and not under contract. BH was only performing his legitimate duties as P&C’s president when he obtained alternative quotations for insurance services and coverages for P&C. Aipa and Kam, as KSBE employees, did not have legal authority to: 1) supercede this Management Contract between P&C and M&M IMS -- especially orally; 2) question Harmon’s authority to obtain competitive bids for P&C from M&M or any other independent contractor; 3) question Harmon’s authority to require a written fee proposal and contract from M&M; and 4) question Harmon’s refusal to pay M&M any service fees not under a legal contract. In actuality, M&M was charging fees for policy services, safety services, claims services, etc. for which they were also receiving commissions from the standard insurance companies they represented — including Federal Insurance Co. and AMRE.
02/??/95 - An article in the Honolulu Advertiser discloses the names of individual investors in the McKenzie deal. Even though I was responsible for the handling of these insurance claims, this was my first knowledge that Trustees, managers, employees and independent contractors had invested in this deal including: Henry Peters, Gil Tam, Mitch Gilbert, Gil Ishikawa (KSBE’s Tax Administrator), Rodney Park (KSBE Controller) and Wally Chin (Asst Controller). Mark McConoghy, of Price Waterhouse, KSBE’s tax consultant, was also an investor.
02/27/95 The Honolulu Advertiser, under the headline, "Monitoring groups not told about deals," reported:
“Both the state Probate Court and the state Attorney General's Office are required to annually review Bishop Estate operations."
"Neither agency knew about the personal investments estate trustees and employees made in connection with the estate's McKenzie Methane investment, according to court records and interviews."
"Peter Trask...made no mention of the McKenzie Methane or HAK Partners investments in his report to the court."
"James Duffy, who reviewed Bishop Estate operations last year for the state Probate Court, said he was unaware of the McKenzie Methane investment and had never heard of the HAK partnerships."
"Benjamin Matsubara, the current court master, also said he was unaware of the HAK Partnerships ..."
"Deputy Attorney General Kevin Wakayama, who reviews Bishop Estate activities for the state, said personal investments by estate trustees and staffers in estate-related business deals have `never been publicly reported by the estate.'"
02/28/95 - The Honolulu Advertiser under the headline, "Bishop Estate tax-exempt status scored," discloses:
"...Peters (attorney Ronald Peters, not Henry Peters) pointed out yesterday that the estate trustees told James Duffy, court-appointed master for the estate's 1989-90 fiscal year, that `they have not undertaken any transactions with members of their families, business associates, employees of the state, or members of immediate families of employees of the estate except such as are disclosed to the master...'"
"The estate had no comment yesterday on questions about why the existence and activities of the HAK partnerships were not reported to court masters since 1989."
"The estate also had no immediate comment on whether it was obligated to report the HAK partnership transactions on its federal income tax returns."
"... in 1989 then-trustee Matsuo Takabuki, his wife, three children, family corporation and a longtime company employee invested $1.5 million in the HAK Partnerships."
"Then-trustees Myron "Pinky" Thompson and William Richardson, invested $510,000 and $210,000, respectively. Trustee Henry Peters...invested $220,000..."◂
"The estate, as a charitable institution, files a `Form 990' federal tax return. One section of that return requires the estate to report whether it has furnished `goods, services or facilities' to any taxable organization in which a trustee or estate principal officer has a management affiliation."
"The estate reported nothing about the HAK partnerships on tax returns ... since 1989..."
"The HAK partnerships were organized and administered by Mitchell Gilbert, financial assets manager of the estate from 1988 to September 1994, according to Texas court records. Gilbert and his relatives invested $72,000 in the HAK partnerships."
"The mailing address for all five partnerships was Bishop Estate headquarters at Kawaiahao Plaza..."
In the same edition, an article under the headline, “Estate's Washington link disclosed," states:
"Robert Rubin, U.S. Treasury secretary, has an important personal financial connection to Hawaii's Bishop Estate, as does one of Rubin's predecessors at the Treasury, former secretary William E. Simon."
"The estate has guaranteed an undisclosed rate of return on Rubin's holdings in Goldman, Sachs & Co., the giant New York-based investment bank in which Bishop Estate has invested $500 million..."
"Rubin was co-chairman of Goldman, Sachs from 1992 through 1994, the same period in which the Bishop Estate made two separate $250 million investments in the firm."
"When Rubin left the bank to join President Bill Clinton's cabinet last month as Treasury Secretary, he secured an `insurance policy' from the estate that underwrites the value of his personal holdings in Goldman, Sachs..."
"...former Treasury Secretary Simon has been the estate's business partner in several major banking deals both in Hawaii and in Asia in recent years."
"Simon also personally invested, along with four estate trustees and numerous senior estate staffers, in a Houston-based methane gas drilling project that is now mired in federal bankruptcy court proceedings."
"The estate itself invested some $85 million in the same energy deal."
03/23/95 - An article in USA Today reports:
"...Bishop Estate - which is strongly tied to the Democratic political machine here - is attracting attention outside Hawaii because of its ties to Treasury Secretary Robert Rubin."
"In an unusual deal, Rubin pays hundreds of thousands of dollars a year to the Bishop Estate in exchange for a guarantee that he'll never lose money on a multimillion- dollar investment in his former firm, Goldman Sachs investment bank."
"Rubin was co-chairman of Goldman Sachs before joining the Clinton administration."
"Rubin could face a conflict of interest if an Internal Revenue Service investigation into the Bishop Estate's tax-exempt status reaches his desk. As Treasury secretary, Rubin oversees the IRS."
"And some Republicans question whether Rubin's actions - especially his role in the Mexican bailout - have been designed to help Goldman Sachs."
"...Bishop Estate is now fighting release of its 1992-93 financial reports..."
"Bishop Estate spokesman Elisa Yadao says the estate doesn't want competitors to see the financial statements."
"But secrecy may also keep hidden the details of the Rubin-Bishop Estate deal, which was made in February 1993."
"Treasury officials won't give details either, except to say Rubin pays the estate hundreds of thousands of dollars a year."
"...First as Clinton's economic adviser and now as Treasury secretary, Rubin could influence interest rates, foreign currencies and other factors crucial to his former firm's health."
"To avoid a conflict of interest, he sold his Goldman Sachs partnership to the firm. A price wasn't disclosed, but the value of a senior partnership could exceed $50 million."
"When buying out partners, Wall Street firms are reluctant to deplete cash reserves, the lifeblood of an investment bank. So Goldman Sachs gave Rubin a note that promised to pay principal and interest over a number of years."
"This still left Rubin with a potential conflict: a gigantic investment in Goldman Sachs that could be affected by his official government actions."
"If Goldman Sachs had financial troubles, Rubin might not get paid, possibly costing him tens of millions of dollars."
"Rubin's solution was to buy an insurance policy on his investment, so he would get paid even if Goldman Sach's finances ran into trouble."
“Rubin got the insurance from the Bishop Estate, rather than a major financial firm, because it was least likely to be affected by his government work, says Treasury general counsel Ed Knight..."
"Bishop Estate critic Ronald Peters, a Honolulu lawyer, has asked the IRS to investigate whether the Bishop Estate should lose its tax-exempt status for allegedly improper business deals by the trustees."
"Hawaii's attorney general has sent the challenge to the IRS, too."
". . . He says Rubin has been under particular scrutiny since he sent a letter to former Goldman Sachs clients saying he looked forward to working with them in his new capacity..."
04/03/95 The Honolulu Advertiser reported, "Estate had $26.9 million in AutoFuel - Its investment coincides with bank loans":
"The Bishop Estate is AutoFuel's single largest secured creditor."
"According to paperwork filed by the Bishop Estate at the Bureau of Conveyances here, the estate and AutoFuel signed a business agreement October 16, 1990. On the same day, the Bank of Hawaii and Bank of New York signed a revolving credit agreement and loan agreement with AutoFuel..."
"In December 1991, AutoFuel signed a stock pledge and security agreement with Bishop Estate..."
"The Bank of Hawaii was also involved in another estate deal in Texas. According to bankruptcy records in Houston, the estate guaranteed loans made by the Bank of Hawaii to individuals and companies that invested in McKenzie Methane Inc. The estate later assumed those loans when the borrowers failed to make payments to the bank."
"AutoFuel Co. entered bankruptcy reorganization in Dallas in March 1993. Some four months later, a wholly owned Texas subsidiary of Bishop Estate called Kukui Inc. filed a claim in the AutoFuel bankruptcy for recovery of $26.9 million."◂
"Of that total debt, $24.76 million was fully secured by unspecified collateral, according to the claim."
"The remainder, $2.16 million, was unsecured..."
"Kukui Inc. is a subsidiary of Royal Hawaiian Shopping Center Inc., itself a profit-making subsidiary of the nonprofit, charitable Bishop Estate."
04/25/95 - The Wall Street Journal, under the headline, "Bishop's Gambit - Hawaiians Who Own Goldman Sachs Stake Play Clever Tax Game - Their Trust Is Educational But Investments Produce Big Incomes for Trustees" reported:
"The giant Hawaiian trust that now owns 11% of Goldman, Sachs & Co. bills itself as a charity. It's an increasingly tough sell."
"...a close look at the trust reveals a much-different operation, one that has more in common with a big investment concern like Goldman Sachs than with even the busiest U.S. charities.
"Take executive pay: For the year ended June 30, 1993, Bishop's five governing trustees earned $820,000 each - payments calculated, in unusual fashion, partly as a percentage of the trust's tax-free investment income. In their best year, the trustees got $925,000 apiece. In contrast, the highest paid official at the American Red Cross earned $342,700 in 1993.
"Wheeling and Dealing - Bishop Estate doesn't invest like a traditional charity either: Instead of passively pursuing rent, interest and dividends, Bishop wheels and deals in the world of shopping centers, apparel chains and drilling ventures. Several of its investment partners say that when deals turn sour, the Bishop trustees don't hesitate to intervene aggressively."
"Then there is the critical matter of taxes. With the help of more than two decades' worth of private rulings from the Internal Revenue Service, the trust has managed to surf to the limits of the law. As a result, potentially taxable deals are conducted on a tax-free basis, and trust properties migrate between taxable and tax-free subsidiaries to reduce the government's take.
"Also, despite $8 billion to $10 billion in assets - which make Bishop the nation's wealthiest charity - the trust has attracted nearly $30 million in federal subsidies for native Hawaiians since 1987. Maintaining support for such largess falls to Hawaii's Democratic congressional delegation, which has close ties to Bishop's trustees, many of whom are former top Democratic politicians."
"Mr. Takabuki's hands-on approach to investing meant that Bishop officials increasingly selected and helped supervise their corporate investments, particularly in times of trouble. Such work...ate up more and more of the trustees' time... In turn, trustees became less involved, local critics charged, in their educational mission."
"Trustees didn't seem to be very interested in expanding school activities as fast as the cash was coming in," says Guido Giacometti, head of Bishop's asset-management group until he left the trust in 1990..."
"...by the late 1980's, Mr. Takabuki's acquisitions were turning Bishop into a diversified investment concern with two distinct branches: taxable units the trust played a role in operating and traditional tax-free holdings. Then, innovatively, the trustees started moving investments from one branch to the other."
"The first big move involved the Royal Hawaiian Shopping Center, Inc... In 1986, Mark McConoghy, an influential tax lawyer at the accounting giant Price Waterhouse, concluded that the shopping center could be transferred from the taxable subsidiary to its tax-free parent..."
"Mr. McConoghy's coup also markedly enhanced the trustees' income, since under Hawaiian law the board members are paid 2% of the trust's tax-free revenue..."
"...Bishop Estate's principal watchdog is a "special master," who each year files a report on the trust's educational and investment activities to the probate court that is supposed to enforce the terms of the princess's will. But Bishop foots the bill for these reports, which usually lag several years behind, and even special masters have been caught up in Bishop's tangled web of business dealings."
"In 1990, for instance, when special master Peter Trask was reviewing the estates activities for the year ended June 30, 1989, Bishop was finalizing what would become a $27 million investment in a company whose subsidiary employed his father, David. BH note: The subsidiary is Auto Fuel Company (AFCO). The young Mr. Trask also did legal work for the company..."
"Bishop's cozy rapport with the state's entrenched Democratic Party also helps insulate it from scrutiny."
"...Many (trustees) are drawn from the upper reaches of Hawaii's political and judicial life... Current trustee Mr. Peters actually became a trustee while still speaker of the state House of Representatives. Until 1993 the newest trustee, Gerard Jervis, was chairman of the selection commission that screens judicial candidates for the governor. So, in effect, Mr. Jervis helped select the judges who subsequently selected him to the Bishop board."
"Who appointed Mr. Jervis to the judicial-selection committee in the first place? None other than Mr. Wong, the current Bishop trustee who then presided over the state senate."
"Once in power, the trustees have been known to favor powerful friends. Consider, for example, the case of former Gov. John Waihee III. He selected all five of the current state Supreme Court justices. These judges in turn named three of the current Bishop trustees, including the chairman, Mr. Wong. Mr. Waihee also appointed trustee Mr. Peter's mother, Hoaliku Drake, to head the Department of Hawaiian Homelands, a post she held until last year."
"Shortly after Bishop made its second $250 million investment into Goldman Sachs last November, Mr. Peters asked Goldman to steer legal work to Mr. Waihee, who is now in private practice, according to people familiar with the matter..."
"On the federal level, some warn that Bishop risks violating the IRS prohibition against ‘excessive personal benefit’...`The IRS is quite concerned with organizations where people are being paid a great deal,' says Dan Langan, a spokesman at the National Charities Information Bureau, a watchdog group. `You've hit the jackpot with this group.'"
"In addition, some people familiar with Bishop's practices question whether trustees' relationships with...subsidiaries are sufficiently at arm's length to satisfy IRS rules. For instance, as chairman of the Royal Hawaiian Shopping Center, Mr. Peters handles a wide range of matters, from the entity's current rent negotiations...to the hiring of a receptionist..."
"Tax experts...point out that the IRS seldom revokes an organization's tax-exempt status, and it has no other penalties at its disposal. (This has changed since the article was written, and the IRS now has the ability to impose "interim sanctions" against individuals who wrongfully gain excessive personal income.) Moreover, during the past several decades, Bishop has nurtured close ties with the IRS, whose employees in Washington and Los Angeles are visited periodically by Bishop officials sometimes bearing chocolate-covered macadamia nuts."
"`This is a group that has so much clout that no one stops them,' says Paul Streckfus, an expert on tax-exempt organizations who dealt with Bishop as an IRS official in the 1970's..."◂
“There are signs...that Bishop Estate is looming larger on the politicians' radar screen these days--thanks in part to Treasury Secretary Robert Rubin, former chairman of Goldman Sachs. In December 1992, shortly after Bishop purchased its first Goldman stake, Mr. Rubin, who had just been appointed head of the National Economic Council, needed to sever his ties with his former firm. In just one phone call from Goldman, Bishop agreed to guarantee, for a fee, Mr. Rubin's limited partnership interest in the unlikely event that the firm ever went under, Bishop will get to pocket about $1 million in fees from Mr. Rubin and to enjoy the satisfactions, however intangible, of having a lasting relationship with the man who now, it turns out, oversees the IRS."◂
"Mr. Rubin, who has reclused himself from Bishop and Goldman matters, disclosed the arrangement last February when questions were raised about his and Goldman Sach's potential stake in the Mexican bailout. Now the House Banking Oversight and Investigations subcommittee is planning hearings in which Mr. Rubin may be questioned about his financial links both to Goldman Sachs and Bishop Estate."
09/13/95 - BH re: The McConnell, et al ADA Class Action Suit. The Honolulu Star-Bulletin reports, “People with disabilities sue Bishop Estate: A class-action lawsuit is seeking $4 million in damages from Kamehameha Schools Bishop Estate, alleging the estate has done nothing to make some of its commercial properties accessible to people with disabilities. Twenty-two residents from 28 states and Puerto Rico are bringing the lawsuit...Five trustees and Bishop Estate's for-profit subsidiaries are also named as defendants in the suit filed by attorney Landsford Dole Phillips. The suit alleges the defendants have done nothing to bring their commercial properties into compliance with the Americans with Disabilities Act. Phillips estimates that more than 5,500 Bishop Estate for-profit properties are violating the act.”
This claim was covered, in part, under two insurance policies: United Educators' (UE) ELL policy and Chubb's D&O Liability policy. The UE policy covered claims against the estate and its trustees and employees. The Chubb policy provided coverages only for Directors and Officers of the insured subsidiaries. It did not cover the entity itself. Premiums for the UE policy were paid by KSBE. Premiums for the Chubb policy were allocated among the subsidiaries. UE's policy was subject to a $500,000 self-insured retention; Chubb's policy had a $250,000 SIR. The retention amount for UE's policy was to be paid from KSBE's insurance budget. The retention for the Chubb policy was to be paid by the subsidiaries, allocated in the same percentages as the premiums. Louanne Kam was the in-house attorney assigned to handle the case. In memos to Kam, I pointed out that KSBE and our defense counsel were not in compliance with the conditions of the insurance policies or the Defense Counsel Guidelines, which was jeopardizing coverages. Contrary to our internal policies and procedures, I was generally not included in any discussions regarding the case. Billings were sent to Aipa or Kam for approval and were paid from the General Counsel's Account, rather than from my Insurance Account. Contrary to what was stated in Shevon Garnett's memo of 03/21/96 to Nancy Kane, KSBE was not to be reimbursed by UEI and/or Chubb insurance companies for over $361,000 in attorney's fees. The last status report I received dated 09/30/96 stated that legal fees and expenses for this civil action totaled over $502,000. These costs had NOT been allocated among KSBE and its subsidiaries as of the date of my termination, and no payments had been made by the insurance carriers.
09/13/95 - The IRS “Interim Sanctions” regulations go into effect (retroactively): www.kycbs.net/IRS-Intermediate-Sanctions.pdf
10/??/95 - BH, in his capacity as the Risk/Insurance & Safety Manager for KSBE, obtained quotations for Association Liability insurance from Federal Insurance Co. through their agent, M&M.
10/27/95 - BH, with authorization from Trustees, arranged thru M&M, for Federal to issue an Association Liability policy effective 10/27/95, Policy Number 8146 79 11, and signed by their authorized representative, Milton T. Perkins (“Perkins”).
10/??/95 - Fredrick Field filed a lawsuit arising out of nine Limited Partnerships dating back to 1984, in which Field and KSBE were partners. Named in the lawsuit were KSBE, Henry Peters, Oswald Stender, Richard S.H. Wong, Lokelani Lindsey, Myron Thompson, Matsuo Takabuki, William Richardson and Lyn Anzai. General damages claimed in this lawsuit totaled $86,700,000, plus unspecified punitive damages and attorneys' fees. Field alleged "fraud" and "breach of fiduciary duties," among other things, in that KSBE and its authorized representatives, made false representations that Field's partnership assets were worth approximately $10 million, while the "true" value of Field's interest was "at least $30 million." Field also alleged "usury" arising out of KSBE's loan of $29,310,577 to him at an interest rate of 20% per annum. Defense costs in this case had exceeded $500,000 at the time of my termination. Law firms representing the defendants in this case were Morrison & Foerster; Tuttle & Taylor; and Cades Schutte Fleming & Wright. Michael Hare is the lead attorney for the latter firm.
02/28/96 - BH met w/ Tim McGrath from Hobbs Group and Mary Breighner from Arkwright Mutual to discuss services that these companies might be able to provide to KSBE and P&C. As a result of this meeting, Hobbs stated that they believed that they could improve upon the property insurance coverages for KSBE and save the organization as much as 30% in premiums. They also indicated that if we qualified for their program, it might be possible for P&C to write the policy, with Arkwright providing reinsurance. The first step to determine if we qualified for the program would be to have Factory Mutual Engineering inspect all the major properties of KSBE and subs.
03/11/96 - Factory Mutual’s team of safety engineers began inspecting the major KSBE properties.
03/11/96 - Robert Basham and Benjamin Stone filed suit against: (1) B.P. Russell, President and Trustee of the Robert Trent Jones Golf Club, Inc., (2) Henry Peters, individually and as a Trustee of the Golf Club and of KSBE, (3) KSBE through its Trustees, (4) Lake Manassas Limited Partnership, (5) RTJ Acquisition Limited Partnership (RTJLP), (6) Treyburn GP, Inc. (Treyburn is the general partner for both RTJLP and Lake Manassas LP. Royal Hawaiian Shopping Center, Inc. serves as the sole limited partner for both partnerships.)
The Plaintiffs asserted, among other things, that (1) Mr. Russell and Mr. Peters breached their fiduciary duties as corporate directors of the Golf Club, that they "aided and abetted" one another in so doing, and that Mr. Peters involvement was so effectively at the direction of the KSBE Trustees that KSBE assumed a corresponding fiduciary responsibility to the Golf Club members which has been breached, and; (2) that Mr. Russell, acting under the control of Mr. Peters, and thus as an agent of KSBE, engaged in common law fraud in obtaining Basham's and Stone's consent to amendments to covenants applicable to their property, by oral statements which they claim to have been intentionally false and misleading.
04/03/96 - BH met with Tim McGrath, VP of Hobbs, and was advised the initial inspections looked promising and they could proceed to negotiate with selected carriers to obtain a proposal.
04/10/96 - BH gave Hobbs an authorization letter to proceed with the proposal and advised M&M.
05/20/96 - BH meeting with Sansone and Anne Anderson, M&M’s property underwriter, S.F. office, to discuss the pending Hobbs’ proposal. They express to Harmon that Hobbs’ claim of a better property program is just “broker talk” and Hobbs won’t be able to deliver on their promises. They say that M&M’s program is the best that is available.
06/12/96 - Hobbs draft proposal for their property insurance program rcvd. The proposal exceeded their original goals. Highlights were that KSBE’s blanket limit could be increased from $140 million under M&M’s program (which was inadequate, but the max that M&M could obtain) to $500 million; a vacant Kona Hotel could be included in the blanket policy rather than being on a separate surplus lines policy with surcharged rates; coverages were broadened; the number of carriers were reduced from 15 to 2 or 3; the premiums reduced by approx $600,000 a year; and Arkwright would be able to write the program on a reinsurance basis for P&C. The target date for the change over to the Hobbs program, if approved by Trustees, was 07/01/96, the beginning of P&C’s fiscal year.
06/17/96 - BH provided Aipa with a first draft of his Staff Report for trustees re the Hobbs proposal. A major point was that P&C could now provide the property insurance rather than the 15 outside carriers that M&M had been using.
06/20/96 - Aipa and Sansone called BH into a meeting in Aipa’s office. Sansone represented that if KSBE gave him a rescinding broker of record letter, M&M would be able to assume Hobb’s program with Arkwright. Based on my previous discussions with Hobbs and Arkwright, I expressed doubts that this could be done. I also stated that I had been dealing in good faith with Hobbs and that giving M&M a broker of record letter would be unethical and would make it difficult to obtain future proposals from Hobbs or other brokers. It would also put the Hobb’s proposal in jeopardy. Aipa directs BH to rewrite his staff report and give M&M a Broker of Record letter and 30 days to assume Hobbs’ proposal. This would take the effective date beyond the July 1st target date, so Aipa directed me to request an extension of the deadline to July 15th, which they granted. M&M was un able to convince Arkwright to give the Hobb’s proposal to them by July 15th, so Aipa and Kam directed me to ask Arkwright to extend the deadline to Aug. 1st, which they did. M&M was still unable to present a competing proposal, so Aipa and Kam directed me to see if the deadline could be extended to Oct. 1st. Arkwright would only extend it to Aug. 15th. Aipa directs me to rewrite my Staff Report to Trustees, saying that I should not be overly critical of M&M’s current program.
06/23/96 - The Honolulu Advertiser, under the headline, "Bishop investment turns bitter," reports:
"The charitable trust has been accused of fraud and conflict of interest in the sale of the exclusive Robert Trent Jones Golf Club."
"One lawsuit has been filed and others are being prepared. Membership sales have been put on hold. Bankruptcy looms."
“...the dispute could cost the estate millions of dollars.”
"Club members allege that Bishop Estate inflated the value of the club through a series of financial transactions with companies or partnerships under its control..."
"Members bought the club last year, but say the estate failed to inform them of a $33 million development debt they would have to pay off--to Bishop Estate."
"In 1986, Bishop Estate joined golf course designer Robert Trent Jones and North Carolina developer Clay Hamner in the purchase of 1,100 acres...at Lake Manassas."
“In March 1991, the partners set up RTJ Acquisition Limited Partnership - an entity largely controlled by Bishop Estate - to develop the property. RTJ borrowed $40 million from a North Carolina bank, bought 210 acres of land from the Hamner-Bishop Estate group for $21.6 million and began building the golf club. RTJ's loan was guaranteed by Bishop Estate."
"...Peters arranges deal. Seventeen months later, club members bought the golf course and property from RTJ in a deal negotiated in part by Bishop Estate trustee, Henry Peters, who also served on the golf club's controlling board of trustees."
"Peters attorney, William Causey, denies any wrongdoing by his client and says that Peters negotiated the sale of the golf club only on behalf of the golf club, and reclused himself from negotiating on behalf of Bishop Estate."
"...In a February memo to members, a committee attorney questioned the $21.6 million price paid by RTJ for the original 210 acres; said no members had been informed that the club was encumbered with up to $40 million in debt; and said that Bishop Estate was `both the buyer and seller' in the March 1991 sale."
The article goes on to list the Bishop Estate tie-in:
DC Land Group Ltd.
- Clay Hamner, managing general partner
- Bishop Estate, equity partner
RTJ Acquisition Limited Partnership
- Bishop Estate, equity partner
- Royal Hawaiian Shopping Center Inc., limited partner
- Treyburn GP Inc., general partner
Treyburn GP Inc.
- Bruce Nakaoka, president (also manager of Bishop Estate Real Estate Investment and Acquisition Division)
- Henry Peters, director (also a Bishop Estate trustee; also a trustee of Robert Trent Jones Golf Club)
- Richard S.H. Wong, president of Royal Hawaiian Shopping Center Inc.
Robert Trent Jones Golf Club Inc.
- Henry Peters, vice president and trustee
- B.P. Russell, president and trustee
- Ernest L. Ransome III, trustee
06/28/96 - BH gives Sansone, M&M, a Broker of Record letter as directed by Aipa. This letter improperly gave M&M unrestricted access to all insurance markets including Arkwright and the other carriers Hobbs had contacted.
06/30/96 - P&C has a profit of $1.2 million its first full fiscal year in operation (7/1/95 to 6/30/96). Assets increased from $4.7 million to $6.6 million.
07/01/96 Memo from Sansone to BH that the Broker of Record letter had been “discussed” with Arkwright and Genesis, that a copy was not filed in order to prevent further confusion with the insurers assigned to Hobbs. Sansone stated: “Both markets confirmed the release of proposals will only occur with an exclusive letter of authorization.” This statement was untrue, as Hobbs/Arkwright had discussed their protocols with me on several previous occasions.
07/02/96 - Hobbs sends Aipa their proprosal by overnight express. In his transmittal letter, Tim McGrath states that he would like to review the salient points of the proposal with Aipa prior to its release to M&M. The proposal is to be effective either July 1st or July 15th.
07/08/96 - BH: Louanne Kam sends a letter to Rocco Sansone, M&M, authorizing M&M to analyze and evaluate Hobbs’ proposal, “pursuant to your discussions with Nathan Aipa.” Kam transmitted the Hobbs’ proposal with her letter. Although it was shown that I was sent a cc of the letter, I did not become aware of its existence until my meeting with Pat Chalfin on 09/19/96. As KSBE’s risk manager, and P&C’s president, the fact that the Hobbs’ proposal was given directly to M&M without my knowledge or consent was of serious concern to me. This authorization to have the incumbent broker review the proposal of a competing broker was highly unusual, unethical, and unlikely to produce any objective evaluation which would be in KSBE’s best interests. M&M clearly had a conflict of interest as they stood to lose around $170,000 in annual commission income from the property insurance.
07/10/96 - Sansone gives Kam M&M’s evaluation of the Hobb’s proposal. In their evaluation, M&M recommends that KSBE “select the broker with will best serve the interests of KSBE” and included a comparison of the facilities and services of M&M vs. Hobbs. Kam directs me to revise my staff report to include M&M’s evaluation. After I made the initial revision, Kam returned it to me for further revisions. This process continued through a 2nd, 3rd, 4th, 5th, and 6th revision before Kam and Aipa would send the report to Trustees. In accordance with Kam’s directives, by the final version, all references to the intent of having the program written by P&C had been deleted; almost all references to this being Hobbs’ proposal had been eliminated; and letters recommending the Hobbs Group provided by the risk managers of Campbell Estate and C. Brewer & Co. had been omitted.
07/16/96 - Sansone writes directly to McGrath at Hobbs, requesting detailed additional information, much of which was proprietary with Hobbs and which they declined to provide. Sansone states that KSBE is requesting additional time to review and make recommendations to Trustees, and KSBE will require an extension to the end of August. This request did not come through me, but apparently was the result of Aipa and Kam dealing directly with Sansone. As this was to be a contract between P&C and Hobbs, IRS “arms-length” guidelines were being ignored.
07/30/96 - Ltr. from Sansone to Aipa re: Arkwright/Genesis Property Proposal Analysis. In this analysis, M&M recommends the “Arkwright/Genesis” proposal. No mention is made in the analysis that this is an analysis of the Hobb’s Group proposal.
07/30/96 - Taxpayer Bill of Rights II signed re Intermediate Sanctions for Tax-Exempt Organizations under which Congress enacted rules which allow the IRS to assess penalty excise taxes on individuals who are involved in transactions with tax-exempt organizations that constitute private inurement. The law applies retroactively to "excess benefit" transactions occurring after 09/13/95.
Penalty excise taxes can also be imposed on "organization managers" (an officer, director, or trustee) who knowingly permits the organization to engage in an excess benefit transaction, even if that manager did not personally benefit. Tax-exempt organizations cannot circumvent the rules by causing a controlled entity to engage in the excess benefit transaction. There is no notice of this new act given by Aipa to me (or to any other employees as far as I know).
08/08/96 - Meeting with John McGrath, Hobbs Group, in KSBE’s legal dept. meeting room to discuss the Hobbs’ property proposal. Attended by Kam, Sansone and BH. Aipa was supposed to attend, but did not show. Sansone told McGrath that M&M had contacted Arkwright for an agency appointment in Hawaii so they could countersign Arkwright’s policy when issued. (McGrath later checked with Arkwright and advised that Arkwright had not received any application from M&M--another misrepresentation on the part of M&M)
08/14/96 - BH: Aipa evaluates my performance as "Below Standard". Major criticisms arise from my handling of the transfer of the Property Ins program from M&M to the Hobbs Group. Much of the evaluation was based on the performance of my duties as the president of P&C Insurance Co., Inc. If KSBE and P&C should be operating at "arms-length", Aipa should not be evaluating my performance as P&C's president. It is obvious that this appraisal was designed to intimidate and coerce me into obeying directives to give Marsh & McLennan insurance business without bids or justifying fees. As a result of this “Below Standard” evaluation, I did not receive the one-time retroactive pay “adjustment” or “bonus” that was given to all employees who were evaluated at “Standard” or above, and did not receive an adjustment in Grade Level or a pay increase.
08/15/96 - Aipa and Kam finally approve my staff report to Trustees on the final day that Hobb’s proposal is to expire. All recommendations in my report are approved by Trustees. At 8:42 a.m., even before the Trustees’ meeting convened, Sansone sent me a fax stating that I should complete an enclosed broker of record letter appointing M&M as KSBE’s exclusive Insurance Representative. Sansone stated: “We will bind coverage with Genesis and will request Hobbs bind coverage with Arkwright.” Sometime that afternoon, I asked Aipa if my staff report had been approved, and he advised me that it had been. Due to the time difference, Arkwright’s office had already closed, but McGrath was standing by awaiting our decision. I faxed word that Trustees had authorized binding, and McGrath immediately faxed back his prepared Confirmation of Coverages. Further details of this complicated attempt to force me to keep M&M on as the broker for these coverages can be found in my letter of 11/08/96 to Aipa in response to his reprimand letter of 10/09/96.
08/28/96 - To budget P&C's expenses for the 1996 fiscal year, BH requested a written proposal from M&M on a "time and expense" basis, which they refused to provide. Aipa and Kam strongly pressed BH to have P&C continue to pay M&M the $200,000 annual flat fee.
09/04/96 - The Marsh & McLennan issues resulted in the "Change in Assignments and Supervision" memo from Aipa. In this memo, he relieves BH of any responsibility for the property insurance program placement and designates L. Kam as KSBE's representative to provide the necessary direction and support to both Hobbs Group (Hobbs) and M&M, and asks that all my files and records regarding the program be turned over to Kam. This same memo states that eff 09/04/96, he is temporarily charging Kam with direct supervision and oversight of me and the function of my dept.
09/05/96 - Due date for M&M’s fee proposal to P&C on a time and expense basis. No proposal rcvd.
09/12/96 - Change of Assignments and Supervision Memo from Nathan Aipa. Aipa relieved BH of any responsibility for the property insurance placement and designated L. Kam to replace him. BH is ordered to halt any further activity on the matter, and direct all contact, correspondence, and inquires thru Kam, and turn over all his files and records to her. Harmon is required to provide Kam all correspondence and memoranda he receives or sends. Aipa temporarily charged Kam with direct supervision and oversight of Harmon and the functions of his dept. Aipa requests that Patrick Chalfin of Employee Relations, Personnel Div., review and evaluate the action in connection with obtaining the property insurance proposal and the implementation of his directions concerning this program as well as that of the Board of Trustees. Aipa states that he will be charging Chalfin with the duty to make specific recommendations to him based upon his findings... cc: Kam; Chalfin
(Note: BH was never provided a copy of Chalfin’s final recommendations.)
09/16/96 - Louanne Kam calls a meeting at Mullen’s office re the Larry Ching Flood Damage Claim. Ching had flood damage to his home on BE leasehold property on Kauai after heavy rains. Mullen's adjuster, Neal Seamon, investigated the case and concluded that this was “an act of God" and not the liability of KSBE and P&C. At the request of Trustee Richard Wong, Kam involved herself in handling the claim. BH was disturbed by the blatant manner Kam attempted to breach the arms-length relationships between KSBE and P&C by indicating that P&C should pay the claim "because Trustee Wong wanted to see it settled". At this meeting, with Neal Seamon and Bob Kuroda, of John Mullen & Co. and Kapu Smith, KSBE, it was everyone's opinion, except Kam's, that Mullen had taken the correct course of action in denying the claim, and if Ching wanted to bring a lawsuit, KSBE would have a defensible claim.
Kam suggested that P&C hire a hydrologist to generate a report to provide an "expert" opinion. The original estimate of Ching's damages were only about $7,000; the expert's report might run as high as $10,000. Seamon recommended that we not hire an expert...
Kam disagreed with this recommendation and continued to press the issue by contacting Pat Onogi of M&M convincing (or directing?) her to write a letter recommending P&C hire an expert.
09/19/96 - Pat Chalfin meets with BH in Harmon’s office. Harmon gives Chalfin details of the situation he is in regarding the pressure being placed upon him to follow directives of Peters, Aipa and Kam that he feels are improper and possibly illegal.
09/23/96 - Forbes article entitled, "No More Sweetheart Deals":
"Under the new rules, trouble starts if the IRS determines that there has been a misdeed with an "excess benefit." It could be a fat salary, a sweetheart contract or an embezzlement. If someone got an excess benefit, the IRS can both fine the recipient 25% of the benefit and demand that the benefit be given back to the charity. If the guilty party doesn't pay the money back, he or she owes twice the excess benefit to Uncle Sam."
"Say a board member convinces the president of a college to let the school's insurance contracts to her firm, even though going with a rival would save the school $150,000. In turn, the board member is influential in voting the president a lavish salary, perhaps $200,000 higher than the norm at comparable universities. The IRS could force the repayment of both the $150,000 and the $200,000..."
"What about directors who sit still for this kind of mischief? They can be fined a collective $10,000, even if they didn't profit..."
BH: It appears that the IRS could interpret several transactions between Marsh & McLennan and KSBE/P&C as resulting in "excess benefit". For examples:
1. I obtained a property insurance proposal from Hobbs Group that was approximately $600,000 less than KSBE was paying for coverages placed through the incumbent broker, Marsh & McLennan. MMI's account representative, Rocco Sansone, represented that M&M could have gotten the same coverages with the same company at the same price... Aipa and Kam conspired with Sansone to keep MMI on as KSBE's exclusive broker... They arranged to have MMI review and give their opinion of Hobbs' proposal before allowing my staff report to go to Trustees. I was pressured by Aipa/Kam/Sansone to give MMI an exclusive broker of record letter to enable them to take over the Hobbs proposal. I considered it highly unethical and not in the best interests of the estate. When MMI was unable to get a resident agent appointment from Arkwright Ins. Co. as Sansone had represented, MMI's policies were canceled and the business went to Hobbs. The 45-day delay in rewriting the policies, however, cost the estate and its subsidiaries nearly $75,000. MMI benefitted not only from the commissions they received from the $600,000 "overcharge", but they also received commissions for the extra 45 days their policies were in force.
2. On June 7, 1994, I received a fee proposal from Peter Lowe, VP of M&M Ins Mgt Services, Inc., (IMS) for services for the formation and ongoing management of a captive insurance company. Fees were quoted on a time and expense basis. The total annual estimated fee for ongoing captive management services was $66,500. After the captive was formed, however, the actual charges made by IMS for ongoing management services was $60,107 for the first 9-month period ending July 1, 1995. MMI, however, had billed an additional $200,000 flat fee for brokerage services" which had not been indicated in the proposal or in the captive management contract with IMS.
Outside services required by P&C were almost always contracted for on a time and expense basis. The exception was Marsh & McLennan, Inc. They billed their services to P&C at a flat rate of $200,000 annually, invoiced in installments of $100,000 each. When I received the first of these invoices, I noted there was no explanation for the invoice and I questioned IMS about the charges. The answer was that these were for "broker services" that IMS was not staffed to perform... I was advised that MMI would provide further details about the services in the future. I never received a satisfactory explanation and a written agreement was never entered into for these services.
The year prior to P&C being formed (1993-94), MMI received $274,928 in brokerage commissions from KSBE. The first year of the captive (1994-95), MMI received $290,443 in brokerage commissions from KSBE, plus the $200,000 flat charge from P&C. In addition, P&C paid MMI-affiliates IMS and Wm Mercer, $60,107 and $2,663 respectively. Total income to MMI and affiliates had gone from $274,928 to $553,213 in one year. (And one of the purported advantages of forming a captive was reduced costs by elimination of the "middle-man".) The following year (1995-96) the total fees and commissions to MMI and its affiliates increased to $632,714.
09/24/96 - Eric Martinson's memorandum to Ramona Hinck, KSBE, regarding premium allocations to the SoCal, AFCO, Unison and SINO subsidiaries. This is an example of a “private benefit”. As a result of this directive, premium charges that had been previously allocated to the subsidiaries were transferred back to KSBE. Martinson is also Secretary/Treasurer, Sino Finance Group LLC, and Vice President, Unison Pacific Investment (US) Limited. These billings and credit memos were done by mail (mail fraud).
09/25/96 - M&M’s annual Stewardship Report to KSBE.
10/01/96 - BH memo on P&C ltrhd to P. Lowe, M&M IMS re Revisions in Captive Operations Manual. BH states that revisions needed due to changes in procedures and personnel. TOP PRIORITY. One major purpose for change is to make clear distinction between the services contracted by P&C from 3rd party captive service providers vs. services provided by these same contractors to KSBE or its subs. “. . . As you know, there are important ‘arms-length’ issues with regard to the relationships between KSBE, Pauahi Holdings and P&C. Therefore, it is extremely important that we do not inadvertently create any appearance of intermingling of funds between the non-profit and for-profit entities. Also, we need to make sure that P&C has written contracts with all its service providers. This is not only prudent business practice, the failure to do so could be questioned by our Board of Directors as well as our Auditors, and possibly the Insurance Div. . . . On p. 7, I omitted Sec E - Financial Risk Management Consultants (M&M) as P&C does not have a contract for these services. At such time that we do enter into a contract, we can reinsert this sec. . . .On p. 9, Sec D - Insurance Broker is deleted for the same reason. . . P&C has never appointed an insurance broker. . . If I am mistaken, please provide me with a copy of P&C’s Agency Agreement with M&M. Again, I have arms-length concerns about confusing M&M’s role as KSBE’s Broker as opposed to being P&C’s Broker. . . .The changes in claims reporting procedures on p. 18 result from our streamlining the reporting procedures so that . . . claims will now be reported directly to John Mullen & Co. . . This speeds the reporting process, eliminates redundancy and reduces the amount of time and paperwork for M&M’s Claims Dept. . . .and also reduces P&C’s service costs. On p. 23, I have deleted the Resident Agent (M&M) as, again, I do not believe P&C has appointed a resident agent.” cc’s: Kam, Sansone, P. Onogi, R. Kuroda, Mullen
10/08/96 - BH: A meeting was called by Kam to discuss M&M's fees to P&C. Attending the meeting were Kam, Rocco Sansone, Peter Lowe, Garrett Liu and me. One of my frequent admonitions to MMI and IMS was that P&C should always act at arms-length from KSBE and its subsidiaries. As Liu's meeting notes indicate, I expressed my desire to be able to justify MMI's fees for the services performed, and to keep P&C's costs separate from KSBE's costs. Rocco expressed his opinion that some of the services provided to P&C were difficult to unbundle from the services provided to KSBE, and suggested that a fee proposal be made for the entire KSBE account and not just P&C. Lowe stated that almost all of the captives he dealt with had a flat fee arrangement with their risk managers and brokers. Kam remarked that I had no "bench marks" for these service fees, and suggested I check on what other captives were doing. After this meeting, I obtained "bench marks" by talking with other local captive managers to see what kind of fee arrangements they had with their clients. In just two five-minute phone calls, I obtained "time and expense" estimates and sample agreements from two other captive managers--something which MMI had not been willing to provide in two years. These competitive cost estimates ran from $25,000 to $50,000 a year and included all the services being provided by MMI and IMS at a cost of approximately $287,000.
10/09/96 - Aipa's Pers 9 reprimand memorandum to BH: "Deficiencies in Handling of Placement and Binders for the Property Insurance Program", again relating to the Hobb's program.
10/11/96 - BH was called to a meeting w/ NA and Peters in Peters’ office. Peters told BH that he was to report to Aipa in his capacity as KSBE’s Risk/Insurance & Safety Manager and regarding all matters relating to the operations of P&C. Peters also told BH that he would hold Aipa responsible for his actions, and that BH could be removed as president of P&C. BH sent a follow-up memo to Henry Peters on this same date to document in writing this oral directive.
10/18/96 BH: At their request, I met with P&C’s auditors, Cary Okawa and Dennis Tsuhako, of Coopers & Lybrand, regarding P&C's annual financial report. We discussed my concerns with respect to "arms-length" issues between KSBE and P&C, as they related to what I believed were efforts to improperly direct and control the operations of P&C by Aipa, Kam and by Henry Peters. As examples, we discussed the blocking of my efforts to have P&C write the blanket property insurance program reinsured through the Hobbs Group. I commented on what I considered to be excessive fees being charged by M&M, and their failure to provide a satisfactory explanation for the services included in their annual flat fee of $200,000. I also expressed my concern regarding attempts being made by persons at KSBE to direct and control the settlement of P&C's claims.
10/25/96 M&M invoiced P&C $50,000 for “Risk Mgt. Consulting Services — Initial Billing”.
10/29/96 BH: On P&C stationery, and signing as Pres. of P&C, I wrote to Sansone regarding our meeting on 10/08/96. Main comments were: “As background, in preparing P&C’s budget for the current fiscal year and in order to develop the premiums for our renewal policies, I had previously requested a proposal for services from M&M. This request outlined the services required by P&C from MMI, and stated that the proposal should be on a time and expense basis, rather than a flat fee as in previous years. The proposal had a target due date of 09/05/96. I was important that this information be received in a timely manner in order to establish P&C’s current fiscal year budget, as well the renewal premiums . . . When this proposal still had not been received by mid-Sept., I sent a follow-up request to Peter Lowe on Sept. 17th. . . Your response on the same date proposed that we continue discussions after renewal negotiations were completed, and you suggested that P&C use the previous flat fee of $200,000 for budget purposes. This was unworkable for me due to the time constraints for determining P&C’s financial budget as well as the renewal premiums (renewal date was 10/01/96.) . . . In the absence of a proposal from MMI and after consulting with Lowe, I used my ‘best estimate’ of $50,000 for the services P&C required. At our meeting, you presented reasons why you felt the previous fee was justified, and why it should remain on a flat basis. Kam indicated her concurrence, and asked that I justify my position and provide benchmarks for services and costs for similar captive insurance company programs. . . . 1st, a flat fee of $200,000 is unacceptable for several reasons. For one, the renewal premiums for P&C were projected to be over $600,000 less than last year, so the G&A costs also needed to be reduced. For another, I have been unable to determine . . . exactly what services are being included in this $200,000 flat fee. . . . in your Stewardship Report (to KSBE) dated 10/01/96, you indicate that safety and loss control services performed by M&M Protections Consultants (M&MPC) are included in the $200,000 flat fee. In your pie chart, “Hazards Management” . . . accounts for roughly 20% of the total fee. This is surprising since P&C has a separate agreement with M&MPC for safety and loss control services. M&MPC’s contract . . . is on a time and expense basis so we are able to specifically identify these services and their related costs. Last year P&C paid $24,881 to M&MPC. . . . In your pie chart, “Brokerage/Misc. Consulting Services” comprise roughly 25% of the total fee. The task of the Brokerage Dept. is, as you indicate in the accompanying table . . . ‘Reinsurance Renewal Marketing’. As you know, MMI is compensated by commissions from the reinsurance company for obtaining the reinsurance policy. If your chart . . . accurately depicts the fee breakdown, it would mean that you are being compensated twice for the same service. . . . Clearly, there is a need to better identify MMI’s services and their associated costs. . . . If the cost is a flat fee, there is no opportunity to reduce costs through improving efficiency, eliminating duplications, etc. Changing to a fee schedule based on time and expense would provide P&C important info to identify where costs are being incurred. . . In order to comply with Ms. Kam’s request to provide some ‘benchmarks’ for captive services, I contacted two local service providers, Alexander Insurance Managers, and 50th State Risk Management Services, Inc. . . . Their responses are enclosed. Please note that these are their standard fee schedules and can be modified through negotiation, especially in a bid situation. . . . the fee schedules were provided immediately after a five minute phone inquiry. . . . Please note that both sample proposals include all services required for management of a captive insurance company . . . with exception of loss control services. . . . The sample proposals do include all services . . . currently provided to P&C by both MMI and M&M IMS. . . . AIM’s sample proposal states, ‘Historically, the majority of our management contracts are written on the basis of time and expense charged at standard rates plus out-of-pocket expenses.’ . . . Under AIM’s Option 1, the adjustable cost range was limited to $25,000 minimum and $36,000 maximum. . . These costs can be compared with the time and expense fees last year of $80,527 charged by M&M IMS, plus the flat fee of $200,000 charged by MMI . . . Marc Lapointe, Managing Dir. for AIM . . . also stated ‘. . . in today’s competitive market you can obtain excellent service at affordable rates.’ . . . the rates quoted by 50th are substantially lower than AIMS’. 50th’s hourly rates range from $12 per hour for clerical staff to $30 per hr for sr accountants, to $40 per hr for managers. . . I trust this . . . will provide adequate benchmarks to prepare your proposal. . . . Your proposal should be based on the services indicated in my previous request . . . On behalf of P&C Ins Co, I thank you for your kind consideration and look forward to receiving your time and expense fee proposal for 1996-97.”
cc’s: Nathan Aipa, Louanne Kam, Peter Lowe
10/30/96 - BH: Kam rescinded my P&C letter of 10/29/96 to M&M without any prior explanation or notification to me. In her letter addressed to Sansone, written on KSBE stationery, and referenced: “Fees for Services to P&C insurance Co., Inc.”, Kam states: “You are to disregard the letter dated Oct. 29, 1996 from Mr. B. Harmon on the above referenced subject. This letter should not have been sent. . . We regret any inconvenience to you and your staff. . . “
10/30/96 - Kam gives Harmon another PERS 9 reprimand. In her memo, Kam stated: "I was shocked to read your letter of October 29, 1996 which was sent to Mr. Sansone and Mr. Lowe. This letter was not previously reviewed or approved by either Nathan or myself. This is a flagrant failure to follow clear and express directives from your supervisors and amounts to insubordination. Any further incident in which you fail to follow directives will be grounds for further disciplinary action including immediate termination."
BH: By this time I had strong suspicions that private arrangements had been made between Nathan Aipa, Louanne Kam, Rocco Sansone and Peter Lowe to which I had not been a privileged party. Looking at the income MMI and its affiliates were receiving from KSBE and P&C, I could definitely see the opportunity for "excess benefit". My understanding of the Taxpayer Bill of Rights II is that as an officer of P&C I could be fined $10,000 by the IRS if it were determined that I knowingly permitted the organization to engage in an excess benefit transaction. But the main reason for my "flagrant failure to follow clear and express directives from my supervisors" was that I felt it was dishonest. In my mind, if I "looked the other way" and allowed this activity to continue, I would be breaching my fiduciary duties to the organization. I believed that my duties to the estate were greater than my duties to my supervisors. from the ben I knew that my conscience would be troubled with the thought that I had allowed certain individuals to steal from the beneficiaries of the estate.
11/04/96 - BH and Kam met with Aipa re Onogi’s letter about the Larry Ching flood damage claim. Harmon explained his position on the claim and the reasons that an expert or outside attorney should not be hired. Under pressure from Aipa and Kam, however, BH agreed to give Mullen the o’k to go ahead with Onogi’s recommendation. Immediately after the meeting, BH called Mullen and gave the o’k.
11/07/96 - Sansone’s fax memo to Kam re: “Consent to Settle (P&C Insurance)”: “The following proposed endorsement is submitted per our discussions and negotiations with Am-Re (P&C’s reinsurer). This endorsement provides KSBE with the option of controlling the settlement process . . . Based on our discussions, we recommend KSBE accept the proposed wording. Please advise . . . and with your approval to add the endorsement. . .” cc: Bob Harmon, KSBE; Chris Lee, M&M (Note: Harmon was not previously included in these discussions. No copy was shown to have been sent to Peter Lowe, M&M IMS, P&C’s captive mgr.)
11/08/96 - Harmon’s 14-page reply, with 26 exhibits, to Aipa’s reprimand memo of 10/09/96, stated: “. . . By the final version (of my staff report), all references to the intent of having this program written by P&C had been omitted at your direction. Also omitted were letters of recommendation for Hobbs written by the risk managers of C. Brewer and Campbell Estate. My attempts to keep the rewrites of the staff report accurate, truthful and clear were generally overruled by Ms. Kam who insisted that her changes be inserted in the report. If these changes were not made, according to Ms. Kam, she would not sign her concurrence on the report. This would mean that the report would not be submitted to Trustees; which would mean that the Hobbs offer would expire; which would mean that M&M’s program would remain in place to the detriment of KSBE and P&C, and all others who pay the costs for this insurance. . . .Marsh & McLennan . . . had self-serving interests in discrediting Hobbs’ proposal. . . I sincerely believe that I have acted to manage my responsibilities and duties both as Risk Mgr for KSBE as well as President of P&C, in a competent, honest and professional manner. . . I believe this is evidenced in the fact that I was able to eventually obtain the Hobbs/Arkwright program despite the fact that MMI had made several deliberate misrepresentations which delayed and confused the process. . . As documented in this letter, this program has benefitted KSBE and its subsidiaries by not only improving coverages and limits, but also by reducing the annual cost by over $600,000. As further evidence, I point to the fact that during the last fiscal year P&C Insurance Co. . . experienced a before-tax profit of $1.2 million. On the other hand, I consider MMI's actions to be extremely unethical, unprofessional and costly to KSBE. Their questionable actions contributed to the delays in final presentation of the staff report to Trustees, which cost KSBE over $75,000 in premiums. Had we continued with MMI’s property program, instead of transferring to the Hobbs’ program, KSBE would have lost another $600,000 annually. . . .The fact that we were unable to write the property insurance in P&C by July 1 or October 1, 1996, cost P&C over $1 million in gross written premium. . . .In view of these actions on the part of MMI, my recommendation would be that KSBE place their insurance program and the captive insurance management contract out to bid for the July 1, 1997 renewals (if not before). . . . I would also recommend that P&C put the Captive Insurance management contract out to bid . . . I further recommend that P&C write the property program on the same date.”
BH believes that these recommendations contributed significantly to his termination 12 days later. He believes these reprimand memos and Aipa's evaluation of his performance were meant to intimidate, threaten, and extort him into “going along” with the unwarranted payments to M&M, and were contrived "excuses" for his termination. He believes these actions were taken by Aipa and Kam to conceal, and to permit to continue, questionable conduct and conflicts of interest by individuals within and outside of KSBE, especially Henry Peters and Rocco Sansone, M&M.
11/08/96 - Harmon’s memo to Chris Lee, M&M re: 1) American Reinsurance Co. - Cert. No. 9257325, Inv. No. 199500 and 2) Risk Management Consulting Service Fee - Inv. No. 199501 - “ . . . this is in response to your letter of Oct. 28, 1996. (1) By copy of this memo to Garrett Liu, I am authorizing payment of your invoice No. 199501 in the amount of $235,254 for the subject reinsurance certificate. (2) . . . I am unable to authorize payment of your invoice No. 199501 in the amount of $50,000 for the Risk Mgt. Consulting Fees. This is because P&C has not yet entered into a contract with MMI for these services, and fees have not yet been determined. . . . As a reminder, all correspondence, invoices, etc. relating to P&C business should be addressed to P&C. If correspondence needs to be addressed to my attention, it should indicate my title as President, rather than being addressed to me as Risk/Insurance & Safety Mgr of KSBE. In this instance, the original invoices should have been sent to Peter Lowe or Garrett Liu, with a copy to me. I am forwarding these original to Mr. Liu with his copy of this memo. . .” cc: L. Kam; G. Liu, R. Sansone
11/12/96 - BH answers Kam’s reprimand letter of 10/31/96. In view of the lower quotes from other captive managers, and the refusal of M&M to submit any bids on a time and expense basis, and to enter into a written contract, BH recommended that KSBE place their insurance program and the captive insurance management contract out to competitive bids for the 7/1/97 renewals and have P&C write the property program on the same date.
11/12/96 - Kam writes another PERS 9 reprimand to BH based on his meeting with Aipa and Kam regarding the Ching flood claim. Her memo provides an example of how Aipa/Kam attempted to control the claims settlement process to the benefit of 3rd parties -- at the cost of the estate and P&C.
11/20/96 - BH responds to Kam’s reprimand letter of 11/12/96, pointing out that: 1) he had never heard or understood that Aipa had directed him to allow Kam to pick the attorney in the Ching claim, and to hire the hydrologist. BH pointed out the arms-length regulations between KSBE and P&C, and P&C’s procedures, allowed only Mullen to hire attorneys and outside experts.
11/20/96 Letter from BH to Cary Okawa (Coopers & Lybrand):
“This is to provide further information regarding issues discussed in my meeting with you and Mr. Dennis Tsuhako in my office on October 18, 1996, regarding P&C’s annual financial report. As you will recall, we discussed my concerns with respect to "arms-length" issues between Kamehameha Schools Bishop Estate (KSBE) and P&C, as they related to what I believed were efforts to direct and control the operations of P&C by my superior, Nathan Aipa, Esq., by Louanne Kam, Esq. and by Henry H. Peters, who is a Trustee of Bishop Estate, as well as Chairman of the Board of Directors for P&C. As examples, we discussed the blocking of my efforts to have P&C write the blanket property insurance program with reinsurance provided through the Hobbs Group, rather than by Marsh & McLennan, Inc. Also, I commented on what I considered to be excessive fees being charged by Marsh & McLennan, Inc., and their failure to provide a satisfactory explanation for the services included in their flat fee of $200,000. Finally, I related to you and Mr. Tsuhako my concerns regarding attempts being made by individuals at KSBE to direct and control the settlement of P&C's claims. In addition to the example we discussed, I have recently received a copy of the attached memo from Rocco Sansone dated 11/7/96, regarding a proposed "Consent to Settle (P&C Insurance)" endorsement. This memo addressed to Louanne Kam, KSBE, states: "The following proposed endorsement is submitted per our discussions and negotiations with Am-Re. This endorsement provides KSBE with the option of controlling the settlement process subject to the indicated agreements. Based on our discussions, we recommend KSBE accept the proposed wording. Please advise if there are any questions and with your approval to add the endorsement." This "Consent to Settle Clause" would, in effect, take the control of claims settlements away from P&C's independent adjuster and turn it over to KSBE. P&C and KSBE would also be exposed to uninsured and unlimited payments of claims due to the condition: "If, however, the Insured shall refuse to consent to any settlement recommended by the Company and acceptable to the claimant and shall elect to contest or continue any proceedings in connection with such claim, the Company's liability for the claim shall not exceed the amount for which the claim could have been settled plus expenses up to the date of such refusal." This recommendation by MMI is . . . highly unusual and one which could result in significant financial loss to P&C and KSBE. The enclosed documents (some written before our meeting and others afterwards) will provide further examples of what I consider to be improper and deceptive business practices by Marsh & McLennan, Inc. and M&M Insurance Management Services, Inc. It is due to the fact that these issues have not been resolved, that I am declining to sign my concurrence to P&C's Annual Financial Report for the fiscal year 1995-96.” . cc: Insurance Commissioner, State of Hawaii
BH received NO RESPONSE from C&L or the Hawaii Insurance Commissioner to this letter.
11/20/96 BH received KSBE termination notice during meeting with Nathan Aipa. [Ltr]: “This action is being taken in recognition of a fundamental difference between (1) our teamwork and management approach within the Legal Group, and (2) your view and approach to the management of risk insurance and safety department.” At same time, NA handed BH a letter from Henry Peters terminating him as President of P&C. The ltr gave no reason for the dismissal.
12/11/96 The Star-Bulletin reports "Investor’s Equity deal OK'd":
"A Circuit Court judge has approved a settlement between state Insurance Commissioner Wayne Metcalf and Gary Vose, the sole shareholder of Investors Equity's parent company at the time the insurer was placed into liquidation in June 1994..."
"The state seized the insurance company after its management ran up a $90 million deficit largely because Vose lost policyholders' money in highly speculative leveraged investments known as derivatives, the state charges..."
"Metcalf said the settlement is part of a series of actions against Bank of America, several brokerage companies including...Goldman Sachs, accountants and attorneys associated with the failure of Investors Equity Life..."
"A state lawsuit accused Vose of racketeering, fraud and other misconduct... The suit alleges that the holding company that controlled Investors Equity conducted sham real estate deals and used the insurance firm's assets to pay large fees to Vose and companies connected with him..."
BH: Bishop Estate and William Simon had other tie-ins with Investors Equity Life through their HonFed investment. Marsh & McLennan had a connection with HonFed as their insurance broker, as well as Mert Chillingworth who sat on HonFed's board of directors. The accounting firm for Goldman Sachs is PricewaterhouseCoopers.
12/29/96 Ltr fm BH to Trustees:
“. . . These Pers 9 (reprimand) memorandums and Mr. Aipa's evaluation of my performance are clearly contrived "excuses" for my termination. It is evident to me that these actions were taken by Mr. Aipa and Ms. Kam in an effort to conceal, and to permit to continue, highly questionable conduct by a number of individuals within and outside of the organization. The following are some of the issues that underlie the true reasons for my termination:
1) Arms-length Relationships/Conflicts of Interest
2) Intentional disregard of State and Federal regulations, notably those under the following acts:
-- Americans with Disabilities Act (ADA)
-- Environmental Protection Act (EPA)
-- Occupational Safety & Health Act (OSHA)
3) Fraud; deceptive practices in financial and regulatory reporting; discrimination; failure to act in good faith with KSBE's insurance and bonding companies; breach of fiduciary responsibilities; non-bid contracts; political favors; improper actions for personal gain or profit; and other wrongful acts
. . . Despite being advised by Mr. Aipa that "arms-length was no longer an issue," regarding my dual roles as Risk/Insurance & Safety Manager for KSBE and as President of P&C Insurance Company, Inc., I still had serious reservations about following many of his directives. Some of my concerns were:
o Tax issues. Operating expenses, insurance premiums and claims costs were . . . being improperly allocated between the tax-exempt estate and its for-profit subsidiaries. I had concern that sanctions might be imposed by the IRS against the estate, and against me personally, if I followed Mr. Aipa's and Mr. Peters' directives.
o Conflicts of interest; private inurement; and private benefit. The board of directors of P&C is made up of Henry Peters, a current trustee; William Richardson, a former trustee and current consultant; and Gil Tam, a former principal executive and currently employed by Bank of Hawaii which handles P&C's checking and savings accounts and its investments. All three directors were investors in the McKenzie Methane deal.
The officers included myself; Peter Lowe, an officer of M&M Insurance Marketing Services, Inc., which is a subsidiary of Marsh & McLennan, Inc. (MMI); William Richardson, a former trustee and current consultant for KSBE; and Nathan Aipa, General Counsel for KSBE. KSBE has also been involved with another MMI subsidiary, Guy Carpenter, through its sizable investments in two Bermuda insurance companies, Centre Reinsurance and Mid-Ocean Reinsurance.”
BH note: At the time of my discharge I had not been informed about Underwriters Equity (Merritt) Insurance Company another Bermuda reinsurance company, in which M&M and KSBE had co-invested (and lost) millions of dollars; for which Peters was on the Board of Directors; which was managed by an M&M subsidiary; and which was sold after about a year and a half to Tera Nova, another Bermuda insurance company in which both M&M and KSBE have substantial financial interests.
Investment committee members included Henry Peters and Daniel Jones, a current KSBE employee. Claims committee members included Louanne Kam, Carol Koza, William Richardson, Rocco Sansone (MMI) and Pat Onogi (MMI). The internal audit committee included Henry Peters and Dennis Fern (previously KSBE's internal auditor; now president of KUKUI, Inc.).
Piercing the corporate veil. Although P&C is a subsidiary of Pauahi Holdings Corporation, direct control of P&C's operations by KSBE trustees and employees could make the estate liable for P&C's acts. An example provided by Price Waterhouse was HEI being held responsible for Hawaiian Insurance Company's liabilities. Recent claims against KSBE in which KSBE and/or its trustees were named as a defendants along with the subsidiary bear this out. These lawsuits include those brought by McKenzie Methane; Kona Enterprises; Keauhou Master Homeowners' Association; Field; and Basham.
Defending these claims has already cost the estate over a million dollars in legal fees alone. . .”
“The following are some of the issues that underlie the true reasons for my termination:
1. Arms-length relationships / conflict of interest:
a. Tax issues: Operating expenses, insurance premiums and claims costs were, in my opinion, being improperly allocated between the tax-exempt estate and its for profit subsidiaries. I had a concern that sanctions might be imposed by the IRS against the estate and against me personally if I followed Mr. Aipa’s and Mr. Peters’ directives.
b. Conflicts of interest; private inurement; private benefit: ...
c. Piercing the corporate veil: Although P&C is a subsidiary of Pauahi Holdings Corporation, direct control of P&C’s operations by KSBE trustees and employees could make the estate liable for P&C’s acts. ... [for example, HEI being held responsible for HIG’s liabilities].
2. Intentional disregard of State and Federal regulations, notably those under the following acts:
a. Americans with Disabilities Act (ADA):
b. Environmental Protection Act (EPA):
c. Occupational Safety & Health Act (OSHA).
3. Failure to act in good faith with KSBE’s insurance and bonding companies; Fraud; deceptive practices; discrimination; conflicts of interest; breach of fiduciary duties; non-bid contracts; political favors; improper actions for personal gain or profit; and other wrongful acts.”
BH sent copies of the letter, with all enclosures, to Michael Goolsby, Chubb Group; Robert Kuroda, John Mullen & Co. (“Mullen”), TPA for P&C; and Pat Onogi, Claims Manager for Marsh &McLennan.
This letter, and all enclosures, were returned under Order to the court under seal. For further details of 12/29/96 letter to trustees, see synopsis.
This is a leaf from
Claims By Harmon
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