Harmon’s Letter to the Kamehameha Schools’ Master
Sightings from The Catbird Seat
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November 24, 1997
HAND DELIVERED
Colbert M. Matsumoto, Esq.
Master, Bishop Estate
Amfac Tower, Suite 2000
700 Bishop Street
Honolulu, Hawaii 96813
RE: Kamehameha Schools Bishop Estate (KSBE); Pauahi Holdings Corporation (PHC); P&C Insurance Company, Inc. (P&C)
Dear Mr. Matsumoto:
This is to provide information regarding what may be conflicts of interests, breach of fiduciary duties and other wrongful acts by trustees, officers, directors, managers and other employees of the referenced entities.
I was employed by Kamehameha Schools Bishop Estate (KSBE) as their Risk/Insurance and Safety Manager from November, 1988. I was president of P&C Insurance Company, Inc. (P&C), a for-profit subsidiary of Pauahi Holdings Corporation (PHC) from October, 1994. I was terminated from my position at KSBE by Nathan Aipa on November 20, 1996; and from my position at P&C by Henry H. Peters on the same date.
My responsibilities at KSBE included arranging insurance and bonds for the estate and its subsidiaries, and providing oversight for claims settlements which were handled by the insurance carriers or independent adjusters. Lines of coverage included trustee bonds; bid and performance bonds; crime insurance, including employee dishonesty; directors and officers liability; fiduciary liability; workers compensation; and other property and casualty coverages. Safety was another of my primary responsibilities.
My belief is that the main reason for both terminations was the fact that I would not follow the directives of Henry Peters, Nathan Aipa, Louanne Kam and others to carry out what I believed were illegal or wrongful acts, including tax fraud and the breach of fiduciary duties.
When I was hired by KSBE, I reported to Gil Tam, who was at that time the Director of Personnel, and later became the Administration Group Director. While in this department, I was interviewed by the masters who requested information on the insurance programs including summaries of insurance policies, claims, etc. After I was transferred to the Legal Group, I no longer was given the opportunity to meet personally with the masters. Instead, Nathan Aipa would ask a paralegal or a legal secretary to obtain insurance summaries or other documents requested by the master. Likewise, I never had the opportunity to talk with the IRS auditors that were in the KSBE offices for several months in 1996. I considered this to be the result of Mr. Aipa’s desire to control the disclosure of information that might raise questions of improprieties on the part of the trustees and others.
The following are examples of breaches of fiduciary duties; questionable tax returns; intentional violation of federal and state statutes; discrimination and other wrongful acts:
1. There was a failure to disclose conflicts of interest and other financial information in federal tax returns as regards personal investments by certain trustees, executives, managers and employees in related for-profit 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 being breached. For example, at the direction of Henry Peters, Nathan Aipa, Louanne Kam, Eric Martinson, and others, KSBE paid insurance premium charges, legal fees and claims costs that should have been paid by for-profit subsidiaries (e.g. Kukui, Inc., Sino Finance, Unison Pacific, SoCal, AFCO, Paradise Petroleum, etc.), or by individual trustees, officers, directors or employees.
3. Services were being provided by KSBE employees, including myself, to P&C and other for-profit entities at no cost to the subsidiaries. In effect, KSBE is subsidizing these for-profit entities, which results in larger profits for the subsidiaries (and possibly larger commissions for the Trustees).
4. Henry Peters, Nathan Aipa and Louanne Kam were attempting to control the operations of P&C, including claims. This included directing the payment of “excess benefits” to independent contractors for non-bid or non-existent contracts. For example, P&C contracted with M&M Insurance Management Services, Inc. (M&M IMS), a subsidiary of Marsh & McLennan, Inc., for captive management services. This contract was on a time and expense basis, with a cost estimate of around $60,000. Yet the broker, Marsh & McLennan, Inc., was billing P&C an additional flat $200,000 annual fee. There was no contract for these services, and no satisfactory explanation was ever given for the charges. One belated explanation given was that this fee included safety and loss control services and “brokerage” services. However, P&C had paid M&M Protection Services, Inc. (another related company) under a separate “time and expense” contract for the safety services, and M&M had received commissions from the reinsurance carrier for their “brokerage” services. This constituted duplicate billing and well as over-billing for these services. Despite my objections as president of P&C, Peters, Aipa and Kam were adamant that I continue to pay these unexplained overcharges by M&M. In addition to these overcharges, I obtained property insurance proposals from another broker, Hobbs Group, which greatly improved coverages over M&M’s program and reduced the costs by over $600,000 a year. Nathan Aipa and Louanne Kam desperately attempted to prevent Hobbs Group from obtaining this account and to keep M&M on as Broker of Record, even at the risk of losing this program and its savings to the estate.
5. Insurance premiums and loss costs were being improperly allocated to lessees and tenants of KSBE properties. Many of the insurance policies for KSBE and its subsidiaries combine coverages for all entities under the same “blanket” policies. 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. 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 charges to the tenants and lessees of these projects. The “overcharges” being made by M&M would also be included in these insurance costs that were passed through to tenants and lessees.
6. A portion of these improperly allocated insurance costs were also paid from the millions of dollars of Federal grant funds, including grants for the school’s ROTC program. On KSBE’s tax returns, Form 990, the estate states that it does not discriminate on the basis of race, while it is well known that in order to apply for admission you must complete a questionnaire which inquires of the applicant’s racial background.
7. Several of P&C’s claims were being directed by Louanne Kam or other KSBE in-house attorneys. An example was the Larry Ching flood damage claim. Kam, in conjunction with Aipa, wanted to hire an outside attorney and an expert to handle this claim. In keeping with P&C’s “arms-length” guidelines and its Operations Manual, only P&C’s contracted independent adjuster, John Mullen & Co., was authorized to hire attorneys and experts. Furthermore, this involvement by Aipa and Kam was, according to Kam, 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 this was “an act of God”.
8. Annual financial statements for KSBE and P&C, which were prepared by Coopers & Lybrand (C&L), failed to disclose large claims, and to show adequate financial reserves for these claims (e.g., the McKenzie and Kona Enterprises, claims). I had several discussions with the auditors from C&L during which I expressed my concerns regarding the failure to disclose this information, and on November 20, 1996, I documented some of the recent discussions in a letter to C&L, with a copy to the State Insurance Commissioner. To my knowledge no action was taken by either C&L or the Insurance Commissioner.
9. It was reported that KSBE guaranteed several large bank loans (including loans from Bank of Hawaii) to “insider partners” in several investments.
10. 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 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. (This arrangement would also appear to constitute a conflict of interest situation between the federal government, Robert Rubin, Goldman Sachs, and the wealthiest tax-exempt educational charity in the United States.)
11. 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 and/or falsifying of staff reports and contracts; directing notaries public to notarize documents without witnessing the signatures, or the signatories personally signing the notary logs; collusion with independent contractors to conceal and cover-up wrongful acts; discriminatory practices in hiring; and misuse of the “attorney-client privilege” to prevent the disclosure of these acts.
12. In my capacity as president of P&C, I refused to sign the annual financial statements prepared by Coopers & Lybrand for the fiscal period July 1, 1995 to June 30, 1996. The basic reasons for my refusal were the attempts by Henry Peters, Nathan Aipa and Louann Kam to direct all areas of P&C’s operations and investments, including the improper awarding of insurance contracts and settlement of claims, and the failure to set proper loss reserves. I discussed these irregularities with Cary Okawa and Dennis Tsuhako of Coopers & Lybrand on October 18, 1996, and followed-up with a letter dated November 20, 1996, in which I enclosed documents that provided evidence of these wrongful acts. A copy of this letter was sent to the Hawaii Insurance Commissioner.
13. There were intentional violations of the Environmental Protection Act (EPA) and other environmental regulations, with various attorneys in the Legal Group actively participating in discussions in order to keep the actions of trustees confidential under the “attorney-client privilege” doctrine. The refusal to act promptly to remediate known environmental problems endangered public safety. Two health teachers complained for months that they felt that there was asbestos in their classrooms, and they were assured that there was not. Eventually, the teachers sent samples of the ceiling tile to a testing lab, and asbestos was indeed found in the ceiling materials. The materials were eventually replaced, but the two teachers were labeled as “chronic complainers” and “trouble-makers”. Over 200 known sites on KSBE properties were identified in a “confidential” survey about two years ago. I was not privileged to see the results of the survey. To my knowledge, little or nothing was done to remediate any of these sites. There was known environmental impairment at the Nationwide Industries’ chemical plant in Pandora, Ohio, which the estate did nothing about for the several years it owned Nationwide (the name was later changed to Snap Products, Inc.). When the company was sold, KSBE retained the liability for clean-up of the site. To my knowledge, there was no clean-up during the time I was employed by KSBE. The one site that environmental clean-up was attempted was the Waterpark Tower site. This project was delayed for months, while tenants and neighbors were exposed to the unknown effects of wind-blown and water- borne hazardous chemicals. Even then, the remedial work was questionable, performed by an uninsured, non-licensed contractor, with hazardous materials being transported from the site by an improperly insured (for environmental liability) trucker.
14. The trustees knowingly disregarded regulations under the Americans with Disabilities Act (ADA). Colleen Wong informed the committee formed to handle the ADA that the schools were exempt from the regulations because it was “a religious institution”. This was despite an outside legal firm’s prior opinion that KSBE indeed fell under the regulations. A multi-million dollar class action suit filed against the estate and its subsidiaries indeed proved the legal department again to be wrong in its advice. Also the estate failed to make reasonable accommodations for persons with disabilities. An example is Marcia Diver, who became disabled on the job from bilateral carpal tunnel syndrome from heavy use of the computer. After having an operation, she was brought back to a job which required even heavier use of the computer. Consequently, her disability worsened. KSBE’s claim committee attempted to bring her back to work in a lighter duty position, but this proposal was successfully defeated by Colleen Wong and Carol Koza from the Personnel Department.
15. Insurance claims were not being reported by the Legal Group (e.g. Kona Enterprises, McKenzie Methane), and were being mismanaged by Aipa, Kam and others when they were reported. This resulted in hundreds of thousands of dollars in legal costs and settlements lost by the estate for failure to comply with the terms of the insurance contracts.
16. Contracts were not being put out for bid proposals in accordance with the trustees’ policies and procedures. For example, the Waterpark Towers environmental remediation contract was supposedly put out for bid. However, it appears that there were no bid specifications and no bid bonds were required for this project. (A consultant, Ed Tabangay, told me that he waived the bond requirements.) One of the bidders told me that there were no specifications, and that the bid was basically “done over the phone”. The low “bidder” was Stay & Sons, which was unable to furnish evidence of proper insurance for the contract. It also appeared that the company was not a licensed contractor, and the remediation process apparently had not been proven to work on this type of chemical (PCB). When the initial on-site remediation treatment was unsuccessful, a change order was issued which approximately doubled the original bid. To top it off, Trustee Lokelani Lindsey’s son just happened to be a key employee for Stay & Sons, which has all the appearances of a conflict-of-interest.
17. Racial discrimination was evident, obviously in the admissions policy for the schools (reportedly the last racially segregated school in the United States), but also in hiring practices. I was informed by -------------- that her department had advertised for a job opening, and that from a number of applicants they had selected the most qualified individual (who happened to be from the mainland) and had made an offer to him. According to -------- in a confidential phone conversation with me, she was called in to the office of her superior, Rodney Park, and was told that Henry Peters wanted her to hire one of the less qualified applicants simply because she was a Kamehameha graduate. She was also the wife of a supervisor at the schools.
Religious discrimination was also evident, and it took a long, expensive lawsuit before the estate was forced to hire other than protestant teachers.
Some of these situations I discussed with persons within the organization or connected with the organization. I reported my concerns regarding the Waterpark Tower situation (among others); co-investments of trustees and others in projects controlled by KSBE; conflict of interest situations; non-bid contracts, and other issues with the internal auditor, Dennis Fern, and his assistant Andrea Oshiro. I reported the pressures being put on me by Nathan Aipa and Louanne Kam to commit illegal acts and to breach my fiduciary duties, with Sandie Wicklein, Director of Personnel, and Pat Chalfin. I had many discussions with Karen Wilkenson, who was responsible for compiling KSBE’s Policies and Procedures manual, concerning the Legal Group’s “ostrich” approach to compliance with environmental protection laws. I discussed the “arms-length” and conflict of interest issues with Gil Ishikawa and Myron Mitsuyasu and with representatives from Coopers & Lybrand. I discussed the Legal Group’s improper interference and improper handling of claims with several claims supervisors and adjusters at John Mullen & Co., notably Robert Kuroda, Gary Gowdy and Neal Seamon. I reported my concerns regarding the excessive charges and improper conduct of M&M to the Insurance Commissioner.
Persons having direct knowledge or information of these acts I have described are believed to include:
KAMEHAMEHA 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 (deceased)
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 Mgr.
Doyal Davis, (former) Budget Mgr.
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) Director, Asset Management Group
Mitch Gilbert, (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.
Rey Graulty, Insurance Commissioner
Wayne Metcalf, (former) Insurance Commissioner
Margery Bronster, Attorney General
Kevin Wakayama, Deputy Attorney General
Robert Kuroda
Neal Seamon
Gary Gowdy
M&M INSURANCE MANAGEMENT SERVICES, INC.
Peter Lowe, Sr. Vice-Pres.
Garrett Liu
UNITED EDUCATORS INSURANCE GROUP
ARKWRIGHT INSURANCE COMPANY/HOBBS GROUP
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 by KSBE and P&C to Marsh & McLennan, Inc., M&M Insurance Management Services, Inc., M&M Protection Services, Inc., and William Mercer Co.
► 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.
► 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.
► My letter dated December 29, 1996, to Trustees, with all enclosures.
► P&C’s Operations Manual.
► My draft of P&C’s “Arms-Length Guidelines”.
► All sections in KSBE’s Policy and Procedures Manual which relate to conflicts of interest; maintaining arms-length relationships; bidding and contract procedures for third party contracts.
► Minutes from P&C’s Board of Directors meetings.
► The following documents relating to the Waterpark Tower Environmental Remediation project: Bid Specifications; List of Bidders; Bid Bonds; all Contracts (including Ed Tabangay’s); Performance Bonds; Staff Reports; all invoices.
► 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. All documents related to this contract, including actuarial studies, reinsurance contracts, surety agreements, etc.
► 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 its unsuccessful efforts to defeat the bill.
► The following Bate-stamped documents which I was required to return to KSBE under court injunction:
1-3; 4-5; 6-50; 61-63; 65-66; 67-80; 120-121; 132-134; 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; 840-925; 976-977; 978-979; 980-991; 1008-1009; 1019-1023; 1076-1077; 1078-1079; 1080; 1081-1082; 1089; 1133-1150; 1151-1212; 1260-1261; 1270-1272; 1273; 1422-1427; 1428-1429; 1430-1433; 1434; 1435-1444; 1445; 1446; 1447; 1451-1458; 3073-3129; 3130.
Thank you very much for your efforts in helping restore control of the legacy of Bernice Pauahi Bishop to those who have a genuine concern for the true beneficiaries--the children of Hawaii.
Very truly yours,
Bobby N. Harmon
cc: State Attorney General Margery Bronster
John Goemans, Esq.
Roy Hughes, Esq.
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Last updated January 5, 2003 by The Catbird