Date: November 10, 1997
To: Carolyn Woods, Internal Revenue Service (HAND-DELIVERED)
From: Bobby N. Harmon
Reference: Kamehameha Schools Bishop Estate (KSBE)
Dear Ms. Woods:
It is my belief that the following IRS regulations were violated by certain individual trustees, executives and managers of the referenced entities:
1. There was a failure to disclose financial information in Federal Tax Returns regarding personal investments of Trustees, executives, managers and employees in companies controlled by KSBE.
2. IRS rules regarding the maintaining of “arms-length” relationships between a tax-exempt charitable organization and its for-profit subsidiaries were breached. For example, insurance premiums and claims costs were improperly allocated among the estate and its various for-profit subsidiaries (e.g. SoCal Holdings, Southern California Savings & Loan, AFCO, Paradise Petroleum, Unison Pacific and Sino Finance). Also, services were being provided by KSBE employees to P&C and other for-profit entities at no cost to the subsidiaries. In effect, KSBE was subsidizing these for-profit entities, which resulted in larger profits for the subsidiaries, and larger commissions for the Trustees.
3. The operations of P&C, including claims and investments, were being controlled by Henry H. Peters, Nathan Aipa and Louanne Kam. This included directing the payment of “excess benefits” to independent contractors (e.g. Marsh & McLennan, Inc.) for non-bid or non-existent contracts.
4. Annual financial statements for KSBE, PHC and P&C, which were prepared by Coopers & Lybrand, failed to disclose large claims, and to show adequate financial reserves for these claims (e.g., McKenzie, Kona Enterprises, etc.). It was also reported that KSBE was also guaranteeing large loans to “insiders” or partners in other investments.
5. It was reported that an “insurance policy” was issued to Robert Rubin to protect his financial interests in Goldman Sachs while he is serving as U.S. Treasury Secretary. Even though insurance contracts and surety bonds were my area of responsibility, I was never informed of the details of this arrangement and, to my knowledge, no actuarial studies were made, no reinsurance was obtained, and no reserves were established to cover this substantial financial guarantee.
6. There was a failure to report to the IRS, the state tax director, the court-appointed Master, the Probate Court and to the Attorney General conflicts of interest and financial transactions among KSBE, its trustees, employees, independent contractors, government officials, and officers and directors of P&C and other for-profit subsidiaries.
7. There was coercion of employees, by means of threats of discipline or termination, to violate laws or to “look the other way” while superiors engaged in illegal or unethical acts, such as: the altering, falsifying and/or destruction of staff reports, board minutes and contracts; collusion with independent contractors to conceal and cover-up wrongful acts; and misuse of the “attorney-client privilege” to prevent the disclosure of these acts.
Some of the specific acts and practices which were being engaged in by certain trustees and managers, and in which I refused to participate, included:
► The operations of P&C were being subsidized by KSBE by providing free labor and paying other operating costs to the for-profit entity.
► At the direction of Nathan Aipa, Louanne Kam, Eric Martinson, and others, KSBE paid premium charges, legal fees and claims costs that should have been paid by for-profit subsidiaries (e.g. Kukui, Sino Finance, Unison, SoCal, AFCO, Paradise Petroleum, etc.), or by individual trustees, officers, directors or employees.
► P&C entered into a contract with M&C Insurance Management Services, Inc. (M&M IMS) for captive management services to be provided for stated rates on a time and expense basis. The first year’s billings were $60,000+. Yet the broker, Marsh & McLennan, Inc. (MMI), billed ) P&C an additional flat $200,000 fee. There was no contract for this service, and no satisfactory explanation was given for the charges. One belated explanation given was that this fee included safety and loss control services and “brokerage” services. However, as I pointed out, P&C had paid M&M Protection Services, Inc. (another related company) under a separate “time and expense” contract for the safety and loss control services, and M&M had received commissions from the reinsurance carrier for their “brokerage” services.
► Insurance premium and loss costs being charged to lessees and tenants of KSBE properties were improper. Many of the insurance policies for KSBE and its subsidiaries combine coverages for all entities under the same policies. These insurance premiums, as well as the claims costs which were paid under self-insured retentions and deductibles, were allocated to the Kamehameha Schools, to Bishop Estate, and to covered subsidiaries. These charges, in turn, were further allocated to specific commercial projects, such as Royal Hawaiian Shopping Center, Windward Mall, Keauhou Shopping Village, Bishop Commerce Center (Georgia), Desert Springs Marketplace (California), etc., in accordance with procedures set forth in KSBE’s Policies & Procedures Manual and under P&C’s operating guidelines. These costs which were allocated to the commercial projects were nearly 100% recovered from the lessees and tenants through their monthly maintenance fees. Due to directives of Nathan Aipa, Louann Kam, Eric Martinson and others, these insurance costs were being improperly allocated, resulting in unfair and improper charges to the tenants and lessees of these projects. Furthermore, the improper overcharges being made by M&M were also included in the insurance charges that were passed through to these tenants and lessees.
► I refused to follow Aipa’s and Kam’s directives regarding giving M&M an “exclusive agent of record letter”, which Rocco Sansone had misrepresented would allow M&M to take over Hobbs’ Group’s proprietary proposal for the organization’s property insurance. The Hobbs’ proposal substantially improved KSBE’s property insurance program and reduced the cost by over $600,000 a year. I also refused many of Kam’s directions to falsify my staff report to trustees regarding the Hobbs’ proposal.
► According to Kam, I refused to follow Aipa’s directive to have Kam hire an attorney and an expert to handle a flood damage claim filed by Larry Ching. In keeping with P&C’s “arms-length” guidelines and Operations Manual, only P&C’s contracted independent adjuster, John Mullen & Co., was authorized to hire attorneys and experts. This involvement by Aipa and Kam in the handling of this claim was stated by Kam to be at the direction of Trustee Richard Wong who wanted to see what we could do to “settle this claim”, which had previously been denied by Mullen based on their findings that the flood damage was due to “an act of God”.
► I refused to sign the annual financial statements prepared by Coopers & Lybrand for P&C, based on efforts by Henry Peters, Nathan Aipa and Louanne Kam to direct P&C’s operations and investments in defiance if IRS tax regulations, including the payment of claims to favored individuals, and giving contracts to third-party contractors without proper bids. (These directives, if followed, would also result in unfair claims settlement practices, and in falsified claims reserves and financial reports in violation of Hawaii insurance codes.) I discussed these irregularities with Cary M. Okawa and Dennis Tsuhako of Coopers & Lybrand on October 18, 1996, and followed-up with a letter dated November 20, 1996, in which I enclosed documents that provided evidence of these wrongful acts. A copy of this letter was sent to the Hawaii Insurance Commissioner.
Persons having knowledge or information of these actions are believed to include:
KAMEHEMAHE SCHOOLS BISHOP ESTATE:
Henry Peters, Trustee
Richard S.H. Wong, Trustee
Oswald Stender, Trustee
Lokelani Lindsey, Trustee
Gerard Jervis, Trustee
Matsuo Takabuki, (former) Trustee and current consultant
William Richardson, (former) Trustee and current consultant
Myron Thompson, (former) Trustee
Rodney Park, Director of Administration Group
Wally Chin, Controller
Yukio Takemoto, Budget Director
Leeann Crabbe, Budget Mgr.
Gilbert Ishikawa, Tax Manager
Myron Mitsuyasu, Asst. Tax Manager
Dennis Fern, (former) Internal Auditor
Andrea Oshiro, (former) Internal Audit Dept.
Ramona Hinck, Accounting Mrg.
Doyal Davis, (former) Budget Mgr.
Maryanne Inouye
Bruce Nakaoka, Real Estate Investments Department Manager
Eric Martinson, Financial Assets Manager
Aaron Au, Financial Assets Division
Daniel Jones, Financial Assets Division
Nathan Aipa, General Counsel & Director, Legal Group
Linda Jacobs, Legal Assistant
Louanne Kam, Director, Litigation and Risk Management Division
Gilbert Tam, (former) Director, Administration Group
Guido Giacommetti, (former) Financial Assets Manager
Sydney Keliipuleole, Asset Management Div.
Charles Maeda, Information Systems Div.
Neil Hannahs, Asset Management Group
Michael Chun, Pres., Kamehameha Schools
Ed Tabangay, (former) Engineering Dept.
Marcia Diver, Information Services Division
Emalia Keohokalole, Secretary
Colleen Wong, Esq.
Phil Chang, Esq.
Lyn Anzai, Esq.
Allan Yee, Esq.
Sam Hata, Director of Administration
Allen Young, Engineering Dept.
Sandie Wicklein, Director of Personnel
Pat Chalfin, (former) Personnel Dept.
David Dunigan, Litigation & Risk Management Div.
Julie Kawakami, Litigation & Risk Management Div.
Kim Kanalaupuni, Litigation & Risk Management Div.
Daniel Pires, Documentary Dept.
Leslie Yamashita, Notary Public
Werylend Tomczyk, Notary Public
Luana Sala, Notary Public
Lori Loo, Notary Public
William Rosehill (former employee)
Henry H. Peters, Chairman, Board of Directors
Gilbert Tam, Director
William S. Richardson, Director & Secretary/Treasurer
Peter J. Lowe, Vice-President
Rocco Sansone, Marsh & McLennan, Inc., Broker
Nathan T.K. Aipa, Asst. Sec./Asst. Treasurer
Richard Wong, President
Glenn Hara, Treasurer
Henry Peters, Chairman, Board of Directors
ROYAL HAWAIIAN SHOPPING CENTER, INC:
Richard Wong, President
Glenn Hara, Treasurer/Controller
Cary M. Okawa, C.P.A.
Dennis Tsuhaka, C.P.A.
Carl Kobayashi, C.P.A.
Peter Trask, Esq.
James Duffy, Esq.
Benjamin Matsubara, Esq.
Colbert Matsumoto, Esq.
Rey Graulty, Insurance Commissioner
Wayne Metcalf, (former) Insurance Commissioner
Margery Bronster, Attorney General
Kevin Wakayama, Deputy Attorney General
Robert Kuroda
Neal Seamon
Gary Gowdy
Patricia Onogi
Christine Lee
M&M INSURANCE MANAGEMENT SERVICES, INC.:
Peter Lowe, Sr. Vice-Pres.
Garrett Liu
UNITED EDUCATORS INSURANCE GROUP:
Joseph McCullough
Milton T. Perkins
M. Tony Rangel
ARKWRIGHT INSURANCE COMPANY/HOBBS GROUP:
John McGrath
Tim McGrath
Mary Brieghner
Documents which relate to these allegations include:
► Federal and state tax returns, financial statements, invoices, credit memos, receipts and disbursements pertaining to insurance premium transactions, payments for insurance claims including legal expenses, and payments to Marsh & McLennan, Inc., M&M Insurance Management Services, Inc., M&M Protection Services, Inc., and William Mercer Co. for KSBE, PHC, and P&C.
► My letter dated December 29, 1996, to Trustees, with all enclosures.
► My letter dated 11/20/96, to Coopers & Lybrand, with all enclosures, and any written response or record of discussion between Coopers & Lybrand and KSBE/P&C/PHC, or with M&M and/or M&MIMS, regarding this letter.
► P&C’s application to the Insurance Commissioner, State of Hawaii, for a license to operate as a captive insurance company, including all supporting documents.
► Minutes from P&C’s Board of Directors meetings.
► P&C’s Operations Manual.
► My draft of P&C’s “Arms-Length Guidelines”.
► All sections of KSBE’s Policy and Procedures Manual which relate to conflicts of interest; maintaining arms-length relationships; bidding and contract procedures for third party contracts.
► The following documents relating to Waterpark Tower Environmental Remediation project: Bid Specifications; List of Bidders; Bid Bonds; all Contracts (including Ed Tabanagay’s); Performance Bonds; Staff Reports; all invoiced.
► The contract (referred to in newspaper reports as an “insurance policy”) between KSBE and Robert Rubin guaranteeing the value of Mr. Rubin’s financial interests in Goldman Sachs.
► Copies of any loan guarantees made by KSBE to any trustees, employees or business partners in any partnerships, joint ventures, or corporations in which KSBE had an interest.
► Sections of KSBE’s Employee Manual, staff reports, internal and external letters, memorandum, and written opinions relating to “arms-length” and conflicts of interest issues.
► Information, correspondence and staff reports relating to the “Taxpayers Bill of Rights II”, including KSBE’s lobbying activities and funds expended in it unsuccessful efforts to defeat the bill.
► The following Bate-stamped documents which I was required to return to KSBE under court injunction.
6-50; 139-141; 142-151; 152-153; 154-155; 156-157; 158-159; 160-162; 165; 167; 176; 177-180; 182; 183-184; 185-188; 225-226; 227; 228; 229; 230; 242; 243; 258-259; 260; 261-262; 263; 264; 265; 266; 267; 268; 269-270; 271; 272; 274-275; 276-279; 281-282; 283-344; 391; 393-394; 397; 407-408; 409; 410-421; 440-441; 442-453; 454; 459; 461; 462-472; 473-474; 475-476; 477-478; 479-498; 543; 544-545; 546-547; 548; 549; 550-552; 553; 554; 562-564; 565-569; 621; 622-624; 733-734; 761-762; 840-925; 976-977; 978-979; 980-991; 1008-1009; 1019-1023;1076-1077; 1078-1079; 1980; 1081-1082; 1989; 1133-1150; 1151-1212; 1260-1261; 1270-1272; 1273; 122-1427; 1428-1429; 1430-1433; 1434; 1435-1444; 1455; 1446; 1447; 1451-1458; 3073-3129; 3130.
Thank you for your interest in this matter. I will cooperate fully in your investigation.
Very truly yours,
Bobby N. Harmon