Bobby N. Harmon, CPCU, ARM
Honolulu, Hawaii 96818
August 5, 2000
Ms. L. Busch
U.S. Department of Labor
PWBA Los Angeles Regional Office
790 E. Colorado Blvd, Ste 514
Pasadena, CA 91101
Re: Kamehameha Schools Bishop Estate Pension Plan
Dear Ms. Busch:
The enclosed documents and news articles related to the Kamehameha Schools’ Pension Plan is being addressed to your attention at the request of Janet Schmidt, Pension Loss Specialist.
Exhibit A indicates that the “Report of Independent Accountants,” prepared by Coopers & Lybrand LLP, and dated October 29, 1997, was addressed “To the Retirement Plan Committee, Kamehameha Schools Bernice Pauahi Bishop Estate Retirement Plan.”
Exhibit B is my letter dated February 1, 2000, addressed to Tina Lisa Tamaru, Benefits Administrator for the Plan, stating “On March 16, 1998, I requested the names of all persons who served on any employee benefit committees for KSBE’s Retirement Plan.” This letter goes on to state that I was not provided this information, and again asks: “Would you kindly provide me the names of individuals who served on any committees for the Plan during the period from January 1, 1996 to the present date, and their positions on the committee.”
Not only was I not given this information, I was told by KSBE’s outside attorney, Robert Katz (of Torkildson Katz Fonseca Jaffe Moore & Hetherington), that because of my letter, they were considering the withdrawal of a settlement offer that had been negotiated in my RICO lawsuit against the estate’s trustees (Henry Peters, Richard Wong, Lokelani Lindsey, Gerard Jervis and Oswald Stender); P&C Insurance Co.; Federal Insurance Co.; Marsh & McLennan, Inc; PricewaterhouseCoopers LLP, et al.
I suspect the reason that the names of the Retirement Plan Committee members are being withheld is that the committee was comprised of one or more of the trustees (most likely Henry Peters), and one or more of the following employees: Nathan Aipa, Colleen Wong, Gilbert Tam, Maryanne Inouye, Rodney Park, Wally Chin, Yukio Takemoto, Dennis Fern, and Gilbert Ishikawa — or a subordinate who reports directly to one of these individuals. Even if one or more of the trustees were not on the committee, any of these employees were in a position, under direction of one or more trustees, to award the contract to Prudential.
If this is true, then I further suspect that no true “Request for Proposals” for the administration of the Plan has been issued for a great number of years, and that no true independent evaluation of the costs and returns of the Prudential plan had ever been ordered.
Exhibit C consists of pages 1, 7, 14,15 and 20 of the “Master’s Report on the 109th Annual Account of the Trustees”, as posted on 11/20/97 by the Honolulu Star-Bulletin. Please note on page 14, the Master, in reference to the Balance Sheet (which was prepared by Coopers & Lybrand) indicates in paragraph 4 that “Potential Loss Exposure Is Substantially Greater Than The Liabilities Reflected On The Balance Sheet” . On page 20, please note the statement: “Based upon your Master’s review of the records relating to the various investments held by the Trust Estate and its Pauahi Holdings, Inc. subsidiary, combined losses and loss reserves of $264,090,257 were recognized in FY 1994. Further note that these totals were made up, in part, by an investment in “Rock Real Estate” which shows a loss of $22,535,000. I have been advised by reliable sources that “Rock Real Estate” is a venture involving Prudential Insurance Company, but I have been unable to independently verify this information.
Exhibit D is a Star-Bulletin article dated 9/11/98, headed “Bronster: ‘Sweetheart Deals with Cronies” which quotes Attorney General Margery Bronster as stating, “I believe certain trustees received kickbacks worth hundreds of thousands of dollars.”
Exhibit E is a Star-Bulletin article dated 9/15/98, headed “It’s Not the First Time for Takemoto — Bishop Estate budget chief was investigated for financial abuses in 1993.” Please note on the first page: “Takemoto, appointed state budget director by former Gov. John Waihee, spent months at the center of a 1993 legislative probe into state purchasing abuses and dealings of the state Employees Retirement System (emphasis added).” Yukio Takemoto is still employed by the estate.
Exhibit F is a news article from the Star-Bulletin dated March 13, 1999, headed “Estate of Disarray” which summarizes many of the investigations and legal actions involving the estate up to that date.
Exhibit G is a news article dated 10/21/99 from ctnow.com headed “Top Politicians Linked To Pension Fund Deals,” which gives some of the principals and the fees involving the Paul J. Silvester scandal. The article starts by saying: “State Treasurer Denise L. Nappier shone the light Wednesday on seldom-seen machinations that have put millions into the pockets of well-connected “finders” in state pension investment deals — and some of the state’s best-known politicians were caught in the glare.”
Exhibit H consists of excerpts from the web-site “Welcome to the Catbird Seat” at http://msnhomepages.talkcity.com/ReportersAlley/thecatbirdseat/ . These excerpts describe some of the relationships between Bishop Estate, The Crossroads Group, The Carlyle Group and others involved in the Paul Silvester scandals and kick-backs from pension-fund investments.
Exhibit I consists of pages 1, 2,12, 18, 19, 20, 26, 27 and 28 of Equity No. 2048, “Report of Master Regarding Retention of Non-Staff Counsel.” Please note on pages 27, 28 and 29, that the Special Master finds that $1,130,383.02 billed to Bishop Estate by PricewaterhouseCoopers, should have been paid by the ex-trustees instead of by the estate. (Nathan Aipa and Rodney Park were two of the individuals approving the engagement of PricewaterhouseCoopers and the payment of these bills.)
Exhibit J is a copy of the Securities Exchange Act of 1934 Release No. 40945 / January 14, 1999; Accounting and Auditing Enforcement Release No. 1098 / January 14, 1999; Administrative Proceeding File No. 309809, In the Matter of PricewaterhouseCoopers LLP.
Exhibit K is a Star-Bulletin article dated 8/24/99 relating to the involvement of Mark McConoghy and PricewaterhouseCoopers in the Bishop Estate scandals. The article also quotes Henry Peters: “PriceWaterhouse and Mr. McConaghy have conflicts of interests with that of KSBE,” said Peters, who also is asking Judge Chang to disqualify the estate’s interim board of trustees.
“These conflicts of interest now extend to the interim trustees because they have retained and rely upon the advice and services of PriceWaterhouse.”
Peters’ complaint— which also alleges conflicts of interests on the part of the estate’s acting chief operating officer Nathan Aipa and the trust’s mainland law firm of Miller & Chevalier— comes as the Bishop Estate’s interim trustees filed a lawsuit today seeking Peters’ permanent removal from the estate’s board. . . .
In his 17-page petition, Peters said that McConaghy could be a target of legal malpractice claims since he played an integral part in past Bishop Estate transactions that are now being questioned by the IRS in its four-year audit of the $6 billion dollar charitable trust. McConaghy’s continued role in negotiating with the IRS places his allegiance to the estate in conflict with his personal interest in fending off a potential malpractice claim, Peters said.
“I believe that the current reliance on the recommendations of the firm of PriceWaterhouseCoopers is highly improper due to the fact that this firm initially was instrumental in recommending the creation of the various entity structures that have caused the IRS to issue substantial proposed deficiencies and penalties for negligence,” said Robert Schriebman, Peters’ California-based tax expert....
To be sure, McConaghy is no stranger to controversy at the estate. Sources said that he played a significant role in the estate’s much-maligned efforts to lobby against federal legislation barring excessive compensation for directors of nonprofit trusts.
He has also invested personal money in several Bishop Estate deals. Court records show that McConaghy invested about $25,000 in McKenzie Methane, Inc., the troubled Houston-based natural gas producer that was taken over by the Bishop Estate after the company sought bankruptcy protection.
McConaghy also had a personal stake in a Michigan venture in which the estate acquired about 292,000 acres of raw timberland for about $25 million in 1991. The timber venture, now known as Shelter Bay Forest, initially was a partnership with New Hampshire timber executive Ben Benson, who is a friend of McConaghy’s....
Exhibit L, dated 1/14/99, is from the SEC website under the heading, “SEC Censures PricewaterhouseCoopers for Violating Auditor Independence Rules and Improper Professional Conduct.”
Exhibit M is from The Wall Street Journal, 1/15/99 and is headed, “SEC Accuses PricewaterhouseCoopers of Conflict With Some Audit Clients.”
Exhibit N contains two articles. The first is the SEC’s press release dated 1/6/00, and the second is AP’s report of the SEC release headed, “Accounting Firm Violations Found — Review Finds Accounting Giant PricewaterhouseCoopers in Violation of Rules Requiring Accountants to Remain Independent From Companies They Audit.”
Exhibit O, from The Washington Post is headed, “Prudential Accused of Fraud, Gets Chance to Avoid Trial.”
Exhibit P, from Reputation Management (pages 1-8) headed, “The Rock’s Tarnished Image, ” begins by stating, “Prudential Insurance Company is emerging from a crisis that might have felled a lesser company. But after seeing its hard-earned “Rock of Gibraltar” image tarnished and paying out the largest fraud settlement in American legal history, the Pru is working to transform its paternalistic culture ...”
On page 5, the statement is made, “. . . By the time the true size of the scandal was apparent, more than $8 billion of risky partnerships - most of which had been marketed as safe and secure - had collapsed.”
“In the end,” says Eichenwald, “no single brokerage firm, banker or trader destroyed the financial security of more people than Prudential Bache... The crime was finally visible when, by the thousands, the firm’s clients faced the prospect of losing their homes, their retirements, or their children’s education. Some investors who carefully pinched pennies for decades would up in bankruptcy....”
As I stated in my previous letter, these circumstances raise considerable doubt as to the proper handling of these employee pension funds. I strongly urge an independent audit of the plan at this time.
Thank you for your consideration.
Very truly yours,
Bobby N. Harmon, CPCU, ARM
encls.
Chief Executive Officer
Kamehameha Schools
567 So. King Street
Honolulu, HI 96813
Dorothy Sellars, Deputy Attorney General
State of Hawaii
425 Queen Street, Rm 317
Honolulu, HI 96813
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