October 4, 1997
Internal Revenue Service
Tax Fraud Unit,
Fresno Service Center
P.O. Box 12947, Stop 83
Fresno, CA 93779
SUBJECT: Report of Tax Fraud and Request for Immediate Investigation
Kamehameha Schools/Bishop Estate
Pauahi Holdings Corporation (PHC)
P&C Insurance Company, Inc. (P&C)
Dear IRS:
This is to give information relating to fraudulent tax returns filed by the subject entities, and to request your immediate investigation into the matter.
I was employed by Kamehameha Schools/Bishop Estate (KSBE), a tax-exempt charitable trust, as their Risk/Insurance & Safety Manager from November, 1988. I was also the president of P&C Insurance Company, Inc. (P&C), a for-profit subsidiary of Pauahi Holdings Corporation (PHC), from October, 1994. All of my services for P&C were paid for by the charitable trust.
I was terminated from both positions on November 20, 1996. It is my belief that my termination was due to my refusal to obey various directives to commit tax fraud and other illegal acts given by my superiors, Henry H. Peters, Trustee, KSBE and Chairman of the Board, P&C; Nathan Aipa, General Counsel, KSBE, and Asst. Secretary, P&C; and Louanne Kam, Esq., Litigation. Manager, KSBE.
Some of the major directives involved breaches of "arms-Iength" relationships between the
tax-exempt entity and its for-profit subsidiaries and related companies (including subsidizing of for-profit subsidiaries by the trust); transactions involving conflicts of interest, private inurement and private benefit; and falsification of financial statements, federal and state tax returns.
In a letter to the estate dated August 9, 1994, KSBE's tax consultant, Mark L. McConaghy of Price Waterhouse stated:
"A large portion of our discussions revolved around the implications a captive insurance subsidiary may have on the tax-exempt status of KSBE. We discussed that in order to preserve KSBE's tax-exempt status, it is important that the captive does not create a situation where a private individual receives a benefit from KSBE's involvement in the captive. Arms-length relationships between KSBE and the captive would be absolutely necessary to prevent private inurement (benefits flowing to insiders such as trustees and directors) and/or private benefit (benefits flowing to third parties such as other subsidiaries) from becoming a problem. In this context, for example, premiums paid into the captive by all the entities involved would need to be actuarialy appropriate in order to prevent the IRS from taking the position that KSBE is improperly subsidizing a for-profit subsidiary."
Despite this admonition, Nathan Aipa, general counsel and my superior at KSBE, orally directed me to report to him on all P&C matters. I requested this directive in writing, but this was never provided. Instead, I was called to meet with Henry H. Peters and Mr. Aipa on October 11,1996. In this meeting, in Trustee Peters' office, Peters' oral directive to me was that, in addition to reporting to Mr. Aipa in my capacity as Risk/Insurance & Safety Manager for KSBE, I was also to report to Mr. Aipa on matters relating to the operations of P&C. Peters also indicated that I could be replaced as president of P&C, and that he would hold Aipa responsible for any actions regarding the operations of P&C.
This arrangement, if complied with, would. place nearly complete control of the operations of P&C (vendors used, premiums charged, premium allocations, investments, dividends to the parent company, claim settlements, etc.) into the hands of Henry Peters, Nathan Aipa and Louanne Kam, Litigation Manager, KSBE.
At a meeting later the same day with Aipa and our insurance agent, Rocco Sansone, of Marsh & McLennan, Inc., I questioned the status of my long-pending staff report recommending my transfer from KSBE to P&C. This transfer had been anticipated from before the formation of the captive due to the arms-length issue. Mr. Aipa informed me at that meeting that I was not being transferred to P&C because arms-length was no longer an issue.
To show some of the connections between KSBE, some of its subsidiaries and its independent contractors, the following was the organizational structure of P&C:
Directors:
Henry Peters, Chairman of the Board
Gilbert Tam (former KSBE principal executive)
William S. Richardson (former KSBE trustee and current consultant to KSBE)'"
Officers:
Bobby N. Harmon, President
Peter Lowe, Vice Pres. (current officer ofM&M Insurance Management Services, Inc.) William S. Richardson, Secretary/Treasurer
Nathan K. Aipa, Asst. Sec.! Asst. Treasurer
Henry H. Peters also holds the following positions, among others: .
Trustee, Bishop Estate
Chairman, Board of Directors, Pauahi Holdings Corp.
Chairman, Board of Directors, Royal Hawaiian Shopping Center Member/Manager, Sino Finance Group LLC
Chairman, Board of Directors, Unison Pacific Investment
Chairman, Board of Directors, Konia, Inc.
Chairman, Board of Directors, Treyburn GP, Inc.
Chairman, Board of Directors, Autofuel Company (AFCO)
Chairman, Board of Directors, Paradise Petroleum, Inc.
Chairman, Board of Directors, Ranray Properties, Inc.
Chairman, Board of Directors, Allred Oil Company, Inc.
Director, SoCal Holdings (parent of Southern California Savings & Loan) Director, Mid-Ocean Reinsurance Co.
Director, Goldman Sachs
Henry Peters also receives compensation for his services as director of some of these taxable entities.
Henry Peters, William Richardson, and Gil Tam (a former principal executive of KSBE and currently employed by Bank of Hawaii which handles P&C's checking and savings accounts and its investments) were all co-investors with the estate in the McKenzie Methane deal.
Peter Lowe is an officer of M&M Insurance Marketing Services, Inc. (M&M IMS), a subsidiary of Marsh & McLennan, Inc. (MMI). William Richardson is a former trustee and current consultant for KSBE. Nathan Aipa is the General Counsel for KSBE, and head of the Legal Group.
KSBE has also been involved with another MMI subsidiary, Guy Carpenter, through its sizable investments in two Bermuda insurance companies, Centre Reinsurance and Mid-Ocean Reinsurance. Henry Peters receives compensation from Mid-Ocean Reinsurance Company.
There are numerous examples of apparent violations of IRS regulations which I cited in a letter dated December 29, 1996, addressed to the KSBE trustees. These examples were all documented by exhibits enclosed with the letter.
One example of what could be considered "private benefit" transactions can be found in Eric Martinson's (KSBE) memorandum of September 24, 1996 to Ramona Hinck (KSBE) directing her to reverse previous insurance premium allocations that I had made to the SoCal, AFCO, Unison and SINO subsidiaries. Eric Martinson was the Financial Assets Manager for KSBE, and was also the Secretary-Treasurer, Sino Finance Group LLC, and Vice President, Unison Pacific Investment (US) Limited As a result of this transfer, the premiums for these taxable entities were paid by KSBE, the tax-exempt charitable trust
Examples of what might be considered "private inurement" are described in the article which appeared in the February 26, 1995 issue of The Honolulu Advertiser regarding the McKenzie Methane, Inc. investment. Key statements in the article include:
"...estate trustees that year (1989) approved...an $85 million investment in a Houston-based energy venture... "
"The same venture a/so received more than $3 million in personal funds from all four trustees and employees and business associates of the estate. "
"The troubled deal may cost the estate as much as $65 million in lost capital and at least twice that much in lost earnings and tax benefits... "
"Honolulu businessman Desmond Byme...called the personal investments by estate trustees and staffers 'an absolutely improper conflict of interest It raises the appearance that their official decisions are affected by their own personal financial interests'..."
"’There was no conflict of interest’. Aipa said."
"The Texas court files clearly show, however, that the trustees, their employees and associates relied on estate reports and financial data when they decided to put their own money in the deal "
"Estate personnel have immediate access to the high-priced and sophisticated financial expertise of such firms as First Boston Bank and Goldman, Sachs & Co."
"The estate, a non-profit, tax-exempt institution...must be very careful in structuring its investment activities so it won't imperil its tax-exempt status. The Houston investment was particularly tricky because one of the principal benefits was that the estate would receive federal energy tax credits, which the tax-exempt estate intended to sell."
"Trustees have made other personal investments in estate-related business deals."
"According to court records, the estate board of trustees was told in April 1989 by Aipa that 'no conflict (of interest) exists in the personal investments.' "
"The personal investments were made 'only after careful review of the issues and advice from the law finn of Rush Moore Craven and Stricklin,' Aipa said. But current trustee Oswald Stender...said under oath in a 1993 deposition that he would not have made such a personal investment... that he would not invest in activities.. .that I had self-dealing in."
"Takabuki, his wife, three children and family company, Magba Corp., invested $1.5 million... "
"The investments were made through a series of five partnerships, called the 'HAK Partnerships,' that were organized and administered by Mitchell Gilbert, Bishop Estate financial assets manager from 1988 to September 1994."
"Gilbert and members of his family invested nearly $72,000 in the five partnerships, the court records show. And he invited various influential 'investment affiliates' of the estate to invest in the HAK Partnerships... "
"In 'marketing' the deal to potential investors, he was acting individually and not as a representative of the Bishop Estate, Gilbert said in his deposition. "
But the letters he wrote were on estate stationery and he signed them as Bishop Estate's financial assets manager. "
"...a Texas lawyer for Bishop Estate said in Houston bankruptcy court last month that the estate can only hope to recover $20 million at most of its $85 million investment. II
According to the Honolulu Advertiser article, the investors included:
Henry Peters (trustee)
William Richardson (then-trustee and current consultant)
Myron Thompson (then-trustee)
Matsuo Takabuki (then-trustee and current consultant)
Dave Thomas (...Thomas participated with the estate in the takeover of two North Carolina
companies, Hanfords, Inc., and Nationwide Enterprises, Inc.)
William E. Simon (Former U.S. Treasury Secretary and a past partner of the estate in the purchase re-sale on Honolulu Federal Savings and Loan, and in Asian banking investments. )
Wayne Rogers (...Rogers is also suing the estate in federal court here over another soured business deal--the North Carolina corporate takeovers--in which Takabuki was also a personal investor.)
Bruce Nelson and Raymond Pettit (Nelson, treasurer, and Pettit, chief financial officer, of the Rockefeller Group, investment arm of the Rockefeller family of New York. The estate and the Rockefeller Group were partners in a series of corporate acquisitions.)
Frederick "Ted" Field (...Three Field employees also invested...Field was the estate's
partner in the corporate takeover of European conglomerate DRG, Inc.)
Mark McConaghy (Bishop Estate's principal tax lawyer and lobbyist. McConaghy, who works for the Price Waterhouse accounting firm's national headquarters in Washington, D.C., was a finalist on last year's state Supreme Court list of nominees to fill the latest vacancy on the estate board of trustees)
Michael Chun (president of Kamehameha Schools)
Gilbert Tam (at the time Director of Administration, Bishop Estate; currently member of
Board of Directors, P&C Ins Co)
Guido Giacommetti (Director of asset management, Bishop Estate)
Anthony Sereno (Board of Directors, Royal Hawaiian Shopping Center)
Neil Hannahs (Head of the estate's Kakaako redevelopment program)
Charles Maeda (Head of Information Systems, Bishop Estate)
Richard Wong (President of the Royal Hawaiian Shopping Center, Inc. & Pauahi
Holdings Corp)
Wallace Tirrell (President of Kamehameha Investment Corp.)
Gilbert Ishikawa~ (Bishop Estate tax manager)
Ed Henrickson (Bishop Estate financial assets division)
Rodney Park (Bishop Estate controller as of the date of the article; currently Administration
Group director)
Wally Chin (Bishop Estate deputy controller as of the date of the article; currently controller)
Donald K. H. Pang (Father of Bishop Estate employee Leeanne Pang; Budget Dept)
In March 1993, B.M. McKenzie and McKenzie Methane Corporation filed a lawsuit in Texas for $2,300,000,000 against the Trustees under the Will & Estate of B.P. Bishop and Kamehameha Schools/Bishop Estate. Additional defendants were HAK Partnership I, II, III, IV and V; Smith-Gordy Methane Co.; SG Methane Co., Inc.; Gordy Oil Co.; L.H. Smith; R.D. Gordy; D.A. Barras; Lee H. Henkel, III; Mitch Gilbert; Royal Hawaiian Shopping Center, Inc.; Maralex, Inc.; M. O'Hare; Kukui, Tnc.; JGT Resources, Tnc.; and Northwestern Mutual Life Insurance Co.
In October 1995, Fredrick Field filed a lawsuit arising out of nine Limited Partnerships dating back to 1984, in which Field and KSBE were partners. Named in the lawsuit were KSBE, Henry Peters, Oswald Stender, Richard S.H. Wong, Lokelani Lindsey, Myron B.Thompson, Matsuo Takabuki, William S. Richardson and Lyn Anzai. General damages claimed in this lawsuit totaled $86,700,000, plus unknown punitive damages and attorneys' fees.
Field alleges "fraud" and "breach of fiduciary duties," among other things, in that KSBE and its authorized representatives, defendants Takabuki, Anzai and A.P. Sereno made false representations that Field's partnership assets were worth approximately $10 million, while the "true" value of Field's interest was "at least $30 million." Field also alleges "usury" arising out of KSBE's loan of $29,310,577 to him at an interest rate of 20% per annum.
Defense costs in this case have already exceeded $500,000. It is believed that these defense costs may have been paid largely, if not entirely, from KSBE funds rather than being allocated to the for-profit subsidiaries and the individual investors/defendants.
On March 11, 1996, Robert Basham and Benjamin Stone filed suit against: (1) B.P. Russell, President and Trustee of the Robert Trent Jones Golf Club, Inc. (the Golf Club), (2) Henry Peters, individually and as a Trustee of the Golf Club and of KSBE, (3) KSBE through its Trustees, (4) Lake Manassas Limited Partnership, (5) RTJ Acquisition Limited Partnership (RTJLP), (6) Treyburn GP, Inc. (Treyburn is the general partner for both RTJLP and Lake Manassas LP. Royal Hawaiian Shopping Center, Inc. serves as the sole limited partner for both partnerships.)
The Plaintiffs asserted, among other things, that (1) Mr. Russell and Mr. Peters breached their fiduciary duties as corporate directors of the Golf Club, that they "aided and abetted" one another in so doing, and that Mr. Peters involvement was so effectively at the direction of the KSBE Trustees that KSBE assumed a corresponding fiduciary responsibility to the Golf Club members which has been breached, and; (2) that Mr. Russell, acting under the control of Mr. Peters, and thus as an agent of KSBE, engaged in common law fraud in obtaining Basham's and Stone's consent to amendments to covenants applicable to their property, by oral statements which they claim to have been intentionally false and misleading.
An article in the June 23, 1996 issue of The Honolulu Advertiser, under the headline, "Bishop investment turns bitter," gives the following information:
"The charitable trust has been accused of fraud and conflict of interest in the sale of the exclusive Robert Trent Jones Golf Club... "
"Club members allege tIul1 Bishop Estate inflated the value of the club through a series of financial transactions with companies or partnerships under its controL.. "
"Members bought the club last year, but say the estate failed to inform them of a $33 million development debt they would have to payoff-to Bishop Estate. "
"In 1986, Bishop Estate joined golf course designer Robert Trent Jones and North Carolina developer Clay Hamner in the purchase of 1,100 acres...at Lake Manassas."
"In March 1991, the partners set up RTJ Acquisition Limited Partnership - an entity largely controlled by Bishop Estate - to develop the property. RTJ borrowed $40 million from a North Carolina bank, bought 210 acres of land from the Hamner-Bishop Estate group for $21.6 million and began building the golf club. RTJ's loan was guaranteed by Bishop Estate. "
"... Peter’s arranges deal seventeen months later, club members bought the golf course and property from RTJ in a deal negotiated in part by Bishop Estate trustee, Henry Peters, who also served on the golf club's controlling board of trustees... II
"...In a February memo to members, a committee attorney questioned the $21.6 million price paid by RTJ for the original 210 acres; said no members had been informed that the club was encumbered with up to $40 million in debt; and said that Bishop Estate was 'both the buyer and seller' in the March 1991 sale."
The article goes on to list the Bishop Estate tie-in:
DC Land Group Ltd.
- Clay Hamner, managing general partner - Bishop Estate, equity partner
RTJ Acquisition Limited Partnership
- Bishop Estate, equity partner
- Royal Hawaiian Shopping Center Inc., limited partner - Treyburn GP Inc., general partner
Treybum GP Inc.
-Bruce Nakaoka, president (also manager of Bishop Estate real estate investment and acquisition division)
-Henry Peters, director (Bishop Estate trustee; also a trustee of Robert Trent Jones Golf Club)
-Richard S.H. Wong, president of Royal Hawaiian Shopping Center Inc.(and president of Pauahi Holdings Corp.)
Robert Trent Jones Golf Club Inc.
-Henry Peters, vice president and trustee -B.P. Russell, president and trustee -Ernest L. Ransome III, trustee.
These large personal investments and huge lawsuits go unreported in KSBE's audited financial statements, to the Master, to thee Probate Court, to the Attorney General's office, and to the IRS.Insurance claim reserves for these large claims were often inadequate or non-existent, as claims were either not reported to the insurance carrier, or, if they were reported, the claims handling was handled by in-house attorneys and employees, and outside attorneys.
These unreported and unreserved liabilities would also adversely affect the estate's financial ratings by services, such as Standard and Poor's.
An article in the February 27, 1995 issue of The Honolulu Advertiser, under the headline, "Monitoring groups not told about deals," states:
"Both the state Probate Court and the state Attorney General's Office are required to annually review Bishop Estate operations. "
"Neither agency knew about the personal investments estate trustees and employees made in connection with the estate's McKenzie Methane investment, according to court records and interviews. "
"Peter Trask...made no mention of the McKenzie Methane or HAK Partners im'estments in his report to the court. 'The investment portfolio appears complete and well-maintained, , Trask wrote. "
'More than adequate information is presented to provide the master with an appropriate understanding of the investments,' Trask reported"
"James Duffy, who reviewed Bishop Estate operations last year for the state Probate Court, said he was unaware of the McKenzie Methane investment and had never heard of the HAK partnerships. "
"Asked if he thought the personal investments by trustees and estate employees were appropriate, Duffy said, 'I would rather not comment. ",
"Benjamin Matsubara, the current court master, also said he was unaware of the HAK Partnerships but intended to look into the matter. His report is due in May. " (It still has not been released)
"Deputy Attorney General Kevin Wakayama, who reviews Bishop Estate activities for the state, said personal investments by estate trustees and staffers in estate-related business deals have 'never been publicly reported by the estate. ",
A follow-up article appearing in the February 28, 1995 edition of The Honolulu Advertiser under the headline, "Bishop Estate tax-exempt status score~" discloses: .
"...Peters (attorney Ronald Peters, not Henry Peters) pointed out yesterday that the estate trustees told James Duffy, court-appointed master for the estate's 1989-90 fiscal year, that 'they have not undertaken any transactions with members of their families, business associaies, employees of the state, or members of immediate families of employees of the estate except such as are disclosed to the master... ",
"The estaie had no comment yesterday on questions about why the existence and activities of the HAK partnerships were not reported to court masters since 1989. "
"The estate also had no immediate comment on whether it was obligated to report the HAK partnership transactions on its federal income tax returns. "
"As reported Sunday, in 1989 then-trustee Matsuo Takabuki, his wife, three children, family corporation and a longtime company employee invested $1.5 million in the HAK Partnerships. "
"Then-trustees Myron "Pinky" Thompson and William Richardson, invested $510,000 and $210,000, respectively. Trustee Henry Peters... invested $220,000..."
"The estate. as a charitable institution. files a 'Form 990' federal tax return. One section of thai return requires the estaie to report whether it has furnished "goods, services or facilities' to any taxable organization in which a trustee or estate principal officer has a management affiliation. "
"The estate reported nothing about the HAK partnerships on tax returns filed with the IRS since 1989..."
"The HAKpartnerships were organized and administered by Mitchell Gilbert, financial assets manager of the estate from 1988 to September 1994, according to Texas court records. Gilbert and his relatives invested $72,000 in the HAK partnerships. "
"The mailing address for all five partnerships was Bishop Estate headquarters at Kawaiahao Plaza... "
A related article in the same edition, under the headline, "Estate s Washington link disclosed,":
"Robert Rubin, U.S. Treasury secretary, has an important personal financial connection to Hawaii's Bishop Estate, as does one of Rubin's predecessors at the Treasury, former secretary William E. Simon. "
"The estate has guaranteed an undisclosed rate of return on Rubin's holdings in Goldman, Sachs & Co., the giant New York-based investment bank in which Bishop Estate has invested $500 million... "
"Rubin was co-chairman of Goldman, Sachs from 1992 through 1994, the same period in which the Bishop Estate made two separate $250 million investments in the firm. "
"When Rubin left the bank to join President Bill Clinton's cabinet last month as Treasury Secretary, he secured an 'insurance policy' from the estate that underwrites the value of his personal holdings in Goldman, Sachs... "
"...former Treasury Secretary Simon has been the estate's business partner in several major banking deals both in Hawaii and in Asia in recent years. " (The banking deal in Hawaii was HONFED, which was later sold to Bank of America. State Insurance Commissioner Wayne Metcalf took legal action against Bank of America and Goldman Sachs, along with other brokerage companies, in connection with the failure of Investors Equity Life Insurance Company, which had sold annuities through HONFED. I was advised by Rocco Sansone that Mert Chillingworth, former president of Marsh & McLennan, Hawaii, also served on the board of directors of HONFED during the period they were marketing the Investors Equity annuities. Another major banking deal with Simon came after this article was published when KSBE became the majority stockholder in SOCAL Holdings, which owns Southern California Savings & Loan Company, and Sino Finance.)
"Simon also personally invested, along with four estate trustees and numerous senior estate staffers, in a Houston-based methane gas drilling project that is now mired in federal bankruptcy court proceedings. "
"The estate itself invested some $85 million in the same energy deal"
An article in the March 23, 1995 issue of USA Today states:
" .. .Bishop Estate - which is strongly tied to the Democratic political machine here - is attracting attention outside Hawaii because of its ties to Treasury Secretary Robert Rubin. "
"In an unusual deal, Rubin pays hundreds of thousands of dollars a year to the Bishop Estate in exchange for a guarantee that he'll never lose money on a multimillion- dollar investment in his former firm, Goldman Sachs investment bank. "
"Rubin was co-chairman of Goldman Sachs before joining the Clinton administration. "
"Rubin could face a conflict of interest if an Internal Revenue Service investigation into the Bishop Estate's tax-exempt status reaches his desk. As Treasury secretary, Rubin oversees the IRS. "
"And some Republicans question whether Rubin's actions - especially his role in the
Mexican bailout - have been designed to help Goldman Sachs. "
"...Bishop Estate is now fighting release of its 1992-93 financial reports..."
"Bishop Estate spokesman Elisa Yadao says the estate doesn't want competitors to see the financial statements. "
"But secrecy may also keep hidden the details of the Rubin-Bishop Estate deal, which was made in February 1993. "
"Treasury officials won't give details either, except to say Rubin pays the estate hundreds of thousands of dollars a year. "
"...First as Clinton's economic adviser and now as Treasury secretary, Rubin could influence interest rates, foreign currencies and other factors crucial to his former firm's health. "
"To avoid a conflict of interest, he sold his Goldman Sachs partnership to the firm. A price wasn't disclosed, but the value of a senior partnership could exceed $50 million."
"When buying out partners, Wall Street firms are reluctant to deplete cash reserves, the lifeblood of an investment bank. So Goldman Sachs gave Rubin a note that promised to pay principal and interest over a number of years. "
"This still left Rubin with a potential conflict: a gigantic investment in Goldman Sachs that could be affected by his official government actions. "
"If Goldman Sachs had financial troubles, Rubin might not get paid, possibly costing him tens of millions of dollars. "
"Rubin's solution was to buy an insurance policy on his investment, so he would get paid even if Goldman Sach 's finances ran into trouble. "
"Rubin got the insurance from the Bishop Estate, rather than a major financial firm, because it was least likely to be affected by his government work, says Treasury general counsel Ed Knight"
"Now, Rubin faces a possible conflict of interest anyway."
"Bishop Estate critic Ronald Peters, a Honolulu lawyer, has aske.d the IRS to investigate whether the Bishop Estate should lose its tax-exempt status for allegedly improper business deals by the trustees. "
"Hawaii's attorney general has sent the challenge to the IRS, too."
"Peters says Rubin has a 'serious conflict of interest...lt is obvious to me that Secretary Rubin has to recuse himself. ",
"Rubins hasn't stepped aside, but his staff says it's unlikely he would get involved..."
"Alex Benes, managing director of the Center for Public Integrity, says there would be 'obvious questions' if Rubin doesn't recuse himself."
"He says Rubin has been under particular scrutiny since he sent a letter to former Goldman Sachs clients saying he looked fonflard to working with them in his new capacity...”
Goldman Sachs continues to be involved in lawsuits accusing the firm of illegal dealings. The Star-Bulletin reports in its December 11, 1996 edition under the headline, "Investors Equity deal OK'd":