Flocking with ...
The FCC

Sightings from The Catbird Seat

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February 21, 2008

For McCain, Self-Confidence on
Ethics Poses Its Own Risk

By JIM RUTENBERG, MARILYN W. THOMPSON, DAVID D. KIRKPATRICK
and STEPHEN LABATON, The New York Times

WASHINGTON — Early in Senator John McCain’s first run for the White House eight years ago, waves of anxiety swept through his small circle of advisers.

A female lobbyist had been turning up with him at fund-raisers, visiting his offices and accompanying him on a client’s corporate jet. Convinced the relationship had become romantic, some of his top advisers intervened to protect the candidate from himself — instructing staff members to block the woman’s access, privately warning her away and repeatedly confronting him, several people involved in the campaign said on the condition of anonymity.

When news organizations reported that Mr. McCain had written letters to government regulators on behalf of the lobbyist’s client, the former campaign associates said, some aides feared for a time that attention would fall on her involvement.

Mr. McCain, 71, and the lobbyist, Vicki Iseman, 40, both say they never had a romantic relationship. But to his advisers, even the appearance of a close bond with a lobbyist whose clients often had business before the Senate committee Mr. McCain led threatened the story of redemption and rectitude that defined his political identity.

It had been just a decade since an official favor for a friend with regulatory problems had nearly ended Mr. McCain’s political career by ensnaring him in the Keating Five scandal. In the years that followed, he reinvented himself as the scourge of special interests, a crusader for stricter ethics and campaign finance rules, a man of honor chastened by a brush with shame.

But the concerns about Mr. McCain’s relationship with Ms. Iseman underscored an enduring paradox of his post-Keating career. Even as he has vowed to hold himself to the highest ethical standards, his confidence in his own integrity has sometimes seemed to blind him to potentially embarrassing conflicts of interest.

Mr. McCain promised, for example, never to fly directly from Washington to Phoenix, his hometown, to avoid the impression of self-interest because he sponsored a law that opened the route nearly a decade ago. But like other lawmakers, he often flew on the corporate jets of business executives seeking his support, including the media moguls Rupert Murdoch, Michael R. Bloomberg and Lowell W. Paxson, Ms. Iseman’s client. (Last year he voted to end the practice.)

Mr. McCain helped found a nonprofit group to promote his personal battle for tighter campaign finance rules. But he later resigned as its chairman after news reports disclosed that the group was tapping the same kinds of unlimited corporate contributions he opposed, including those from companies seeking his favor. He has criticized the cozy ties between lawmakers and lobbyists, but is relying on corporate lobbyists to donate their time running his presidential race and recently hired a lobbyist to run his Senate office.

“He is essentially an honorable person,” said William P. Cheshire, a friend of Mr. McCain who as editorial page editor of The Arizona Republic defended him during the Keating Five scandal. “But he can be imprudent.”

Mr. Cheshire added, “That imprudence or recklessness may be part of why he was not more astute about the risks he was running with this shady operator,” Charles Keating, whose ties to Mr. McCain and four other lawmakers tainted their reputations in the savings and loan debacle.

During his current campaign for the Republican presidential nomination, Mr. McCain has played down his attacks on the corrupting power of money in politics, aware that the stricter regulations he championed are unpopular in his party. When the Senate overhauled lobbying and ethics rules last year, Mr. McCain stayed in the background.

With his nomination this year all but certain, though, he is reminding voters again of his record of reform. His campaign has already begun comparing his credentials with those of Senator Barack Obama, a Democratic contender who has made lobbying and ethics rules a centerpiece of his own pitch to voters.

“I would very much like to think that I have never been a man whose favor can be bought,” Mr. McCain wrote about his Keating experience in his 2002 memoir, “Worth the Fighting For.” “From my earliest youth, I would have considered such a reputation to be the most shameful ignominy imaginable. Yet that is exactly how millions of Americans viewed me for a time, a time that I will forever consider one of the worst experiences of my life.”

A drive to expunge the stain on his reputation in time turned into a zeal to cleanse Washington as well. The episode taught him that “questions of honor are raised as much by appearances as by reality in politics,” he wrote, “and because they incite public distrust they need to be addressed no less directly than we would address evidence of expressly illegal corruption.”...

A Formative Scandal

Mr. McCain started his career like many other aspiring politicians, eagerly courting the wealthy and powerful. A Vietnam war hero and Senate liaison for the Navy, he arrived in Arizona in 1980 after his second marriage, to Cindy Hensley, the heiress to a beer fortune there. He quickly started looking for a Congressional district where he could run.

Mr. Keating, a Phoenix financier and real estate developer, became an early sponsor and, soon, a friend. He was a man of great confidence and daring, Mr. McCain recalled in his memoir. “People like that appeal to me,” he continued. “I have sometimes forgotten that wisdom and a strong sense of public responsibility are much more admirable qualities.”

During Mr. McCain’s four years in the House, Mr. Keating, his family and his business associates contributed heavily to his political campaigns. The banker gave Mr. McCain free rides on his private jet, a violation of Congressional ethics rules (he later said it was an oversight and paid for the trips). They vacationed together in the Bahamas. And in 1986, the year Mr. McCain was elected to the Senate, his wife joined Mr. Keating in investing in an Arizona shopping mall.

Mr. Keating had taken over the Lincoln Savings and Loan Association and used its federally insured deposits to gamble on risky real estate and other investments. He pressed Mr. McCain and other lawmakers to help hold back federal banking regulators.

For years, Mr. McCain complied. At Mr. Keating’s request, he wrote several letters to regulators, introduced legislation and helped secure the nomination of a Keating associate to a banking regulatory board.

By early 1987, though, the thrift was careering toward disaster. Mr. McCain agreed to join several senators, eventually known as the Keating Five, for two private meetings with regulators to urge them to ease up. “Why didn’t I fully grasp the unusual appearance of such a meeting?” Mr. McCain later lamented in his memoir.

When Lincoln went bankrupt in 1989 — one of the biggest collapses of the savings and loan crisis, costing taxpayers $3.4 billion — the Keating Five became infamous. The scandal sent Mr. Keating to prison and ended the careers of three senators, who were censured in 1991 for intervening. Mr. McCain, who had been a less aggressive advocate for Mr. Keating than the others, was reprimanded only for “poor judgment” and was re-elected the next year.

Some people involved think Mr. McCain got off too lightly. William Black, one of the banking regulators the senator met with, argued that Mrs. McCain’s investment with Mr. Keating created an obvious conflict of interest for her husband. (Mr. McCain had said a prenuptial agreement divided the couple’s assets.) He should not be able to “put this behind him,” Mr. Black said. “It sullied his integrity.”

Mr. McCain has since described the episode as a unique humiliation. “If I do not repress the memory, its recollection still provokes a vague but real feeling that I had lost something very important,” he wrote in his memoir. “I still wince thinking about it.”

A New Chosen Cause

After the Republican takeover of the Senate in 1994, Mr. McCain decided to try to put some of the lessons he had learned into law. He started by attacking earmarks, the pet projects that individual lawmakers could insert anonymously into the fine print of giant spending bills, a recipe for corruption. But he quickly moved on to other targets, most notably political fund-raising.

Mr. McCain earned the lasting animosity of many conservatives, who argue that his push for fund-raising restrictions trampled free speech, and of many of his Senate colleagues, who bristled that he was preaching to them so soon after his own repentance. In debates, his party’s leaders challenged him to name a single senator he considered corrupt (he refused).

“We used to joke that each of us was the only one eating alone in our caucus,” said Senator Russ Feingold, Democrat of Wisconsin, who became Mr. McCain’s partner on campaign finance efforts.

Mr. McCain appeared motivated less by the usual ideas about good governance than by a more visceral disapproval of the gifts, meals and money that influence seekers shower on lawmakers, Mr. Feingold said. “It had to do with his sense of honor,” he said. “He saw this stuff as cheating.”

Mr. McCain made loosening the grip of special interests the central cause of his 2000 presidential campaign, inviting scrutiny of his own ethics. His Republican rival, George W. Bush, accused him of “double talk” for soliciting campaign contributions from companies with interests that came before the powerful Senate commerce committee, of which Mr. McCain was chairman. Mr. Bush’s allies called Mr. McCain “sanctimonious.”

At one point, his campaign invited scores of lobbyists to a fund-raiser at the Willard Hotel in Washington. While Bush supporters stood mocking outside, the McCain team tried to defend his integrity by handing the lobbyists buttons reading “McCain voted against my bill.” Mr. McCain himself skipped the event, an act he later called “cowardly.”

By 2002, he had succeeded in passing the McCain-Feingold Act, which transformed American politics by banning “soft money,” the unlimited donations from corporations, unions and the rich that were funneled through the two political parties to get around previous laws.

One of his efforts, though, seemed self-contradictory. In 2001, he helped found the nonprofit Reform Institute to promote his cause and, in the process, his career. It collected hundreds of thousands of dollars in unlimited donations from companies that lobbied the Senate commerce committee. Mr. McCain initially said he saw no problems with the financing, but he severed his ties to the institute in 2005, complaining of “bad publicity” after news reports of the arrangement.

Like other presidential candidates, he has relied on lobbyists to run his campaigns. Since a cash crunch last summer, several of them — including his campaign manager, Rick Davis, who represented companies before Mr. McCain’s Senate panel — have been working without pay, a gift that could be worth tens of thousands of dollars.

In recent weeks, Mr. McCain has hired another lobbyist, Mark Buse, to run his Senate office. In his case, it was a round trip through the revolving door: Mr. Buse had directed Mr. McCain’s committee staff for seven years before leaving in 2001 to lobby for telecommunications companies.

Mr. McCain’s friends dismiss questions about his ties to lobbyists, arguing that he has too much integrity to let such personal connections influence him.

“Unless he gives you special treatment or takes legislative action against his own views, I don’t think his personal and social relationships matter,” said Charles Black, a friend and campaign adviser who has previously lobbied the senator for aviation, broadcasting and tobacco concerns.

Concerns in a Campaign

Mr. McCain’s confidence in his ability to distinguish personal friendships from compromising connections was at the center of questions advisers raised about Ms. Iseman.

The lobbyist, a partner at the firm Alcalde & Fay, represented telecommunications companies for whom Mr. McCain’s commerce committee was pivotal. Her clients contributed tens of thousands of dollars to his campaigns.

Mr. Black said Mr. McCain and Ms. Iseman were friends and nothing more. But in 1999 she began showing up so frequently in his offices and at campaign events that staff members took notice. One recalled asking, “Why is she always around?”

That February, Mr. McCain and Ms. Iseman attended a small fund-raising dinner with several clients at the Miami-area home of a cruise-line executive and then flew back to Washington along with a campaign aide on the corporate jet of one of her clients, Paxson Communications. By then, according to two former McCain associates, some of the senator’s advisers had grown so concerned that the relationship had become romantic that they took steps to intervene.

A former campaign adviser described being instructed to keep Ms. Iseman away from the senator at public events, while a Senate aide recalled plans to limit Ms. Iseman’s access to his offices.

In interviews, the two former associates said they joined in a series of confrontations with Mr. McCain, warning him that he was risking his campaign and career. Both said Mr. McCain acknowledged behaving inappropriately and pledged to keep his distance from Ms. Iseman. The two associates, who said they had become disillusioned with the senator, spoke independently of each other and provided details that were corroborated by others.

Separately, a top McCain aide met with Ms. Iseman at Union Station in Washington to ask her to stay away from the senator. John Weaver, a former top strategist and now an informal campaign adviser, said in an e-mail message that he arranged the meeting after “a discussion among the campaign leadership” about her.

“Our political messaging during that time period centered around taking on the special interests and placing the nation’s interests before either personal or special interest,” Mr. Weaver continued. “Ms. Iseman’s involvement in the campaign, it was felt by us, could undermine that effort.”

Mr. Weaver added that the brief conversation was only about “her conduct and what she allegedly had told people, which made its way back to us.” He declined to elaborate.

It is not clear what effect the warnings had; the associates said their concerns receded in the heat of the campaign.

Ms. Iseman acknowledged meeting with Mr. Weaver, but disputed his account.

“I never discussed with him alleged things I had ‘told people,’ that had made their way ‘back to’ him,” she wrote in an e-mail message. She said she never received special treatment from Mr. McCain’s office.

Mr. McCain said that the relationship was not romantic and that he never showed favoritism to Ms. Iseman or her clients. “I have never betrayed the public trust by doing anything like that,” he said. He made the statements in a call to Bill Keller, the executive editor of The New York Times, to complain about the paper’s inquiries.

The senator declined repeated interview requests, beginning in December. He also would not comment about the assertions that he had been confronted about Ms. Iseman, Mr. Black said Wednesday.

Mr. Davis and Mark Salter, Mr. McCain’s top strategists in both of his presidential campaigns, disputed accounts from the former associates and aides and said they did not discuss Ms. Iseman with the senator or colleagues.

“I never had any good reason to think that the relationship was anything other than professional, a friendly professional relationship,” Mr. Salter said in an interview.

He and Mr. Davis also said Mr. McCain had frequently denied requests from Ms. Iseman and the companies she represented. In 2006, Mr. McCain sought to break up cable subscription packages, which some of her clients opposed. And his proposals for satellite distribution of local television programs fell short of her clients’ hopes.

The McCain aides said the senator sided with Ms. Iseman’s clients only when their positions hewed to his principles.

A champion of deregulation, Mr. McCain wrote letters in 1998 and 1999 to the Federal Communications Commission urging it to uphold marketing agreements allowing a television company to control two stations in the same city, a crucial issue for Glencairn Ltd., one of Ms. Iseman’s clients. He introduced a bill to create tax incentives for minority ownership of stations; Ms. Iseman represented several businesses seeking such a program. And he twice tried to advance legislation that would permit a company to control television stations in overlapping markets, an important issue for Paxson.

In late 1999, Ms. Iseman asked Mr. McCain’s staff to send a letter to the commission to help Paxson, now Ion Media Networks, on another matter. Mr. Paxson was impatient for F.C.C. approval of a television deal, and Ms. Iseman acknowledged in an e-mail message to The Times that she had sent to Mr. McCain’s staff information for drafting a letter urging a swift decision.

Mr. McCain complied. He sent two letters to the commission, drawing a rare rebuke for interference from its chairman. In an embarrassing turn for the campaign, news reports invoked the Keating scandal, once again raising questions about intervening for a patron.

Mr. McCain’s aides released all of his letters to the F.C.C. to dispel accusations of favoritism, and aides said the campaign had properly accounted for four trips on the Paxson plane. But the campaign did not report the flight with Ms. Iseman. Mr. McCain’s advisers say he was not required to disclose the flight, but ethics lawyers dispute that.

Recalling the Paxson episode in his memoir, Mr. McCain said he was merely trying to push along a slow-moving bureaucracy, but added that he was not surprised by the criticism given his history.

“Any hint that I might have acted to reward a supporter,” he wrote, “would be taken as an egregious act of hypocrisy.”

Statement by McCain

Mr. McCain’s presidential campaign issued the following statement Wednesday night:

“It is a shame that The New York Times has lowered its standards to engage in a hit-and-run smear campaign. John McCain has a 24-year record of serving our country with honor and integrity. He has never violated the public trust, never done favors for special interests or lobbyists, and he will not allow a smear campaign to distract from the issues at stake in this election.

“Americans are sick and tired of this kind of gutter politics, and there is nothing in this story to suggest that John McCain has ever violated the principles that have guided his career.”

http://www.nytimes.com/2008/02/21/us/politics/21mccain.html

TALK TO THE NEW YORK TIMES NEWSROOM

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FOR MORE SEE: VULTURES IN THE MEADOWS

< < < FLASHBACK < < <

From Stupid White Men (Copyright 2001), by Michael Moore:

When not fighting wars, Colin Powell sat on the boards of Gulfstream Aerospace and AOL. Gulfstream makes jets for both Hollywood honchos and foreign governments like Kuwait and Saudi Arabia.

During his time at AOL, the company merged with Time Warner, and Powell’s stock rose in value by $4 million. At the time, Colin’s son, Michael Powell, had been the only Federal Communications Commission (FCC) member who advocated that the AOL/Time Warner merger go through without question.

Powell’s son has since been named chairman of the FCC by George W. Bush; part of his job is to oversee the activities of AOL/Time Warner.

He will also oversee any regulation of AOL’s monopolistic “instant messaging” technology.

For more, GO TO > > > Hail to The Chief; The Impeachment of George W. Bush; The Mating of AOL & Time Warner; Nests in the Pentagon; The Rise & Fall of Summit Communications; Vultures of the Sandwich Isles

May 17, 2007

Three phone companies
rake in subsidies

By Sean Hao, Honolulu Advertiser

The tax you pay on your long-distance phone bill — $2 or more a month — is resulting in a major income boost for three Hawai'i phone operators.

Since 1998, Sandwich Isles Communications Inc. has been collecting $765 a month per customer for providing phone service to residents of Hawaiian Home Lands. Now two cell-phone companies — Sprint Nextel Corp. and Mobi PCS — have gotten in on the deal. Nextel and Mobi also get $765 a month per customer for extending their cell-phone service to Hawaiian Home Lands.

By September, the three companies will have received a combined $132 million in subsidies for servicing less than 3,500 residences.

The generous subsidies come from the Universal Service Fund, a federal program initially designed to ensure that phone companies would extend landlines to customers in high-cost rural areas. Later, the program was amended to allow cell-phone companies to collect the same subsidy as landline companies.

In Hawai'i, the program provides phone service to those living on Hawaiian Home Lands, the 200,000 acres of property formerly owned by the Hawaiian monarchs, which is set aside for use by eligible Hawaiians.

The national program is coming under increasing criticism as wasteful and inefficient, and the federal government is looking at ways to bring the subsidies under tighter control. The high-priced services in areas such as Hawai'i also lead to higher taxes for all long-distance users.

"This was a good idea that's gone terribly bad," said Mac Haddow, chairman of the policy advisory council for The Seniors Coalition, a Fairfax, Va.-based advocate for Universal Service Fund reforms.

The $765 per month subsidy for each qualifying rural phone line in Hawai'i is 36 times higher than the average national rural phone line subsidy, and the costliest subsidy in the nation.

The phone companies say they provide a valuable service in underserved areas, and at least one said there is no evidence of a windfall from the subsidies.

Still the mounting costs of the subsidies — especially those going to cell-phone companies — are driving a push to reform the program.

Earlier this month, a Federal-State Joint Board on Universal Service recommended the Federal Communications Commission, which oversees the program, take immediate action to rein in explosive growth in high-cost universal service fund reimbursements.

"Changes in technology and increases in the number of carriers who are receiving universal service support have ballooned, placing significant pressure on the stability of the fund," FCC Chairman Kevin Martin said during a February speech in Washington, D.C. "The current trajectory is unsustainable."

Nationwide fund payments to the new companies serving rural areas — known as competitive eligible telecommunications carriers — soared from $16.9 million in 2001 to an estimated $1 billion last year, according to the FCC.

SUBSIDY COSTS TO GO UP

The cost of subsidizing phone service in Hawai'i is expected to climb further this year following a February decision by state regulators to allow Mobi, a Honolulu-based wireless phone company, to receive subsidies. Mobi will now compete for customers with Reston, Va.-based Sprint Nextel Corp. and Sandwich Isles.

Instead of getting reimbursed based on actual costs, Sprint and Mobi are reimbursed based on the costs of Sandwich Isles.

Sandwich Isles is installing the country's most expensive tele-communications network, burying fiber cable to connect homes on Hawaiian Home Lands on the Big Island, O'ahu, Maui, Moloka'i, Lana'i and Kaua'i.

Reforms being considered for the subsidy program include an immediate emergency cap on the support that cell-phone companies receive. Another alternative is to reimburse cell-phone companies based on their actual costs, rather than on the costs of wire-line companies. Other options being considered include the use of reverse auctions in which companies would submit competing bids to become eligible for reimbursements.

"We're looking at all these proposals through a lens: is the proposal competitively neutral and technologically neutral," said Sprint spokesman John Taylor. "We do not believe that our company, because we are a wireless service, should be treated any different" than the wire-line phone service.

Gil Tam, Sandwich Isles vice president, referred questions about the reforms to the Organization for the Promotion and Advancement of Small Telecommunications Companies, which lobbies on behalf of rural phone companies such as Sandwich Isles.

Stuart Polikoff, director of government relations for the trade group, blamed wireless companies for taking advantage of the fund.

"The problem is the wireless carriers are able to get support based on the unrelated costs of the wire-line company," he said. "It's a windfall, and that's why they go after it. It's a pot of money. That's the crux of the problem, and that is what needs to be reformed."

DISPUTING 'WINDFALL'

Sprint's Taylor said there is no proof that wireless companies are making a windfall....

"There's no way for you to know what's costing what and whether the costs of the incumbent (wire-line phone company) are significantly higher or lower than the wireless companies," he said. "In some areas the costs may be higher and in some areas it may be lower."...

The subsidies are in part a result of the way companies are compensated for providing service. Under the Universal Service Fund, companies are guaranteed an 11.5 percent return on network expenses and face little scrutiny over how they spend money, according to critics.

In addition, neither the state Public Utilities Commission nor the Universal Service Administrative Co., a nonprofit corporation that administers the fund nationwide, has audited Sandwich Isles. And nearly all financial information, construction spending plans and other documents filed by Sandwich Isles, Nextel and Mobi to the state PUC are not available to the public.

"It really gives incentives for these local carriers to be very, very inefficient," said the Seniors Coalition's Haddow. "The solution has to come where we force them to be competitive in a bidding process.

"The pigs are getting fat. Somebody is going to have to put them on a diet."...

In 2005, Hawai'i phone users paid $28 million into the fund, which was up from $25 million in 2004, according to the FCC.

During the same period, USF reimbursements to local companies such as Sandwich Isles and Sprint rose from $12 million to $27 million.

http://www.honoluluadvertiser.com/apps/pbcs.dll/article?AID=/20070527/NEWS01/705270372

Posted 2006-08-01 11:39:07 by Karl:

FCC Cronyism Nets Big
Hawaii USF Payoff

$500 million to wire just 5,400 affluent homes

Telecom pundit Gordon Cook points to yet another example of waste in the USF system you pay into via your broadband, landline, and wireless phone bills. The idea is to help fill in the nation's rural telecom black holes, but instead the fund, as this Hawaii Free Press article explores, is sometimes used for political cronyism.

One of the last acts of former FCC chief Mike Powell was to approve a waiver that gave Sandwich Isles Communications in Hawaii $500 million to wire just 5,400 homes. The IP Inferno blog points out that the properties, which already have landlines, could get DSL for $600 or so; instead of the $93,000 per home this project will cost.

The rub: Michael Powell was a Naval Academy classmate of Al Hee, president of the company receiving the $500 million. Another reason critics like Cook argue that FCC statistics aim to show a rosy picture of American broadband, and why the USF system - long rife with fraud - has yet to be either scrapped or reformed by the FCC.

www.dslreports.com/shownews/76911

June 4, 2005

Sandwich Isles Communications:
Political Connections Pay Off

By Andrew Walden, Hawaii Reporter

Special from Hawaii Free Press

In a little-noticed May 16 ruling, the Federal Communications Commission (FCC) has granted a waiver necessary to allow Sandwich Isles Communications to complete construction of its $500 million project to link 69 Hawaiian Homelands properties with a fiber optic communications network.

Sandwich Isles, had completed about $160 million worth of construction bringing its network to all the islands except the Big Island, when in October, 2004 the FCC suddenly acted on a 6-year-old complaint from telecom rival Verizon. As a result of the October ruling, Sandwich Isles was forced to reapply for its FCC waiver which allowed SIC to receive $400 million in federal funds taken from the “Universal Service Fund” (USF) tax on consumers’ phone bills.

The Universal Service Fund tax is intended to subsidize telecommunications service to unserved rural areas. Verizon Hawaii, now re-named Hawaii Telecom after being purchased by the Carlyle Group, had argued the DHHL lots Sandwich Isles proposed to serve were not unserved because they were within Verizon territory. With the waiver granted, federal funds can once again flow into Sandwich Isles Communication’s coffers and construction can be completed on the Big Island.

Gilbert Tam, Sandwich Isles Communications Vice President for government and community relations, says the company “is pleased with the FCC order” which “allows SIC to fulfill its commitment and efforts to provide modern and affordable telecommunications services to residents of Hawaiian Home lands.”

At an estimated of $500 million, if Sandwich Isles Communications were to serve all 20,000 DHHL lots, the cost would be $25,000 per lot. But DHHL has only about 5,400 lots occupied by leaseholders.

At current build-out rates it would be about 40 years until all 20,000 lots are filled. $500 million to wire 5,400 lots averages out to about $93,000 per lot - the construction cost of a house - just for high speed internet and phone service.

 Further, there is no reason to believe that all 5,400 DHHL leaseholders would want to pay Sandwich Isles Communication’s monthly fees for high speed internet service.

Many DHHL homesteaders already have land lines from Verizon. In the United States, about 33 percent of households have high speed internet connections.

If DHHL leaseholders have the same level of interest in high speed internet connections, Sandwich Isles Communications would serve about 1,800 lots at an average cost to the taxpayers of about $278,000 per lot.

Currently, Sandwich Isles Communications is reported to serve about 1,300 customers.

These figures compare unfavorably to the $600 or less setup cost of many commercially available high-speed satellite internet connections.

Internet satellite providers’ monthly charges are competitive with those of Sandwich Isles Communications. With inexpensive, commercially available “VOIP” technology, high quality internet based telephone service can be included.

Satellite technology requires no digging to lay cables, thus minimizing environmental damage and disruption of Hawaiian sites.

Unsurprisingly, Sandwich Isles is led by many politically connected directors and corporate officers.

Robert Kihune, retired vice admiral and Vice-Chair of the Kamehameha Schools Board of Trustees, is Sandwich Isles Communications Chief Executive Officer. Kihune, who is also Chairman of the USS Missouri Memorial Association, was keynote speaker at the Hawaii County Council inauguration in December.

Al Hee, brother of former Office of Hawaiian Affairs Chairman (and current Democrat State Senator) Clayton Hee, is Sandwich Isles Communications President.

Sandwich Isles Vice president, Gilbert Tam is a former Director of P&C Insurance Company, Inc. and the former Administrative Group Director for Kamehameha Schools/Bishop Estate (KSBE). Tam was formerly an officer with Bank of Hawaii, which has substantial financial connections with KSBE.

As a Dec. 31, 2001, article in The Honolulu Advertiser explained:

Part of the reason Sandwich Isles Communications has attracted interest in Hawaii political circles is that the company has ties to a variety of politicians and current or former executives involved with Kamehameha Schools, another politically influential local institution.

Al Hee says his brother Clayton, then chairman of the board of trustees of the Office of Hawaiian Affairs, is not involved in the project. Sandwich Isles did hire Clayton Hee’s wife, Lynne Waters, to produce videos for presentations to business leaders, homesteaders and others on the company’s operations.

Among (Sandwich Isles’)... 22 employees are former Democratic House Majority Leader Tom Okamura and former Rep. Devon Nekoba, who both carry the title of agency coordination officer. (Al) Hee says the two advise company executives on government policy matters.

Ties to Kamehameha Schools, formerly known as the Bishop Estate, include Gil Tam, the company’s vice president of government and community relations, formerly director of administration and interim chief executive officer for Bishop Estate, and Robert Kihune, chief executive officer, now a Kamehameha Schools trustee.

The Hawaiian Homes Commission chairwoman in 1994, when the commission approved Hee’s license (to provide communications services), was Hoaliku Drake, the mother of former Bishop Estate trustee Henry Peters.

Clayton Hee is a friend of Peters and was hired as a cultural affairs researcher for the Royal Hawaiian Shopping Center, a subsidiary of the former Bishop Estate/Kamehameha Schools (KSBE).

(See article and related materials posted at www.the-catbird-seat.net/SandwichIsles.htm)

(Catbird Note: This site has since been terminated by the U.S. Department of Justice by Order of Judge David A. Ezra. It can now be found at http://www.kycbs/SandwichIsles.htm )

Henry Peters was one of the Bishop Estates Trustees named in the infamous “Broken Trust” case. Gilbert Tam was also a co-investor in KSBE’s McKenzie Methane deal at the time he was a KSBE manager.

(Articles reprinted at: www.the-catbird-seat.net/Methane.htm)

(Catbird Note: This site has since been terminated by the U.S. Department of Justice by Order of Judge David A. Ezra. It can now be found at http://www.kycbs/Methane.htm )

In Harmon vs. Federal, et al, a lawsuit stemming from the Broken Trust expose, plaintiff Bobby Harmon, former P&C President, alleged “Tam’s actions, through his complicity, deceptions, and breach of fiduciary duties, in collusion with some or all of the trustees of KSBE, with other managers and employees of KSBE, with other officers and directors of P&C, and with outside contractors, attorneys, politicians and others, constituted a conspiracy to defraud P&C and the beneficiaries of the Estate of Bernice Pauahi Bishop; racketeering; mail fraud; wire fraud; extortion; and violation of IRS interim sanctions regulations....”

(See Harmon vs. Federal reprinted at www.the-catbird-seat.net/RICO-BH.htm)

(Catbird Note: This page can now be found at http://www.kycbs.net/RICO-BH.htm )

In addition to “Broken Trust” connections, Sandwich Isles also benefits from a connection with former FCC Chairman Michael Powell, son of former Secretary of State Colin Powell, and a mid-1970s Annapolis Naval Academy classmate of SIC President Al Hee. The FCC’s sudden decision to rule on Verizon’s complaint corresponds in time closely to Michael Powell’s resignation as FCC chair.

There is also a correspondence in timing between the purchase of Verizon Hawaii’s assets by the Carlyle Group, with many well-known connections to both Democrat and Republican national political leaders and appointees, and the FCC’s subsequent ruling in SIC’s favor.

Sandwich Isles Communication’s cable-laying contractor is MasTec, named for its founder the late Jorge Mas Canoza, Cuban exile leader. On the Mas Tec board, in Joseph Kennedy II, whose family connections with Mas Canoza go back to the Bay of Pigs.

Amazingly for a $500 million fiber-optic communications company, Sandwich Isles does not have a web site.

Sandwich Isles Communications shares offices with Waimana, Inc., Richardson-Luke, and Ku’iwalu.

As of today, June 2, 2005, Sandwich Isles Communications has not released to this writer a complete list of company officers and directors and their total remuneration....

Andrew Walden is the publisher and editor of Hawaii Free Press, a Big Island based newspaper. He can be reached via email at andrewwalden@email.com

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Catbird Note: See also Hawaiian Telcom Communications, Inc. Application For Review In the Matter of Sandwich Isles Communications, Inc., Before the Federal Communications Commission, Washington, D.C. - CC Docket No. 96-45 - Filed on June 15, 2005: http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6517689577

For more, GO TO > > > Vultures in Hawaiian Home Lands

$ $ $

Ms. Mariene Dortch
Office of the Secretary
Federal Communications Commission
445 12^th Street S.W.
Washington, DC 20554

RE:   Support of Hawaiian Telcom’s Request for Reconsideration of Sandwich Isles Communications Study Area Waiver - CC Docket 96-45

Dear Ms. Dortch,

I urge you to support Hawaiian Telecom’s request of reconsideration of Sandwich Isles Communications study area waiver. I believe wholeheartedly that it is not in the best interests of the Universal Service Fund to be supporting this project. Most of the DHHL areas are unoccupied and will be for the foreseeable future. Thus I have some real serious issues with the USF subsidizing this boondoggle at a cost of nearly $14,000 per customer.

On top of that, some of the DHHL areas are being serviced by Hawaiian Telcom currently, e.g. Hilo Hawaii DHHL lands. From my view there will be serious issues arising from Hawaiian Telcom’s ability to service these customers in the future. I urge you to take a close look at this. Along with the fact that Sandwich Isles Communications will be skirting the rules of their licenses and service non-DHHL areas through their sister company ClearCom Inc. Thus going head to head with Hawaiian Telcom etc.

You can read evidence of this dream of SIC in numerous publications, like Forbes “Dreaming and Scheming Hawaiian Style, 10/2002,” Maui News www.the-catbird-seat.net/SandwichIsles.htm, (now at www.kycbs.net/SandwichIsles.htm ); Hawaii Business News www.hawaiibusiness.cc/hb42001/default.cfm?articleid=6

Thank you for your time in this matter.

Sincerely,

< Name Withheld By Request >

May 14, 2003

Summit loans questioned

Money loaned to the bankrupt firm's CEO resulted
in improper payments, a new lawsuit contends

By Tim Ruel, Honolulu Star-Bulletin

A politically adept telecommunications company financed primarily by the federal government has several connections to troubled firm Summit Communications Inc., including a $456,793 loan that is being questioned by a bankruptcy trustee.

Sandwich Isles Communications Inc., headed by Al Hee, loaned the money in March 1998 to Summit through Summit's then-chief executive and part-owner, Harold C. Johnston, according to a lawsuit.

In 2001, Harold Johnston received $8,400 in interest payments from Summit for the loan.

Harold Johnston denied loaning the money to Summit....

~ ~ ~

For more, GO TO > > > The Rise and Fall of Summit Communications

* * *

July 9, 2003

Audit spurs criminal probe

The Attorney General's Office is investigating issues
raised at the Hawaii Visitors & Convention Bureau

By Tim Ruel, Honolulu Star-Bulletin

The state Attorney General's Office has opened a criminal review into points raised by the critical audit of the Hawaii Visitors & Convention Bureau.

The criminal justice unit of the Attorney General's Office is looking into the matter, said Linden Joesting, a deputy attorney general. Joesting declined to say what aspects of the audit are being probed, because it's an internal matter....

... continued at Hawaii Visitors & Convention Bureau

< < < FLASHBACK < < <

April 27, 2001

Burial Council questions need
for fiber optics system

By VALERIE MONSON, The Maui News

WAILUKU –– A proposed $500 million fiber optics cable system that would provide high-tech hookups to every parcel of Hawaiian Homes land on six islands was met with criticism – and suspicion – by the Maui/Lanai Islands Burial Council Thursday.

"These lines are telling a different story," said Leslie Kuloloio, a former member of the council who was testifying on his own behalf, as he pointed to a map covered with red lines over land and under the ocean that would connect the project.

"These lines aren't geared for Hawaiian Homes - they're geared for a big picture 50 years from now," he said.

The system has been proposed by Sandwich Isle Communications, an Oahu-based public utility company certified as a rural telephone company by the state Public Utilities Commission and Federal Communications Commission. The company, formed in 1995, is owned and operated by Native Hawaiians.

Although Sandwich Isle spokesman Gil Tam insisted the main purpose of the project was to offer state-of-the-art communications to Hawaiian homesteaders, the Native Hawaiians of the Burial Council feared their lands were being used to create a huge network for the public at large as well as commercial ventures and, possibly, the military.

"What about the Department of Defense? The Department of Energy?" wondered Kuloloio.

"Are they another part of the big picture that we don't see? How many Hawaiians have computers and Microsoft? We're at the bottom. What we need is water. I'd like to see all these lines be waterlines."

Chairman Charles Kauluwehi Maxwell Sr. and Vice Chairwoman Dana Naone Hall were especially surprised that the cable would run all the way to LaPerouse Bay just to connect a small piece of Hawaiian Homes land that no one on the council even knew was part of the trust.

"I'm shocked, I've never even heard of that being homelands," said Maxwell.

"There's nothing there but lava. There's no water there. People won't be able to live there for at least 50 or 100 years."

Maxwell pointed out that costs for the project will soar even more because of all the archaeological work that will be needed to address the expected concentration of ancient graves and historic sites through the South Maui corridor to connect LaPerouse. He said it would also needlessly disturb the bones of the ancestors.

"How is this (project) practical?" he asked. "I can't see digging through intense, intense (layers) of archaeological sites and burials for (a community) that might not even occur."

Hall called the draft environmental assessment prepared for the project "premature," because the system would be built in phases and things would inevitably change over the years.

She also called the archaeological assessment prepared by Cultural Surveys Hawaii Inc. of Oahu "extremely inadequate" in describing the minimal impacts on burials that would result from widespread trenching.

Maxwell said the Burial Council has "had a lot of problems" with work done by Cultural Surveys Hawaii in the past and suggested that Sandwich Isle hire a Maui firm.

Kuloloio was also concerned that there had never been a public hearing about the system for Hawaiian homesteaders on Maui.

Tam said the idea for the project came from Hoaliku Drake, a past chairwoman of the Hawaiian Homes Commission. He said $400 million of the needed money would come from a loan from Rural Utility Services in the U.S. Department of Agriculture. The other $100 million would come from private sources.

The public would end up helping Sandwich Isle pay back the federal loan through charges on monthly telephone bills.

Tam said when AT&T broke up several years ago, a fund was created by Congress to enable rural areas to keep up with cities in terms of technology. At that time, the charge was $1 per customer each month. Current charges were not available.

Tam said those fees "help companies like ours to pay back the loan."

No one on Hawaiian Homes land will be charged for any infrastructure. Individuals will only be expected to pay for their service.

The installation for Maui County would come to $30 million, with most of that being spent for Maui island.

Hall asked how Sandwich Isle would recoup its costs or ever make a profit considering that, in the near future, there probably will be barely 500 Native Hawaiian families on homestead lots across the island.

Tam finally acknowledged that the general public will be the major subscribers of the project. After the meeting, he admitted that the users might include the military.

"Anybody could" end up paying to tap into the network, he said.

Sandwich Isle hopes to obtain state or county permits to construct as many of the trenches as possible in public rights of way.

The Burial Council voted unanimously to require the developer to revise the environmental assessment, particularly the archaeological assessment. Members also asked to be included as a consulting party in further discussions.

Tam assured the panel that the company would not pursue a "finding of no significant impact" for the project and would remain in close communication with the Burial Council.

"We really want to do the right thing," he said.

* * *

April 20, 2001

All In The Ohana

Sandwich Isles Communications Inc. is starting
a family of companies.

By Jacy L. Youn, Hawaii Business Magazine

When Sandwich Isles Communications completes its fiber-optic cables throughout Hawaii, a number of local companies will have already enjoyed benefits as a result of the high-speed network.

Summit Communications, which was incorporated in 1996, went fully operational the following year, providing telecom solutions for multi-tenant buildings. In March 1998, with just 15 employees, Summit entered into a long-term service contract with Sandwich Isles Communications, dedicating roughly one-third of its staff to the project.

According to Summit General Manager Chad Johnston, the contract is worth at least $5 million. It is a five-year project with an option to extend.

“We get about $100,000 a month,” says Johnston, “So they are a big portion of our revenues.” Last fiscal year, Summit reported revenues of about $1.9 million and is looking at a 40 percent increase this year, with sales expected to reach $3.2 million.

Johnston says working with Sandwich Isles has allowed Summit to expand by about 15 to 18 employees. A few, like Johnston, are expatriates. “In the near future our company may increase to 50 percent of what we otherwise would’ve been, because of this network,” he says. “I think Sandwich Isles wants to provide opportunities for our population here.”

Sandwich Isle’s Gil Tam, vice president for administration and community affairs, says that whenever possible they contract and support local businesses. Ohana Telcomm/Construction Inc. was incorporated in February 1999, after being approached by Sandwich Isles five years ago to do construction and material management for the project, which hadn’t even come on-line yet.

“The Sandwich Isles project was actually one of Ohana’s missions or charters,” says Randy Funn, president for Ohana. Sandwich Isle’s contracts with Ohana range from $100,000 to $5 million, and as of February, Ohana had completed seven projects. As a result, Ohana earned 2000 revenues of $5 million and hired at least 50 employees statewide.

“We’ve hired about six or seven expatriates, over 50 percent of our staff is part-Hawaiian, and we even have three employees that are actually moving onto these Hawaiian Homestead Lands as well,” says Funn. Although Sandwich Isles doesn’t require contractors to meet ethnic or racial guidelines, a majority of the companies that get contracts do make efforts to employ native and part-Hawaiians. “It’s a consistent philosophy,” Summit’s Johnston says. “Not to the point of reverse discrimination, but just to provide opportunities for our fellow Hawaiians.”

Alden Kealoha, owner of Maui-based Kealoha Construction, says that nearly all of his dozen or so employees are either native or part-Hawaiian. Kealoha Construction signed two contracts, valued at $166,000 and $138,000 respectively, to construct equipment buildings for Sandwich Isles on Maui this year. Revenues from these contracts will contribute to Kealoha Construction’s anticipated $3 million in annual sales.

All in all, the Sandwich Isles project has resulted in the creation of roughly 500 jobs statewide, the majority of which are temporary construction and contractor positions.

But according to Tam, Sandwich Isles’ ability to sustain employment remains one of its longer-term goals: “Right now we’’re sustaining about 100 jobs, and that’s before we even launched the network.”

For more, GO TO > > > The Rise and Fall of Summit Communications

$ $ $

Nepotism, Sole-Source Contracting, and Corruption

How OHA, Hawaiian Homelands, and Kamehameha
Schools/Bishop Estate Make Rich Hawaiians
Even Richer at Everyone Else's Expense

by Kenneth R. Conklin, Ph.D.

This web-page was started in December, 2001 after a new version of the Native Hawaiian Recognition Bill was introduced in Congress: S.1783. The new bill contained a curious section that was never a part of earlier versions of the bill. This Section 9, entitled "Ethics," is an explicit waiver of the federal law that prevents people from holding federal government positions where they or their close relatives and family members can profit from the decisions they make.

The main supporters of the Hawaiian Recognition bill are huge, wealthy institutions whose administrators and staff stand to profit enormously if the bill is passed. Thus, it was clear why Section 9 was included in the bill.

These people are shamelessly exploiting the Hawaiian grievance industry, getting land, money, and power for themselves by claiming to work on behalf of poor, downtrodden Hawaiians.

Passing the bill will let them pass lots of other bills -- i.e., passing the Native Hawaiian Recognition Bill will give land, money, and power to large institutions and wealthy Hawaiians, allowing them to pass along to everyone else their BILL for housing, healthcare, education, infrastructure development, and lavish lifestyles.

Party on! ...

-----------------------------------

THE DAWSON/HEE PROVISION -- SECTION 9 (entitled "Ethics") OF THE NATIVE HAWAIIAN RECOGNITION BILL S.1783, INTRODUCED IN THE U.S. SENATE ON DECEMBER 7, 2001

Section 9 of the Native Hawaiian Recognition bill S.1783, introduced in the Senate on December 7, 2001, is entitled "Ethics." This section is inappropriately named. It should be re-named "The Dawson/Hee Provision: License for Nepotism and Corruption."

Here is the text:

"The provisions of section 208(a) of title 18, United States Code, prohibiting involvement by a Federal Government officer or employee in particular matters where the officer or employee or his or her spouse or minor child has a financial interest shall not apply to Native Hawaiians employed by the United States Office for Native Hawaiian Relations if the financial interest that would be affected by the particular matter involved is that resulting solely from the interest of the officer or employee or his or her spouse or minor child that results from his or her status as a Native Hawaiian."

This language of Section 9 of S.1783 means that nepotism and financial conflict of interest are explicitly permitted, so that the people who run the federal office for Native Hawaiian Relations could be the same people (or their close relatives) who own and operate businesses in Hawai'i receiving minority set-asides or who otherwise engage as service-providers under contracts administered by the federal office.

We know that such practices have produced gross corruption in many Indian tribes, most notably the Mashantucket Pequots (Dan Inouye, Chairman of the Senate Committee on Indian Affairs responsible for recognizing that tribe originally, has raised over $100,000 in campaign contributions from Mashantucket Pequot tribal members and service-providers and has attended their local events in Connecticut).

Section 208(a) of title 18 of the United States Code was probably written specifically to prohibit the sorts of flagrant corruption which Section 9 of the new Akaka bill seeks to allow.

(For more, GO TO > > > U.S. Bureau of Indian Affairs.)

Section 9 is new -- nothing like it was in earlier versions of the Native Hawaiian Recognition bill. The author of this website is naming this new Section 9 the "Dawson/Hee Provision" in (dis)honor of Beadie Dawson and the Dawson Group, together with Clayton Hee who is Chairman of the Office of Hawaiian Affairs.

Information is provided below, from published sources, about the nepotism and sole-source contracting already being practiced by the families of Beadie Dawson and Clayton Hee based on their "Native Hawaiian" ancestries and their political connections with the Office of Hawaiian Affairs.

Such nepotism, wealth-building, and corruption will surely intensify if the Native Hawaiian Recognition bill passes, because then family members and close business associates can become officials in the federal agency that will be writing specifications and contracts for projects on "Hawaiian Homelands" and for other aspects of the new Hawaiian "nation." . . .

-----------------------------------

THE OFFICE OF HAWAIIAN AFFAIRS PLANS TO SPEND UP TO $9 MILLION FOR MEDIA PROPAGANDA AND TO LOBBY FOR PASSAGE OF THE NATIVE HAWAIIAN RECOGNITION BILL

The Office of Hawaiian Affairs has reportedly appropriated up to $9 Million to lobby for passage of the Native Hawaiian Recognition bill. At the time the lobbying budget was approved, Haunani Apoliona was Chairman of OHA, although Clayton Hee was formerly and is now again currently the Chairman....

Here is an excerpt of a newspaper article from February 28, 2001 describing the lobbying effort (http://HonoluluAdvertiser.com/228localnews15.html):

The Office of Hawaiian Affairs is poised to spend millions of dollars in what could rank as the state agency’s most ambitious publicity campaign to gain federal recognition for Hawaiians and deflect court challenges that threaten its very existence. Called the "Post-Rice Overall Strategy" in the aftermath of the landmark Rice vs. Cayetano case, the proposal amounts to a blitzkrieg of local and national public relations efforts intended to "protect Hawaiian rights and programs, protect Hawaiian assets and rebuild broad-based support for a Hawaiian agenda," according to a draft copy of the strategy....

Though OHA trustees will not say what they expect the campaign to cost, unofficial estimates range from $2 million to $9 million.

The agency has an investment portfolio worth more than $350 million. By a majority vote, its trustees have the final authority to spend money on projects they deem appropriate to fulfill the agency’s mandate.

-----------------------------------

A SOLE-SOURCE CONTRACT FOR OHA CHAIRMAN CLAYTON HEE'S BROTHER, FAMILY MEMBERS, AND POLITICAL CRONIES TO SPEND $400 MILLION OF FEDERAL FUNDS TO PROVIDE FIBER-OPTIC CABLE EXCLUSIVELY TO INTERCONNECT ALL 203,000 ACRES OF THE RACIALLY EXCLUSIONARY HAWAIIAN HOMELANDS

During 2001 a massive sole-source contract came to public awareness, in which a developer will use federal funds to build and operate a massive money-losing fiber-optic cable network to link every parcel of Hawaiian Homelands on 203,000 acres of land throughout all the Hawaiian islands.

The project is using money from the federal tax added to every American's phone bill to pay for helping remote, sparsely-populated rural areas get telephone service (however, many Hawaiian Homelands are not located in rural areas, and already have telephone service).

The developer is the brother of OHA Chairman Clayton Hee, and his small company was assembled with most of its management employees having close relationships with OHA, Kamehameha School/Bishop Estate, the Hawai'i legislature, and the political establishment.

~ ~ ~

Three articles were published about this scheme during 2001; and an excerpt is provided from the third one:

December 31, 2001

Savvy developer wins federal money
to wire homelands

The Honolulu Advertiser

A local politically connected company is eligible for as much as $400 million in federal loans to weave fiber-optic cable through Hawaiian Home Lands on six islands, even though much of the land is undeveloped and lacks roads, water and electricity. With the ability to draw on federal money rather than finding private investors to pay for the start-up, the project has the potential to be one of the most expansive high-tech ventures ever undertaken in Hawai'i.

At the center of the project is Al Hee, who has hired a number of people with significant Democratic political connections and experience, including former legislators and several people connected with Kamehameha Schools.

The foundation for Hee's Sandwich Isles Communications Inc. was laid in 1994, when the Hawaiian Homes Commission awarded him the exclusive right to provide telecommunications services on all Hawaiian Home Lands. The exclusive license was approved without any competition or bidding after Hee's plan was evaluated for the department by former state Sen. Mike Crozier.

Crozier said he is friends with Hee and considers him "a genius," but that he evaluated the proposal fairly.

With contract in hand, Hee applied for and received low-interest federal loans from the U.S. Department of Agriculture under a program designed to provide telecommunications services to sparsely populated rural communities that wouldn't otherwise get fiber-optic cable.

Part of the reason Sandwich Isles Communications has attracted interest in Hawai'i political circles is that the company has ties to a variety of politicians and current or former executives involved with Kamehameha Schools, another politically influential local institution.

Al Hee said his brother Clayton, chairman of the board of trustees of the Office of Hawaiian Affairs, is not involved in the project. Sandwich Isles did hire Clayton Hee's wife, Lynne Waters, to produce videos for presentations to business leaders, homesteaders and others on the company's operations.

Among the company's 22 employees are former Democratic House Majority Leader Tom Okamura and former state Rep. Devon Nekoba, who both carry the title of agency coordination officer. Hee said the two advise company executives on government policy matters.

Ties to Kamehameha Schools, formerly known as the Bishop Estate, include Gil Tam, the company's vice president of government and community relations, formerly director of administration and interim chief executive officer for Bishop Estate; and Robert Kihune, chief executive officer, now a Kamehameha Schools trustee.

The Hawaiian Homes Commission chairwoman in 1994, when the commission approved Hee's license, was Hoaliku Drake, the mother of former Bishop Estate trustee Henry Peters.

Clayton Hee is a friend of Peters and was hired as a cultural affairs researcher for the Royal Hawaiian Shopping Center, a subsidiary of the former Bishop Estate/Kamehamaha Schools.

The new fiber-optic network Hee is building may not be profitable by itself, but it qualifies for ongoing subsidies from the Federal Communications Commission. In effect, the FCC will cover the operating costs of the network and pay Sandwich Isles a profit based on the value of the telecommunications equipment installed, Hee said.

Hee said he plans to borrow more than $400 million from the federal Rural Utilities Service to build what will eventually be a $500 million interisland fiber-optic network. He expects private money will be invested eventually, but no outside investors have been found so far.

Hawaiian Home Lands are tracts available at low cost to Native Hawaiians for businesses and homes. Hee has promised to [use] the federal money to install the latest generation underground fiber-optic telecommunications network, wiring all 69 parcels of Hawaiian Home Lands, a total of 200,000 acres.

Crozier said he "did the due diligence" and scrutinized Hee's proposal, then recommended the commission approve it. The commission agreed, and voted unanimously to grant Hee an exclusive license to provide telecommunications services on Hawaiian Home Lands. The license was awarded under a section of the Hawaiian Homes Commission Act usually used to grant utilities what amount to easements, giving them access to install wires, pipes, poles or other equipment.

Francis Apoliona, spokesman for the Department of Hawaiian Home Lands, said that section of the act probably was not intended to grant monopolies to utilities, and the way the rule was used in this case is "unparalleled." There was no competitive process to decide who would get the license, but Hee points out the commission never has required utilities to compete for the right to provide services on Hawaiian Home Lands.

The scope of the investment Hee is planning is huge. He said it will cost $60 million to string undersea fiber-optic cable links between the islands. Environmental reports for the project indicate it will cost the company another $100 million to dig trenches and bury cable on the Big Island; $35 million to install cable on Oahu; $30 million on Maui, Moloka'i and Lana'i; and $10 million on Kaua'i.

When that money is spent, Hee will have wired together all Hawaiian Home Lands and built the state's third interisland fiberoptic network.

Sandwich Isles is free to sell telecommunications services to non-Hawaiians, and some observers have speculated that may be how Hee plans to make money. But Hee said the system was designed as a rural service for Hawaiians, not as a telecom provider for the state.

The planned system ... runs through Waikiki in a configuration that may help Sandwich Isles market its services to customers far from Hawaiian Home Lands. Hee's project is advancing at a time when similar privately financed businesses on the Mainland are struggling or collapsing because the demand for data transmission services hasn't been nearly as strong as experts predicted. (See Global Crossing.)

Other industry observers are pessimistic that Sandwich Isles' enormous undertaking ever will lead to a profitable business independent of federal subsidies. Those analysts, who asked that their names not be used because they might want to do business with Sandwich Isles, said the company is spending astonishing sums to provide service to relatively few far-flung customers, which translates to high costs and low revenue.

Roberta Purcell, assistant administrator of the telecommunications program of the U.S. Department of Agriculture's Rural Utilities Service, confirmed that the federal government will be covering the cost of Sandwich Isles' operations in its early years....

* * * * *

FOR A CLOSER LOOK AT SOME PARTICULARLY
VORACIOUS VULTURES IN THE SANDWICH ISLES,
JUST FOCUS YOUR FIELD GLASSES BELOW...

Albert Hee - President of Sandwich Isles Communications, Inc.

October 11, 2002

Dreaming & Scheming Hawaiian Style

By Carleen Hawn, Forbes Magazine

While foolhardy telecom chiefs choked their companies with debt to fund broadband rollouts, Al Hee contrived to have the U.S. government subsidize his state-of-the-art network. Look out, Verizon.

It is 8 a.m. on a blazing July day on the big island of Hawaii. Five miles south of the airport, amid the lava flows that span the island's barren west coast, there springs up a lonely housing development called Laiopua. Budless flower beds and freshly paved sidewalks indicate the newness of the place. The uniform clapboard homes are well kept. Most are painted pink or yellow. Some have rusting car chassis in their driveways.

A small crowd has formed around the one building that stands out: a windowless cinderblock structure with a green metal roof. It is a festive gathering, including homeowners and several Hawaiian elders. One man chants a pule, or prayer, in Hawaiian. Another blesses the ground with water and ti leaves. A tall and imposing man--clearly the honored host--steps forward and unties a lei of maile plants, then bends to dig at the earth with a carved wood o'o stick.

This is a consecration ritual, all right, but not for some monument or native burial site. This crowd is here to bless the newest leg of a $500 million fiber-optic network that will soon bring high-speed Internet access and cheap phone service to the 225 households at Laiopua, a government-subsidized site deemed too poor and too desolate to merit even basic service until now. But the broadband rollout won't come from Verizon, whose Hawaii unit has had a local monopoly here for most of 12 decades. It comes courtesy of the guy with the o'o stick, a native Hawaiian and first-time telecom entrepreneur named Albert S. N. Hee.

Hee, 48, is president of Sandwich Isles Communications, the rural carrier he founded in 1995 to serve the residents of Laiopua and 22,000 other native Hawaiians who inhabit the Home Lands, 200,586 acres of sparse, rugged terrain set aside by the federal government in 1921.

"This isn't about making money, completely," says Hee. "I wanted to do something for my people, to change things for the community of Hawaiians."

By the time his buildout is complete in 2005, SIC's network will link Hawaii's six largest islands with 1,500 miles of underground and undersea cable filled with 48 strands of gleaming fiber-optic glass capable of transmitting 2.4 billion bits of data per second.

It will have all the slick features of the multibillion-dollar pipes that bankrupted once-high-flying carriers like Global Crossing and WorldCom. The only difference is Al Hee didn't have to go into hock on Wall Street to build his network. Hee got the government to pay for it, more or less.

It gets better: While Hee landed federal largesse because he will serve underprivileged natives of Hawaii, he is also building out his network in Honolulu and other cities to compete with Verizon and other incumbents for higher-spending businesses and richer residential customers.

"It's all about dreaming and scheming," says Hee, clad in his trademark Hawaiian shirt and Bermuda shorts and standing barefoot on the plush white rug in his glittering office. He gazes out 27 floors above the bustling business district of Honolulu and adds: "I dream up something and then scheme and scheme until I find a way to make it happen."

That irks his rivals. At a time when vanquished telecom titans such as former Qwest chief Joseph P. Nacchio call for a government bailout to revive a devastated industry, a rookie they never heard of has beaten them to it.

"We question the reasonableness of it," says Joel Matsunaga, vice president at Verizon's Hawaii unit. "They're getting loans from the government, then they're going to get other subsidies to pay off the loans. To compete with other providers in an open market just isn't fair."

SIC's network, because it targets underserved rural areas, is being financed with $400 million in long-term, low-interest loans from the Department of Agriculture's Rural Utilities Service (RUS). The agency has subsidized rural delivery of water and electricity since 1935, adding phone service in 1950.

SIC, an RLEC (rural local exchange carrier) licensed to serve only rural communities, landed the largest grant the agency has ever made.

The loans have a term of 20 years at 5% to 6% annual interest. The remaining $100 million of SIC's $500 million price tag will come from private funds, including some of Hee's own cash.

The residents of Laiopua and their ilk need Hee's help. Thirty percent of native Hawaiians are functionally illiterate; 45% are on welfare. SIC's network will help provide home-schooling and remote health care as well as phone calls. Many customers previously had no wired phone service at all; the only way they could dial 911 was by using a cell phone.

Hawaii's Home Lands, some 69 tracts on six islands, are overseen by the state's Department of Hawaiian Home Lands (DHHL), established in 1961 and tasked with developing affordable housing for native Hawaiians, many of whom are homeless or can't afford to live in urban centers.

But most of the land is so desolate and fallow that it had long gone ignored by developers and utilities. Except for a few homesteads near urban centers, Hawaii's main carrier (formerly GTE and now Verizon) never built out its networks to serve the Home Lands.

If this sounds strange, it should. For decades the Federal Communications Commission has used a Universal Service Fund to subsidize carriers to help provide affordable phone service to remote areas. But carriers are required to serve such "high-cost" areas only if they have networks in place to do so. The FCC can't require Verizon to extend to a new remote region that is unlikely to produce a profit.

In 1992 DHHL asked GTE to provide service to a new homestead called Maku'u near the city of Hilo on Big Island. Verizon said it would have to charge DHHL $1 million for installation, or about $10,000 per subscriber. With a budget of just $15 million, DHHL couldn't afford it. Nor could the customers themselves.

This is when DHHL turned to Al Hee, a well-known businessman who made his fortune in the late Eighties building a hydroelectric power plant on Hawaii.

The younger of two sons, Hee was born into a working-class family in Honolulu in 1954. His mother, a native Hawaiian, worked as cashier at the famously pink Royal Hawaiian Hotel on Waikiki beach. Hee's father, a Chinese-American, was a site inspector for the Honolulu Board of Water Supply. Father and son would trek through the large water mains beneath Honolulu's streets, an experience that later inspired Al's foray into fiber optics.

Hee attended the Kamehameha Schools on Oahu, a highly regarded private academy for Hawaiians set up by the late Princess Bernice Pauahi Bishop. Later he won an appointment to the U.S. Naval Academy at Annapolis. When he left for school in 1972 it was the first time he had ever set foot off the islands. Hee bristled under the rigors of military life but says it served him well in business. "You can't quit, that's what it taught me. It gave me the undeniable belief that I can do whatever I put my mind to."

Annapolis helped Hee in other ways, too. It was through a former classmate that he later made the acquaintance of Michael Powell, now chairman of the FCC. The two remain friendly.

"Albert is an extraordinary entrepreneur. His goal is quite noble," Powell says.

"SIC is a labor of love for him as much as it is a business. He could be willing to take a hit [on it], because you know he's not going to recover that money from the customer."

SIC customers will pay no more than $20 a month for their phone service, as much as 20% less than what Verizon charges its subscribers. That owes in part to SIC's getting back-end subsidies from the Universal Service Fund.

"That's not fair competition," Verizon's Matsunaga complains.

But then, Al Hee is an opportunist. He graduated from Annapolis in 1976 and served in New Jersey before returning to Hawaii in 1980. The state was in a real estate boom, and resort developers faced a lack of desalinization plants and power utilities. In 1985 the Federal Energy Regulatory Commission began deregulating power, and Al Hee made the most of it. "I figured if buying utility stocks was smart, then owning a utility must be smarter," he says.

Hee sowed the seeds of his first fortune when he got a contract to develop a hydroelectric plant on the Big Island in 1986. He raised financing and kept a small equity stake in the plant, later selling his share for several million dollars, which formed the basis for his current holding company, Waimana Enterprises.

Waimana (Hawaiian for "water power") later formed SIC.

When DHHL, the state Home Lands agency, approached Hee in 1992, he had been looking for a way to "give back" to the Hawaiian community. Ray Soon, now head of DHHL, approached him and explained the homesteaders' predicament. Soon asked whether Hee could help find a way to develop a telecom infrastructure for the homesteaders. The catch was that DHHL would not be able to pay for it. Remarkably, Hee agreed.

Hee tried to raise money from private investors like Mitsubishi but found no takers. Then a Hawaiian friend, who had worked in the first Bush Administration, alerted him to the rural loan program.

In 1995 DHHL gave Hee an exclusive license for voice and data services, letting Hee register with the FCC as a rural local exchange carrier and qualify for government-backed loans. Still, it took several trips to Washington, D.C., and one helicopter ride over DHHL land with an RUS loan agent in tow, to build his case.

Now Hee had to build the network and find a way to turn a profit on it. He spent several years lobbying for construction permits from state utility commissioners, local mayors and other pols.

"It was a headache," Hee recalls. He also hired a consultant to plan the project and lined up contractors and network specialists like Tyco, NTT and little-known Summit Communications for the actual laying of the network.

In 1997 SIC broke ground near four rural homesteads on the north side of Oahu. By 1999 construction was under way for three more homesteads on Maui and Molokai.

Two years later SIC had completed nearly 5% of its buildout and was serving 11% of the 22,539 residents on nine homesteads, including Laiopua. It was at this point, Hee says, that he came up with a big idea for how to make money off SIC. It happened one night as he drove home from work and suddenly remembered the subterranean tours of water mains that he had taken with his father years before.

"What's the most expensive part of building a telecom network?" Hee asks. "Digging up the streets to lay the fiber. Oahu has miles and miles of vacant water pipes lying fallow," he adds, then smiles shrewdly.

"They're a liability to the city"--and a boon to Al Hee.

He figured he could use the water mains to easily extend his network to central Honolulu and take on Verizon.

The problem: SIC's federal license as a rural carrier permitted it to serve only rural areas.

The solution: ClearCom, a CLEC (competitive local exchange carrier) that he formed four years earlier. "In business we call these parallel paths," he reasons.

ClearCom will use SIC's central switching offices to link the communications traffic of urban customers to the public network. Because for at least the first few years ClearCom won't have to pay SIC for access, Hee figures he can undercut incumbent rivals on price.

Now-defunct CLECs, like NorthPoint Communications and Covad, were bankrupted by the huge access fees they had to pay to the Bells.

In June 2002, following an open auction in which SIC was the only bidder, Al Hee and ClearCom were granted an exclusive license with Honolulu's Board of Water Supply to lease all of its abandoned water mains in perpetuity.

ClearCom has agreed to pay an annual fee of $1 million, and when the network is complete ClearCom also will pay the board a dollar a year for every foot of pipe it uses. Hee will also deliver voice and data service to the water board itself at a 50% rebate.

So Al Hee uses government subsidies to build a telecom network for rural consumers and parlay it into profits by serving urban residents and businesses.

This irritates his detractors, but he doesn't flinch.

"My [SIC] license is dependent upon providing service to the Home Lands. As long as I do that, I'm good. Worst-case scenario, someone sues and it takes 10 to 15 years to work through the courts. By then my network will be built. Will they then tear it up? No way."...

May 29, 2001

Haitian Connections

How Clinton's cronies cashed in on foreign policy.

One of the famous foreign policy interventions of the Clinton Presidency was the controversial decision to return Jean Bertrand Aristide to power in Haiti in 1994. This newspaper supported Mr. Clinton, arguing that with U.S. prestige committed and with the restoration of democratic government in the impoverished island as a goal, the President deserved support.

So it is worth revisiting the status of Haiti today, especially to ask how it came to pass that in the wake of this intervention, President Clinton's political associates – including a former Democratic Party finance chair, a former White House counselor and Joseph P. Kennedy II – ended up in commercial relationships with the Aristide government's monopoly-owned telephone company.

Since 1994, both as president and later as the power broker behind the presidency of René Preval and the Lavalas Party, Mr. Aristide has ruled Haiti like a mob don. He has extorted the business community, trampled on the 1987 constitution and terrorized his political and economic opponents. Just this past week the Coast Guard sent a ship of 121 Haitian refugees back to the island. Nearly 700 have tried to escape by sea this year.

Haiti's November 26 Presidential election, in which less than 5% of Haitians voted, was a sham. Five international human rights organizations released a joint statement in January denouncing the election's violent political climate. Amnesty International called upon the Lavalas Party to condemn acts of intimidation and violence committed in the party's name. The European Union voted to withhold aid.

In response, the Clinton Administration in January sent Anthony Lake, a former Clinton national security adviser, to Port-au-Prince. He came back with an eight-point agreement in which Mr. Aristide promised better behavior in the future.

The Lake agreement was one free pass too many for Mr. Aristide's battered opponents (just this past Monday, a house was shot up where opposition leaders were meeting, wounding three). They have grown increasingly eager to tell what they know about Mr. Aristide's business activities--both now and in Washington during the 1991-94 exile that followed his overthrow by General Raul Cedras.

Regarded as Haiti's legitimate president at that time, U.S. authorities granted Mr. Aristide access to the country's frozen assets, most notably the long distance telephone royalties due to Haitian Teleco.

According to Christopher Caldwell, writing in the July 1994 American Spectator, Mr. Aristide "raised hackles at the Latin America division of AT&T by ordering the proceeds from Haiti's international phone traffic moved to a numbered Panamanian account."

In November 1993, The Wall Street Journal reported that Mr. Aristide was paying Democratic Party operative Michael Barnes $55,000 a month to lobby for U.S. action to reinstate him.

With the help of U.S. troops, he returned to Haiti. After regaining Haiti's presidency, the telephone monopoly continued to be useful. Because Haiti is one of the top three markets in the region for long distance calls from the U.S., the monopoly is a cash cow. Mr. Aristide placed loyal Lavalas followers in charge of it, keeping it under his control....

Says one U.S. telecom expert with knowledge of Haiti's system: "The real sweetheart deals are the ones that have a connection inside Teleco. Those are the deals that make people filthy rich." . . .

The wide recognition in Haiti that such deals are available has made the presence of independent U.S. long distance provider Fusion Telecommunications International a topic of much discussion among the Haitian business community.

Fusion's board of directors reads like a who's who of Democratic Party heavyweights.

Fusion's CEO is Marvin Rosen, who was the finance chairman of the Democratic National Committee during the 1996 Clinton fund-raising scandals.

Fusion's board of directors includes Joseph P. Kennedy II, former Mississippi Governor Raymond Mabus and Bill Clinton's White House chief of staff and Arkansas confidant Thomas "Mack" McLarty, now with Kissinger McLarty Associates....

The Fusion board also includes Joseph R. Wright, a former director of the Office of Management and Budget under President Reagan.

Listed as chairman of the Fusion Advisory Board is former President Bush's White House Chief of Staff John Sununu. ...

Last fall, when we began to inquire about Fusion's long distance service to Haiti, the company's in-house counsel refused to either confirm or deny that it even offered service in that market. Numerous follow-up calls since to her and other members of management were never returned. Mr. McLarty denied any knowledge altogether about Fusion's involvement in Haiti. Mr. Kennedy did not return our query.

It was only after our Mary O'Grady independently confirmed Fusion's activity in Haiti and wrote about it for the Americas column that Mr. Kennedy's office gave us a statement: "Joe has no joint venture, partnership or business arrangement with the president of Haiti or for that matter, anyone in Haiti."

The statement also says that Mr. Kennedy is not involved in running Fusion. Mr. Kennedy's denial is interesting given his February 7 op-ed in the Boston Globe where he wrote on the occasion of Mr. Aristide's inauguration: "I was proud to help bring more than $1 million in private investment from Fusion into Haiti."

We are not suggesting that Fusion's business in Haiti is illegal. And we are not so naive as to be shocked at the spectacle of prominent political figures exploiting their former lives as public officials. We are saying that Fusion's Haiti deal is sleazy. For people connected with the Clinton Presidency-cum-political machine to attach themselves like pilot fish to the bleeding ruin of Haiti under Jean Bertrand Aristide, in the wake of an enormous commitment of American prestige and money on behalf of Haiti's people, doesn't survive any conceivable smell test.

It also smells that it is so hard for Fusion's Clintonites to acknowledge secret business deals with Mr. Aristide, the sole owner and operator of the Haitian economy, who is in power thanks to a U.S. intervention.

And yes, we do wonder if this is the tip of yet another Clinton iceberg.

The Bush Administration, particularly Colin Powell at State, should be alert to this phenomenon as it revisits the venues of the Clinton foreign policy legacy.

April 23, 2001

Vice Admiral Robert Kihune
Speaks at JAIMS

HONOLULU—This spring, JAIMS students were pleased to welcome Vice Admiral Robert Kihune as a guest speaker for a special session on "Leadership for the New Economy."

Currently a trustee of the Kamehameha Schools, Kihune had much to say to the audience of students and staff on the qualities of leadership.

"Leadership really is an invisible strength," Kihune said. "It's really is as mysterious as is powerful. Leadership is colorblind. It doesn't care whether you're black, yellow, white, or what. There is no gender bias. You can be a woman and be a leader, as well as you can be a man and be a leader."

Kihune wanted to stress, especially to the students in the audience, the qualities of what he believes makes a leader.

"If you want to be a leader, first of all you must have the trust of the people," he said, "you have to have their confidence that you will be working for them. Secondly, you have to have the integrity to do what is right. If you cannot do what you think is right, don't compromise."

Also in the audience, were special guests Dr. Fujio Matsuda and Mr. Hideto Kono, both former presidents of JAIMS whom Kihune referred to as examples of leaders who, like him, paid their dues in order to reach the level of success they have attained.

Vice Admiral Kihune was born on Maui, and is a graduate of the Kamehameha Schools and the U.S. Naval Academy. He retired from the U.S. Navy after serving 35 years. He currently serves as a trustee of the Kamehameha Schools, the CEO of Sandwich Isles Communications, Inc., and the president of the USS Missouri Memorial Association.

February 15, 2002

Summit Communications files bankruptcy

The local telecommunications company has debts
between $1 million and $10 million

By Lyn Danninger, Honolulu Star-Bulletin

Summit Communications, a local company that provides telecommunications services for clients including Hawaii Visitors & Convention Bureau, filed for Chapter 11 bankruptcy protection yesterday.

Summit, founded in 1996, listed debts of between $1 million and $10 million, estimated assets of between $1 million and $10 million and between 50 and 99 creditors on its bankruptcy filing.

Telecommunications services provided by Summit include alternative local and long-distance telephone services to multi-tenant buildings and call center services.

Company president Grant Johnston said the company does not plan to lay off any of its 40 employees. Summit reduced its staff by about 20 percent in June 2000. Management and administration staff also took a 20 percent pay cut, he said.

"Now the plan is to get some temporary relief from creditors to re-group and get back on track," he said.

With approximately $3 million in annual revenues, Johnston said the company had been growing. But economic ups and downs in the telecom industry, the fallout from Sept. 11 and difficulty getting vendor financing hurt the company....

Summit's contract with the Hawaii Visitors and Convention Bureau is worth between $30,000 and $50,000 per month, depending on the bureau's marketing activities and the volume of calls handled by Summit, said Barbara Okamoto, HVCB's vice president of customer trends and communications.

Okamoto said the Bureau plans to retain its contract with Summit....

* * *

September 10, 2002

State, feds seek Summit trustee

The telecom firm owes more than $1 million
to the state and feds

By Tim Ruel, Honolulu Star-Bulletin

The fate of a million-dollar tax delinquency is coming to blows in the bankruptcy of telecommunications services firm Summit Communications Inc.

In the past several weeks, the U.S. Attorney's Office, the U.S. Trustee's Office and the state Department of Taxation have raised the heat in Summit's bankruptcy proceedings. They support the appointment of an outside trustee to manage and investigate the firm's finances.

Summit owes $528,603 to the state and $512,315 to the federal government for taxes, according to claims in Summit's Chapter 11 reorganization bankruptcy case.

In an early August court filing, attorneys for the U.S. government cited Summit's "gross mismanagement and incompetence" as a justification for the appointment of a trustee.

Summit opposes the appointment of a trustee and disputes the government's assertions. It says the appointment of a trustee will raise the expense of administering its bankruptcy case, a point the U.S. government concedes. Having a trustee at the helm would reduce confidence in the firm, potentially warding off customers, and make it harder for Summit to emerge from bankruptcy successfully, according to a filing by Summit's attorneys Steven Guttman and James Duca.

Summit is seeking an extension of time to submit its in-house plan for reorganization, which was due two months ago. The government says Summit shouldn't get an extension. A hearing on the disputes is scheduled for Monday before U.S. Bankruptcy Judge Robert Faris.

During a brief hearing yesterday, Summit and its creditors said they would meet outside court to talk things over. One of the potential topics was whether the government's desire to appoint a trustee would merit the potential loss of tax dollars, according to Carol Muranaka, special assistant U.S. attorney.

"We are in a bad place, I think, the state and United States," Muranaka said during yesterday's hearing.

Among the U.S. government's assertions:

>> Summit's current management is related to the management that led the firm to its tax situation. Shortly before Summit filed bankruptcy, Grant Johnston, the son of a Summit co-founder and owner, became president;

>> Summit has made a couple major revisions to its financial statements. As such, the firm's numbers are not reliable.

In response, Summit said the relationship between its management teams is not relevant. If there's a question of whether the relationship has interfered with efforts to fix Summit, "no such claim can factually be proven," the company said.

The company blames its erroneous financial statements on disarray in its finances at the time of filing bankruptcy. Since then, the company says it has hired an outside accountant.

In a March interview, Grant Johnston said Summit ran into major cash-flow problems that were more important at the time than paying taxes. According to Johnston, the firm discovered the tax problem after it changed management in 2001. Johnston could not be reached for further comment yesterday.

Unpaid taxes make up about one-third of Summit's $3 million total claims.

In a court filing, Summit noted it is current on its post-bankruptcy financial obligations, and it has made $38,223 in adequate protection payments to the federal government.

The state Tax Department, which has supported the federal government's case for appointing a trustee, has its own bone to pick with Summit. In a recent filing, the state claims Summit has been "tightfisted" with information, hindering a state audit.

Before filing bankruptcy in February, Summit hadn't filed general excise tax returns since 1997. Also, Summit has refused to file public service company returns, the state said.

There's a simple reason for that, Summit said: The firm is exempt from public service company taxes, and hasn't compiled the information needed to compute the tax liability....

* * *

January 6, 2003

Examiner critical of Summit’s finances

The bankrupt telecom firm is a
"mini-Enron," says a bankruptcy trustee

By Tim Ruel, Honolulu Star-Bulletin

An examiner hired to look at the books of bankrupt telecommunications services firm Summit Communications Inc. says the firm's leaders have benefited to the financial detriment of creditors.

"It's sort of like a mini-Enron, or mini-WorldCom," said Mark Yee, who was hired to review Summit's financial condition.

Yee, a bankruptcy trustee, has filed a court report that says Grant Johnston and Harry Johnston received questionable payments from Summit and from a separate company owned by Grant Johnston that works closely with Summit.

Summit, which provides call-center and telephone services, filed for Chapter 11 protection from creditors in February 2002. Summit owed more than $1 million in unpaid state and federal taxes, though the company said it has repaid one-fifth of what it owes to the Internal Revenue Service.

Grant Johnston is president of Summit. Harry Johnston is Grant's father and is a co-founder and principle shareholder of Summit.

Grant also owns a company, Summit Exchange Inc., which provides similar services as Summit Communications, and has its work done by the staff of Summit Communications, Yee's report said. Yee said the companies should be treated as one and the same. Grant Johnston disagreed.

Grant Johnston also took exception to having Summit Communications labeled a "mini-Enron."

"(Yee's) comment ... confirms in my mind that he and others are on a fishing expedition," Grant Johnston said. "They're looking and fishing for wrongdoing."

The Johnstons say Yee's report is inaccurate and misleading, and said they will rebut any allegations of wrongdoing. The fundamental problem with the report, they said, is that they were not given a chance to clear things up before it was filed with the court.

When asked to respond to specific accusations within Yee's 17-page report, they repeatedly declined.

"There is available an explanation to every question that (Yee) may have come across," Grant Johnston said Friday. "Whether or not he chooses to believe our answers is up to him."

It may also be up to U.S. Bankruptcy Judge Robert Faris. Last year, the U.S. Attorney's Office, the state Department of Taxation and the U.S. Trustee's Office all backed the court appointment of a trustee to replace Summit's current management. Summit, in opposition, says the appointment of a trustee would only make it harder for the company to stay in business and pay off debts.

Yee's appointment was a temporary compromise between Summit and the government. His report supports the appointment of a trustee, as well as further investigation of the firm's finances. A lawyer for the U.S. government could not be reached for comment Friday.

In his report, Yee said Summit's latest financial statements to creditors are not to be believed, and that the company is not producing the profits that it claims. Plus, he describes Summit's past records as being in a mess that is so bad, he said, there is no point in trying to figure it out.

"To get those books in order is going to take a major undertaking," Yee said.

Summit has acknowledged in the past that it had major problems with record-keeping under previous management, though the Johnstons said the more recent financial statements are accurate.

Summit recently lost approximately 20 percent of its overall business from one of its bigger customers, Sandwich Isles Communications Inc. Summit had provided technical support for Sandwich Isles, which is building a $500 million communications system that would link all Department of Hawaiian Home Lands residents.

Grant Johnston said that loss will not hurt Summit's plans to reorganize its finances, stay in business and pay off its debts over time. Summit has pared down expenses and increased its call-center business and other revenues, he said.

Since filing for bankruptcy, Summit has reduced its work force to 28 employees from 40.

For much more, GO TO > > > The Rise and Fall of Summit Communications

March 30, 2001

Ex-CEO makes comeback with
GST's Hawaii assets

Pacific Business News (Honolulu) - by Terrence Sing

Most CEOs don't get a second chance to run the same company. But former GST Telecommunications Chairman and CEO John Warta -- who was forced to resign by GST's board amid allegations of fraud in 1998 -- has teamed with TM Communications Hawaii LLC to take over the bankrupt company's Hawaii assets.

Warta was later sued by GST along with other top executives. However, legal actions taken against them were eventually dropped or settled out of court. In 1999, a U.S. District Court judge in Washington cleared Warta of any wrongdoing in an additional class action suit brought against him by GST shareholders.

TM Communications Hawaii LLC is the largest secured creditor of GST Telecom Hawaii and a subsidiary of Japanese trading conglomerate Tomen Corp. Last week, the U.S. Bankruptcy Court in Delaware approved the sale of assets of GST Telecom Hawaii and sister company GST Hawaii OnLine to TM Communications Hawaii LLC, for a reported $25 million. The exact dollar value of the sale, however, is unclear since the buyer didn't pay cash but rather canceled its debt against the company as part of the transaction.

Warta says GST Hawaii's operations are valued at about $60 million in terms of physical assets, customer base and staff. The sale is still subject to regulatory approval by the Hawaii Public Utilities Commission and the Federal Communications Commission.

GST Telecom Hawaii, which provides voice and data telecommunications services, was a subsidiary of Vancouver, Wash.-based GST Telecommunications Inc., which filed for Chapter 11 bankruptcy last May amid rising financial difficulties. In January, Time Warner Telecom Inc. bought most of its mainland business for $690 million, leaving the fate of GST Telecom Hawaii and GST Hawaii OnLine to be resolved later.

"One of the biggest issues was that GST Hawaii information was combined with all of GST's operations," explains Warta. "It was hard for a buyer to sort through the maze and figure out all the costs and revenue. Fortunately, many of the people we now have understand the systems and issues GST had and we know how to break them out just for Hawaii. This fortunately gave us a picture of what we were getting. Others just gave up."

There had been rumors Warta was interested in acquiring the Hawaii operations, but until last week's announcement -- made through Honolulu public relations firm Communications Pacific -- they remained unsubstantiated.

TM Communications Hawaii LLC and Warta's firm, Washington-based NextNet Investments LLC, will form a new Hawaii-based company to operate GST Telecom Hawaii and GST Hawaii OnLine under a new name beginning March 27.

GST Telecom Hawaii currently serves 17,000 customers and offers both local and long distance service as well as Internet services. The company also operates its own high-speed fiber-optic cables between the islands. "Our first priority is to make certain we do a better job of taking care of these loyal customers," says Warta, who believes the former owners did not manage the Hawaii operations well.

"I think GST made many mistakes," says Warta. "In fact, the Hawaii operation appears to have been cash-flow break-even for some time. But three years ago they announced they were selling, which stopped the progress that had been made. This was a board decision."

December 25, 1998

GST investment set up
to fail, lawsuit alleges

Portland Business Journal - by Dan McMillan

GST Telecommunications Inc.'s $15 million relationship with Magnacom, a company controlled by GST's former chief executive and board chairman, is again being questioned--this time in a new lawsuit filed by the Vancouver telecommunications company.

The lawsuit portrays dealings between GST and Magnacom as fatally flawed, and alleges that shoddy legal work and lack of oversight all but guaranteed GST would take a bath. In fact, GST wrote off the Magnacom investment and took a $15 million charge against third-quarter earnings following Magnacom's filing for Chapter 11 bankruptcy protection.

John Warta, who ran GST and Magnacom concurrently, has argued that his actions always put GST's interests first. He also said he never received a salary through Magnacom while running GST, and that he abstained from voting on transactions between the firms. Warta was unavailable for comment.

GST last week filed a $250 million-plus malpractice lawsuit against Stephen Irwin and his New York City law firm, Olshan Grundman Frome & Rosenzweig. Irwin is a GST director and former legal counsel. Much of the complaint is a dissection of transactions between GST and Magnacom. Warta is not named in the second lawsuit, but he is a defendant, as is Irwin, in an earlier fraud suit brought against former and current GST directors and officers.

According to the lawsuit prepared by Wilson Sonsini Goodrich & Rosati, GST's high-powered Palo Alto, Calif., litigation counsel, GST's investment in Magnacom got off to a bad start when the defendants in the malpractice lawsuit acted as counsel to GST and provided advice to Magnacom. ". . . (R)epresentation of Magnacom violated their obligation of loyalty to GST and compromised all of their advice insofar as it related to GST."

Then, the suit alleges, Warta and Irwin in July 1996 "caused GST to advance approximately $5.9 million to Magnacom" prior to board approval. The money was used as a deposit to acquire licenses totaling $108 million from the Federal Communications Commission. The suit claims the advance was not brought before GST's finance committee until Aug. 1.

At that meeting, another $5.4 million advance to Magnacom was approved. At that point, with $11.3 million advanced to Magnacom, GST fell afoul of rules regarding investments in outside entities, the suit says.

On one hand, GST could not legally advance more than $10 million to Magnacom without owning more than 50 percent of the company, the suit says. On the other hand, rules restricting foreign ownership of FTC licenses meant GST couldn't own more than 25 percent of Magnacom. GST is incorporated in Canada.

Irwin, the suit alleges, did not tell the GST board about the problems. The suit claims Irwin should have told the board to get its money back and not make any additional investments in Magnacom.

"Not surprisingly, in light of Irwin and Olshan's simultaneous but undisclosed representation of Magnacom, Irwin gave exactly the opposite advice," the suit says.

Instead, Irwin told the board they could sidestep the tricky legal issues by characterizing the advances as prepayments for time on a network to be built by Magnacom. He also recommended the board be given an option to acquire 99 percent of Magnacom for a small fee, the suit says.

Both those steps simply placed GST's money in further jeopardy, the suit argues.

The prepayment for services, which ultimately totaled $14.4 million, was a bet that Magnacom would be able to pay the FCC the remaining $102 million for the licenses and build a network costing $200 million to deliver the services, the suit says. "Minimal due diligence would have disclosed that Magnacom did not have anything close to the funds necessary to finance construction of the network," the suit says.

Failure to build the network in a timely fashion, the suit continues, would mean default on the licenses to the FCC.

The option to acquire Magnacom for a nominal fee--Warta said it was $1--was not practical, the suit says. If GST exercised that option, it would likely lose the licenses because of foreign ownership restrictions, the suit says.

According to the suit, the formal agreement between GST and Magnacom was not executed by Irwin until after GST had advanced $14.4 million and the agreement contained no provision for repayment to GST if Magnacom forfeited its licenses or failed to build a network.

As a result, "GST has effectively no recourse against Magnacom and has been damaged in an amount not less than $15 million," the suit says.

For more, GO TO > > > Vultures in the Pacific LightNet

# # #

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FOR A CLOSER LOOK NOW AT SOME MORE
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Confessions of a Whistleblower

Dirty Money, Dirty Politics & Bishop Estate

Ron Rewald: Flying High In Hawaii

The Freedom To Sing

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I Sing the Hawaiian Electric

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The Pimps To Power

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The Silence of the Whistleblowers

The Sinking of the Ehime Maru

Tracking The Murdoch Flock

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Vultures of the Sandwich Isles

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Last update March 25, 2008, by The Catbird