Harmon's Letter to the FBI

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.

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.

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.

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.

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