September 17, 1998

 

Federal Bureau of Investigation
Prince Kuhio Federal Building, Rm. 4307
300 Ala Moana Blvd.
Honolulu, Hawaii 96850

Re: Request for Investigation of the Following Entities Under the Racketeer Influenced & Corrupt Organizations Act (RICO):

. Trustees of Bernice Pauahi Bishop Estate

. P&C Insurance Company, Inc. (P&C)

. Pauahi Holdings Corporation(PHC) & Subsidiaries

. Unison Pacific

. Bank of Hawaii

. SoCal Holdings/William Simon

. Sino Finance/William Simon

. Xerox Corp/William Simon

. Honolulu Federal Savings & Loan/William Simon

. Investors Equity Insurance Company

. Robert Trent Jones Golf Club

. J&H, Marsh & McLennan, Inc. (J&H, M&M) & Subsidiaries

. M&M Insurance Management Services, Inc. (M&M IMS)

. Federal Insurance Company (A Member of The Chubb Group)

. Centre Reinsurance Company

. Mid-Ocean Reinsurance Company

. Underwriters Capital (Merritt)

. Coopers & Lybrand LLP           

. Price Waterhouse LLP/Mark McConaghy

. Goldman Sachs & Company/Robert Rubin

Gentlemen:

This is to provide information regarding the referenced organizations and related companies, relating to possible illegal activities under the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).

The relevant activities that RICO proscribes include:

. Deriving income from a "pattern of racketeering activity" or through collection of an unlawful debt and using or investing the income or its proceeds in any enterprise engaged in, or whose activities affect, interstate or foreign commerce;

. Acquiring or maintaining any interest in or control of such an enterprise through a "pattern of racketeering activity";

. Conducting or participating in the conduct of such an enterprise's affairs (as an officer or director) through a "pattern of racketeering activity"; or

. Conspiring to do any of the above.

I understand that various state and federal crimes are included under RICO's definition of "predicate acts", among them mail fraud, wire fraud, financial institution fraud, fraud in the sale of securities, and bribery. A "pattern of racketeering activity" requires at least two acts of "racketeering activity" within 10 years. I believe that evidence exists that the referenced organizations have collectively engaged in all of these criminal activities during the past decade, and will continue to do so until such time as appropriate regulatory and law enforcement agencies act to investigate and prosecute those individuals engaging in such activities.

As background to my involvement with these organizations, I was employed by Kamehameha Schools Bishop Estate (KSBE), a tax-exempt charitable trust, as their Risk/Insurance and Safety Manager from November, 1988, until I was terminated from that position by Nathan Aipa, General Counsel for KSBE, on November 20, 1996. Concurrent with this position, I was the president of P&C Insurance Company, Inc. (P&C), a for-profit subsidiary of Pauahi Holdings Corporation (PHC) from October, 1994. I was terminated from this position by Henry H. Peters, Trustee of Bishop Estate and Chairman of the Board of Directors of P&C, on the same date as my termination from KSBE.

Financial Relationships Between Entities

I do not have complete knowledge of all relationships between the referenced entities. However, some of the connections between KSBE, P&C, and other related entities at the time of my employment, were as follows:

P&C Insurance Company, Inc.:

Directors:

Henry H. Peters, Chairman of the Board (and KSBE trustee)

Gilbert Tam (former KSBE principal executive; now with Bank of Hawaii)

William S. Richardson (former KSBE trustee and a consultant to KSBE)

Officers:

Bobby N. Harmon, President

Peter J. Lowe, Vice Pres. (current officer of M&M Insurance Management Services, Inc.)

William S. Richardson, Secretary/Treasurer

Nathan T. K. Aipa, Asst. Sec./Asst. Treasurer

Henry Peters also held the following positions:

-- Trustee of Bishop Estate

-- Chairman, Board of Directors, Pauahi Holdings Corp.

-- Chairman, Board of Directors, Royal Hawaiian Shopping Center

-- Member/Manager, Sino Finance Group LLC

-- Chairman, Board of Directors, Unison Pacific Investment

-- Chairman, Board of Directors, Konia, Inc.

-- Chairman, Board of Directors, Treyburn GP, Inc.

-- Chairman, Board of Directors, Autofuel Company (AFCO)

-- Chairman, Board of Directors, Paradise Petroleum, Inc.

-- Chairman, Board of Directors, Ranray Properties, Inc.

-- Chairman, Board of Directors, Allred Oil Company, Inc.

-- Director, Robert Trent Jones Golf Club

-- Director, Mid Ocean, Ltd.

-- Director, Underwriters Capital (Merrett) Ltd.

-- KSBE Representative, Goldman Sachs Group LP

Marsh & McLennan, Inc. and M&M Insurance Management Services, Inc.

Marsh & McLennan, Inc. (M&M) has been an insurance agent for KSBE and its major subsidiaries since 1990. Rocco Sansone, CPCU, Vice-President, has been the account executive servicing the account. KSBE and M&M (or their subsidiaries) have also co-invested and/or have jointly participated in some manner in several business operations, including Centre Reinsurance Company; Mid Ocean Ltd.; Underwriters Capital (Merrett) Ltd.; and EXEL, Ltd.

M&M Insurance Management Services, Inc. was contracted by P&C in 1994 to organize and manage the captive insurance company. Peter Lowe, Sr. Vice President, was the senior executive which provided the management services.

Federal Insurance Company (a member of The Chubb Group)

The Federal Insurance Company provides Professional Liability, Employment Practices Liability, Directors & Officers Liability, Fiduciary Liability and Crime Insurance to KSBE and most of its subsidiaries and related companies.

Coopers & Lybrand LLP

Coopers & Lybrand (C&L) was the accounting firm responsible for auditing KSBE, PHC, P&C and other subsidiaries.

Price Waterhouse LLP

Tax consultant for KSBE & subsidiaries. PW's principal tax consultant for KSBE is Mark McConoghy, who has also been reported to be a co-investor with the estate and/or the estate's trustees and employees in several large investments.

Goldman Sachs/Robert Rubin

Kamehameha Schools/Bishop Estate owned approximately 10% of Goldman Sachs during this period. Henry Peters was a designated Director.

Activities Potentially Covered Under RICO. Many of the activities that may potentially be covered under RICO have already be exposed and extensively covered in local and national news reports. The purpose of this letter is not to go into great detail about these activities; however, they do deserve some mention in order to help tie together some of the complex political and financial relationships that exist among these various entities.

The following are some of these relationships and activities:

Excessive and Improper Fees Charged by M&M; Conflicts of Interests. At the time P&C was formed, I signed a management agreement between P&C and M&M Insurance Management Services, Inc. for captive management services. This contract specified that M&M IMS would provide services on a time and expense basis. In addition to these fees, however, M&M was billing to P&C an annual $200,000 flat charge for "brokerage services". There was never any contract negotiated with M&M for these services and no satisfactory explanation given for the charges.

Conflict of interests existed due to the fact that Peter Lowe of M&M IMS was an officer of P&C and arranged contracts on behalf of P&C with the various vendors. These vendors included companies that were directly related to M&M, including William Mercer & Co. (the actuary), M&M Insurance Protection Services (safety & loss control), and Marsh & McLennan, Inc. (the agent). The $200,000 flat fee that was billed to P&C by M&M was repeatedly questioned by me. Mr. Lowe approved of the charges, but never justified them and never arranged a contract for these services.

In correspondence to KSBE, M&M stated that their $200,000 flat fee had included services that had been provided directly to KSBE. They also stated that the fee included their brokerage services in obtaining reinsurance for P&C. However, M&M was receiving commissions from the reinsurer for this placement, and charging a fee in addition to this commission was fraudulent and illegal.

Other relationships between KSBE and M&M existed which were not disclosed to me at the time of my employment. According to KSBE's tax returns for the period 1/1/94 to 1/1/95, KSBE and Marsh & McLennan Risk Capital Holdings, Ltd. were co-investors in Underwriters Capital (Merrett) Ltd., a Bermuda reinsurance company. This corporation was managed by Marsh & McLennan Management Services (Bermuda) Limited. During this one year period, Underwriters Capital had a net loss of $5,887,378. Most of this loss appears to be from investments rather than from insurance claims. From the tax return, it appears that M&M received sizable management fees from this venture. Henry Peters was listed as a Director of Underwriters Capital. It is unknown to me if he received compensation from this company.

Unfair, Deceptive and Fraudulent Business Practices; Conflicts of Interest; Mail Fraud. At the direction of Henry Peters and other managers for KSBE, premiums that should have been charged to subsidiaries were actually paid by KSBE. One example is Eric Martinson's memorandum of September 24, 1996 to Ramona Hinck regarding the reallocation of premiums for the SoCal, AFCO, Unison and SINO subsidiaries. As a result of this directive, premium charges that had been previously allocated by me to these subsidiaries were transferred to KSBE. Eric Martinson was the Financial Assets Manager for KSBE, and was also the Secretary/Treasurer, Sino Finance Group LLC, and Vice President, Unison Pacific Investment (US) Limited.

Under the lease agreements for various commercial properties that are owned and managed by the estate, insurance costs are directly passed on to the lessees and tenants through monthly maintenance fees. As a result of the overcharges by M&M, and the improper allocations of premiums and claims costs to the various subsidiaries, these lessees and tenants were wrongfully and deceptively billed a share of these higher costs. The various commercial properties would include Royal Hawaiian Shopping Center, Windward Mall, Bishop Commerce Center (Georgia), Desert Springs Marketplace (California), and Velvet Cloak Inn (North Carolina), among others.

These monthly maintenance billings and payments are normally done by mail and involve interstate commerce since many of KSBE's properties, and the home offices of various lessees, are located on the mainland. As a result, in addition to RICO, these acts may be subject to the 1994 Federal Insurance Crimes Act, which covers crimes by persons engaged in the business of insurance whose activities affect interstate commerce.

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.

Various IRS regulations regarding the maintaining of "arms-length" relationships between a tax-exempt charitable organization and its for-profit subsidiaries were also being breached. At the direction of Henry Peters, Nathan Aipa, Louanne Kam, Eric Martinson, and others, KSBE paid various 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 by individual investors, trustees, officers, directors or employees of these entities.

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 wrongfully subsidizing these for-profit entities.

Conflicts of Interest: the "Insurance Policy" for U.S. Treasury Secretary, Robert Rubin; Goldman Sachs; Former U.S. Treasury Secretary, William Simon. An article appearing in the February 28, 1995 edition of The Honolulu Advertiser reported that the Estate had issued an insurance policy for Robert Rubin. As the insurance manager of KSBE and president of P&C, I was not informed of any details of this transaction. If this were an insurance transaction, actuarial studies should have been made to determine proper premium charges; policies should have been issued; premiums billed; premium taxes paid, etc. To my knowledge, none of these actions were taken. This raises the question of whether or not this transaction violated any insurance statutes of the State of Hawaii.

To quote from the article:

"Robert Rubin, U.S. Treasury secretary, has an important personal financial connection to Hawaii's Bishop Estate, as does one of Rubin's predecessors at the Treasury, former secretary William E. Simon."

"The estate has guaranteed an undisclosed rate of return on Rubin's holdings in Goldman, Sachs & Co., the giant New York-based investment bank in which Bishop Estate has invested $500 million..."

"Rubin was co-chairman of Goldman, Sachs from 1992 through 1994, the same period in which the Bishop Estate made two separate $250 million investments in the firm."

"When Rubin left the bank to join President Bill Clinton's cabinet last month as Treasury Secretary, he secured an `insurance policy' from the estate that underwrites the value of his personal holdings in Goldman, Sachs..."

"...former Treasury Secretary Simon has been the estate's business partner in several major banking deals both in Hawaii and in Asia in recent years." (The banking deal in Hawaii was HONFED, which was later sold to Bank of America. State Insurance Commissioner Wayne Metcalf took legal action against Bank of America and Goldman Sachs, along with other brokerage companies, in connection with the failure of Investors Equity Life Insurance Company, which had sold annuities through HONFED. Mert Chillingworth, former president of Marsh & McLennan, Hawaii, also served on the board of directors of HONFED.)

"Simon also personally invested, along with four estate trustees and numerous senior estate staffers, in a Houston-based methane gas drilling project..."

"The estate itself invested some $85 million in the same energy deal."

An article in the March 23, 1995 issue of USA Today states:

"In an unusual deal, Rubin pays hundreds of thousands of dollars a year to the Bishop Estate in exchange for a guarantee that he'll never lose money on a multimillion-dollar investment in his former firm, Goldman Sachs investment bank."

"Treasury officials won't give details either, except to say Rubin pays the estate hundreds of thousands of dollars a year."

"To avoid a conflict of interest, he sold his Goldman Sachs partnership to the firm. A price wasn't disclosed, but the value of a senior partnership could exceed $50 million."

"When buying out partners, Wall Street firms are reluctant to deplete cash reserves, the lifeblood of an investment bank. So Goldman Sachs gave Rubin a note that promised to pay principal and interest over a number of years."

"This still left Rubin with a potential conflict: a gigantic investment in Goldman Sachs that could be affected by his official government actions."

"If Goldman Sachs had financial troubles, Rubin might not get paid, possibly costing him tens of millions of dollars."

"Rubin's solution was to buy an insurance policy on his investment, so he would get paid even if Goldman Sach's finances ran into trouble."

"Rubin got the insurance from the Bishop Estate, rather than a major financial firm, because it was least likely to be affected by his government work, says Treasury general counsel Ed Knight."

Goldman Sachs continues to be involved in lawsuits accusing the firm of questionable dealings. The Honolulu Star-Bulletin reports in its December 11, 1996 edition:

"A Circuit Court judge has approved a settlement between state Insurance Commissioner Wayne Metcalf and Gary Vose, the sole shareholder of Investors Equity's parent company at the time the insurer was placed into liquidation in June 1994..."

"The state seized the insurance company after its management ran up a $90 million deficit largely because Vose lost policyholders' money in highly speculative leveraged investments known as derivatives, the state charges..."

"Metcalf said the settlement is part of a series of actions against Bank of America, several brokerage companies including... Goldman Sachs, accountants and attorneys associated with the failure of Investors Equity Life..."

"A state lawsuit accused Vose of racketeering, fraud and other misconduct... The suit alleges that the holding company that controlled Investors Equity conducted sham real estate deals and used the insurance firm's assets to pay large fees to Vose and companies connected with him..."

Conflicts of Interest: Bank of Hawaii, William Simon, Henry Peters, Gil Tam, William Richardson, Eric Martinson. P&C's director, Gil Tam, was a co-investor along with KSBE, in the McKenzie Methane deal in Texas. Tam is currently an officer of Bank of Hawaii. P&C's checking and savings accounts are with the bank, and its investments are handled by the bank's subsidiary, Hawaiian Trust.

The Honolulu Advertiser reported in its April 3, 1995 issue under the headline, "Estate had $26.9 million in AutoFuel - Its investment coincides with bank loans":

"According to paperwork filed by the Bishop Estate at the Bureau of Conveyances here, the estate and AutoFuel signed a business agreement October 16, 1990. On the same day, the Bank of Hawaii and Bank of New York signed a revolving credit agreement and loan agreement with AutoFuel..."

"The Bank of Hawaii was also involved in another estate deal in Texas. According to bankruptcy records in Houston, the estate guaranteed loans made by the Bank of Hawaii to individuals and companies that invested in McKenzie Methane Inc. The estate later assumed those loans when the borrowers failed to make payments to the bank."

To tie these statements into this inquiry regarding conflicts of interest, all three of P&C's board of directors, Gil Tam, William Richardson and Henry Peters, were co-investors in this McKenzie Methane deal, as were William Simon and Eric Martinson.

Conflicts of Interest: Goldman Sachs & Robert Rubin. It was reported in the media that an "insurance policy" was issued 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 my area of responsibility, I was never informed of this arrangement and, to my knowledge, no actuarial studies were made, no reinsurance was obtained, and no reserves were established to cover this substantial financial guarantee.

Tampering with Public Records. In-house attorneys routinely directed KSBE employees to notarize documents without witnessing their signing. One employed notary public expressed concern to me about this practice as I was responsible for obtaining the Notary Bonds. It would appear 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.

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 had personally invested.

In my capacity as president of P&C, I 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 my 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 non-bid contracts and settlement of claims, and the failure to set proper loss reserves. I discussed these irregularities with Cary Okawa and Dennis Tsuhako of Coopers & Lybrand on October 18, 1996, and followed-up with a letter dated November 20, 1996, in which I enclosed documents that provided evidence of these wrongful acts. A copy of this letter and substantiating documents were sent to the Insurance Commissioner, State of Hawaii.

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, and financially benefitted the Trustees by reducing expenses of these for-profit entities, thus increasing profits of the companies and commissions to the Trustees.

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.

Insurance claims were not being reported by the Legal Group (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.

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." To top it off, Trustee Lokelani Lindsey's son 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.

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.

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.

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.

Henry Peters, Nathan Aipa and Louanne Kam were attempting to control the operations of P&C, including claims. This included directing the payment of excessive amounts to independent contractors for non bid, even nonexistent, contracts. For example, as President of P&C, I 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, 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 my objections, Peters, Aipa and Kam were adamant that I continue to pay these unexplained overcharges by M&M.

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 combine 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, Louanne 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.

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.

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 had personally invested.

It was reported in the media that an "insurance policy" was issued 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 my area of responsibility, I was never informed of this arrangement and, to my 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 the insurance department.

In-house attorneys routinely directed KSBE employees to notarize documents without witnessing their signing. One employee expressed her concern to me about this practice as I was responsible for obtaining the Notary Bonds. It would appear 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.

In my capacity as president of P&C, I 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 my 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 non-bid contracts and settlement of claims, and the failure to set proper loss reserves. I discussed these irregularities with Cary Okawa and Dennis Tsuhako of Coopers & Lybrand on October 18, 1996, and followed-up with a letter dated November 20, 1996, in which I enclosed documents that provided evidence of these wrongful acts. A copy of this letter and substantiating documents were sent to the Insurance Commissioner, State of Hawaii.

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, and financially benefitted the Trustees by reducing expenses of these for-profit entities, thus increasing profits of the companies and commissions to the Trustees.

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.

Insurance claims were not being reported by the Legal Group (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.

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." To top it off, Trustee Lokelani Lindsey's son 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.

It would appear to me that the IRS possibly could interpret several transactions between Marsh & McLennan and KSBE/P&C as resulting in "excess benefit". For examples:

1. I obtained a property insurance proposal from Hobbs Group which was approximately $600,000 less than KSBE was paying for coverages placed through the incumbent broker, Marsh & McLennan. MMI's account representative, Rocco Sansone, represented that M&M could have gotten the same coverages with the same company at the same price, if only I had let him know that was what the estate wanted. Nathan Aipa and Louanne Kam conspired with Sansone to keep MMI on as KSBE's exclusive broker. They requested that Hobbs extend the proposal deadline - first to July 15; then to July 31; then to August 31 - in order to allow MMI time to arrange to take over Hobbs proposal with the carriers. (The latest Hobbs would extend the proposal was August 15.) They arranged to have MMI review and give their opinion of Hobbs' proposal before allowing my staff report to go to Trustees. I was pressured by Aipa/Kam/Sansone to give MMI an exclusive broker of record letter to enable them to take over the Hobbs proposal. This I would not do as I considered it highly unethical and not in the best interests of the estate. When MMI was unable to get a resident agent appointment from Arkwright Insurance Company as Sansone had represented, or make any other arrangements, MMI's policies were cancelled and the business went to Hobbs. The 45-day delay in rewriting the policies, however, cost the estate and its subsidiaries nearly $75,000. MMI benefited not only from the commissions they received from the $600,000 "overcharge", but they also received commissions for the extra 45 days their policies were in force.

2. On June 7, 1994, I received a fee proposal from Peter Lowe, Vice President of M&M Insurance Management Services, Inc., (IMS) for services for the formation and ongoing management of a captive insurance company. Fees were quoted on a time and expense basis. The total annual estimated fee for ongoing captive management services was $66,500.

After the captive was formed, the actual charges made by IMS for ongoing management services was $60,107 for the first 9-month period ending July 1, 1995. This was in line with their proposal. MMI, however, had billed an additional $200,000 flat fee for brokerage services" which had not been indicated in the proposal or in the captive management contract with IMS.

Outside services required by P&C were almost always contracted for on a time and expense basis. The notable exception was Marsh & McLennan, Inc. They billed their services to P&C at a flat rate of $200,000 annually, invoiced in installments of $100,000 each. When I received the first of these invoices, I noted there was no explanation for the invoice and I questioned IMS about the charges. The answer was that these were for "broker services"that IMS was not staffed to perform, such as, policy issuance, billings, claims services, etc. I was advised that MMI would provide further details about the services in the future. I never received a satisfactory explanation and a written agreement was never entered into for these services.

During the year prior to the captive being formed (1993-94), Marsh & McLennan, Inc. received $274,928 in brokerage commissions from KSBE. During the first year of the captive (1994-95), MMI received $290,443 in brokerage commissions from KSBE, plus the $200,000 flat charge from P&C. In addition, P&C paid MMI-affiliated companies IMS and William Mercer, $60,107 and $2,663 respectively. Total income to MMI and affiliates had gone from $274,928 to $553,213 in one year. (And one of the purported advantages of forming a captive was reduced costs by elimination of the "middle-man".) The following year (1995-96) the total fees and commissions to MMI and its affiliates increased to $632,714.

To budget P&C's expenses for the current fiscal year, on August 28, 1996 I requested a written proposal from MMI on a "time and expense" basis (Exhibit 21), which they did not provide. Aipa and Kam strongly pressed me to have P&C continue to pay MMI the $200,000 annual flat fee. On October 8, 1996, a meeting was held at the direction of Ms. Kam to discuss MMI's fees. Attending the meeting were Ms. Kam, Rocco Sansone, Peter Lowe and Garrett Liu.

One of my frequent admonitions to MMI and IMS was that P&C should always act at arms-length from KSBE and its subsidiaries. As Mr. Liu's meeting notes indicate, I expressed my desire to be able to justify MMI's fees for the services performed, and to keep P&C's costs separate from KSBE's costs. Rocco expressed his opinion that some of the services provided to P&C were difficult to unbundle from the services provided to KSBE, and he suggested that a fee proposal be made for the entire KSBE account and not just P&C Insurance.

Peter Lowe represented that almost all of the captives he dealt with had a flat fee arrangement with their risk managers and brokers. Ms. Kam remarked that I had no "bench marks" for these service fees, and suggested I check my reference materials and determine what other captives were doing. After this meeting, I reasoned that the best way to obtain such "bench marks" was to check with other local captive managers to see what kind of fee arrangements they had with their clients. In just two five-minute phone calls, I obtained "time and expense" estimates and sample agreements from two other captive managers--something which MMI had not been willing to provide in two years. These competitive cost estimates ran from $25,000 to $50,000 a year and included all the services being provided by MMI and IMS at a cost of $287,527.

On P&C stationery, and signing the letter as President of P&C, I responded to Mr. Sansone with my findings and again requested a service proposal from MMI.

Ms. Kam rescinded my letter without any prior notification, and issued another PERS 9 reprimand dated October 31, 1996. In this memorandum she states:

"I was shocked to read your letter of October 29, 1996 which was sent to Mr. Sansone and Mr. Lowe. This letter was not previously reviewed or approved by either Nathan or myself. This is a flagrant failure to follow clear and express directives from your supervisors and amounts to insubordination. Any further incident in which you fail to follow directives will be grounds for further disciplinary action including immediate termination."

Needless to say, by this time I had strong suspicions that "private agreements" had been made between Nathan Aipa, Louanne Kam, Rocco Sansone and Peter Lowe to which I had not been a privileged party. Looking at the income MMI and its affiliates were receiving from KSBE and P&C, I could definitely see the opportunity for "excess benefit".

If my understanding of the Taxpayer Bill of Rights II is correct, as an officer of P&C I could be fined $10,000 by the IRS if it were determined that I knowingly permitted the organization to engage in an excess benefit transaction. But the main reason for my "flagrant failure to follow clear and express directives from my supervisors" was that I felt it was downright dishonest.

In my mind, if I "looked the other way" and allowed this activity to continue, I would be breaching my fiduciary duties to the organization. I believed that my duties to the estate were greater than my duties to my supervisors. And I knew that my conscience would be forever burdened with the thought that I had stood by and allowed certain unscrupulous individuals to "rob" the true beneficiaries of the estate - the children of Hawaiian ancestry.

One example of what could be considered as "private benefit" can be found in Eric Martinson's memorandum of September 24, 1996 to Ramona Hinck regarding premium allocations to the SoCal, AFCO, Unison and SINO subsidiaries. This memorandum and my response are enclosed (Exhibit 13). As a result of this directive, premium charges that had been previously allocated to the subsidiaries were transferred back to KSBE. Eric Martinson is also Secretary/Treasurer, Sino Finance Group LLC, and Vice President, Unison Pacific Investment (US) Limited.

1) Arms-length Relationships/Conflicts of Interest

2) Intentional disregard of State and Federal regulations, notably those under the following acts:

-- Americans with Disabilities Act (ADA)

-- Environmental Protection Act (EPA)

-- Occupational Safety & Health Act (OSHA)

3) Fraud; deceptive practices in financial and regulatory reporting; discrimination; failure to act in good faith with KSBE's insurance and bonding companies; breach of fiduciary responsibilities; non-bid contracts; political favors; improper actions for personal gain or profit; and other wrongful acts

Despite being advised by Mr. Aipa that "arms-length was no longer an issue," regarding my dual roles as Risk/Insurance & Safety Manager for KSBE and as President of P&C Insurance Company, Inc.,

I still had serious reservations about following many of his directives. Some of my concerns were:

o Tax issues. Operating expenses, insurance premiums and claims costs were, in my opinion, being improperly allocated between the tax-exempt estate and its for-profit subsidiaries. I had concern that sanctions might be imposed by the IRS against the estate, and against me personally, if I followed Mr. Aipa's and Mr. Peters' directives.

o Conflicts of interest; private inurement; and private benefit. The board of directors of P&C is made up of Henry Peters, a current trustee; William Richardson, a former trustee and current consultant; and Gil Tam, a former principal executive and currently employed by Bank of Hawaii which handles P&C's checking and savings accounts and its investments. All three directors were investors in the McKenzie Methane deal.

The officers included myself; Peter Lowe, an officer of M&M Insurance Marketing Services, Inc., which is a subsidiary of Marsh & McLennan, Inc. (MMI); William Richardson, a former trustee and current consultant for KSBE; and Nathan Aipa, General Counsel for KSBE. KSBE has also been involved with another MMI subsidiary, Guy Carpenter, through its sizable investments in two Bermuda insurance companies, Centre Reinsurance and Mid-Ocean Reinsurance.

o Piercing the corporate veil. Although P&C is a subsidiary of Pauahi Holdings Corporation, direct control of P&C's operations by KSBE trustees and employees could make the estate liable for P&C's acts. An example provided by Price Waterhouse was HEI being held responsible for Hawaiian Insurance Company's liabilities. Recent claims against KSBE in which KSBE and/or its trustees were named as a defendants along with the subsidiary bear this out. These lawsuits include those brought by McKenzie Methane; Kona Enterprises; Keauhou Master Homeowners' Association; Field; and Basham.

Defending these claims has already cost the estate over a million dollars in legal fees alone.

From the initial discussions starting in 1989, the issue of arms-length relationships was a major concern with the formation of a captive. Enclosed as references are a letter dated August 9, 1996, from Mark L. McConaghy of Price Waterhouse; a section from an undisclosed source document from the Legal Group; and my draft of Arms-Length Guidelines for P&C Insurance Company (Exhibit 11).

Mr. McConaghy states in his letter, "A large portion of our discussions revolved around the implications a captive insurance subsidiary may have on the tax-exempt status of KSBE. We discussed that in order to preserve KSBE's tax-exempt status, it is important that the captive does not create a situation where a private individual receives a benefit from KSBE's involvement in the captive. Arms-length relationships between KSBE and the captive would be absolutely necessary to prevent private inurement (benefits flowing to insiders such as trustees and directors) and/or private benefit (benefits flowing to third parties such as other subsidiaries) from becoming a problem. In this context, for example, premiums paid into the captive by all the entities involved would need to be actuarially appropriate in order to prevent the IRS from taking the position that KSBE is improperly subsidizing a for-profit subsidiary."

Despite this admonition, Mr. Aipa orally stated to me that I was to report to him on all P&C matters. I requested this in writing, but never received it. Instead, I was called to meet with Mr. Peters and Mr. Aipa on October 11, 1996. In this meeting in Mr. Peters' office, his oral directives to me were that, in addition to reporting to Mr. Aipa in my capacity as Risk/Insurance & Safety Manager for KSBE, I was also to report to Mr. Aipa on matters relating to the operations of P&C (Exhibit 12).

I remarked that it was my belief that I was responsible to the board of directors of P&C. Mr. Peters stated that that was correct, but that as an employee of KSBE, Nathan was my superior. He also indicated that, although I had done a good job in the past, I could be replaced as president of P&C. He further stated that he would hold Nathan responsible for any actions regarding the operations of P&C.

This arrangement, if I complied with these directives, would place nearly complete control of the operations of P&C (vendors used, premiums charged, premium allocations, investments, dividends to the parent company, claim settlements, etc.) into the hands of Henry Peters, Nathan Aipa and Louanne Kam.

At a meeting later the same day with Mr. Aipa, Rocco Sansone (MMI's account executive) and myself, I questioned the status of my long-pending staff report recommending my transfer from KSBE to P&C. Mr. Aipa informed me that I was not being transferred to P&C because arms-length was no longer an issue.

Examples of what might be considered opportunities for "private inurement" are described in the article which appeared in the February 26, 1995 issue of The Honolulu Advertiser regarding the

McKenzie Methane, Inc. investment (Exhibit 14). Key statements in the article include:

"...estate trustees that year (1989) approved...an $85 million investment in a Houston-based energy venture..."

"The same venture also received more than $3 million in personal funds from all four trustees and employees and business associates of the estate."

"The troubled deal may cost the estate as much as $65 million in lost capital and at least twice that much in lost earnings and tax benefits..."

"Honolulu businessman Desmond Byrne...called the personal investments by estate trustees and staffers `an absolutely improper conflict of interest. It raises the appearance that their official decisions are affected by their own personal financial interests'..."

"The current board is almost completely different from that of 1989. Only one trustee, Henry Peters, remains. But the current board still holds that the old one did nothing wrong, according to Aipa."

"There was no conflict of interest, Aipa said."

"The Texas court files clearly show, however, that the trustees, their employees and associates relied on estate reports and financial data when they decided to put their own money in the deal."

"Estate personnel have immediate access to the high-priced and sophisticated financial expertise of such firms as First Boston Bank and Goldman, Sachs & Co."

"The estate, a non-profit, tax-exempt institution...must be very careful in structuring its investment activities so it won't imperil its tax-exempt status. The Houston investment was particularly tricky because one of the principal benefits was that the estate would receive federal energy tax credits, which the tax-exempt estate intended to sell."

"Trustees have made other personal investments in estate-related business deals."

"According to court records, the estate board of trustees was told in April 1989 by Aipa that `no conflict (of interest) exists in the personal investments.' "

"The personal investments were made `only after careful review of the issues and advice from the law firm of Rush Moore Craven and Stricklin,' Aipa said. But current trustee Oswald Stender...said under oath in a 1993 deposition that he would not have made such a personal investment...that he would not invest in activities...that I had self-dealing in."

"Takabuki, his wife, three children and family company, Magba Corp., invested $1.5 million..."

"The investments were made through a series of five partnerships, called the `HAK Partnerships,' that were organized and administered by Mitchell Gilbert, Bishop Estate financial assets manager from 1988 to September 1994."

"Gilbert and members of his family invested nearly $72,000 in the five partnerships, the court records show. And he invited various influential `investment affiliates' of the estate to invest in the HAK Partnerships..."

"In `marketing' the deal to potential investors, he was acting individually and not as a representative of the Bishop Estate, Gilbert said in his deposition."

"But the letters he wrote were on estate stationery and he signed them as Bishop Estate's financial assets manager."

"...a Texas lawyer for Bishop Estate said in Houston bankruptcy court last month that the estate can only hope to recover $20 million at most of its $85 million investment."

The list of those who invested along with Bishop Estate in this venture would be relevant to my wrongful termination case. According to the Honolulu Advertiser article, the investors included:

Henry Peters (trustee)

William Richardson (then-trustee and current consultant)

Myron Thompson (then-trustee)

Matsuo Takabuki (then-trustee and current consultant)

Dave Thomas (...Thomas participated with the estate in the takeover of two North Carolina companies, Hanfords, Inc., and Nationwide Enterprises, Inc.)

William E. Simon (Former U.S. Treasury Secretary and a past partner of the estate in the purchase re-sale on Honolulu Federal Savings and Loan, and in Asian banking investments.)

Wayne Rogers (...Rogers is suing the estate in federal court here over another soured business deal--the North Carolina corporate takeovers--in which Takabuki was also a personal investor.)

Bruce Nelson and Raymond Pettit (Nelson, treasurer, and Pettit, chief financial officer, of the Rockefeller Group, investment arm of the Rockefeller family of New York. The estate and the Rockefeller Group were partners in a series of corporate acquisitions.)

Frederick "Ted" Field (...Three Field employees also invested...Field was the estate's partner in the corporate takeover of European conglomerate DRG, Inc.)

Mark McConaghy (Bishop Estate's principal tax lawyer and lobbyist. McConaghy, who works for the Price Waterhouse accounting firm's national headquarters in Washington, D.C., was a finalist on last year's state Supreme Court list of nominees to fill the latest vacancy on the estate board of trustees)

Michael Chun (President of Kamehameha Schools)

Gilbert Tam (at the time Director of Administration, Bishop Estate; currently member of Board of Directors, P&C Ins Co)

Guido Giacommetti (Director of asset management, Bishop Estate)

Anthony Sereno (Board of Directors, Royal Hawaiian Shopping Center)

Neil Hannahs (Head of the estate's Kakaako redevelopment program)

Charles Maeda (Head of Information Systems, Bishop Estate)

Richard Wong (President of the Royal Hawaiian Shopping Center, Inc. & Pauahi Holdings Corp)

Wallace Tirrell (President of Kamehameha Investment Corp.)

Gilbert Ishikawa (Bishop Estate tax manager)

Ed Henrickson (Estate financial assets division)

Rodney Park (Estate controller as of the date of the article; currently Administration Group director)

Wally Chin (Deputy controller as of the date of the article; currently controller)

Donald K. H. Pang (Father of Bishop Estate employee Leeanne Pang, Budget Dept)

In March 1993, B.M. McKenzie and McKenzie Methane Corporation filed a lawsuit in Texas for $2,300,000,000 against the Trustees under the Will & Estate of B.P. Bishop and Kamehameha Schools/Bishop Estate. Additional defendants were HAK Partnership I, II, III, IV and V; Smith-Gordy Methane Co.; SG Methane Co., Inc.; Gordy Oil Co.; L.H. Smith; R.D. Gordy; D.A. Barras; Lee H. Henkel, III; Mitch Gilbert; Royal Hawaiian Shopping Center, Inc.; Maralex, Inc.; M. O'Hare; Kukui, Inc.; JGI Resources, Inc.; and Northwestern Mutual Life Insurance Co.

In October 1995, Fredrick Field filed a lawsuit arising out of nine Limited Partnerships dating back to 1984, in which Field and KSBE were partners. Named in the lawsuit were KSBE, Henry Peters, Oswald Stender, Richard S.H. Wong, Lokelani Lindsey, Myron B.Thompson, Matsuo Takabuki, William S. Richardson and Lyn Anzai. General damages claimed in this lawsuit totaled $86,700,000, plus unknown punitive damages and attorneys' fees.

Field alleges "fraud" and "breach of fiduciary duties," among other things, in that KSBE and its authorized representatives, defendants Takabuki, Anzai and A.P. Sereno made false representations that Field's partnership assets were worth approximately $10 million, while the "true" value of Field's interest was "at least $30 million." Field also alleges "usury" arising out of KSBE's loan of $29,310,577 to him at an interest rate of 20% per annum.

Defense costs in this case have already exceeded $500,000. Law firms representing the defendants in this case are Morrison & Foerster; Tuttle & Taylor; and Cades Schutte Fleming & Wright. Michael Hare is the lead attorney for the latter firm.

On March 11, 1996, Robert Basham and Benjamin Stone filed suit against: (1) B.P. Russell, President and Trustee of the Robert Trent Jones Golf Club, Inc. (the Golf Club), (2) Henry Peters, individually and as a Trustee of the Golf Club and of KSBE, (3) KSBE through its Trustees, (4) Lake Manassas Limited Partnership, (5) RTJ Acquisition Limited Partnership (RTJLP), (6) Treyburn GP, Inc. (Treyburn is the general partner for both RTJLP and Lake Manassas LP. Royal Hawaiian Shopping Center, Inc. serves as the sole limited partner for both partnerships.)

The Plaintiffs asserted, among other things, that (1) Mr. Russell and Mr. Peters breached their fiduciary duties as corporate directors of the Golf Club, that they "aided and abetted" one another in so doing, and that Mr. Peters involvement was so effectively at the direction of the KSBE Trustees that KSBE assumed a corresponding fiduciary responsibility to the Golf Club members which has been breached, and; (2) that Mr. Russell, acting under the control of Mr. Peters, and thus as an agent of KSBE, engaged in common law fraud in obtaining Basham's and Stone's consent to amendments to covenants applicable to their property, by oral statements which they claim to have been intentionally false and misleading.

An article in the June 23, 1996 issue of The Honolulu Advertiser (Exhibit 15), under the headline, "Bishop investment turns bitter," gives the following information:

"The charitable trust has been accused of fraud and conflict of interest in the sale of the exclusive Robert Trent Jones Golf Club."

"One lawsuit has been filed and others are being prepared. Membership sales have been put on hold. Bankruptcy looms."

"...the dispute could cost the estate millions of dollars."

"Club members allege that Bishop Estate inflated the value of the club through a series of financial transactions with companies or partnerships under its control..."

"Members bought the club last year, but say the estate failed to inform them of a $33 million development debt they would have to pay off--to Bishop Estate."

"...From the beginning, the estate has played an important but low-profile role in developing the exclusive golf club."

"In 1986, Bishop Estate joined golf course designer Robert Trent Jones and North Carolina developer Clay Hamner in the purchase of 1,100 acres...at Lake Manassas."

"In March 1991, the partners set up RTJ Acquisition Limited Partnership - an entity largely controlled by Bishop Estate - to develop the property. RTJ borrowed $40 million from a North Carolina bank, bought 210 acres of land from the Hamner-Bishop Estate group for $21.6 million and began building the golf club. RTJ's loan was guaranteed by Bishop Estate."

"...Peters arranges deal. Seventeen months later, club members bought the golf course and property from RTJ in a deal negotiated in part by Bishop Estate trustee, Henry Peters, who also served on the golf club's controlling board of trustees."

"Peters attorney, William Causey, denies any wrongdoing by his client and says that Peters negotiated the sale of the golf club only on behalf of the golf club, and reclused himself from negotiating on behalf of Bishop Estate."

"...In a February memo to members, a committee attorney questioned the $21.6 million price paid by RTJ for the original 210 acres; said no members had been informed that the club was encumbered with up to $40 million in debt; and said that Bishop Estate was `both the buyer and seller' in the March 1991 sale."

The article goes on to list the Bishop Estate tie-in:

DC Land Group Ltd.

- Clay Hamner, managing general partner

- Bishop Estate, equity partner

RTJ Acquisition Limited Partnership

- Bishop Estate, equity partner

- Royal Hawaiian Shopping Center Inc., limited partner

- Treyburn GP Inc., general partner

Treyburn GP Inc.

-Bruce Nakaoka, president (also manager of Bishop Estate

real estate investment and acquisition division)

-Henry Peters, director (also a Bishop Estate trustee; also a trustee of Robert Trent Jones Golf Club)

-Richard S.H. Wong, president of Royal Hawaiian Shopping Center Inc.

Robert Trent Jones Golf Club Inc.

-Henry Peters, vice president and trustee

-B.P. Russell, president and trustee

-Ernest L. Ransome III, trustee

One wonders how these large personal investments and huge lawsuits go unreported in KSBE's audited financial statements and in the Master's report, and even to the IRS. An article in the February 27, 1995 issue of The Honolulu Advertiser, under the headline, "Monitoring groups not told about deals," (Exhibit 16) may give a clue:

"Both the state Probate Court and the state Attorney General's Office are required to annually review Bishop Estate operations."

"Neither agency knew about the personal investments estate trustees and employees made in connection with the estate's McKenzie Methane investment, according to court records and interviews."

"Peter Trask...made no mention of the McKenzie Methane or HAK Partners investments in his report to the court. 'The investment portfolio appears complete and well-maintained,' Trask wrote."

`More than adequate information is presented to provide the master with an appropriate understanding of the investments,' Trask reported."

"James Duffy, who reviewed Bishop Estate operations last year for the state Probate Court, said he was unaware of the McKenzie Methane investment and had never heard of the HAK partnerships."

"Asked if he thought the personal investments by trustees and estate employees were appropriate, Duffy said, `I would rather not comment.'"

"Benjamin Matsubara, the current court master, also said he was unaware of the HAK Partnerships but intended to look into the matter. His report is due in May."

"Deputy Attorney General Kevin Wakayama, who reviews Bishop Estate activities for the state, said personal investments by estate trustees and staffers in estate-related business deals have `never been publicly reported by the estate.'"

A follow-up article appearing in the February 28, 1995 edition of The Honolulu Advertiser under the headline, "Bishop Estate tax-exempt status scored," (Exhibit 17) discloses:

"...Peters (attorney Ronald Peters, not Henry Peters) pointed out yesterday that the estate trustees told James Duffy, court-appointed master for the estate's 1989-90 fiscal year, that `they have not undertaken any transactions with members of their families, business associates, employees of the state, or members of immediate families of employees of the estate except such as are disclosed to the master...'"

"The estate had no comment yesterday on questions about why the existence and activities of the HAK partnerships were not reported to court masters since 1989."

"The estate also had no immediate comment on whether it was obligated to report the HAK partnership transactions on its federal income tax returns."

"As reported Sunday, in 1989 then-trustee Matsuo Takabuki, his wife, three children, family corporation and a longtime company employee invested $1.5 million in the HAK Partnerships."

"Then-trustees Myron "Pinky" Thompson and William Richardson, invested $510,000 and $210,000, respectively. Trustee Henry Peters...invested $220,000..."

"The estate, as a charitable institution, files a `Form 990' federal tax return. One section of that return requires the estate to report whether it has furnished `goods, services or facilities' to any taxable organization in which a trustee or estate principal officer has a management affiliation."

"The estate reported nothing about the HAK partnerships on tax returns filed with the IRS since 1989..."

"The HAK partnerships were organized and administered by Mitchell Gilbert, financial assets manager of the estate from 1988 to September 1994, according to Texas court records. Gilbert and his relatives invested $72,000 in the HAK partnerships."

"The mailing address for all five partnerships was Bishop Estate headquarters at Kawaiahao Plaza..."

A related article in the same edition, under the headline, Estate's Washington link disclosed," (Exhibit 17) states:

"Robert Rubin, U.S. Treasury secretary, has an important personal financial connection to Hawaii's Bishop Estate, as does one of Rubin's predecessors at the Treasury, former secretary William E. Simon."

"The estate has guaranteed an undisclosed rate of return on Rubin's holdings in Goldman, Sachs & Co., the giant New York-based investment bank in which Bishop Estate has invested $500 million..."

"Rubin was co-chairman of Goldman, Sachs from 1992 through 1994, the same period in which the Bishop Estate made two separate $250 million investments in the firm."

"When Rubin left the bank to join President Bill Clinton's cabinet last month as Treasury Secretary, he secured an `insurance policy' from the estate that underwrites the value of his personal holdings in Goldman, Sachs..."

"...former Treasury Secretary Simon has been the estate's business partner in several major banking deals both in Hawaii and in Asia in recent years." (The banking deal in Hawaii was HONFED, which was later sold to Bank of America. State Insurance Commissioner Wayne Metcalf took legal action against Bank of America and Goldman Sachs, along with other brokerage companies, in connection with the failure of Investors Equity Life Insurance Company, which had sold annuities through HONFED. I was advised by Rocco Sansone that Mert Chillingworth, former president of Marsh & McLennan, Hawaii, also served on the board of directors of HONFED during the period they were marketing the Investors Equity annuities. Another major banking deal with Simon came after this article was published when KSBE became the majority stockholder in SOCAL Holdings, which owns Southern California Savings & Loan Company.)

"Simon also personally invested, along with four estate trustees and numerous senior estate staffers, in a Houston-based methane gas drilling project that is now mired in federal bankruptcy court proceedings.

"The estate itself invested some $85 million in the same energy deal."

An article in the March 23, 1995 issue of USA Today (Exhibit 18) states:

"...Bishop Estate - which is strongly tied to the Democratic political machine here - is attracting attention outside Hawaii because of its ties to Treasury Secretary Robert Rubin."

"In an unusual deal, Rubin pays hundreds of thousands of dollars a year to the Bishop Estate in exchange for a guarantee that he'll never lose money on a multimillion- dollar investment in his former firm, Goldman Sachs investment bank."

"Rubin was co-chairman of Goldman Sachs before joining the Clinton administration."

"Rubin could face a conflict of interest if an Internal Revenue Service investigation into the Bishop Estate's tax-exempt status reaches his desk. As Treasury secretary, Rubin oversees the IRS."

"And some Republicans question whether Rubin's actions - especially his role in the Mexican bailout - have been designed to help Goldman Sachs."

"...Bishop Estate is now fighting release of its 1992-93 financial reports..."

"Bishop Estate spokesman Elisa Yadao says the estate doesn't want competitors to see the financial statements."

"But secrecy may also keep hidden the details of the Rubin-Bishop Estate deal, which was made in February 1993."

"Treasury officials won't give details either, except to say Rubin pays the estate hundreds of thousands of dollars a year."

"...First as Clinton's economic adviser and now as Treasury secretary, Rubin could influence interest rates, foreign currencies and other factors crucial to his former firm's health."

"To avoid a conflict of interest, he sold his Goldman Sachs parthership to the firm. A price wasn't disclosed, but the value of a senior partnership could exceed $50 million."

"When buying out partners, Wall Street firms are reluctant to deplete cash reserves, the lifeblood of an investment bank. So Goldman Sachs gave Rubin a note that promised to pay principal and interest over a number of years."

"This still left Rubin with a potential conflict: a gigantic investment in Goldman Sachs that could be affected by his official government actions."

"If Goldman Sachs had financial troubles, Rubin might not get paid, possibly costing him tens of millions of dollars."

"Rubin's solution was to buy an insurance policy on his investment, so he would get paid even if Goldman Sach's finances ran into trouble."

"Rubin got the insurance from the Bishop Estate, rather than a major financial firm, because it was least likely to be affected by his government work, says Treasury general counsel Ed Knight."

"`This is primarily an ethics vehicle, not an investment one,' Knight says."

"Now, Rubin faces a possible conflict of interest anyway."

"Bishop Estate critic Ronald Peters, a Honolulu lawyer, has asked the IRS to investigate whether the Bishop Estate should lose its tax-exempt status for allegedly improper business deals by the trustees."

"Hawaii's attorney general has sent the challenge to the IRS, too."

"Peters says Rubin has a `serious conflict of interest...It is obvious to me that Secretary Rubin has to recuse himself.'"

"Rubins hasn't stepped aside, but his staff says it's unlikely he would get involved."

"`The chances are very slight that he would have any involvement in something that might have a major impact on Bishop Estate,' Knight says. `He made it clear he wants us to keep matters like this away from his desk.'"

"Alex Benes, managing director of the Center for Public Integrity, says there would be `obvious questions' if Rubin doesn't recuse himself."

"He says Rubin has been under particular scrutiny since he sent a letter to former Goldman Sachs clients saying he looked forward to working with them in his new capacity..."

Goldman Sachs continues to be involved in lawsuits accusing the firm of illegal dealings. The Star-Bulletin reports in its December 11, 1996 edition under the headline, "Investors Equity deal OK'd":

"A Circuit Court judge has approved a settlement between state Insurance Commissioner Wayne Metcalf and Gary Vose, the sole shareholder of Investors Equity's parent company at the time the insurer was placed into liquidation in June 1994..."

"The state seized the insurance company after its management ran up a $90 million deficit largely because Vose lost policyholders' money in highly speculative leveraged investments known as derivatives, the state charges..."

"Metcalf said the settlement is part of a series of actions against Bank of America, several brokerage companies including...Goldman Sachs, accountants and attorneys associated with the failure of Investors Equity Life..."

"A state lawsuit accused Vose of racketeering, fraud and other misconduct... The suit alleges that the holding company that controlled Investors Equity conducted sham real estate deals and used the insurance firm's assets to pay large fees to Vose and companies connected with him..."

Bishop Estate and William Simon had other tie-ins with Investors Equity Life through their HonFed investment. Marsh & McLennan had a connection with HonFed as their insurance broker, as well as Mert Chillingworth who sat on HonFed's board of directors.

The Honolulu Advertiser reported in its April 3, 1995 issue (Exhibit 19) under the headline, "Estate had $26.9 million in AutoFuel - Its investment coincides with bank loans":

"The Bishop Estate is AutoFuel's single largest secured creditor."

"According to paperwork filed by the Bishop Estate at the Bureau of Conveyances here, the estate and AutoFuel signed a business agreement October 16, 1990. On the same day, the Bank of Hawaii and Bank of New York signed a revolving credit agreement and loan agreement with AutoFuel..."

"In December 1991, AutoFuel signed a stock pledge and security agreement with Bishop Estate..."

"The Bank of Hawaii was also involved in another estate deal in Texas. According to bankruptcy records in Houston, the estate guaranteed loans made by the Bank of Hawaii to individuals and companies that invested in McKenzie Methane Inc. The estate later assumed those loans when the borrowers failed to make payments to the bank."

"AutoFuel Co. entered bankruptcy reorganization in Dallas in March 1993. Some four months later, a wholly owned Texas subsidiary of Bishop Estate called Kukui Inc. filed a claim in the AutoFuel bankruptcy for recovery of $26.9 million."

"Of that total debt, $24.76 million was fully secured by unspecified collateral, according to the claim."

"The remainder, $2.16 million, was unsecured..."

"Kukui Inc. is a subsidiary of Royal Hawaiian Shopping Center Inc., itself a profit-making subsidiary of the nonprofit, charitable Bishop Estate."

Another article which appeared in the April 25, 1995 issue of The Wall Street Journal (Exhibit 20), under the headline, "Bishop's Gambit - Hawaiians Who Own Goldman Sachs Stake Play Clever Tax Game - Their Trust Is Educational But Investments Produce Big Incomes for Trustees," contains these comments:

"The giant Hawaiian trust that now owns 11% of Goldman, Sachs & Co. bills itself as a charity. It's an increasingly tough sell."

"...a close look at the trust reveals a much-different operation, one that has more in common with a big investment concern like Goldman Sachs than with even the busiest U.S. charities.

"Take executive pay: For the year ended June 30, 1993, Bishop's five governing trustees earned $820,000 each - payments calculated, in unusual fashion, partly as a percentage of the trust's tax-free investment income. In their best year, the trustees got $925,000 apiece. In contrast, the highest paid official at the American Red Cross earned $342,700 in 1993.

"Wheeling and Dealing - Bishop Estate doesn't invest like a traditional charity either: Instead of passively pursuing rent, interest and dividends, Bishop wheels and deals in the world of shopping centers, apparel chains and drilling ventures. Several of its investment partners say that when deals turn sour, the Bishop trustees don't hesitate to intervene aggressively."

"Then there is the critical matter of taxes. With the help of more than two decades' worth of private rulings from the Internal Revenue Service, the trust has managed to surf to the limits of the law. As a result, potentially taxable deals are conducted on a tax-free basis, and trust properties migrate between taxable and tax-free subsidiaries to reduce the government's take.

"Also, despite $8 billion to $10 billion in assets - which make Bishop the nation's wealthiest charity - the trust has attracted nearly $30 million in federal subsidies for native Hawaiians since 1987. Maintaining support for such largess falls to Hawaii's Democratic congressional delegation, which has close ties to Bishop's trustees, many of whom are former top Democratic politicians."

"Mr. Takabuki's hands-on approach to investing meant that Bishop officials increasingly selected and helped supervise their corporate investments, particularly in times of trouble. Such work...ate up more and more of the trustees' time... In turn, trustees became less involved, local critics charged, in their educational mission."

"Trustees didn't seem to be very interested in expanding school activities as fast as the cash was coming in," says Guido Giacometti, head of Bishop's asset-management group until he left the trust in 1990..."

"...by the late 1980's, Mr. Takabuki's acquisitions were turning Bishop into a diversified investment concern with two distinct branches: taxable units the trust played a role in operating and traditional tax-free holdings. Then, innovatively, the trustees started moving investments from one branch to the other."

"The first big move involved the Royal Hawaiian Shopping Center, Inc... In 1986, Mark McConoghy, an influential tax lawyer at the accounting giant Price Waterhouse, concluded that the shopping center could be transferred from the taxable subsidiary to its tax-free parent..."

"Mr. McConoghy's coup also markedly enhanced the trustees' income, since under Hawaiian law the board members are paid 2% of the trust's tax-free revenue..."

"...Bishop Estate's principal watchdog is a "special master," who each year files a report on the trust's educational and investment activities to the probate court that is supposed to enforce the terms of the princess's will. But Bishop foots the bill for these reports, which usually lag several years behind, and even special masters have been caught up in Bishop's tangled web of business dealings."

"In 1990, for instance, when special master Peter Trask was reviewing the estates activities for the year ended June 30, 1989, Bishop was finalizing what would become a $27 million investment in a company whose subsidiary employed his father, David. The young Mr. Trask also did legal work for the company..."

"Bishop's cozy rapport with the state's entrenched Democratic Party also helps insulate it from scrutiny."

"...Many (trustees) are drawn from the upper reaches of Hawaii's political and judicial life... Current trustee Mr. Peters actually became a trustee while still speaker of the state House of Representatives. Until 1993 the newest trustee, Gerard Jervis, was chairman of the selection commission that screens judicial candidates for the governor. So, in effect, Mr. Jervis helped select the judges who subsequently selected him to the Bishop board."

"Who appointed Mr. Jervis to the judicial-selection committee in the first place? None other than Mr. Wong, the current Bishop trustee who then presided over the state senate."

"Once in power, the trustees have been known to favor powerful friends. Consider, for example, the case of former Gov. John Waihee III. He selected all five of the current state Supreme Court justices. These judges in turn named three of the current Bishop trustees, including the chairman, Mr. Wong. Mr. Waihee also appointed trustee Mr. Peter's mother, Hoaliku Drake, to head the Department of Hawaiian Homelands, a post she held until last year."

"Shortly after Bishop made its second $250 million investment into Goldman Sachs last November, Mr. Peters asked Goldman to steer legal work to Mr. Waihee, who is now in private practice, according to people familiar with the matter..."

"On the federal level, some warn that Bishop risks violating the IRS prohibition against 'excessive personal benefit'...`The IRS is quite concerned with organizations where people are being paid a great deal,' says Dan Langan, a spokesman at the National Charities Information Bureau, a watchdog group. `You've hit the jackpot with this group.'"

"In addition, some people familiar with Bishop's practices question whether trustees' relationships with...subsidiaries are sufficiently at arm's length to satisfy IRS rules. For instance, as chairman of the Royal Hawaiian Shopping Center, Mr. Peters handles a wide range of matters, from the entity's current rent negotiations...to the hiring of a receptionist..."

"Tax experts...point out that the IRS seldom revokes an organization's tax-exempt status, and it has no other penalties at its disposal. (This has changed since the article was written, and the IRS now has the ability to impose "interim sanctions" against individuals who wrongfully gain excessive personal income.) Moreover, during the past several decades, Bishop has nurtured close ties with the IRS, whose employees in Washington and Los Angeles are visited periodically by Bishop officials sometimes bearing chocolate-covered macadamia nuts."

"`This is a group that has so much clout that no one stops them,' says Paul Streckfus, an expert on tax-exempt organizations who dealt with Bishop as an IRS official in the 1970's..."

There are signs...that Bishop Estate is looming larger on the politicians' radar screen these days--thanks in part toTreasury Secretary Robert Rubin, former chairman of Goldman Sachs. In December 1992, shortly after Bishop purchased its first Goldman stake, Mr. Rubin, who had just been appointed head of the National Economic Council, needed to sever his ties with his former firm. In just one phone call from Goldman, Bishop agreed to guarantee, for a fee, Mr. Rubin's limited parnership interest in the unlikely event that the firm ever went under, Bishop will get to pocket about $1 million in fees from Mr. Rubin and to enjoy the satisfactions, however intangible, of having a lasting relationship with the man who now, it turns out, oversees the IRS."

"Mr. Rubin, who has recused himself from Bishop and Goldman matters, disclosed the arrangement last February when questions were raised about his and Goldman Sach's potential stake in the Mexican bailout. Now the House Banking Oversight and Investigations subcommittee is planning hearings in which Mr. Rubin may be questioned about his financial links both to Goldman Sachs and Bishop Estate."

"...So what does Goldman's $500 million investor really want? Apparently, an initial public offering of Goldman's stock--the worst nightmare of the last remaining private powerhouse on Wall Street."

"Without being asked, Mr. Peters raises the topic of Goldman's `IPO potential,' then coyly says he won't comment. But in the next breath, Mr. Peters blurts out: `Heck, I see an opportunity.'"

One wonders about arms-length and other tax issues with many other deals, such as the one with Benson Forests (now Shelter Bay Forests). This deal, in which Mark McConoghy also had a hand,

involved a number of partnership transactions with Ben Benson, which concluded with KSBE buying Benson's remaining interests in the partnership. During the time Benson was still a partner, the estate arranged and paid for a life insurance policy on Benson. The policy was purchased through Marsh & McLennan. Shortly after Benson sold his interests to Bishop, he and his wife made a large charitable donation of an island in the Atlantic to the Kamehameha Schools.

During the period when the formation of the captive insurance company was under discussion, I recommended to Mr. Aipa that I be transferred from KSBE to the captive in large part due to the arms-length issues. I drafted a staff report for this transfer which was submitted to Mr. Aipa for review and approval. The recommendation was that I be transferred to P&C and that KSBE contract with P&C for risk management services. The Personnel Division was consulted about the continuation of benefit programs and other employment issues if this transfer were made. I included an estimated $200,000 in the initial budget for P&C to establish and operate a separate office. This staff report was never presented to trustees by Mr. Aipa.

Most of my risk management and safety responsibilities could be provided to KSBE through this contract. However, the handling of the open, self-insured claims that had been incurred prior to the formation of P&C presented a problem. When these self-insured programs were instituted, KSBE had not given the independent adjuster (John Mullen & Co.) any claims or draft authority for general liability claims. The approval of claims payments and issuance of KSBE checks was obviously a function that could not be transferred to a subsidiary. To solve this problem, I drafted a staff report requesting that trustees grant Mullen claims and draft authority.

Mr. Aipa directed that I make changes to these staff reports, including combining the two reports into one. He indicated that he had discussed the report with Mr. Peters, and that Peters seemed to be in favor of the transfer. However, the staff report was never presented to the full board of trustees by Mr. Aipa.

This proposal for my transfer to P&C was placed on the agenda for P&C's last annual Board of Directors meeting. During discussion on the issue, Mr. Peters indicated that the matter should be presented first to the estate's trustees for approval, and the board's decision on the matter was deferred. Still, Mr. Aipa would not present the staff report to trustees.

Little concern was demonstrated by Mr. Aipa regarding work being performed for P&C by KSBE management and staff at no charge to the subsidiary. I, for one, spent hundreds of hours on KSBE time performing work for P&C which was never charged to that entity. Others providing "free" services included Virginia Mau, David Dunnigan, Louanne Kam and Nathan Aipa. According to the opinions expressed in Price Waterhouse's letter, this might be considered by the IRS as "improperly subsidizing a for-profit subsidiary."

Taxpayer Bill of Rights II - Intermediate Sanctions for Tax-Exempt Organizations. Under a bill signed July 30, 1996, Congress enacted rules which allow the IRS to assess penalty excise taxes

on individuals who are involved in transactions with tax-exempt organizations that constitute private inurement. The law applies retroactively to "excess benefit" transactions occurring after September 13, 1995.

Penalty excise taxes can also be imposed on "organization managers" (an officer, director, or trustee) who knowingly permits the organization to engage in an excess benefit transaction, even if that manager did not personally benefit.

Tax-exempt organizations cannot circumvent the rules by causing a controlled entity to engage in the excess benefit transaction.

An article entitled, "No More Sweetheart Deals", in the September 23, 1996 issue of Forbes includes the following comments and example:

"Under the new rules, trouble starts if the IRS determines that there has been a misdeed with an "excess benefit." It could be a fat salary, a sweetheart contract or an embezzlement. If someone got an excess benefit, the IRS can both fine the recipient 25% of the benefit and demand that the benefit be given back to the charity. If the guilty party doesn't pay the money back, he or she owes twice the excess benefit to Uncle Sam."

"Say a board member convinces the president of a college to let the school's insurance contracts to her firm, even though going with a rival would save the school $150,000. In turn, the board member is influential in voting the president a lavish salary, perhaps $200,000 higher than the norm at comparable universities. The IRS could force the repayment of both the $150,000 and the $200,000..."

"What about directors who sit still for this kind of mischief? They can be fined a collective $10,000, even if they didn't profit..."

Intentional disregard of State and Federal regulations.

This was an issue over which many members of the Legal Group, the Asset Management Group and I definitely had "philosophical differences".

At the time the Americans with Disabilities Act and many of the environmental regulations became effective, I was a member of KSBE's Master Plan and Capital Improvements Project committee (MP/CIP). Good risk management practices say that risks should be identified, analyzed, possible solutions formulated, and action taken to eliminate or reduce the risks. My recommendations as risk manager were to identify what KSBE's exposures were, develop a master plan, and take action to correct any deficiencies. Others in the organization had opposing views.

The Environmental Protection Act.

With regards to environmental regulations, for example, staff members in the Asset Management Group expressed concern in some of our meetings that, given all of Bishop Estate's property holdings, it would cost too much to comply with the regulations. Especially if the properties were undeveloped, suggestions were made that KSBE should wait until there were plans for development; then the developer could pay for the remediation.

The advice of attorneys from the Legal Group at these meetings was that we should not try to identify the problem locations because "if we knew about them we would have to correct them."

One of the purposes of these meetings was to draft KSBE's policies and procedures regarding environmental liabilities; therefore, Karen Wilkenson can verify the wide differences of opinion between myself and others within the Legal and Asset Management groups.

The advice of the Legal Group prevailed. As a consequence, for several years little was done in the way of pro-actively identifying, remediating or insuring potential environmental hazards.

The responsibility for managing environmental risks supposedly was assigned by Aipa to Alan Yee. As with many of these "sensitive" matters, one purpose of this assignment was to maintain the attorney-client privilege". As a result, even I as risk manager, often was not privileged to information about environmental issues until I learned of them through other sources or an actual problem arose.

One example is the acquisition of Nationwide Industries. Colleen Wong and Alan Yee were responsible for performing due diligence for mergers and acquisitions. Nationwide had a chemical manufacturing plant in Pandora, Ohio, which had known problems with chemical leaks or spills. Ms. Wong and Mr. Yee either failed to determine this in their due diligence, or else did not disclose it to me as risk manager. I learned about it after the acquisition through discussions with management at Nationwide.

During the time when RHSCI owned Nationwide, no remediation of the site was done. Even after Nationwide/SNAP was sold, RHSCI retained the liability for clean-up of the site. I was never advised of the status of that remediation.

Another example is the Waterpark Tower site. I learned of this through an article in the June 12, 1995 issue of the Pacific Business News, which reported: "`We are just about to start our environmental clean of our site,' said Neil Hannahs, manager of Bishop Estate's Kakaako development." It was only after contacting Neil that I learned that the environmental remediation contracts had already been signed and work was already under way.

As KSBE's liability insurance policy does not afford protection for environmental claims involving remediation work, I advised Neil that in order to protect KSBE we should make sure that either the contractor(s) or KSBE obtain this coverage. As Neil had only recently taken over this project from John Peterson, he expressed surprise that I had not been apprized of the situation earlier by Alan Yee, who been given the responsibility for handling the contracts.

The Waterpark Tower project, as I subsequently learned, would be high on the list of "A Risk Manager's Top Ten Nightmares". An initial review of the contract with Stay & Sons, Inc. and other information resulted in my memos of July 19, August 1, August 22 and September 5, 1995 to Neil Hannahs (Exhibit 22). The final result was that KSBE had no environmental liability insurance protection for the project.

Some disturbing aspects of this case came to light when I attempted to obtain the Bid Specifications for the project, and found there apparently were none. I searched the yellow pages under Environmental & Ecological Services for Stay & Sons, Inc., and could find no listing. I called the Contractors' Licensing department of the State, and was told they did not have a listing under Stay & Sons, Inc. or Robert Stay. I called Stay & Sons' insurance agent and learned that they were unaware that their insured was doing this type of work (they were told he was doing composting work). I called other bidders for the job to inquire if their Miscellaneous Charges had included environmental liability insurance, and was advised that they did. However, I was also advised by one contractor that the bid was basically, "done over the phone." When trying to get a copy of Ed Tabangay's independent consultant" contract with our Legal Group, I found there apparently was none. I also learned that Trustee Lindsey's son worked for Stay & Sons.

Americans with Disabilities Act (ADA).

The issue of compliance with the Americans with Disabilities Act sparked similar discussions regarding the high costs of compliance, and similar "Confidential - Attorney-Client Privilege" handling. On November 14, 1991, for example, Colleen Wong sent Allen Young a letter referenced: Personnel/Americans with Disabilities Act - Public Accommodation; Opinion No. P-91-3. In this letter Ms. Wong states:

"We understand your inquiry to be whether Kamehameha Schools is exempt from Title III (Public Accommodations) requirements because of Judge Alan Kay's ruling that Kamehameha Schools is a religious institution. We answer in the affirmative."

"There is an exemption for `religious organizations or entities controlled by religious organizations, including places of worship.' We believe, based on the Federal decision concerning Kamehameha Schools as a religious educational institution, that it should fall into this exemption."

This advice was given to our engineering department despite an earlier opinion given to Stanley Hioki by Charles Ching of the law firm of Perkin & Shimizu. In his letter of December 11, 1990, Mr. Ching states:

"Since Colleen is on maternity leave, I am forwarding directly to you a copy of my letter responding to her inquiry regarding the Americans With Disabilities act..."

"The ADA has a sweeping application and extends to both the KS campus as well as commercial properties owned by KS/BE."

In his letter to Ms. Wong, Mr. Ching states:

"In describing the scope of coverage of Title III of the ADA, the Senate Report to the ADA specifically states that "private schools, including elementary and secondary schools, are covered by this title..."

The ADA became effective January 26, 1992.

On January 7, 1992, Rosemary Fazio of the law firm of Ashford & Wriston sent a letter to Aipa providing information about the Act, and stating, "One of the reasons we have prepared this letter is our concern about the impact of the rather strong remedies and penalties provided for in the Act."

On March 3, 1992, Allen Young arranged a meeting regarding "ADA for Kamehameha Schools (Exemption vs. Voluntary Compliance - On-Campus and Off-Campus), with guest speakers, Colleen Wong, Cindy Winegar of Watanabe, Ing & Kawashima, and Peter Fritz, Esq. Attendees included Sam Hata, Ed Tabangay, Jim Holt, Mike Lum, Bob Stender, Lena Young, Charlee Kowalski, Clifford Kobashigawa and myself. These attorneys again stated their opinions that KSBE, as a religious institution, was exempted from the act.

On October 6, 1992, I sent a memorandum to Nathan Aipa, Colleen Wong, Gil Tam, Sandie Wicklein, Tony Sereno, Richard Wong (RHSC), and Wally Tirrell (KIC) enclosing two articles from the CPCU Journal: 1) Risk Management Implications of the ADA; 2) The ADA and Workers Compensation. I advised that KSBE's Educators Legal Liability insurance policy provided certain coverages for discrimination; however, the willful violation of a statute or government regulation or ordinance committed by or with the knowledge or consent of an Individual Insured is excluded. Also, I advised that payment of any governmental fines or penalties was not covered.

On July 15, 1993, Ed Tabangay sent a memo to Tony Sereno, Nathan Aipa, Mike Chun and Gil Tam regarding "Organizational Wide KS/BE ADA Action Plan" (Exhibit 23). In the memo he states:

"As you are aware there has been several meetings within the past few weeks regarding subject matter. As reported by Bruce Clarke...an Organizational ADA Action Plan is considered essential for an organization such as KSBE."

"Noting that the ADA Law became effective January 26, 1992, KS/BE's exposure to civil suits for ADA non compliance is a major concern..."

"Therefore, an ADA Action Plan would establish compliance goals, which will serve as evidence of a good faith effort to comply, and would provide KS/BE with a managed approach to comply with the ADA Law. This would help safeguard KS/BE from legal and risk management concerns."

On February 14, 1995, an ADA Action Plan was presented to all KS supervisors by Bob Ramsey and Bruce Clark for information and action. The Engineering Department was given responsibility for implementing the plan.

Amazingly enough, as late as October 8, 1996, Sam Hata stated to me that he was concerned about the lack of compliance with the ADA. I remarked that I thought a master plan had been submitted a long ago and that we had taken action. Sam replied that, yes, the plan was drafted, but Trustees never approved the funds for implementation.

The McConnell, et al ADA Class Action Suit (Exhibit 24). In its September 13, 1995 edition, the Honolulu Star-Bulletin reports: "People with disabilities sue Bishop Estate":

"A class-action lawsuit is seeking $4 million in damages from Kamehameha Schools Bishop Estate, alleging the estate has done nothing to make some of its commercial properties accessible to people with disabilities."

"Twenty-two residents from 28 states and Puerto Rico are bringing the lawsuit..."

"Five trustees and Bishop Estate's for-profit subsidiaries are also named as defendants in the suit filed by attorney Landsford Dole Phillips."

"The suit alleges the defendants have done nothing to bring their commercial properties into compliance with the Americans with Disabilities Act. Phillips estimates that more than 5,500 Bishop Estate for-profit properties are violating the act."

This claim was covered, in part, under two insurance policies: United Educators' (UE) ELL policy and Chubb's D&O Liability policy. The UE policy covered claims against the estate and its trustees and employees. The Chubb policy provided coverages only for Directors and Officers of the insured subsidiaries and related companies. It did not cover the entity itself.

Premiums for the UE policy were paid by KSBE. Premiums for the Chubb policy were allocated among the subsidiaries. UE's policy was subject to a $500,000 self-insured retention; Chubb's policy had a $250,000 self-insured retention. The retention amount for UE's policy was to be paid from KSBE's insurance budget. The retention for the Chubb policy was to be paid by the subsidiaries, allocated in the same percentages as the premiums.

Louanne Kam was the in-house attorney assigned to handle the case. In memos to Ms. Kam, I pointed out that KSBE and our defense counsel were not in compliance with the conditions of the insurance policies or the Defense Counsel Guidelines.

Contrary to our internal policies and procedures, I was generally not included in any discussions regarding the case. Billings were sent to Aipa or Kam for approval and were paid from the General Counsel's Account, rather than from KSBE's Insurance Account. Contrary to what was stated in Shevon Garnett's memo of March 21,1996 to Nancy Kane, KSBE was not to be reimbursed by UEI and/or Chubb insurance companies for the $361,383.62 attorney's fees.

The last status report I received dated September 30, 1996 indicated that legal fees and expenses for this civil action totaled $502,071.98. These costs had not been allocated between KSBE and the subsidiaries as of the date of my termination, and no payments had been made by the insurance carriers.

13) Failure to act in good faith with KSBE's insurance and bonding companies; fraud; deceptive practices in financial and regulatory reporting; discrimination; conflicts of interest; breach of fiduciary responsibilities; non-bid contracts; political favors; improper actions for personal gain or profit; and other wrongful acts.

In several discussions with Mr. Aipa I was told that I was always "taking the side of the insurance company" and not KSBE's side. I responded that I was not taking the insurance company's side, but was only stating the conditions in the insurance policies and what the companies required of insureds in applications for insurance, claims reporting, etc.

When I would cite the insurance policy conditions, exclusions, etc. to him in response to a question, Mr. Aipa would say that he knew what the policy said - he wanted to know what the company would actually do in these cases.

Having previously been an underwriter for the Hartford and the Hawaiian Insurance Companies, and a vice-president in charge of marketing for a local general agency for 17 years, my philosophy and approach to dealing with the insurance companies has always been one of acting with honesty and in good faith. I have seen many situations over the years where failure to disclose complete underwriting information to the carriers resulted in cancellations and non-renewals, high audit premiums, denial of claims, etc.

Mr. Aipa's philosphy was that "sensitive" issues, financial information, etc. should not go outside the company, or even outside the Legal Group, if possible. Hence the heavy use of Attorney-Client privilege" memos between the legal group and other departments within the organization.

Therefore, when it came to completing insurance applications that requested "sensitive" information such as financial statements, knowledge of any pending claims or future potential claims, this information was often not disclosed to me, or was provided only after repeated requests.

It is apparent that Mr. Aipa found my philosophy of dealing in good faith with the insurance carriers too "open", and in complete contrast to his philosophy of keeping everything "confidential". It is also apparent to me that he found someone between myself and the insurance companies that was willing to share his philosophy: the broker, Marsh & McLennan, Inc.

I have heard Mr. Aipa and Ms. Kam remark that if you control the information, you control the case. At KSBE, Mr. Aipa has gone to great lengths to control the information. Central Files and Documentary are under his supervision. All staff reports are reviewed by the Legal Group. Information provided to the Master is provided by Mr. Aipa. The Tax Department is under Mr. Aipa.

The Risk/Insurance & Safety Department was transferred from the Administration Group, headed by Gil Tam, to the Legal Group at the time the McKenzie Methane situation was heating up.

Almost as soon as Ms. Kam joined the Legal Group, which was shortly after I was transferred, she began to make efforts to control" the insurance information. She wanted to deal directly with the insurance brokers, the insurance companies and the insurance adjusters. She wanted to change the filing system for insurance policies and claims files, and contacted MMI directly and instructed them as to how she wanted the policy files set up. She admonished me for not allowing Colleen Wong deal directly with the insurance companies on employment-related liability claims. She frequently ignored established procedures and involved herself in the claims process by taking on my responsibilities or the responsibilities of the independent claims adjusters.

Both Aipa and Kam often dealt directly with Rocco Sansone and Pat Onogi of MMI on specific risk and insurance matters without my knowledge or participation. Mr. Aipa had Alan Yee work with MMI to draft a Confidentiality Agreement.

Staff reports that were prepared by me were heavily edited and re-edited by Aipa and Kam, often in private consultation with Sansone, before they would approve them for presentation toTrustees. My staff report regarding the Hobbs' Group's property proposal is a prime example as described in my response to my performance evaluation (Exhibit 3). This report went through at least five major revisions as directed by Ms. Kam, during a period of over a month and a half. (Note: At this time I was not even in her division or under her supervision.)

Each month we delayed in transferring the property program meant a loss to the estate of over $50,000. Therefore, I finally gave-in to her directives in order to have the staff report presented to Trustees. However, what had started out to be a factual, straight-forward report recommending that KSBE accept Hobbs' property program, was transformed into a document designed to mislead Trustees and others into believing that Marsh & McLennan could be the broker of record for this program when, in fact, they could not.

As I stated in response to Aipa's evaluation of my performance:

"Mr. Aipa's comment (3) "due diligence review of the proposed property insurance program by M&M was initiated only after the insistence of the General Counsel" totally escapes me. I do not recall being asked at all to have M&M perform due diligence. In fact, as I learned much later from Pat Chalfin, it was Kam who had written to request that M&M review Hobbs' proposal. And, although her letter indicated that I was to receive a courtesy copy, I had never seen this letter before Mr. Chalfin provided me a copy."

"As a personal opinion, I found it very unusual and highly discomforting that a proposal obtained in good faith from a broker be given to the incumbent broker for `performing due diligence.' I believe that comparing competing proposals is the responsibility and function of the risk manager or, if an outside opinion is deemed necessary, there are professional firms such as Tillinghast which can provide this analysis."

"...As to comment (6) `poor drafting of a staff report that objectively presented to my satisfaction the history and proposal of the property insurance program', I can only say that I believe that my original draft presented the most accurate and complete history of the proposal, and contained detailed information about the Hobbs Group and Arkwright Mutual, including the recommendation letters from C. Brewer and Campbell Estate. It also included the intent that this program was to be underwritten by P&C Insurance Company, and was to be reinsured by Arkwright. It also included a letter from Arkwright which indicated that Hobbs had reserved KSBE as a prospective account in January, 1996 and that MMI would not have been able to obtain a quotation or coverages from them even with an exclusive Agent of Record letter. This information was removed at Louanne Kam's direction, and other information of questionable origin and accuracy inserted. I questioned Ms. Kam on many of the changes, and was told that unless these changes were made, she would not concur with the report (which meant to me that the deadline for accepting the proposal would pass and KSBE would be left with MMI's program)."

Another example is my staff report dated September 23, 1996 regarding the renewal proposals for the remaining property and casualty policies that were due to be renewed on October 1st. Aipa and Kam directed that I remove one of the recommendations to Trustees which stated: "...3) that KSBE's captive, P&C Insurance Company, Inc. (P&C), be requested to provide a Property insurance proposal structured on the basis of P&C being the direct carrier, with Arkwright Mutual Insurance Company (Arkwright) providing the necessary reinsurance."

Sections in the body of the report supporting this recommendation were also ordered removed. Even after these changes were made, and Kam signed her concurrence, it is my understanding that Aipa never submitted the report to Trustees.

Copies of the original and final drafts of this report are enclosed (Exhibit 25).

Staff reports regarding settlements of "sensitive" insurance claims (such as the William Rosehill case) which should have come from my department, instead were written and presented to trustees by attorneys such as Colleen Wong, without my concurrence, and without the knowledge and prior consent of the insurance carriers.

Another example of the collusion between Aipa/Kam and Marsh & McLennan in their ongoing efforts to gain "control" of the claims process, was the attempt to arrange to have all of P&C's policies endorsed with a "Consent to Settle" clause. This scheme was carried out directly between Ms. Kam and Mr. Sansone, as indicated in Mr. Sansone's memorandum of November 7, 1996 (Exhibit 26).

This memo, addressed to Ms. Kam, states: "The following proposed endorsement is submitted per our discussions and negotiations with Am-Re. This endorsement provides KSBE with the option of controlling the settlement process subject to the indicated agreements. Based on our discussions, we recommend KSBE accept the proposed wording. Please advise if there are any questions and with your approval to add the endorsement."

This "Consent to Settle" clause would, in effect, take the control of claims settlements away from P&C's independent adjuster and turn it over to KSBE. This clause would also have the effect of exposing both KSBE and P&C to unlimited payments of claims due to the condition: "...If, however, the Insured shall refuse to consent to any settlement recommended by the Company (Am-Re) and acceptable to the claimant and shall elect to contest or continue any proceedings in connection with such claim, the Company's liability for the claim shall not exceed the amount for which the claim could have been settled plus expenses up to the date of such refusal."

This type of "Consent to Settle" clause is frequently used in Professional Liability policies, due to the fact that the insured may not wish to settle the case because it may affect his/her professional reputation. I consider this recommendation by MMI, however, to be highly unusual and totally unnecessary when applied to the General Liability, Workers Compensation, Automobile and Property insurance policies underwritten by P&C. I also consider this recommendation by MMI to be highly irresponsible since it exposes P&C and the estate to significant financial losses if improperly administered.

Mr. Aipa and the Legal Department had demonstrated on previous occasions their strong desire to "control" the insurance claims, especially when it came to choosing the defense attorneys. One prior automobile claim, for example, had raised my concerns as Aipa had directed Alan Yee to contact Pacific Insurance Company and complain about their use of their in-house attorney. At Aipa's direction, Pacific reluctantly transferred the case to Stanford Manuia, an attorney of Mr. Aipa's choosing.

This handling of insurance claims by the attorneys directly with the insurance companies, coupled with the non-disclosure of information to the insurance carriers and to me, often resulted in confusion and delays in settling claims. This also cost the estate and its subsidiaries untold sums of money that would have been paid by the insurance companies had the Legal Group acted in good faith and followed the terms of the policies.

Also, there were often strong indications of conflicts of interest, political influence, opportunities for personal gain, and attempts by our in-house attorneys to "cover-up" evidence of wrongdoing. To cite just a few examples:

The William Rosehill claim (Exhibit 27). The Rosehill case, which began while I was still under the supervision of Gil Tam, raised further suspicions and concerns as documented in my memorandum to Mr. Tam dated July 22, 1992.

Colleen Wong had wanted our independent insurance adjusters, John Mullen & Co., to engage James Kawashima of Watanabe, Ing & Kawashima for this case. However, when Neal Seamon, the adjuster for Mullen, and I attempted to meet with Mr. Kawashima, the meeting was cancelled at the direction of Mr. Aipa. I was advised by Ms. Wong that the reason was "political", and that although Kawashima was the attorney that might actually handle the case, Doug Ing was KSBE's contact person at the law firm. She also stated that Doug Ing might be our new boss, as he was under consideration to be the new trustee.

Even after agreeing with Ms. Wong that we would cancel the meeting, Mr. Aipa called me and in a demanding tone stated that any meetings scheduled with attorneys must be made by Colleen and that the meeting with Kawashima had to be cancelled.

I pointed out in my memo to Tam that United Educators' required that any attorney we may wish to use required their prior approval; that defense costs incurred before United was notified of a claim are not covered under the policy; and that prior approval must be obtained from United on any settlement.

I also expressed my personal concern with the ethics and economics of this case.

As the claim progressed, Aipa and Wong continued to disregard the conditions of the insurance policies (two policies were involved: the ELL policy from United Educators and the General Liability policy from Scottsdale) as well as KSBE's own policies and procedures. Status reports were not provided to the adjuster or insurance carriers on a timely basis.

A staff report regarding the Rosehill claim dated May 6, 1996, prepared by Colleen Wong, and approved by Mr. Aipa, provides examples of how the Legal Group controls information and claims.


 

For this staff report, interdepartment concurrences were obtained from Sandie Wicklein, Director of Personnel, and Rodney Park, head of the Administration Group. Neither the Controller, the Budget Department or I were asked to concur with the report, despite the fact that this was an insurance claim and the funds expended to defend and settle this case were coming from my insurance account.

The staff report makes no mention that this was an insurance claim; that the claim was being investigated and handled by our independent adjuster; and that prior approval was required from the insurance carriers before any settlement offers could be made. No reports or recommendations from the adjuster and the insurance carriers were included in the report.

The original investigation into Mr. Rosehill's alleged wrongdoing was conducted in-house by Colleen Wong and other staff members who are not professional investigators. KSBE's internal investigation relied almost entirely on the testimony of one employee of Umikoa Ranch. The adjuster had earlier suggested that a private investigator be hired to look further into the alleged kick-backs.

A private investigation might reveal important information such as: (1) was this the only lessee that was involved in the alleged kick-backs, or were there others; (2) was Rosehill the only employee involved in this type of activity, or were others similarly stealing from the estate? This information would be crucial to the decision to settle or fight the claim. It would also be important to KSBE's financial interests if it were learned that other property managers were also involved in similar schemes. Stolen funds may have been recoverable under KSBE's fidelity bond. From a risk management perspective, this investigation might provide insight into whether or not additional controls (such as more frequent and/or detailed audits) were needed.

Aipa did, in fact, authorize Kawashima to engage a private investigator, Goodenow Associates, Inc., to investigate the case. The investigation was apparently accomplished as Goodenow's bill for around $10,000 appeared on one of Kawashima's expense items which I paid from the claims account. However, the results of this investigation apparently went directly to Mr. Aipa and was never released to me or the insurance carriers, even after repeated requests. In fact, during a phone conference in Aipa's office, Kawashima indicated that he had not been provided a copy of the report, and that he really should have it in order to properly defend this case.

Some questions that this withholding of information raises: (1) was there something in the report that was so "sensitive" or incriminating to other "insiders" that Mr. Aipa did not wish to release the information; (2) did the report indicate that the internal investigation by Colleen Wong and others was biased or deficient; (3) did the report indicate that our key witness was probably lying to protect himself and/or his employer and that Rosehill was probably innocent; (4) was the existence of this report made known to all five Trustees and, if so, was it presented to them "off the record" in one of their frequent executive sessions"; (5) was there any information in the report which would have affected the settlement decisions of the trustees and the insurance carriers.

The staff report included a letter from James Kawashima dated April 30, 1996 addressed to Colleen Wong. The letter includes these statements:

"In response to the request made by Nathan Aipa and yourself this morning, I have taken our letter to you of April 25, 1996, and amended it pursuant to your request..."

"Another rather significant area of concern is with respect to the disciplinary action taken against Plaintiff in the sandlewood investigation. Apparently, Plaintiff and William Stayton were the only persons disciplined for the sandlewood incident, although the trustees had approved disciplinary action against Plaintiff, Mr. Stayton, Guido Giacometti, Sydney Keliipuleole, and Wallace Tirrell..."

"Another area of concern that has arisen with respect to the Umikoa investigation is a letter from David Matsuura to the Board of Directors of Umikoa Ranch... We had heard rumors that Senator Matsuura had been inquiring of one or more of the trustees as to the settling of the case and that Senator Matsuura seemed anxious that the case settle. While these inquiries, assuming they occurred, may have been purely based on the Senator's obvious distaste for litigation, one wonders if the above document may be viewed by the Senator as causing problems for his son..."

What the revised letter of April 30th does not tell the trustees and others, is that there were twostatus letters addressed to Wong on the same date of April 25th. Important information in this second letter which was not included in the staff report:

"I travelled to Kona on two occasions, March 28 and April 18, 1996, to argue our Motions for Summary Judgment..."

"As you can see, the hearings did not go as well as had been anticipated as we expected to prevail on all of the counts except for the defamation counts as those counts may very well have had material questions of fact that a jury should decide..."

"The reason that the court reserved on the counts relating to defamation and invasion of privacy was because the Plaintiff has not been able to take the oral deposition of State Representative Virginia Isbell..."

"...On the positive side, the granting of the motion on the whistle blower's act is significant as the alleged claims related to gifts to late trustee Lyman and alleged issuing of leases as political favors.. These remedies (under the whistle blower's act) can be quite severe and include costs, attorney's fees, reinstatement, with or without back pay and, arguably, front pay..."

The insurance carriers had been told from early on that trustees wanted to fight this case on principle. McCullough agreed that we should defend the case and had stated, "Why would you want to pay off somebody who was stealing from you." Our attorneys agreed. Mullen agreed. I agreed. Every indication was that we had a very defensible case.

Then on June 19, 1996, nearly four years after the case began and just days before the case was set to go to trial, and after we had spent countless hours in meetings and depositions and over a quarter million dollars in legal fees and costs, Kawashima writes to Wong to advise:

"I am writing to you because of the front page headline article in this morning's Honolulu Advertiser, in which it was reported that a lawsuit had been brought against Bishop Estate and others, alleging fraud, conflict of interest and breach of fiduciary duty..."

"...in discharging my obligations to you, I feel compelled to comment on the ways in which this newspaper article may impact on our upcoming trial in Kona. My opinion is in two areas, one relating to KS/BE itself, and the other relating to Trustee Henry Peters, who unfortunately was the only trustee named in the newspaper article."

"...More specifically, the problem we are faced with is that we have an article that alleges, among other things, conflict of interest against Bishop Estate... As it relates to this case, you will recall that one of the important points that we will bring to the jury's attention is that Mr. Rosehill's termination was not based only on the kickbacks he was receiving from Umikoa Ranch, but also on his prior three disciplinary matters, two of which had to do with conflicts of interest, among other things..."

"From another standpoint, more directly relating to Trustee Peters, we know that he has been subpoenaed to testify at our trial...Knowing Plaintiff's counsel, I would not be surprised if the press were to be present at trial for Trustee Peters' testimony and, of course, they would attempt to interview him after he left the stand...Again, I hope that this may be an over-reaction, but I know the Plaintiff's attorneys well and would not put it beyond them to try to impart a `circus' atmosphere to the trial."

The final settlement agreement was worked out by our Legal Group and Kawashima who dealt directly with our insurance carriers, by-passing myself and Mullen. It was only after requests by Mullen, that Kawashima provided Mullen a report of the settlement agreement. I found it surprising and unusual that a part of the agreement was that Plaintiff would take out $5,000 from his settlement for a contribution "to an organization designated by KSBE." I understand the organization designated by KSBE was a Kamehameha Schools' affiliated organization. If this is correct, then it would mean that the insured would, in effect, be receiving a "rebate" on the proceeds of the claim settlement. This might be considered yet another conflict of interest.

Even the final settlement in this Rosehill case was apparently mishandled by our attorneys. A fax from McCullough to Kawashima dated September 16, 1996 states: "I am unable to issue a check under the terms of the current settlement agreement. The reason is that this settlement does not conform to the current US tax codes and payment cannot be issued with out withholding and a W-2..."

The Kona Enterprises, Wayne Rogers et al claim (Exhibit 28).

When the first lawsuit in this case was filed in North Carolina, it was apparently so "sensitive" that Mr. Aipa did not report the claim. Consequently, the insurance company did not pay any defense costs in the North Carolina case. As these costs were paid out of the OGC account, and not the insurance account, I do not know how much this omission on the part of Mr. Aipa cost the estate in lost recoveries from the insurance carriers.

I did get word of a second lawsuit filed in Utah and gave notice of the claim to United Educators Insurance Company (UE). Mr. Aipa assigned Lyn Anzai to handle the claim directly with the carrier.

In a letter to Ms. Anzai dated August 13, 1993, UE's claims adjuster, Joseph McCullough, points out:

"As we discussed, the plaintiff has made allegations and seeks certain remedies which fall outside the coverage of the insurance policy... Please be assured that our listing of particular allegations and remedies in no way reflects our independent evaluation of their truth. On the contrary, the plaintiff must prove the truth of these allegations and we will support the efforts to disprove each and every one. However, we will not be able to pay on your behalf any amount awarded for a non-covered allegation."

"Several of the trustees of the Bishop Estate also made individual investments and became shareholders in Kona. While your investigation indicates that they did not act outside of the scope of their duties to the Estate, should it be determined that they did act outside this scope, the United Educators policy would not be able to indemnify for that liability."

"The policy also excludes any loss arising out of any insured gaining a profit or advantage to which they were not entitled."

"It is further alleged that the Bishop Estate violated Rule 10b-5 of the Securities Exchange Act of 1934. The policy excludes damages arising from a willful violation of a statute or governmental regulation and the policy will not apply to any damages arising out of this allegation."

"The policy will respond to the defense of the lawsuit and any damages arising out of covered allegations, in excess of the retention. The retention applies to both defense costs and damages combined."

"Under the terms of your policy, you have the right to select defense counsel subject to our approval. Our approval is predicated on defense counsel agreeing to work within the parameters of the enclosed Defense Counsel Guidelines..."

"We will not be able to credit the retention or pay any amounts which are incurred without our prior approval. Until we receive a legal budget we can only authorize up to $25,000 for counsel to protect your interests..."

A third lawsuit was filed in Hawaii. Despite the admonitions of United Educators, KSBE retained, without the required prior consent of the insurance company, C. Michael Hare of Cades Schutte Fleming & Wright, as well as William Raper of Womble Carlyle Sandridge & Rice in North Carolina.

With Aipa's apparent consent, the Cades firm continued to disregard many of UE's Guidelines. This resulted in fees and expenses that UE questioned and would not approve. As a consequence, Mr. Aipa began paying the Cades firm from the General Counsel's account rather than from my insurance account.

A memorandum from McCullough dated March 21, 1996 states that many of the Cades fees were disallowed due to noncompliance with the policy terms. The Hawaii case was settled in KSBE's favor, but is currently on appeal to the 9th Circuit.

I do not know the total defense costs to date for this case, or how much UE has paid. But if the original lawsuit had been reported, and if UE's Guidelines and policy conditions had been followed, the total costs to KSBE should have been limited to the self-insured retention of $250,000. I do know that the Cades firm alone had billed $759,068 as of September 30, 1996. (As a side note, Cades billed another $12,982 for a review of the Master's inquiries of this litigation.)

I do not know how many dollars, if any, the individual defendants who personally invested in this venture have contributed to the defense costs in this case, or if they are getting a "free ride" and private benefit at the expense of the estate and the tax-payers.

In what may be a related action, Montrose Nationwide Limited Partnership filed a recent lawsuit (Civil Number 96-CVS-03546) against Nationwide Industries, Inc. To my knowledge, this claim had not been reported to the carrier as of my termination date.

The McKenzie Methane claim (Exhibit 29). This claim is probably the best example of Mr. Aipa's non-disclosure philosophy.

This lawsuit was filed in March, 1993. I first learned of it in August, 1993 as a result of gathering information for the October 1st renewal of KSBE's ELL policy. I gave notice of the claim to the insurance carrier, United Educators, hoping it would not be denied due to non-compliance with the prompt reporting requirement. The amount claimed was $2,300,000,000.

KSBE, Pauahi Holdings Corporation, Royal Hawaiian Shopping Center, Inc., and Kamehameha Investment Corporation, as well as their trustees, directors, officers and employees were entitled to defense under this policy. Nathan Aipa directed that he would be the responsible attorney.

A letter dated September 16, 1993, to Aipa from UE's claims manager, Joseph McCullough, states:

"I would like to acknowledge receipt of the fax from Marsh & McLennan advising us that there is a law suit filed in Texas by M. McKenzie and McKenzie Methane Corporation against Royal Hawaiian Shopping Center, Inc. among others. This fax was our first notice of claim. This fax does not contain enough information for us to determine the allegations being made and therefore we are unable to advise you of what coverage, if any, is available under the KS/BE policies with United Educators."

"I have made at least 6 phone calls to you in an effort to get information about this claim. I have talked to Bobby Harmon who advises you are the person with information about this case. I have asked that if anyone else in the legal department has the necessary information, that they contact me. To date, I have been contacted by no one from the legal department. I have attempted to get additional information from Marsh & McLennan but they advise they have no additional information."

"I must advise you that the policy requires that insureds cooperate with the company in reporting and investigating claims. Failure to cooperate may result in coverage that may otherwise be available may be lost to an insured."

"The first notice received indicated that `settlement discussions are currently in progress'. While I currently have no idea whether there is any coverage available to any of the defendants in the lawsuit, United does not consent to any settlement that is entered into with out our informed consent."

"Therefore, if you believe that any defendant is entitled to coverage under any of the policies issued by United Educators to Kamehameha Schools/Bishop Estates, your failure to cooperate with the carrier is jeopardizing such coverage."

"Please call me at your earliest opportunity."

Aipa responded on September 17, 1993 with these statements:

"...With respect to the McKenzie Methane Corporation litigation...please be advised that we have been involved in some intense very confidential settlement negotiations with Michael McKenzie, and I am pleased to inform you that a settlement agreement in concept has been reached..."

McCullough responded on September 27, 1993:

"...While it appears that the terms of the settlement will not require a payment by any of our insureds, please be advised that United is not in a position to authorize any settlement of this claim for any amount for which you will seek coverage under the policy."

The closing of the settlement was subsequently deferred. On November 15, 1993, McCullough advised Aipa:

"I look forward to your update regarding the settlement terms that were to be agreed last Friday. As you know we are monitoring this under a reservation of rights because we do not have any information on which to determine the extent of coverage, if any, under the policy."

"We have delayed our request for information in order to allow you time to resolve the dispute which seems promising. If you wish to continue this arrangement, I am willing to continue, as long as our agreeing to do so will not be held against United, should the settlement not be consummated and you do not agree with the ultimate coverage decision we make."

In a letter dated January 31, 1994, Aipa informed McCullough:

"...I wish to confirm that McKenzie Methane Corporation has failed to comply with the terms of the settlement agreement previously discussed. As such, we are continuing with the litigation..."

McCullough responded on February 1, 1994:

"Since this case did not settle as expected, and with the scheduled trial date in May, I certainly need to get some basic information from you in order to determine whether there is any coverage under KS/BE's policy and if United Educators should play a role in the ongoing litigation. I have not tried to contact you by phone since you requested I communicate solely by fax to you. Please provide the following at the earliest time.

The complaint filed by McKenzie and any amended complaints.

The Answers filed by the Trustees, KS/BE, Royal Hawaiian, and Kukui.

Other significant pleadings by McKenzie or the defendants.

Defense counsel's analysis of liability and damages.

Documents which support such analysis.

Any other documents which will help shed light on the case."

It is imperative that I receive this information very quickly and urge that it be sent overnight mail."

"If you wish for me to contact defense counsel directly, please provide the name of the principal attorney, address and phone number."

On February 16, 1994, McCullough informed Mr. Aipa by fax:

"In deference to your request, United Educators, in an effort to us of the investigation and pleadings arising from this lawsuit based on your belief that the case would settle and that you would not be seeking coverage for the settlement under the KS/BE insurance policy with United. With the settlement not being finalized and the trial scheduled for May of this year, we requested that you overnight information on this case on 2/1/94."

"That was 2 weeks ago and we have not received any information. The very limited information I have indicates this is a business dispute... The proposed settlement did not provide for any damages to be paid to McKenzie by any insured.. Taking that into consideration and trying to surmise why you have been reluctant to provide information, the only inference I could draw was that you may not feel there is any coverage available under the policy and therefore do not feel it is necessary to provide any information."

"If that is the case, fine. However, if such a conclusion is in error, and you do feel there may be some coverage available and intend to seek such under the policy, I strongly urge you to cooperate with us and provide the information I have been requesting immediately. I must inform you that your failure to provide this information may have already prejudiced United with respect to this claim, and that the longer you withhold information, even if we have not yet been prejudiced, the more likely it is that we are prejudiced."

"Based on the fact that United does not have information for the matter, we must iterate our position that this request is to determine what coverage, if any, may be available to the defendants under the terms of ELP99200667 and is not an admission by us that there is any coverage. On the contrary, we have absolutely no information on which to determine whether there is any coverage under the terms of the policy or whether any prejudice exists based on late notice or failure to provide information."

"Based on the above, I will wait to hear from you. If, in a reasonable period of time, additional information is not forthcoming, I will simply close our file. In that way, you won't be inconvenienced with having to contact me if in your opinion that is not necessary."

Mr. Aipa did not respond to McCullough's letter and UE closed their file without any payments being made. No defense costs were paid from my insurance claims account, so I do not know the total costs incurred in this lengthy and complex lawsuit.

Defendants in the suit included subsidiaries and individual employees in addition to KSBE and its trustees. I question whether or not these subsidiaries and individuals were properly advised by Aipa of the fact they had potential protection under the ELL policy, and that these coverages were essentially waived by Aipa's failure to cooperate. I also question if these subsidiaries and individuals paid their fair share of these defense costs, or did all funds come from the estate?

The Larry Ching flood damage claim.

Larry Ching had flood damage to his home on Kauai after heavy rains. His home is on Bishop Estate leasehold property. Mullen's adjuster, Neal Seamon, thoroughly investigated the case and concluded that this was an act of God" and not the liability of KSBE and P&C. Ms. Kam actively involved herself in the handling of the claim, reportedly at the request of Trustee Wong.

What was particularly disturbing to me in this case was the blatant manner in which Ms. Kam attempted to breach the arms-length relationships between KSBE and P&C by indicating that we should pay the claim "because Trustee Wong wanted to see it settled".

In a meeting called by Kam with Neal Seamon and Bob Kuroda, of John Mullen & Co.; Kapu Smith; and myself, it was everyone's opinion, except Kam's, that Mullen had taken the correct course of action in denying the claim, and if Mr. Ching wished to bring a lawsuit, KSBE would have a very defensible claim.

Ms. Kam suggested that P&C hire a hydrologist to generate a report to provide an "expert" opinion. The original estimate of Ching's damages were about $7,000; the expert's report might run as high as $10,000. Mr. Seamon logically recommended that we not hire an expert at that time, but wait to see if Ching hired an attorney and they went to the expense of hiring their own expert. If they did, then Mullen could request the findings of that report which would indicate specific allegations of fault, if any. Then we could hire our own expert to determine if those specific allegations were accurate or could be disputed. This report would cost much less than a general report and be much more effective in the event we went to trial.

Kam apparently was not happy with this recommendation and continued to press the issue by contacting Pat Onogi of MMI convincing (or directing?) her to write a letter recommending P&C hire an expert. This letter provided the excuse for Aipa and Kam to call me into a meeting.

This meeting resulted in yet another PERS 9 reprimand from Kam dated November 12, 1996. Her memorandum provides another excellent example of how Aipa/Kam attempted to influence and control the claims settlement process to the benefit of third parties, but at the cost of the estate.

This reprimand and my response of November 20, 1996 are enclosed (Exhibit 30).

The Marcia Diver Workers Compensation and Discrimination claims.

This claim provides an example of how staff members from the Personnel Division and attorneys from the Legal Group get involved in handling claims that are best left to the insurance company's professional adjusters.

The case itself is too complex and involved to even summarize here but, in my opinion, KBSE staff members have contributed much to the problems, and little to the solutions. There is an obvious conflict of interest situation here in that Ms. Diver is alleging that Rodney Park, her supervisor at the time of the incident(s), harassed and/or discriminated against her. Mr. Park is now the head of the Administration Group, in charge of the Personnel Division. Yet Carol Koza in the Personnel Division has been actively attempting to "control" the Workers Compensation claim, along with Louanne Kam and Colleen Wong.

By way of example, this was one of several major open workers compensation claims that was discussed in meetings held with representatives from Mullen, Norman Peterson & Associates and Apple Health Systems during the implementation stage of the OUR System. At these meetings it was determined that Ms. Diver would be an excellent candidate for this return-to-work program.

After these discussions, however, Ms. Koza called for another meeting with participants Colleen Wong, Louanne Kam, Charles Maeda and myself. At this meeting Koza, Wong and Kam were adamant that Ms. Diver not be returned to work under the OUR System. This action, in and of itself, could be considered discriminatory. Ms. Diver, in my opinion, was not given an equal opportunity to return to work.

KSBE could also be in violation of the Americans with Disabilities Act, as reasonable efforts were not made to alter the workplace to accommodate her disabilities.

Politics and political favors. Even before I accepted my position with KSBE, I was advised by Gil Tam that KSBE was "a very political organization." At the time, I had no idea what this really meant. I began to get an inkling when I was "invited" by Tam to attend a political fund-raiser for Milton Holt, a KSBE employee. The fund-raiser was held at Bishop Museum, a non-profit, tax-exempt organization founded by Charles R. Bishop. The trustees for the C.R. Bishop Estate are the same trustees as for Bishop Estate. On another occasion I was "invited" to attend a fund-raiser for Bob Herkes, an employee of KIC. This was also held at Bishop Museum.

On one occasion I was invited by Mr. Tam to "waive signs" for Henry Peters who was running for re-election to the State House of Representatives. Although I was not even a resident of Mr. Peters' district, I "volunteered". Luckily, for me, the demonstration was called off on account of rain.

Rocco Sansone personally met with Mr. Peters reportedly to ask his assistance in getting "wrap-up" insurance legislation passed in the last session. This legislation is expected to greatly benefit the large brokers who are experienced and equipped to handle these large multi-insured programs - at the expense of the small agents who are not so equipped.

According to public records, Milton Holt received political contributions from Gil Tam in the last election. Holt was strongly pushing a pure "no-fault" bill in the last session. The insurance industry, including Marsh & McLennan, was strongly behind this effort as it was believed this would greatly enhance the insurance companies profits.

Non-bid Contracts and Conflicts of Interest.

At the time I joined KSBE, the insurance agent was the wife of the Financial Asset Manager. The person responsible for the purchase of insurance at that time was Doyal Davis. Mr. Davis can verify the pressures placed upon him to keep the insurance program with this agent.

Obtaining competitive bids for the insurance program on a periodic basis is considered to be a good risk management practice in order to "keep the broker honest." In 1990, I requested proposals from a number of reputable local general agencies. MMI submitted, and I recommended, a very competitive proposal which improved coverages and reduced the costs of insurance to KSBE. For this I was commended by my supervisor and received an "Outstanding" performance rating with a corresponding increase in pay.

In 1996, I obtained a very competitive proposal from the Hobbs Group which greatly improved property coverages and saved KSBE over $600,000 a year. For this, I was soundly chastised; harassed; demeaned; embarrassed; called unprofessional and insubordinate; relieved of my responsibilities for the property insurance program; received my career-first "below-standard"performance rating, my career-first written reprimands, and my career-first termination of employment. How do you explain this?

For its 1995-96 fiscal year, P&C made a profit of $1.2 million and had an increase in assets from $4.7 million to $6.6 million. For the current fiscal year budget, I trimmed $150,000 off the "risk management" expense charged by MMI, which resulted in reducing premiums to KSBE and its subsidiaries by this amount. For this, I received my second termination notice on the same day as my first. How do you explain this?

KSBE has, I'm told, a list of contractors who are "approved" to bid on jobs, and a list of contractors who are "not approved" Apparently the same holds true for non-bid contracts.

All bids and contracts, I'm told, must be reviewed and approved KSBE's Budget Director Yukio Takemoto. An article from the Star-Bulletin gives some background on Mr. Takemoto (Exhibit 31).

Likewise, there is a list of "approved" attorneys that Aipa requires for KSBE's and P&C's insurance claims. Aipa and Kam routinely dictate which attorneys are to be used for each case.

Once the designated attorney is engaged for a claim, Aipa, Kam, Anzai or Wong usually "take control" by calling or corresponding directly with the attorney and directing his/her activities. This leads to another conflict of interest situation.

The Legal Group includes in their performance evaluation criteria for their attorneys what is called "billable hours". Under this system, the greater the number of billable hours, the higher the performance evaluation. This, in turn, can mean greater increases in salaries to the attorney. Consequently, it benefits the in-house attorneys who spend more "billable hours" on the phone, in conferences, or corresponding with outside counsel. This activity also benefits the outside counsel who is charging KSBE or P&C by the quarter hour.

Who pays these benefits? KSBE and every entity that pays the insurance premiums; the insurance carriers that pay the claims; the taxpayers; and the beneficiaries of the estate.

In the event we are unable to reach a settlement agreement, the alternative would be a demand for a jury trial. The following would be the potential defendants and witnesses:

POTENTIAL DEFENDANTS:

Kamehameha Schools Bishop Estate

Richard S. H. Wong

Henry Peters

Lokelani Lindsey

Gerard Jervis

Oswald Stender

Nathan Aipa

Louanne Kam

Rodney Park

P&C Insurance Company, Inc

Henry Peters

William Richardson

Gilbert Tam

Peter J. Lowe

Nathan Aipa

Marsh & McLennan, Inc.

Rocco Sansone

Puna Chillingworth

Richard Nakayama

M&M Insurance Management Services, Inc.

Peter J. Lowe

POTENTIAL WITNESSES:

Myron Thompson, Matsuo Takabuki, William Richardson, Yukio Takemoto, Dr. Michael Chun, Gilbert Tam, Wally Chin, Ramona Hinck, Leeanne Crabbe, Dennis Fern, Andrea Oshiro, Gilbert Ishikawa, Myron Mitsuyasu, Mark McConaghy, Sam Hata, Bob Ramsey, Allen Young, Michael Lum, Robert Stender, Stan Hioki, Edward Tabangay, Rodney Park, Guido Giacommetti, Doyal Davis, Neil Hannahs, John Peterson, Sydney Keliipuleole, Paul Cathcart, Guy Gilliland, Rochelle Arquette, Charles Maeda, Daniel Jones, Richard Wong, Glenn Hara, Louis Kau, Jonathan Kim, Marlene Akau, Edith Won, John Rocha, Wallace Tirrell, Ed Henrickson, Colleen Wong, Lyn Anza, Alan Yee, Philip Chang, Stacy Rezentes, Shevon Garnett, David Dunigan, Julie Kawakami, Linda Jacobson, Anela Shimizu, Coreene Zablan, Liz Kilbey, Daniel Pires, Eric Martinson, Bruce Nakaoka, Aaron Au, Sandie Wicklein, Earlene Garvey, Carol Koza, Kathie Reis, Lena Young, Charlee Kowalski, Maryanne Inouye, Robert Lindsey, Milton Holt, Alika Thompson, Nam Snow, Rocco Sansone, Puna Chillingworth, Richard Nakayama, Bruce Anderson, Anne Anderson, Adam McDonough, Joseph McCullough, Peter J. Lowe, Garrett Liu, Christine Lee, Patricia Onogi, Robert Kuroda, Gary Gowdy, John McGrath, Timothy McGrath, Gerald Takeuchi, Mary Breighner, Marcia Diver, Robert Stay, William Stayton, William Rosehill, William E. Simon, Robert Rubin, Michael McKenzie, Wayne Rogers, Bruce Nelson, Raymond Pettit, Frederick Field, Robert Basham, Benjamin Stone, Paul Norman, Clay Hamner, Mitch Gilbert, Bruce Clark, Stanford Manuia, Michael Hare, James Kawashima, David Trask, Peter Trask, Cary Okawa, Dennis Tsuhako, Guy Lamb, Bruce Marcus, Donald Pang, B.P. Russel, James Duffy, Benjamin Matsubara, Neal Seamon, Ben Benson

In addition to the wrongful termination claim, other claims may include breach of fiduciary duties; fraud; harassment; verbal abuse; libel; slander; coercion to commit illegal acts; violation of the whistle-blower act; discrimination, etc.

The prayer for relief would probably include damages to be determined at trial plus interest; back pay; forward pay; punitive damages; attorney's fees, etc. I would also demand reinstatement as President of P&C. I would not accept a structured settlement.

As I would prefer, however, to avoid taking this action, I am submitting the following claim for your consideration and for the consideration of your insurance carriers:

As it was pointed out to me on several occasions by Aipa and Kam, I am not an attorney, so I am not an expert in the law. Therefore, everything that I have reported in this letter may be completely legal and ethical.

I leave that decision up to you.

Unfortunately, I cannot provide you with a copy of my letter of 12/29/96, as KSBE obtained a court order for the return of all my letters and personnel records, even the letter which I sent to the trustees after my termination. However, I thought that the information provided in this letter, as well as some of my recent correspondence with other governmental agencies, might be of some assistance in your investigation.

If I can be of any further assistance in this matter, please feel free to contact me at 839-0654 (home) or at 522-8686 (work), or at the address shown above.

I commend you for your investigation, and wish you quick success.

Very truly yours,

Bobby N. Harmon

encls.

 

This is a leaf from

Claims By Harmon

~ ~ ~

To fly to the top of the tree

The Catbird Seat