Table of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

II STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

IV STANDARD OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

VI ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

RULE 12-5-93 (e) (20). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

APPELLANT “ACTED IN WILFUL DISREGARD OF THE EMPLOYER’S BEST INTEREST” BY NOT FOLLOWING

VIII CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

A) Hawaii Dept. of Labor & Industrial Relations, Administrative Rule 12-5-93 (e) (20).

B) I.R.S. Code - Section 501 (c) (3) - Applicable sections attached as Appendix “B”.

This appeal is taken pursuant to HRS Section 91-14 and Rule 72, HRCP from the decision of the Appeals Officer, State of Hawaii, Department of Labor and Industrial Relations, rendered on March 5, 1998.

The Circuit Court of the First Circuit, State of Hawaii, has jurisdiction to entertain this appeal pursuant to HRS Section 91-14 and Rule 72 HRCP.

On or about November 7, 1988, Appellant was hired by Kamehameha Schools/Bishop Estate (KSBE), a tax-exempt charitable trust, as a Risk Management/Insurance Administrator. Later, this position was changed to Risk/Insurance & Safety Manager. On or about November 15, 1994, Appellant was appointed as President of P&C Insurance Company, Inc., a for-profit subsidiary of Pauahi Holdings Corporation (PHC), which is a for-profit subsidiary of KSBE.

The mission of the Risk/Insurance & Safety Department was to protect and preserve the assets of the estate. To accomplish this mission, Appellant’s responsibilities included obtaining Trustee Bonds (to protect the estate and the State from, among other things, breach of fiduciary duties by the trustees); Fiduciary Liability insurance; Notary Bonds; Errors & Omissions Liability insurance; Directors & Officers Liability insurance; Commercial General Liability insurance; Workers Compensation insurance; Property insurance; Crime insurance (including employee dishonesty); Bid and Performance Bonds, and other miscellaneous property and casualty insurance. Another responsibility was to explore alternative risk financing techniques which would be in the best interests of the estate. One alternative which was ultimately approved by the Trustees was to form a “captive” insurance company.

When P&C was chartered in September, 1994, it was understood by Appellant that his employment was to be transferred from KSBE to P&C, in large part due to IRS “arms-length” regulations. Several drafts of a Staff Report recommending this transfer were prepared by Appellant, but these were never approved or presented to the trustees by Appellant’s superior, Nathan Aipa, Esq., General Counsel and head of the Legal Group. This transfer issue was placed on the Agenda for P&C’s 1996 Annual Board of Directors meeting. Board Chairman, Henry H. Peters, made a motion, which was seconded and approved by vote of the Board of Directors, that this matter be deferred because Peters stated that the transfer should first be approved by KSBE’s Board of Trustees. Despite this directive, Aipa continued to refuse to submit a Staff Report recommending this transfer to Trustees. In mid-1996, Appellant again asked Aipa the status of the Staff Report. Aipa’s response was that Appellant was not being transferred because “arms-length was no longer an issue”.

Between early and mid-1996, Appellant, acting in his capacity as President of P&C, obtained a proposal for property reinsurance from a competing insurance broker, Hobbs Group. This proposal greatly improved the property insurance protection for KSBE and its subsidiaries, and would result in a premium savings of over $600,000 annually. When faced with the prospect of losing this business, Rocco Sansone, representing the incumbent broker, Marsh & McLennan, Inc. (MMI), made the misrepresentation to Appellant and Aipa that MMI could provide this same program through the same insurance carriers if KSBE would provide MMI a Broker of Record letter. Appellant advised Sansone and Aipa that this was not acceptable business practice, and that the primary insurance carrier, Arkwright Insurance Company (Arkwright), would not accept a Broker of Record letter. Despite this advice, Aipa directed Appellant to give MMI a Broker of Record letter in order to assume the proposal of Hobbs Group. Ultimately, the advice of Appellant proved to be correct, as M&M was unable to obtain an Agency Agreement with Arkwright, and the property insurance program was written by Hobbs Group effective August 15, 1996.

Because of the extreme pressures placed on Appellant by Aipa and Louanne Kam, Esq., to continue giving favorable considerations or “sweetheart deals” to MMI, Appellant suspected that there may have been improper dealings between certain parties at KSBE (namely Aipa, Kam, Colleen Wong, Esq., Henry Peters and Richard Wong), and MMI. Because of these pressures and suspicions, and due to Appellant’s belief that directives being given him by Aipa were in violation of IRS regulations and against the policies of KSBE’s Trustees’ and P&C’s Board of Directors, in mid-1996 Appellant contacted Sandie Wicklein, KSBE Personnel Director, to discuss his concerns. During this conversation, Appellant advised Wicklein that Aipa had informed him that his previously proposed transfer to P&C was not going to happen because “arms-length was no longer an issue”. Appellant also informed Wicklein about the pressures being placed on him to give unfair and excess benefits to MMI, and about his concern that he was being directed by Aipa and Kam to violate IRS regulations and breach his fiduciary duties, in his capacities and KSBE’s Risk/Insurance & Safety Manager and as P&C’s President. Appellant asked Wicklein for advice on the chances and advisability of transferring from the Legal Group to another division. Wicklein’s advice was that she believed similar conditions existed in all the other divisions, so that a transfer would not be an improvement. She also suggested that I document all such suspected improper directives in writing.

In a memorandum dated September 12, 1996, to Bobby. Harmon (Employer’s Exhibit #4), Aipa advised, “I requesting that Patrick Chaflin (sic) of Employee Relations, Personnel Division review and evaluate the action taken in connection with obtaining the property insurance proposal and the implementation of my directions concerning the program as well as that of the Board of Trustees. I will be charging Mr. Chalfin with the duty to make specific recommendations to me based upon his findings.” Soon after this, Appellant met with Chalfin and relayed to him many of the improper, and possibly illegal, acts Appellant was being directed to do by Aipa, Kam and others. It is Appellant’s understanding that a written report was provided by Chalfin to Wicklein and Aipa, but Appellant does not know the contents of that report and a copy was not provided to the Unemployment Division for Harmon’s appeal hearings.

On October 18, 1996, Appellant, in his capacity as President, P&C, met with P&C’s auditors, Cary Okawa and Dennis Tsuhako, of the firm of Coopers & Lybrand (C&L). At this meeting Appellant explained the reasons why he had not signed his approval to the annual financial statement of P&C for the fiscal period July 1, 1995 to June 30, 1996. The reasons stated included the attempts by Peters, Aipa and Kam to direct the operations of P&C, including the improper awarding of insurance contracts and settlement of claims, the failure to set proper loss reserves, and other improper and illegal acts, including the breach of fiduciary duties to both KSBE and P&C. This was followed with a letter dated November 20, 1996 to Coopers & Lybrand which provided numerous documents providing evidence to support these contentions. A copy of this letter and its attachments were sent to the Hawaii Insurance Commissioner.

Appellant sent another letter dated December 29, 1996, to the trustees detailing many of the same wrongful acts, as well as providing many of the same attachments. The following examples represent some of the illegal and/or wrongful acts witnessed and documented by Appellant:

1. KSBE failed to disclose information in federal tax returns regarding personal investments by certain trustees, executives, managers and employees in certain for-profit companies controlled by KSBE. The Tax Manager for KSBE was under the direction of Aipa; consequently, Aipa had direct involvement in, and responsibility for, the information contained in the tax returns.

2. IRS regulations regarding the maintaining of “arms-length” relationships between a tax-exempt charitable organization and its for-profit subsidiaries were being breached. At the direction of Henry Peters, Nathan Aipa, Louanne Kam, Eric Martinson, and others, KSBE paid certain insurance premium charges, legal fees and claims costs that should have been paid by its for-profit subsidiaries (e.g., Kukui, Inc., Sino Finance, Unison Pacific, SoCal, AFCO, Paradise Petroleum, etc.), or that should have been paid by individual trustees, officers, directors or employees.

3. Services were being provided by KSBE employees, including Aipa, Louanne Kam, Colleen Wong, Allan Yee, Lyn Anzai and me, to P&C and other for-profit entities at no cost to the subsidiaries. In effect, KSBE was subsidizing these for-profit entities.

4. Henry Peters, Nathan Aipa and Louanne Kam were attempting to control the daily operations of P&C, including claims, in violation of IRS “arm-length” regulations. This included directing the payment of excessive amounts to independent contractors for non- bid, even nonexistent, contracts. For example, as President of P&C, Appellant contracted with M&M Insurance Management Services, Inc. (M&M IMS), a subsidiary of Marsh & McLennan, Inc. (M&M), for captive management services. This contract was on a time and expense basis, with a cost estimate of around $60,000. In addition to these billings, however, KSBE’s broker, Marsh & McLennan, Inc., was billing an additional flat $200,000 annual fee to P&C. There was no contract for these services, and no satisfactory explanation was ever given for the fees. Despite Appellant’s objections, Peters, Aipa and Kam were adamant that P&C continue to pay these unexplained overcharges by M&M.

5. Insurance premiums and loss costs were being improperly allocated to lessees and tenants of KSBE properties. Many of the insurance policies for KSBE and its subsidiaries combined coverages for all entities under the same “blanket” policies. The insurance costs for these coverages were allocated to the Kamehameha Schools, to Bishop Estate, and to the covered subsidiaries. These charges, in turn, were further allocated to specific commercial projects, such as Royal Hawaiian Shopping Center, Windward Mall, Keauhou Shopping Village, Bishop Commerce Center (Georgia), Desert Springs Marketplace (California), etc. Most of the costs which were allocated to these commercial projects were recovered from the lessees and tenants through their monthly maintenance fees. Due to directives of Nathan Aipa, Louann Kam, Eric Martinson and others, these insurance costs were being improperly allocated, resulting in unfair charges to the tenants and lessees of these projects. The overcharges made by M&M were also included in these costs that were passed through to tenants and lessees. Some of these improperly allocated insurance costs were also paid from the millions of dollars of Federal grant funds received by KSBE, including grants for the school’s ROTC program.

6. KSBE’s tax return, Form 990, states that the organization does not discriminate on the basis of race. Yet, it is known that in order to apply for admission to the schools you must complete a questionnaire which inquires of the applicant’s racial background.

7. Annual financial statements for KSBE and P&C, which were prepared by Coopers & Lybrand (C&L), failed to disclose large claims, and to show adequate financial reserves for these claims (e.g., the McKenzie Methane and Kona Enterprises, claims). These claims were made by companies in which the trustees and other KSBE managers and employees had personally invested.

8. It was reported in the media that an “insurance policy” was issued by KSBE to Robert Rubin to protect his financial interests in Goldman Sachs while he is serving as U.S. Treasury Secretary. Even though insurance contracts and surety bonds were Appellant’s area of responsibility, Appellant was not informed of this arrangement and, to Appellant’s knowledge, no actuarial studies were made, no reinsurance was obtained, and no reserves were established to cover this substantial financial guarantee. Aipa and other in-house attorneys were, no doubt, aware of these “insurance” contracts, but deliberately failed to disclose this information to Appellant. Other information relating to Goldman Sachs was also provided, including the relationships between KSBE, Goldman Sachs, William Simon, Honolulu Federal Savings & Loan (HONFED) and Investors Equity Insurance Company. (It was just recently reported that the State has settled their lawsuit against Goldman Sachs for approximately $17 million for the role they played in the failure of Investors Equity.) It was reported in KSBE’s financial statements that a loan of approximately $1,000,000 was made to an individual named Harmon. Appellant was questioned by the Attorney General’s office if he was the recipient of this loan, which he denied. Appellant was later informed by other sources that the Harmon receiving the loan was a partner in Goldman Sachs.

9. KSBE guaranteed several large bank loans (including loans from Bank of Hawaii) to “insider partners” in several investments in which KSBE also invested large sums of money. Collateral for these loans was reported to be the stock in the investments. When the investors defaulted in these loans, KSBE was forced to assume loan balances and ended up owning the devalued or worthless stock.

10. In-house attorneys routinely directed KSBE employees to notarize documents without witnessing the actual signing of these documents. It appeared that this would constitute tampering with public records under HRS Code 10117. Evidence of this practice can be found by reviewing the notary public logs which are public record.

11. In Appellant’s capacity as president of P&C, he refused to sign the annual financial statements prepared by Coopers & Lybrand for the fiscal period July 1, 1995 to June 30, 1996. The primary reason for this refusal was the attempt by Henry Peters, Nathan Aipa and Louanne Kam to direct all areas of P&C’s operations and investments, including the improper awarding of insurance contracts and settlement of claims, and the failure to set proper loss reserves.

12. There were intentional violations of the Environmental Protection Act (EPA). Allan Yee, Colleen Wong and Louanne Kam were involved in environmental issues in order to keep the estate’s activities confidential under the “attorney-client privilege” doctrine. Their refusal to act promptly to remediate known environmental problems endangered public safety.

13. The trustees knowingly disregarded regulations under the Americans with Disabilities Act (ADA). Colleen Wong informed the committee formed to handle the ADA, that the schools were exempt from the regulations because it was “a religious institution.” This was despite an outside legal firm’s prior opinion that KSBE came under the regulations. A multimillion dollar class action suit was later filed against the estate and its subsidiaries.

14. Insurance claims were not being reported by the Legal Group to the insurance carriers (e.g., Kona Enterprises, McKenzie Methane), or were being controlled by Aipa, Kam and others when they were reported. This resulted in hundreds of thousands of dollars in legal costs and settlements lost by the estate for failure to comply with the terms of the insurance contracts.

15. Contracts were not being put out for bid proposals in accordance with the trustees’ written policies and procedures. The Waterpark Towers environmental remediation contract, for example, was supposedly put out for bid. In actuality there were no bid specifications and the normally required bid bonds were waived for this project. One of the bidders told me that the bid was basically “done over the phone.” The low “bidder” was Stay & Sons, which was unable to furnish evidence of proper insurance for the contract. It appears the company was not a licensed contractor, and the remediation process apparently had not been proven to work on this hazardous chemical (PCB). When the initial on-site remediation treatment was unsuccessful, a change order was issued which approximately doubled the original “bid.” Trustee Lokelani Lindsey’s stepson was a key employee for this contractor, which has the appearance, at least, of a conflict-of-interest and a breach of fiduciary duties. All contracts were handled by in-house attorneys who were fully aware of the circumstances, yet chose to “go-along” with falsifying the staff reports to trustees and the contracts.

Appellant discussed many of these situations with persons within KSBE and outside third parties. He reported his concerns regarding the Waterpark Tower situation; co-investments of trustees and other “insiders” in projects largely controlled by KSBE; conflicts of interests; non-bid contracts and other issues with KSBE’s internal auditor, Dennis Fern, and his assistant Andrea Oshiro. He had numerous discussions with Karen Wilkenson, who was responsible for compiling KSBE’s Policies and Procedures manual, concerning the Legal Group’s secretive “ostrich” approach to compliance with environmental protection laws. He discussed the “arms-length” issues with Gil Ishikawa, Myron Mitsuyasu, Rocco Sansone, Peter Lowe, and representatives from John Mullen & Co. and Coopers & Lybrand. He reported the Legal Group’s improper interference and handling of claims with representatives from John Mullen & Co., Rocco Sansone, Peter Lowe and Patricia Onogi.

On January 22, 1997, the Appellant filed a claim for Unemployment Insurance Benefits with the State of Hawaii, Department of Labor & Industrial Relations, Unemployment Insurance Division. On January 30, 1997, Appellant’s former employer, Kamehameha Schools Bishop Estate, filed a Request for Information Form (UC-BP-35), stating that Appellant was “Discharged for unsatisfactory work performance”. On March 13, 1997, Claims Examiner Merlyn Stigger rendered the decision to deny benefits, stating that Appellant was discharged for misconduct connected with work.

On March 20, 1997, Appellant filed an Appeal of Decision to Deny Unemployment Insurance Benefits with the State of Hawaii, Department of Labor & Industrial Relations. The first appeals hearing was held on May 14, 1997, before Appeals Referee, Ernest Hanaumi. This hearing was continued to June 2, 1997 and June 19, 1997, with a final hearing held on February 27, 1998. A decision was rendered by the Appeals Referee on March 5, 1998.

On March 12, 1998, Appellant filed an Application for Reopening of the Appeals Officer’s Decision dated March 5, 1998, with the Employment Security Appeals Office. On March 24, 1998, the Appeals Officer requested additional information under Administrative Rule 12-5-93 (e) (20). Appellant responded to this request by letter dated April 1, 1998. On April 6, 1998, Appellant responded to a letter dated April 2, 1998 from Employer’s attorney addressed to the Appeals Officer. On April 29, 1998, the Appeals Officer denied the reopening of the Decision.

A Notice of Appeal from the Decision was filed with the Circuit Court of the First Circuit, State of Hawaii, in a timely manner on May 27, 1998.

The Appeals Officer erred in denying due process to Appellant in his written requests dated May 27, 1997; February 6, 1998 and February 16, 1998, for the subpoena of witnesses and documents as required in Administrative Rule 12-5-93 (e) (20). In Ernest Hanaumi’s letter dated March 24, 1998, he states:

“In the reopening of the Appeals Officer’s decision, you again request the subpoena of individuals and documents. However, your explanations do not say that they and the documents will show that the I.R.S. Code and the Insurance Commission’s Regulations prohibit you from complying with the directives.”

“Administrative Rule 12-5-93 (e) (20) says, ‘Upon a showing of necessity by any party for the issuance of a subpoena to compel the attendance of a witness or the production of accounts, records and documents at any hearing, a subpoena shall be issued by the referee’.”

In Appellant’s response dated April 1, 1998, to this request from Mr. Hanaumi, Harmon states, in pertinent part:

“Your statement in the first paragraph is correct. I do contend that I was denied due process because I was disallowed the subpoena of any witnesses and documents which I believe would have substantiated my claim.”

“Your statements in the second paragraph contain some factual errors. You state that I ‘...listened the employer’s testimonies, cross-examined the witnesses, afforded the opportunity to rebut the testimonies...’ You use the singular, employer’s, while there are two employers involved in this case: Kamehameha Schools/Bishop Estate (KSBE) and P&C Insurance Company, Inc. (P&C) There was only one witness (singular) at the hearing representing KSBE, Louanne Kam. I was allowed to cross-examine this one witness, but, because of the declination of subpoenas, I was denied the opportunity to question any witnesses of my choosing or review key documents I believe would have provided evidence of my contentions.”

“There were no witnesses representing P&C. As Kam was not an officer, director or employee of P&C, she was not in a position to answer any questions regarding my employment by that corporation. There were no letters or testimony from P&C stating that I was terminated by that company for any reason. There were no policy or procedure manuals, minutes of board of directors meetings, financial statements, directives, reprimand letters, or other documents produced by P&C, which would indicate that my discharge from that company was for misconduct. If, as I stated in my previous letter, the burden of proof is on the employer, I fail to see ‘the preponderance of the evidence’.”

“As an example, a key document relating to my employment by both entities is the letter dated August 9, 1994 from Mark McConaghy of Price Waterhouse, KSBE’s tax consultant, addressed to Myron Mitsuyasu (KSBE tax department). In this letter, McConaghy stated that their discussions had largely revolved around the implications a captive insurance subsidiary may have on the tax-exempt status of KSBE. He emphasized that maintaining arms-length relationships between KSBE and the captive would be absolutely necessary to prevent private inurement (benefits flowing to insiders such as trustees, directors or officers) and/or private benefit (benefits flowing to third parties such as other subsidiaries) from becoming a problem. This letter also stated that it would be necessary that the board of directors and corporate officers be independent in order to maintain the corporate separateness between KSBE and the for-profit captive. The letter stressed that it was 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. McConaghy also stated that an independent board of directors would show that KSBE does not control the captive. A copy of McConaghy’s letter was included in P&C’s application to the Insurance Commissioner for its license to operate as a captive insurance company.”

“When Kam was asked at the hearing if she had seen this document, I believe her answer was that she had not. Without the production of this document, and by being denied access to Myron Mitsuyasu, Gil Ishikawa, or any other witnesses that were familiar with the contents and importance of this letter, I believe I was placed at a disadvantage in these hearings by being required to ‘prove’ my contentions, while KSBE was allowed to withhold the evidence.”

“I testified that Aipa had orally informed me that I was not being transferred to P&C (as had been previously proposed because of the potential IRS consequences described in McConaghy’s letter), because ‘arms-length was no longer an issue.’ When Aipa made this statement, I requested that it be put in writing, which he agreed to do, but never did. When Kam was asked (by you) what Aipa meant when he made the statement that ‘arms-length was no longer an issue’, she replied that it was her understanding that Aipa had received another opinion. I believe she indicated that she had not seen this letter either. I believe this opinion, if it exists, should be subpoenaed for examination. Also, the person to whom the letter was addressed should be subpoenaed for cross-examination.”

“There was another document that I requested subpoenaed, which stated that in situations where KSBE’s subsidiary is involved in litigation, negotiations with third parties, etc., it must be made abundantly clear to the third party that the subsidiary itself is in control of the negotiations and litigation, and not KSBE. The document also stated that the CEO of a subsidiary should not be a Trustee or an employee of KSBE, and that 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.”

“This document also stated that management of the daily operations of the captive insurance company, including claims administration, should be largely free of influence or control of KSBE’s trustees and staff. One reprimand which I received from Kam, resulted from the attempts of Trustee Richard Wong, Aipa and Kam to influence or control the settlement of the Larry Ching flood damage claim previously denied by P&C’s independent adjuster, John Mullen & Co.”

“It was also stated in this document that, to the extent that KSBE staff is called upon to assist in the management of a subsidiary, KSBE should be reimbursed by the subsidiary for the consulting services provided by KSBE’s staff. This was not being done. Or, if such services were to consume a large amount of the employee’s time, then transfer of such employee from KSBE to the subsidiary should be considered.”

“Another statement was that the directors and officers of subsidiaries should be compensated appropriately by the subsidiary in order to demonstrate the separateness between a subsidiary and KSBE. It also stated that these policies would likely operate to improve the arms-length relationship between KSBE and its subsidiaries, and thereby further KSBE’s mission of perpetuating the legacy of Bernice Pauahi Bishop by protecting its assets and maintaining its tax exempt status. On the other hand, according to this document, 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. If I had disregarded this advice, then I believe I would have been acting in wilful disregard of the employers’ best interests. But it was this very advice that I was being orally directed by Aipa, Kam and Peters to ignore.”

“As a result of these documents, I drafted ‘arms-length’ guidelines for P&C, which I attempted to abide by in my capacity as its president. I believe that any directives contrary to these written opinions should have come, in written form, from either KSBE’s board of trustees, or P&C’s board of directors--not orally from any one trustee or manager. I believed that if there were any subsequent documents that expressed contrary opinions, I should have been provided copies in my capacity as a manager and as an officer of a subsidiary. If any contrary opinion had been accepted by trustees, it would have represented a major change in policy. Major policy changes by trustees were supposedly communicated in writing to all managers, if not to all employees. No such communication was received by me in this case.”

“As I was not aware of the existence of any subsequent opinion regarding these tax issues until the testimony of Kam at these hearings, I would like to add this document to my request for subpoenaed items. I would also like to request the subpoena of the person or persons to whom this opinion was addressed, and any documents that would substantiate that this opinion was presented to, and approved by, KSBE’s board of trustees and P&C’s board of directors.”

“As the complete I.R.S. codes regarding “Intermediate Sanctions” are quite lengthy, I am not including them with this letter. However, to illustrate my point about the need for subpoenaed documents and witnesses, I am enclosing some information that was distributed by Coopers & Lybrand (C&L) during a meeting on October 4, 1996. Keeping in mind that Kam stated that it was her understanding that Aipa’s comment that arms-length was no longer an issue, was made because he had received a subsequent legal opinion. Aipa made this statement, to the best of my recollection, sometime in May or June, 1996. Yet, C&L’s information, which was prepared on 01/24/96, and distributed on 10/04/96, describes the I.R.S. regulations which provide penalties for private inurement transactions. C&:L’s bulletin also warns about acquisitions: ‘If sales transactions involve unrelated parties bargaining at arm’s-length, the actual sales price may establish fair market value. However, if such insiders as directors, key employees or substantial contributors were involved, arm’s-length status could be questioned.’ Nathan Aipa was present at this meeting. He did not question the accuracy of this information being distributed and discussed. He made no mention of the fact that he had another opinion that indicated that arms-length status was no longer an issue.”

“I am enclosing another article from Forbes, dated September 23, 1996, entitled, No more sweetheart deals. This article gives examples of types of unlawful transactions which were very similar to what was transpiring at KSBE. At my hearing I referred to the fact that I believed I could be personally fined for my participation in these transactions, even if I did not personally benefit. I call your attention to the second from last paragraph which says, ‘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’.”

“In my letter of December 27, 1996, to the trustees (which I requested subpoenaed), I document with exhibits many of the wrongful acts and questionable activities that we touched upon at the hearings. I was required by the court to return all copies of this letter and its exhibits as KSBE considered these documents property of KSBE. Thus, I no longer have access to these pertinent documents, and, consequently, must request that they be subpoenaed in order to present them as evidence at my hearing.”

“In this same letter, I also describe questionable political activities involving Henry Peters and Milton Holt. It has been recently reported that Holt charged thousands of dollars at strip bars and Las Vegas casinos on KSBE charge cards. In recent days, it has come to light that over $43,000 is unaccounted for in Holt’s campaign fund. At the very moment I am writing this letter, the television news is reporting that Holt borrowed $9,500 from the fund which has not been repaid, and by the F.B.I. is now investing the matter. The same newscast is reporting that trustees Stender and Jervis appeared in court circuit today on their charges that they have been deliberately left out of certain decisions at the estate, including Holt’s use of a KSBE charge card.”

“With regard to my contention that insurance regulations were being violated, the evidence of these violations is contained in my letter of November 20, 1996 to Coopers & Lybrand. This is the reason that I have requested the subpoena of this document, along with all enclosures. All copies of these documents were returned to the estate under court order and are not available to me.”

“I also requested all documents in my personnel file, which I was also required to return to KSBE. As KSBE was permitted to produce certain documents of their choosing from my personnel file, I believe I should be allowed to introduce the remaining documents, so that the evidence is not incomplete or biased.”

“Regarding the necessity for issuance of the subpoena to compel certain witnesses, I am under court order not to speak to any employees of KSBE about any matter relating to my employment there. As I am prohibited from requesting their voluntary attendance at these hearings, it is necessary that I ask that their attendance be subpoenaed. I stated the reasons that each witness should be subpoenaed in my earlier letter, so for the sake of brevity I will not repeat them here. If, however, you feel that I should expand on these reasons, I will be happy to do so.”

“As Kam has made the statement that Aipa has a document that counters the previous tax opinions of Price Waterhouse relating to arms-length relationships between KSBE and P&C, I also request the subpoena of Nathan Aipa, and all documents, including staff reports, relating to arms-length relationships between KSBE and its for-profit subsidiaries, and the I.R.S. intermediate sanctions statutes.”

“If my list of documents and witnesses to subpoena is too extensive, then I would consider the most important witnesses to be Henry Peters, Oswald Stender, Nathan Aipa, Sandie Wicklein, Gil Tam, Peter Lowe, Gil Ishikawa, Dennis Fern and Eric Martinson. The most important documents would be my letter of November 20, 1996 to C & L, with enclosures; my letter to KSBE trustees dated December 27, 1996, with enclosures; all minutes of P&C’s board of directors meetings; P&C’s latest annual financial statement; KSBE’s latest Form 990 tax return; all documents relating to I.R.S. regulations concerning ‘arms-length’ relationships and interim sanctions, including the legal opinion referred to by Kam.”

The I.R.S. regulations referred to above are contained in the Code Sec. 501 (c) (3). (See Appendix “B”)

There is no dispute as to the material facts in this case, to the extent that they were allowed to be presented. The questions presented involve conclusions of law and are therefore freely reviewable on appeal. See Block v. Lea, 5 Haw. App. 266, 688 P.2d 724 (1984).

A. Why was Appellant denied the subpoena of witnesses and documents not available to him as provided for under Administrative Rule 12-5-93 (e) (20)?

B. Why did the Appeals Officer decide that Appellant “acted in wilful disregard of the employer’s best interest” by not following a Superior’s directives which would cause the Appellant to commit illegal and wrongful acts which would be detrimental to the best interests of the beneficiaries of the estate of Bernice Pauahi Bishop and to P&C Insurance Company, Inc.?

A. WHY WAS APPELLANT DENIED THE SUBPOENA OF WITNESSES AND DOCUMENT NOT AVAILABLE TO HIM AS PROVIDED FOR UNDER ADMINISTRATIVE RULE 12-5-93 (e) (20).

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The Appeals Officer’s decision dated April 29, 1998, states, “The documents and individuals in your subpoena request may show that your superiors were violating the I.R.S. code and/or the Insurance Commissioner’s regulations. However, there is nothing to show that you would be guilty of a wrongdoing if you followed the Chairman of the Board’s (Henry Peters) directive. You failed to show the necessity of the individuals and documents for a fair hearing.”

At the request of the Appeals Officer, on April 1, 1998, Appellant provided the names of witnesses and description of documents, and gave explicit reasons why these witnesses and documents were necessary to present his case. With this letter, he provided additional documents from P&C’s auditors, Coopers & Lybrand, that gave clear evidence that he could be subjected to criminal penalties under the IRS’s “Intermediate Sanctions for Tax Exempt Organizations” regulations if he had followed the directives of Henry Peters, Nathan Aipa and Louann Kam. The Decision fails to disclose that Appellant did supply these documents which stated that the new law would “...allow the IRS to assess penalty excise taxes on individuals who are involved in transactions with tax-exempt organizations that constitute private inurement. Penalty excise taxes could also be imposed on organization managers who knowingly approve the transactions.” The advisory states that the penalty for directors, officer or managers of tax-exempt organizations was set at a maximum of $10,000, and this penalty could be imposed on organization managers who knowingly participate in such prohibited transactions...even if that manager did not personally benefit.

Aside from this documentation, it is common knowledge that “ignorance of the law is no excuse.” During his appeals hearing, Appellant used as an example: What if my superiors gave me a gun and told me to go out and kill someone? Would I not be held responsible simply because my superiors had directed me to take this action?

In this case, it was not even a superior that was giving directives to Harmon acting in his capacity as President of P&C. He was receiving directives from Nathan Aipa, who was the Assistant Secretary/Assistant Treasurer for P&C; and Louanne Kam, who was not an officer, director or employee of P&C. KSBE admitted at the hearings that Aipa and Kam were given the alleged authority to direct Appellant’s activities as President of P&C, by Henry Peters, who was Chairman of the Board of Directors of P&C, as well as a Trustee for Bishop Estate. This admission, in itself, provides evidence that Peters, Aipa and Kam had colluded to control the operations of P&C, which goes against the official “arm’s length” policy of KSBE’s Board of Trustees, as well as IRS regulations. The only way Appellant could prove this, however, would be through the subpoena of the Trustees’ official policy regarding “arms-length” transactions, and the questioning of the other Trustees and P&C’s Directors.

At the hearings, KSBE and P&C were offered the opportunity to produce evidence collaborating Aipa’s oral statement that “arms-length was no longer an issue.” They could not, or would not, produce this evidence. Appellant is of the belief that these documents were non-existent or withheld in a deliberate attempt to obstruct justice not only in this case, but in the investigations into the activities of the estate and its for-profit subsidiaries by the I.R.S., the State Attorney General, the F.B.I. and the court-appointed Master.

B. WHY DID THE APPEALS OFFICER DECIDE THAT APPELLANT “ACTED IN WILFUL DISREGARD OF THE EMPLOYER’S BEST INTEREST” BY NOT FOLLOWING A SUPERIOR’S DIRECTIVES WHICH WOULD CAUSE THE APPELLANT TO COMMIT ILLEGAL AND WRONGFUL ACTS WHICH WOULD BE DETRIMENTAL TO THE BEST INTERESTS OF THE BENEFICIARIES OF THE ESTATE OF BERNICE PAUAHI BISHOP AND TO P&C INSURANCE CO., INC.?

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In Appellant’s letter of April 1, 1998, which was in reply to the Appeals Officer’s letter of March 24, 1998, Harmon states:

“In the third paragraph of your letter, you state that you disqualified me for unemployment benefits because I acted in wilful disregard of the employer’s best interest. As I stated in my letter of March 12, 1998, I believe that I would be committing fraud and breaching my fiduciary duties if I followed the oral directives of Aipa and Kam that P&C should continue to pay excessive fees to Marsh & McLennan, Inc., without any accountability or written contract. It was my belief that this would not be in the best interests of my employers to continue to pay these excessive fees. I also indicated that I considered my employers to be KSBE, as governed by the board of trustees, and P&C, as governed by the board of directors--not the individuals, Aipa, Kam and Peters, who could well have been acting on their own without the knowledge or consent of the other trustees or directors.”

“As I also indicated in my previous letter, in addition to violations of I.R.S. codes, the documents which I requested subpoenaed would also present evidence of breaches of fiduciary duties and other wrongful acts. These include possible violations of other Federal and State laws, including the Americans With Disabilities Act; ERISA; OSHA; the Environmental Protection Act; EEOC regulations; State Insurance Codes; and the Federal Insurance Crimes Act. I cannot understand how it is possible, by any reasonable standards, to consider that I was acting with wilful disregard of my employer’s best interests by ‘looking the other way’ while these activities were going on, or by refusing to follow the directives of Aipa, Kam, Peters or others to disregard compliance with these laws.”

“Your third paragraph concludes, ‘You acknowledge that you understood the directives but refused to carry them out because you felt that you would be in violation of the I.R.S. Code and the Insurance Commission’s Regulations. However, you failed to provide any substantive evidence that supports you(r) concerns.’ As previously stated, I believe the substantive evidence you seek can be found in the documents, and from testimony of witnesses, that you declined to subpoena. I can provide sections of the I.R.S. code and other information which provides the basis for my contentions, but the actual evidence that laws were being violated can be found in the requested documents and witnesses.”

A) Hawaii Dept. of Labor & Industrial Relations, Administrative Rule 12-5-93 (e) (20).

B) I.R.S. Code - Section 501 (c) (3) - Applicable sections attached as Appendix “B”.

In accordance with Administrative Rule 12-5-93 (e) (20) it is evident that Appellant was denied due process and should have been permitted the subpoena of witnesses and documents that were unavailable to him. It is also evident, even from the admitted evidence and testimony, that Appellant truly believed that he was acting in the best interests of his employers, and of the beneficiaries of the Estate of Bernice Pauahi Bishop, when he declined to follow the directives of Henry Peters, Nathan Aipa and Louanne Kam to commit acts which he believed to be wrongful, illegal or a breach of his fiduciary duties.

Civil No. 97-0512-02 - P&C Insurance Company, Inc., et al v. Bobby N. Harmon, and Appellant’s Counterclaim under the State of Hawaii’s “Whistleblower” statutes is pending in the Circuit Court of the First Circuit, the Honorable B. Eden Weil presiding.

I HEREBY CERTIFY that a copy hereof was served upon each of the following by mailing the same, postage prepaid on November 6, 1998.

I (a) PLAINTIFF ATTORNEY (NAME & NUMBER)

BOBBY N. HARMON

I. PLAINTIFF

BOBBY N. HARMON

IX. SIGNATURE OF ATTORNEY OF RECORD

_______________________________________________

DEFENDANTS

STATE OF HAWAII, DEPARTMENT OF LABOR & INDUSTRIAL RELATIONS; BERNICE P. BISHOP ESTATE, ATTN: PERSONNEL DIVISION

RESERVED FOR COURT USE

CIV. NO. ________________________________________

II. NATURE OF SUIT

(503) Agency Appeal

DEFENDANT ATTORNEY (IF KNOWN)

SABRINA R. TOMA