Dirty Money, Dirty Politics and Bishop Estate

Stealing the Legacy of a Hawaiian Princess

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PART II - The Stealing Continues....

Where we left off in Part I ...

In 1997, responding to a surging tsunami of criticism from the faculty, students and alumni of the Kamehameha Schools, and from concerned citizens of all ethnic backgrounds in Hawaii, Governor Ben Cayetano took an unprecedented action and directed the state's attorney general, Margery Bronster, to investigate the practices of the Estate's five highly paid trustees.

But the attorney general was not the only one investigating the estate. The IRS had already been auditing the records of the estate for several months -- empowered by the "interim sanctions" regulations which had been passed by Congress in early 1996. At the same time, the court-appointed "master" who is charged by the probate court with oversight of the operations of the estate, was digging deeper into the activities of the trustees than a long line of previous masters.

Suddenly the trustee's were, for the first time in the schools' 115-year history, under siege from all sides.

The full and sordid story of the looting of the estate is too long to relate here. To give you an idea of the magnitude of the financial losses, however, the Master's Report on the 109^th Annual Account of the Trustees revealed that the Estate's investment portfolio suffered substantial losses in 1994, the year under review. The records relating to the various investments showed that combined losses and loss reserves of $264,090,257 were recognized in fiscal year 1994 alone.

The short story is that, after long and hard-fought court battles, the five former trustees were forced to resign, and five interim trustees were selected to take their places until a new trustee selection process was created and implemented. The removal of the five former trustees was one of the non-negotiable conditions of the IRS to prevent the loss of the estate's tax-exempt status.

The removal of the incumbent trustees was good news, hailed by many as the beginning of the healing process....

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So, is this the happy ending to the story of the last Hawaiian princess -- the ending where all her children live happily ever after? Unfortunately, that may not be the case.

There is still a secretive, hidden, dark side to this saga.

Many may not realize that the removal of the five trustees was accomplished only because the higher-ups -- the power elite and the super-rich -- decided that the secret activities at the estate had been exposed to such a degree that they could no longer sweep them under the political rug. The trustees had to be sacrificed to save the estate. Not to save the estate for the children, mind you, but to preserve it for the same politicians and power brokers who have controlled and looted its vast fortunes over the past decades.

Many of the key players in the conspiracy are still in place.

Only time will tell if these powerful birds of prey can succeed in sinking their talons even deeper into the corpus of the estate. Let us all pray that persons of honor and integrity are selected as future trustees and that Princess Pauahi's legacy is restored to her deserving children.

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SO ... GIVEN:

That the FORMER TRUSTEES have been removed and their dirty laundry hung out in public;

That the INTERIM TRUSTEES were aware that the key conspirators extended beyond the trustees they replaced;

That the NEW TRUSTEES know the depth of the corruption, and have had ample opportunity to clean it up

...the $8 billion question remains:

IS THE TRUST STILL BROKEN?

- - -

THE ANSWER IS: DEFINITELY ...

YES!

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May 9, 2000

An Editorial from The Honolulu Star-Bulletin

House-cleaning is due at Kamehameha Schools

> The issue: "Broken Trust" author Randall Roth urges the interim trustees of the Kamehameha Schools to clean house of employees who operated with the former trustees.

> Our view: The interim trustees cannot ignore the need for accountability.

DESPITE the recent "60 Minutes" report on network television describing the ouster of the former Bishop Estate trustees, this struggle isn't finished. A pointed reminder of unfinished business was published in the Saturday Star-Bulletin in the form of a letter by Randall Roth, the principal author of the 1997 "Broken Trust" article that was a key factor in the battle.

Roth, who is a University of Hawaii professor of law and an authority on trust law, noted that one year after the removal of the former trustees, the estate, now called the Kamehameha Schools, has yet to "clean house." Roth charged that "individuals who for years were at the epicenter of abuse are still on the payroll, well placed, some even promoted."

The letter noted that several of the questionable holdovers are lawyers. It pointed out that under Hawaii law, lawyers for a trust are obligated to report trustee misconduct to the probate court. "It seems obvious," Roth said with a hint of sarcasm, "that no such report was ever made by a Bishop Estate lawyer."

In addition, he said, other key positions were held by people who were willing to use estate funds improperly, and they are also still there.

The letter amounted to a rebuke of the interim trustees. Roth warned that the trustees "have a legal duty to hold accountable any and all who have harmed the trust. If the interim trustees fail to do so, they themselves will be in serious breach of trust under the law."

The professor quotes the interim trustees as saying they want to focus on the future, not retribution. He asserts that the issue is not retribution but accountability.

It is also hard to believe that employees who cooperated with the former trustees in their abuses should be considered suitable for carrying out the policies of the new board.

One dismissal of an estate official has resulted in the filing of a lawsuit. Randall Chang, a former asset manager, alleges in his suit that interim trustee Robert Kihune and interim chief operating officer Nathan Aipa violated his civil rights through racial discrimination and retaliation. The suit could have a bearing on future decisions by the trustees regarding holdover employees.

The interim trustees may have decided to defer personnel changes in the trust pending their appointment of a chief executive officer. Now that Hamilton McCubbin has been installed as CEO, perhaps the time for the trustees and their CEO to clean house, as Roth put it, has come.

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MORE INDICATIONS OF A STILL-DIRTY HOUSE?

According to the Oct 20, 2000 issue of Pacific Business News, one of Hawaii's largest construction projects is currently a parking deck at Kamehameha Schools' Windward Mall.

The architectural firm for the project is shown as Kajioka, Yamachi Architects. . . .

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From Equity No. 2048 - Petition of the Atty General on Behalf of the Trust Beneficiaries to Remove and Surcharge Trustees (Sep 99): . . .

Illegal Payments for Politicians.

The Trust has participated in a scheme of illegal campaign contributions benefitting Marshall Ige and Milton Holt. ... The Trust, a public charitable trust, has incurred and not reported lobbying expenses. ...

Marshall Ige is a friend of Henry Peters and served as his Vice Speaker of the House. After Ige was defeated for re-election to the Hawaii House of Representatives in the 1994 primary election, he owed $18,262.71 to a vendor of campaign goods and services (the Vendor).

The Vendor had also provided campaign goods and services to Milton Holt. Holt worked at the Trust in the government relations division, which reported to Peters.

The Vendor contacted Holt for help in collecting the unpaid $18,262.71 from Ige. Shortly thereafter, a Trust employee called the Vendor and instructed him to bill Ige's campaign debt to the firm of Kajioka, Okada, Yamachi Architects, Inc. (Kajioka), a recipient of non-bid contracts from the Trust.

The Vendor followed this instruction and sent a false invoice to Kajioka in the amount of the campaign debt for goods and services never provided to Kajioka.

Kajioka paid the false invoice and thus paid the full amount of Ige's campaign debt to the Vendor.

Ige was elected to the Hawaii Senate in 1996.

After Holt was defeated for re-election to the Hawaii Senate in the 1996 primary election, he owed the Vendor approximately $12,334.44 for campaign goods and services. A Trust employee instructed the Vendor to divide the balance of Holt's campaign debt into three equal parts and send an invoice for one-third of the balance to each of three non-bid contractors of the Trust: Kajioka; Ronald N.S. Ho & Associates, Inc. (Ho); and Sato and Associates, Inc. (Sato).

The Vendor followed the Trust's instruction, and sent false invoices to the non-bid contractors for goods and services that were never provided to them.

Each of the three non-bid contractors paid the false invoice by sending the Vendor a check for $4,111.48 to pay off Holt's campaign debts.

Yukio Takemoto is the principal executive of the budget and review group of the Trust and reports directly to Peters.

After the 1996 primary election, Holt owed Starr Seigle McCombs (SSM), his media and advertising consultants, $18,690.72 that SSM had paid the Vendor on behalf of Holt.

Takemoto asked another non-bid contractor of the Trust, Akinaka & Associate, Ltd. (Akinaka), to help with Holt's unpaid campaign expenses. When Akinaka agreed to help, Takemoto said that Kajioka would be in touch. Kajioka left a message for Akinaka that the Vendor would send an invoice.

Shortly thereafter, a Trust employee instructed the Vendor to send four invoices (each for $4,672.68, or one-fourth of the campaign debt of $18,690.72) to each of Kajioka; Ho; Akinaka; and Okita, Kunimitsu and Associates (Okita).

The Vendor followed this instruction and sent false invoices to the four non-bid contractors for goods and services that were never provided to them. Each of the four non-bid contractors paid the false invoice from the Vendor, and the Vendor then paid in full Holt's campaign debt to SSM.

All the firms that participated in the instruction of the Trust in making illegal campaign contributions by sending or paying bogus invoices were receiving, have received, and continue to receive lucrative non-bid contracts from the Trust.

Holt used a credit card issued to the Trust to charge lunches and dinners for himself and members of the Hawaii Legislature at various Honolulu restaurants.

The Trust paid these charges with Trust assets. ... The charges to entertain legislators were lobbying expenses of the Trust that have not been disclosed to the State Ethics Commission and have not been disclosed in and IRS Form 990 submitted by the Trust.

All or some of the Trustees know of the Trust's participation in the illegal campaign contribution scheme to benefit Ige and Holt and of the Trust's lobbying activities.

All or some of the Trustees violated their duty to administer the Trust in compliance with all applicable law, and their duty to protect the Trust's tax-exempt status....

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May 23, 2002

CEO's daughter gets job
at Kamehameha

Hamilton McCubbin played
no role in the hiring, the trust says

By Rick Daysog, Honolulu Star-Bulletin

The Kamehameha Schools has hired the daughter of Chief Executive Officer Hamilton McCubbin to a part-time position in a potential conflict of interest.

In a 38-page report recently sent to the Internal Revenue Service, the estate's internal auditor Arthur Andersen LLP said that the trust hired "an immediate family member of a top (Kamehameha Schools) executive" to a temporary job, starting March 26.

Arthur Andersen's report -- which also was given to the estate's five trustees, the Attorney General's Office and the trust's court-appointed master Ben Matsubara -- did not identify the executive and his relative. But the trust confirmed that McCubbin's daughter, who is a doctoral candidate at a mainland college, was hired at the estate as a research assistant for the summer.

McCubbin did not return calls, but the trust said he was not involved in his daughter's hiring and had no influence in the process.

The estate, in a statement approved by trustees, also said the position was advertised internally and externally. The position ends June 30.

Arthur Andersen said the division that hired McCubbin's daughter reports to the chief executive officer, but the accounting firm described the hiring as an "isolated personnel matter" that was conducted through the normal employment process.

The trust's in-house lawyers concluded that matter did not violate the estate's conflict-of-interest policies, Arthur Andersen said.

The trust said McCubbin's annual conflict-of-interest disclosure form was filed in February and predated his daughter's hiring.

Subsequently, McCubbin has amended his disclosure form to list her employment.

Arthur Andersen indicated that McCubbin filed his amended disclosure form after the issue was first raised in April by the internal auditing team. The executive did not immediately update his disclosure form "due to an oversight," Arthur Andersen said.

Peter Hanashiro, an Arthur Andersen partner, declined comment when asked why the firm did not identify McCubbin in the report. Deputy Attorney General Hugh Jones also declined comment.

Arthur Andersen has served as the estate's internal auditor since February 2000. For the fiscal year ending June 30, 2001, the estate paid the accounting firm $2.1 million.

The report, known as the Closing Agreement Compliance Monitoring Report, was required under the February 2000 closing agreement between the IRS and the Kamehameha Schools.

In the closing agreement, the IRS reaffirmed the estate's tax-exempt status after the $6 billion charitable trust agreed to implement major management reforms and remove former board members Henry Peters, Richard "Dickie" Wong, Lokelani Lindsey, Gerard Jervis and Oswald Stender.

The IRS and the Attorney General's Office alleged that the former trustees engaged in numerous conflicts of interest and self-dealing.

The reforms included a strict conflict-of-interest policy.

The Star-Bulletin obtained a copy of Arthur Andersen's report from the Attorney General's Office after filing a formal request under the state's open-records law.

The Star-Bulletin initially asked the estate for a copy of the compliance monitoring report, but trust officials denied the request. The estate said such reports typically cover internal and operational matters that are "often of a sensitive nature."

The bulk of Arthur Andersen's report described how trust officials have complied with the terms of the IRS closing agreement.

The report also described a management dispute involving the head of Kukui Inc., a for-profit trust unit which owns McKenzie Methane Corp., a Houston-based natural gas producer.

In a Feb. 27 letter to senior trust executives, Kukui President Dennis Fern alleged that Wendell Brooks, the former head of the estate's nonprofit Bishop Holdings Corp., abused his power and intimidated Kukui's management.

Fern, the estate's former internal auditor, complained that several activities involving Kukui and Bishop Holdings were not conducted at arm's length and were driven by the estate's asset allocation strategies, Arthur Andersen said.

Bishop Holding is the parent of Kukui's sole shareholder.

The estate said it hired an outside law firm to review Fern's allegations.

The law firm found that the trust did not violate any of its internal policies and that there were sufficient checks and balances to avert potential abuses of power.

Fern, the estate's former internal auditor, could not be reached.

Brooks declined comment....

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May 16, 2002

Kamehameha uses Enron
firm in audit

By Jim Dooley, Honolulu Advertiser

The beleaguered accounting firm Arthur Andersen, on trial in Houston for obstructing justice in the federal investigation of Enron Corp.'s collapse, was paid $2.1 million last year to help audit Hawaii's largest nonprofit organization, the $6 billion Kamehameha Schools, according to the organization's tax return, made public yesterday.

Eric Yeaman, chief financial officer of Kamehameha Schools, was an Arthur Andersen employee, working as "internal auditor" of the schools, when the Kamehameha trustees decided to hire him for the CFO post in July 2000.

Arthur Andersen has continued to serve as internal auditor and provides other services to Kamehameha Schools. The company will receive a slightly lower sum this year than the $2.1 million it was paid last year, according to Yeaman and to the tax return.

Yeaman said he has a conflict of interest in dealing with Arthur Andersen and "leaves the room" when there is any discussion at Kamehameha Schools about a business transaction with the accounting firm.

Hamilton McCubbin, chief executive officer of the schools, said the Honolulu office of Arthur Andersen has demonstrated "outstanding integrity" in its dealings with Kamehameha Schools.

The internal auditing contract with Arthur Andersen expires this summer, and the schools plan to hire their own internal auditing staff rather than rely on an outside company for the work, McCubbin said.

But an outside firm will be needed to help in that transition and to provide independent expertise when needed by the internal auditing staff, McCubbin said.

Arthur Andersen will be free to bid for that work, he said....

. . . Continued at Eric Yeaman

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May 16, 2002

Kamehameha top pay went
to lawyer in 2001

Nathan Aipa earned more than the trust's CEO, IRS data show

By Rick Daysog, Honolulu Star-Bulletin

The Kamehameha Schools paid its former top lawyer $413,630 during its last fiscal year, making him the estate's highest-paid employee, according to records filed with the Internal Revenue Service.

Attorney Nathan Aipa's 2001 compensation was nearly $100,000 higher than the $321,026 paid to estate Chief Executive Officer Hamilton McCubbin and was more than double the $170,636 paid to the trust's current chief legal officer, Colleen Wong, for the year ending June 30, 2001.

It is also double the $195,000 that the $6 billion charitable trust paid Aipa during its previous fiscal year.

Aipa, who left the estate last year and is now in private practice, said his compensation included his base salary as well as a severance package. Trust officials declined comment, saying it was a personnel matter.

Aipa, who served as the estate's first chief operating officer before stepping down, has been criticized for his role in the estate's three-year legal battles with the state, the IRS and members of the local Hawaiian community.

Robert Richards, a special master appointed by the probate court, faulted Aipa's handling of the trust's outside law firms, which represented interests of the estate's former trustees at the expense of the estate.

Aipa is just one of several former and current employees who received big payouts in 2001. According to the estate's Form 990 filing with the IRS:

>> Former Chief Investment Officer Wendell Brooks earned $300,000.

>> Ex-Chief Administrator Rodney Park received $260,023.

>> Gilbert Ishikawa, the estate's former tax director, was paid $271,610.

>> Eric Yeaman, the estate's current chief financial officer, earned $224,532.

>> Michael Chun, Kamehameha Schools' president, earned $188,718.

Current estate trustees Doug Ing, Diane Plotts and Nainoa Thompson, who joined the board on Jan. 1, 2001, earned $51,000 each, while trustees Robert Kihune and Constance Lau received $122,000 and $100,500, respectively. Former interim trustees Ronald Libkuman, the Rev. David Coon and Francis Keala each received $49,500.

Lau and Kihune also served as interim trustees.

Prior to their removals in 1999, former trustees Richard "Dickie" Wong, Lokelani Lindsey, Henry Peters, Oswald Stender and Gerard Jervis each earned as much as $1 million a year.

The estate's annual Form 990 filing also provided a broad look of the estate's investment and educational operations.

The nonprofit Kamehameha Schools posted total revenues of about $303.6 million during the 12 months ending June 30, while the Kamehameha Activities Association, a tax-exempt support organization, recorded total revenues of about $1.3 billion thanks to the recent sale of stock in Goldman Sachs Inc.

On a consolidated basis, the two organizations grossed about $1 billion during its 2001 fiscal year, up from $936.3 million in the year-earlier period.

The trust said it spent about $192 million for educational programs and school construction last year and is poised to spend an extra $200 million this year.

The estate said it paid the local architecture firm Group 70 International $2.82 million largely for work related to its Maui and Big Island campuses, which are under construction.

The trust also paid $2.1 million to the accounting firm of Arthur Andersen LLP and $1.85 million to the Washington, D.C., law firm of Miller & Chevalier to resolve various tax issues with the IRS.

The Kamehameha Activities Association also paid Miller & Chevalier $488,091 during the 2001 fiscal year.