S. C. NO. 22624

IN THE SUPREME COURT OF THE STATE OF HAWAI’I

BOBBY N. HARMON,                                 )          CIVIL NO. 98-2394-05

)

                                    Appellant-Appellee    )          APPELLANT-APPELLEE

                                                                        )          BOBBY N. HARMON’S REPLY

                        vs.                                           )          BRIEF TO APPEAL FROM THE

                                                                        )          THE ORDER REVERSING

BERNICE P. BISHOP ESTATE,                  )          EMPLOYMENT SECURITY APPEALS

ATTN: PERSONNEL DIVISION,                )          OFFICE’S DECISION 9701016,

                                                                        )          FILED ON MAY 27, 1999;

                                    Appellee-Appellant    )          CERTIFICATE OF SERVICE

)

                        and                                          )          FIRST CIRCUIT COURT

)

STATE OF HAWAI’I, DEPT. OF LABOR  )          HONORABLE B. EDEN WEIL, Judge

AND INDUSTRIAL RELATIONS,              )

)

                                    Appellee-Appellee      )

                                                                        )

BOBBY N. HARMON

2920 Ala Ilima Street, #1103

Honolulu, Hawaii 96818-2506

Tel. No. 839-0654

Appellant-Appellee, Pro Se

TABLE OF CONTENTS

PAGE

I                      REPLY TO KSBE’S STATEMENT OF THE CASE . . . . . . . . . . . . . . . 1

II                     REPLY TO KSBE’S STATEMENT OF POINTS RELIED UPON . . . . 7

III                    APPELLANT-APPELLEE’S COUNTER-ARGUMENT . . . . . . . . . . . . 7

                        A.        The Circuit Court’s Finding of “Necessity” to Issue

                                    The Subpoenas Was Correct . . . . . . . . . . . . . . . . . . . . . . . . . . .

                        B.        The Circuit Court’s Conclusion Regarding Misconduct

                                    Was Correct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IV       RELEVANT STATUTES AND ORDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

V.        CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

STATEMENT OF RELATED CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

APPELLANT-APPELLEE BOBBY N. HARMON’S REPLY BRIEF

TO APPEAL FROM THE ORDER REVERSING EMPLOYMENT SECURITY

APPEALS OFFICE’S DECISION 9701016, FILED ON MAY 27, 1999

I. REPLY TO KSBE’S STATEMENT OF THE CASE

           This Reply Brief is respectfully submitted by the Appellant-Appellee, Bobby N. Harmon.

           KSBE states on page 2 that “Harmon served at the pleasure of the P&C Board of Directors as an unpaid officer (CRA 56-7). He was not an employee of P&C.” KSBE fails to disclose to the Court that this fact is material to this case in that, upon formation of P&C, Harmon was to have been transferred from his employment with KSBE to be the paid President of P&C, in order to comply with I.R.S. regulations regarding “arms-length” relationships between tax-exempt charitable trusts and its for-profit subsidiaries. The Trustees violated these regulations, the advice of their tax consultants, Price Waterhouse, and their official written Policies, by not transferring Harmon from KSBE to P&C, thus jeopardizing the Estate’s tax-exempt status.

           KSBE states on page 2 that: “. . . as an unpaid officer of P&C, Harmon reported directly to Aipa as Harmon acknowledged by memo dated October 11, 1996 to P&C Board Chair Henry Peters, that he was to report to Aipa ‘regarding all P&C Insurance matters’.” This gives further evidence that Peters and Aipa were deliberately colluding to “control” the activities of P&C in violation of I.R.S. regulations and the Trustees’ official Policies.

           KSBE’s statement on page 2 that: “First, Harmon admitted failing to follow an Aipa/Kam directive (CRA 32) that he prepare a draft letter or memo for Aipa and/or Kam’s review by October 25, 1996, which detailed the brokerage and other support services Harmon required of Marsh & McLennan, so that Aipa and Kam could better understand Harmon’s proposal to pay Marsh & McLennan $50,000 per year, rather than the annual flat rate $200,000 retainer (CRA 32-3, 50-2, 73-6) (‘the Marsh & McLennan fee matter’). Harmon instead sent an October 29, 1996 letter directly to Marsh & McLennan which was neither read, nor approved, by either Aipa or Kam and which questioned the basis for Marsh & McLennan’s fees (CRA33).” KSBE fails to disclose to this Court that the $200,000 flat fee was an expense being paid by P&C, not KSBE, for services supposedly being rendered to P&C, but that there was no contract with M&M for these supposed services. KSBE fails to disclose that this letter was written on P&C letterhead, with Harmon’s signature as President. Harmon avers that as P&C’s president, he had the authority and fiduciary responsibility to expend the funds of the corporation in a prudent manner.

KSBE further fails to disclose to this Court that Kam, who was not a director, officer or employee of P&C, rescinded Harmon’s letter to M&M without prior consultation or approval from Harmon.

           Harmon further avers that Kam falsely testified that she and Aipa issued a directive to him that they were, “. . . to review and approve the letter before it went out. . . so that we all three could be [in] agreement with the proposal that would be sent to our consultant.” Harmon has claimed that he never received such a directive, and KSBE has never presented any substantial evidence to dispute this claim. Harmon alleges and avers that this incident was manufactured in order to intimidate and threaten Harmon with termination, in order to enable Peters, Aipa, Kam and others to continue with their “sweetheart” deal with M&M. Harmon begs the Court to take notice that these were expenditures of P&C, and not of KSBE, so that there was no legitimate reason for Kam to be in agreement with a proposal which would save P&C approximately $150,000 or more a year.

           Harmon has consistently maintained that these excessive payments to M&M involved “private inurement” and “private benefit” transactions which violate I.R.S. “Interim Sanctions” regulations, for which he could have been held personally liable. Harmon discussed these violations with Sandie Wicklein, KSBE Personnel Director, and Patrick Chalfin, KSBE Employment Relations Generalist, months before his termination, and with Coopers & Lybrand, P&C’s auditors, about one month prior to his termination.

           KSBE states on page 3: “Harmon initially told Kam that he either did not understand Aipa’s directive regarding the Marsh & McLennan matter, or did not believe he should follow the directive as it violated P&C’s operating policies (CRA 28). He did not at any time prior to his termination further explain his belief that the Aipa/Kam directive violated P&C’s operating policies (CRA29). Indeed, Harmon attempted to justify his actions in a November 20, 1996 memo to Kam (which Kam received after Harmon’s termination), . . . ” Harmon disputes the accuracy and/or interpretation of this statement. There had been many prior meetings, discussions, written opinions from KSBE’s tax experts, memorandums, and the Trustees’ official written policies regarding I.R.S.’ arms-length regulations. Aipa, Kam and Peters were aware of these regulations and policies for many months prior to Harmon’s termination. Harmon had repeatedly requested that copies of documents pertaining to these “arms-length” regulations, and witnesses with knowledge of these material issues, be subpoenaed for these hearings. These requests for subpoena of documents and witnesses were repeatedly denied.

           KSBE states on page 5: “Third, Harmon admitted refusing to follow an Aipa/Kam directive (CRA 421) to notify the third party administrators that the insured be allowed to select retained counsel for litigated claims. Harmon responded to Kam’s reprimand stating he did not consider oral directives from either Aipa or Kam sufficient to override the P&C Operations Manual which he believed gave P&C the sole authority to retain experts and attorneys (CRA 420-1). Kam found Harmon’s November 20 response insufficient to change her determination that Harmon had disobeyed Aipa’s directive (CRA 43-8).” Harmon avers that this situation is much the same as the “Marsh & McLennan fee matter” discussed above. This situation involved a P&C flood damage claim made by Larry Ching, who was reportedly a friend of Trustee Richard Wong. P&C’s independent adjuster, John Mullen & Co., Inc., had already investigated and denied the claim as an “act of God”. At Wong’s request, Kam and Aipa involved themselves in the claim, wanting to reverse Mullen’s decision in an apparent effort to pay off Wong’s friend. Again, this was against I.R.S. “arms-length” regulations, the Trustees’ Policies and P&C’s Operations Manual, which gave P&C to sole authority to retain experts and attorneys. Harmon, acting as P&C’s president in this situation, had the duty to act in P&C’s best interests, and not interfere with Mullen’s role as P&C’s independent claims administrator. Harmon, in good conscience, could not breach his fiduciary duties to P&C by allowing an improper claims payment to be made to an individual because he happened to be friend of a KSBE Trustee.

           KSBE states on page 6: “Harmon was ultimately terminated on November 20, 1996. . . The same day, he drafted two memos to Kam responding to her October 31 and November 12 disciplinary memos . . . Kam did not receive either memo prior to Harmon’s termination. . .” The term “drafted” is misleading. Harmon had worked at his home for several days to prepare responses to Kam’s disciplinary memos. He completed these memos at his home on November 19^th, and gave them to his secretary on the morning of November 20^th to copy and deliver to Kam and the Personnel Department. Kam’s office was in close proximity to the secretary’s desk and, as a common practice, would have received Harmon’s responses that morning or the early afternoon. Harmon was unaware that he was to be terminated near the close of the day, and had no opportunity to determine if Kam had received his responses prior to his termination. Harmon believes that this is not a material issue to this case; however, he avers that he should be permitted the subpoena of his secretary if it becomes necessary to determine to verify the delivery date.

II. REPLY TO KSBE’S STATEMENT OF POINTS RELIED UPON

           1. Harmon submits that the record does indeed support the Circuit Court’s finding of necessity to compel the attendance of witnesses and production of documents as Reg. § 12-5-93(e)(20)(1997) mandates, in order to provide evidence which was relevant, material, and/or not duplicative to the misconduct issue, as Haw. Rev. Stat. § 91-10(1)(1998), requires.

           2. Harmon submits that the Circuit Court was correct in finding the record supported its determination that Harmon did not exhibit a willful or wanton disregard for the employer’s interests and that his actions were an exercise of his good faith discretion.

III. APPELLANT-APPELLEE’S COUNTER-ARGUMENT

           A.      The Circuit Court’s Finding of “Necessity” to Issue Subpoenas Was Correct

           Harmon disputes KSBE’s arguments and submits that the Circuit Court’s findings and conclusion were correct for the following reasons:

           First, it was adequately proven that the witnesses and/or documents Harmon sought would provide evidence which was relevant and/or material to Harmon’s alleged misconduct and ensuing termination. KSBE knowingly and falsely alleges that: “. . . the only witnesses who could have had personal knowledge which was salient to the termination for misconduct issue were Aipa and Kam.”

           KSBE states on page 13:

“Harmon argued the witnesses and documents were necessary to establish that the Aipa and Kam directives contravened the arms length policy of KSBE’s Board of Trustees, as well as Internal Revenue Service (“IRS”) regulations. . . however, Harmon’s understanding of how the arms-length concept applied to the relationship between KSBE and P&C was based upon tax advice provided by an accounting firm in 1994 which recommended certain practices to minimize the risk of tax liability to KSBE. There is no evidence that the advice indicated contrary business practices were illegal. The opinion letter was not a ruling by a government agency, nor was it binding on KSBE. Moreover, the overwhelming weight of the evidence showed that Harmon’s superiors determined arms-length practices were no longer applicable in late 1996.”

           The accounting firm referred to was Price Waterhouse, LLP, and the professional tax advice in this instance was provided by Mark McConoghy. Trustees relied on this advice when they approved their official policy (Procedure Number 5920). Harmon relied on this tax advice when P&C was licensed. In fact, a copy of McConoghy’s letter was included as an attachment to P&C’s application for a captive license with the Hawaii Insurance Commissioner’s office. Harmon was never provided any written evidence that “his superiors had determined arms-length practices were no longer applicable in late 1996.” Harmon had only Aipa’s oral statement to this effect, and had requested that he be provided written evidence of the alleged changes. This was never provided to Harmon prior to his termination, or afterwards at any of the Appeals Office hearings, even though Harmon had asked for the subpoena of documents and witnesses to verify the truthfulness of Aipa’s statement.

           In another violation of I.R.S. arms-length regulations, KSBE was subsidizing the for-profit subsidiary, P&C, through the use of KSBE personnel, including Peters, Aipa, Kam, Dennis Fern, Dan Jones and Harmon himself.

           KSBE states on page 14:

“Thus, the witnesses whom Harmon sought by subpoena could not provide probative evidence as to whether Mr. Harmon’s conduct constituted a ‘deliberate violation[s] of or deliberate disregard of the standards of behavior which the employer has a right to expect of an employee. . .’ Reg. § 12-5-51(c)(1997), with respect to either the Marsh & McLennan fee matter and/or Ching Claim. . .”

           KSBE then lists a number of individuals identified by Harmon as witnesses and states that these individuals would have no direct personal knowledge of the directives issued by Aipa or Kam, Harmon’s noncompliance with those orders, or the legality of KSBE’s operations, and alleges that none of these witnesses which Harmon sought to subpoena would provide new evidence which was either relevant and/or material to the issue of his termination.

           This statement is clearly untrue. The following persons and documents, among others requested subpoenaed, had relevant and material knowledge of Harmon’s alleged misconduct:

           a) Patrick Chalfin, KSBE’s Employee Relations Generalist, who was requested by Aipa to investigate Harmon’s alleged insubordination months before his termination. Harmon met with Chalfin on several occasions and disclosed to him evidence of wrongdoing on the part of Peters, Aipa and Kam. Chalfin was directed by Aipa to provide a written report of his findings. A copy of this report was never provided to Harmon, and never presented to the Appeals Hearing Office. Harmon was denied the subpoena of his own Personnel Files, which should contain Chalfin’s report, and of Chalfin himself whose testimony would be material to this case.

           b) Sandie Wicklein, KSBE’s Personnel Director, with whom Harmon spoke on several occasions preceding his termination regarding the actions of Peters, Aipa and Kam intended to intimidate and coerce him into committing acts he considered wrongful and possibly illegal. Wicklein was the person responsible for the integrity of Harmon’s personnel records.

           c) Henry H. Peters, Trustee of the Estate of Bernice Pauahi Bishop and Chairman of the Board of P&C Insurance Company, Inc., obviously had personal knowledge of his directive to Harmon that he was to report to Aipa on any P&C matters, and of his threat to Harmon that he could be terminated as president of P&C. Clearly, Peters was a material witness regarding supervision issues, and the I.R.S. “arms-length” and “interim sanctions” issues.

           d) Rodney Park, Director of the Administration Group, had responsibility for the Controller Division as well as the Personnel Division. Park was aware of the “arms-length” and “interim sanctions” issues of the I.R.S., and of the disciplinary issues involving Harmon.

           e) Gilbert Ishikawa, KSBE’s tax manager, had knowledge of I.R.S. regulations and of the Trustees’ Policy regarding “arms-length” issues.

           f) Trustees Wong, Lindsey, Jervis and Stender all had knowledge of the “arms-length” and “interim sanctions” issues, and the official policy of the Trustees regarding these issues.

           Second, the evidence elicited would have been relevant, material and non-repetitious with respect to the issue of Harmon’s alleged misconduct. Thus, the Appeals’ Officer’s denial of the subpoenas was clearly inappropriate.

           Third, KSBE’s statement that “. . . the Appeals Officer’s denial of the subpoenas did not preclude Harmon from calling witnesses who would be amenable to voluntarily appear on his behalf” merely restates their previous deliberately false arguments. As Judge Weil clearly and correctly pointed out on page 3 of her Opinion:

“In Civil Number 97-0512-02, on February 21, 1997, Judge Radius sitting in the Circuit Court, granted KSBE’s motion for preliminary injunction against Appellant. By the court taking judicial notice of the minute order for that date, the Court notes that Mr. Katz was present when that occurred with his partner or associate Mr. Tsukazaki of the same law office, the same law office which is representing KSBE today, and did throughout the unemployment insurance hearing.”

“That on May 27, 1997, in the agency appeal, Appellant requested subpoenas and records including his personnel records which the Appeals Office denied.”

“On August 21, 1997, Mr. Katz’s law firm with Mr. Katz again on the pleading, filed an emergency motion for enforcement of Judge Radius’ order in Civil Number 97-0512-02. On August 26, September 26, and October 31, 1997, this particular judge hear that motion. Mr. Katz did not argue, but the attorney from his law firm, Mr. Tsukazaki argued the motion.”

“On February 16, 1998, the Appeals Office rejected another of Appellant’s requests for subpoenas.”

“On March 5, 1998, the Appeals Office decision was entered.”

“On March 12, 1998, Appellant brought a motion for reconsideration and again requested subpoenas for the documents, and based on the testimony of Louanne Kam at the hearing, added the need for Mr. Aipa to be called as a witness, and a specific document to which Ms. Kam had referred that being a second opinion on the arms length relationship between KSBE and P&C.”

“In requesting the additional subpoenas along with the previously requested subpoenas, Appellant included a justification, among others that the court order he was under would not allow him to provide it himself.”

“On April 29, 1998, the Appeals Office denied the request to reopen the case and again denied Appellant’s request for subpoenas on the basis that Appellant failed to show the necessity of the individuals and documents for a fair hearing.”

“Based on the above, the argument that Appellant should have brought forth the documents he was precluded from having because of actions taken by Mr. Katz’s law office in the companion case will not prevail.”

“The law regarding subpoenas is found at Hawaii Administrative Rules § 12-5-93(e)(20) (1997) and reads, ‘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 account records and documents at any hearing, a subpoena shall be issued by the referee.’ It is not a matter of discretion.”

“With respect to necessity, the Court finds there was a showing of necessity. Appellant was under court order so he did not have the documents and had no way to compel the testimony of Employer. The Court also finds that the information sought to be subpoenaed was relevant to the underlying unemployment case, inter alia, because it could go to reasons for Appellant’s actions . . . and whether Appellant was acting with wilful and wanton disregard of Employer’s best interest. The Court also finds that it is beyond cavil that it is against the best interest of a charitable trust, namely KSBE, to lose its tax exempt status.”

“. . . It is not disputed that Appellant was acting on information that indicated such action could or would jeopardize Employer’s tax-exempt status. Ms. Kam testified and the Appeals Office found . . . that Appellant had a genuine concern for the organization and that concern was understandable.”

“. . . The record shows there was no wilful or wanton disregard of Employer’s interests; Employer being KSBE, the charitable estate as opposed to any individual who worked for KSBE, and that his actions were an exercise of his discretion. . .”

           KSBE does not dispute the facts in this case as stated above. A preponderance of the evidence clearly shows that Harmon was denied due process by the refusal of the Appeals Office to subpoena witnesses and documents which Harmon had no way to access. This Court should accordingly uphold the Circuit Court’s ruling on this basis.

           B. The Circuit Court’s Conclusion Regarding Misconduct Was Correct

           KSBE argues on pages 17 and 18 that the Circuit Court’s conclusion that Harmon’s

actions did not constitute misconduct was wrong for the following reasons:

“First, the Appeals Officer correctly concluded that Aipa and Kam were authorized to issue directives to Harmon (CRA 245). Harmon admitted both at the agency hearing and in memos submitted as exhibits that he was to report to Aipa and Kam in Fall 1996 (CRA 87, 153, 160-1, 163-4, 404-6). Therefore, notwithstanding Harmon’s contradictory testimony (CRA 125-6), the Appeals Officer’s finding was not clearly erroneous.”

           This argument fails in that, although Harmon admitted he was directed by Peters to report to Aipa regarding P&C matters, he stated that he believed he owed a higher duty to his employers, KSBE and P&C, which was to act in a manner which did not contradict the written policies of the Trustees and P&C, and which did not violate the law.

           KSBE on page 18 argues:

“Second, there was no probative evidence on the record before the Circuit Court that the directives violated a specific law. . . Moreover, Harmon conceded he had no information from either the Internal Revenue Service or the Insurance Commissioner to support his position that complying with the Aipa and Harmon (sic) [Kam] directives would violate a law or regulation. . . Instead, Harmon’s firm belief was premised upon his own interpretation of a 1994 tax consultant’s report . . . as well as written materials from Coopers & Lybrand, magazines, and newspapers regarding the interim IRS sanction regulations . . . Harmon also admitted he was not a lawyer and never consulted a lawyer to interpret the tax code interim sanctions . . . His subjective belief as to what was in the ‘best interests’ of KSBE, as well as his understanding of what was lawful, both of which had tenuous bases, did not justify his flagrant acts of insubordination.”

           This argument fails in that Harmon’s “firm belief” and his suspicions of wrongful acts being committed were sufficient cause for his refusal to commit these acts which Harmon concluded were in violation of a public policy. Harmon’s refusal to commit these wrongful acts based upon his best knowledge and his desire to protect the interests of his employer, do not rise to the level of being categorized as “flagrant acts of insubordination”.

            The Court correctly determined that: “The record shows there was no wilful or wanton disregard of Employer’s interests; Employer being KSBE, the charitable estate as opposed to any individual who worked for KSBE, and that his actions were an exercise of his discretion.”

           Other courts have also ruled that an employer may not discharge an employee in violation of a “public policy”. The general rule was articulated in Shaffer v. Frontrunner, Inc.(Ohio Court of Appeals, No. 4-88-22, 1990), when the court said, simply, that “there is an exception to the at-will employment doctrine . . . for wrongful discharge in violation of public policy.” In Stoeckert v. Primary Plus Inc. (California Superior Court, Santa Clara Cty., no. 724319, 1996), for example, a nursery school teacher was awarded damages when she was suspended, transferred and eventually forced to quit because she reported suspected child abuse, even though no one was ever officially charged with child abuse in the case.

           KSBE’s argument also fails in that Harmon, during the time he was employed by KSBE, was entitled to rely upon the information provided to him by KSBE’s tax consultant, Mark McConaghy (who was an attorney); its financial auditor, Coopers & Lybrand; its tax manager, Gilbert Ishikawa; and by Aipa himself. It was not reasonable to expect that Harmon needed to be an attorney to carry out his responsibilities, or that he needed to consult with other outside lawyers when he was already being provided this information by KSBE and P&C.

           During the time he was employed by KSBE and was the president of P&C, Harmon agreed with the opinions of these paid experts and acted accordingly. As a consequence, there was no reason for Harmon to seek further outside expert opinion. In effect, it was Aipa and Kam who disagreed with these expert opinions when they orally told Harmon that these original opinions no longer applied. Aipa refusal to provide Harmon with written evidence of the alleged revised opinions was unreasonable, or else an indication that this was a false statement and that no revised opinions ever existed.

KSBE argues on page 19:

“Third, Harmon’s understanding of the applicability of the arms-length concept to his duties on behalf of P&C and KSBE were, like his reading of the tax code interim sanctions, premised upon his own flawed interpretation. . . ”

           KSBE’s arguments fail because it has already been determined by the Court that Harmon’s interpretation was indeed correct.

           Harmon begs the Court to take notice of the following material excerpts from Equity No. 2048, Petition of the Attorney General on Behalf of the Trust Beneficiaries to Remove and Surcharge Trustees, dated Sept. 10, 1998:

“. . . The Trust established by the Will has one single, immutable purpose. It is to educate Hawaiian children.”

“. . . The Trustees have been unfaithful to the Will and the purpose of the Trust. They have failed to comply with clear directives of the Will. They have subordinated the sole purpose of the Trust to their personal gain. They have squandered Trust assets intended for education by their excessive compensation, and by imprudent and improper Trust management and investments. They have violated Hawaii statutes and court orders.”

“STANDARDS APPLICABLE TO TRUSTEES”

“. . . The Trustees owe the Beneficiaries a duty of faithful adherence to the terms of the Will and the purpose of the Trust.”

“The Trustees owe the Beneficiaries a duty of loyalty. The Trustees are required to administer the Trust without regard to their own interests and solely in the interest of the Beneficiaries and with surpassing honesty. . .”

“The duty of loyalty prohibits self-dealing and prohibits a Trustee from acting when there is a conflict between a Trustee’s individual interest and the interest of the Trust and its Beneficiaries.”

“. . . The Trustees owe the Beneficiaries a duty of care. The Trustees are required to act prudently at all times and in all matters affecting the Trust.”

“. . . The Trustees owe the Beneficiaries a duty to delegate prudently and to exercise continuing general supervision over delegated matters.”

“The Trustees owe a duty to the Beneficiaries to keep and render clear, accurate, and complete accounts with respect to the administration of the Trust.”

“. . . A Trustee who violates any duty owed to the Beneficiaries is subject at the request of the Beneficiaries to removal, surcharge, and other available remedies.”

“COUNT 1"

“THE TRUSTEES HAVE VIOLATED THE DIRECTIVES

OF THE WILL AND THE PURPOSE OF THE TRUST”

“. . . In violation of the Will, the Trustees have failed to expend the annual Trust income on the Kamehameha Schools, have instead diverted $350 million to other purposes, and thus have failed the single purpose of the Trust of educating Hawaiian children.”

“. . . In violation of the Will, the Trustees have failed to make a full, complete, and accurate disclosure of the financial condition of the Trust. This failure also violates the Trustees’ duty to provide the Beneficiaries complete and accurate information as to the nature and amount of the Trust property.”

“. . . The Trustees’ failure to account clearly and separately for Trust income and corpus violates the Will, violates a binding order of this court, and has the effect of depriving the Kamehameha Schools of monies intended for the education of Hawaiian children.”

“. . . The Trustees at all times during the terms of Stender, Wong, Lindsey, and Jervis and during the last 13 years of Peters’ term have accumulated $350 million in income directed by the Will for the use of Kamehameha Schools and then depleted the accumulated income by reclassifying it a corpus.”

“The Trustees calculated their compensation on the Trust income while it was classified as income and before it was later reclassified as corpus.”

“The reclassification of Trust income as corpus was not disclosed to the Beneficiaries and was not disclosed to the court.”

“The effect of the reclassification has been to subvert the single purpose of the Trust, to necessitate reductions in educational programs and services, to deprive thousands of children of the opportunity to obtain educational benefits from the Trust, and to deprive the Kamehameha Schools of $350 million intended by Ke Ali`i Pauahi to educate Hawaiian children.”

“Incomplete Financial Reporting”

“Hawaii Revised Statutes 554-4 and the Hawaii Probate Court Rules impose reporting requirements on the Trustees in addition to those imposed by paragraph 13 of the Will.”

“Section 554-4 requires the trustees of a charitable trust to ‘file annually with the court having jurisdiction thereof an account showing in detail all receipts and disbursements, together with a full and detailed inventory of all property in the trustee’s possession or under the trustees’ control.”

“Rule 27 of the Hawaii Probate Court Rules provides that ‘all charitable trust accounting shall be referred to a special master appointed by the court for review, analysis, and report to the court.’”

“Rule 29 of the Hawaii Probate Court Rules provides that: ‘The master shall have unlimited access to the books and records of the fiduciary with respect to the trust or estate that are not protected by privilege, including minutes of all meetings, and may interview any employee of the fiduciary regarding the trust or estate (emphasis added) as the master deems appropriate.’”