THE MYTH AND THE METHANE: Following the Wampum Trail.

THE MYTH AND THE METHANE

Following the Wampum Trail

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THE MYTH

A group of wealthy pale faces (and some orientals and part-Hawaiians) are selling back the drilling rights that they purchased from a Native American Indian Tribe.

That's a fact, Jack!

The myth is that the Indians are not getting scalped in the process.

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THE METHANE

February 3, 2003

Estate sells stake in gas
operation for $160 mil

Bishop Holding Corp. posts a $70 million gain on
an investment once considered risky

By Rick Daysog, Honolulu Star-Bulletin

The Kamehameha Schools sold its controversial investment in a Texas-based methane gas operator today for about $160 million.

Bishop Holding Corp., the trust's for-profit unit, signed an agreement this morning to sell Kukui Inc. to the Southern Ute Indian Tribe, according to people familiar with the deal.

The deal is part of the $6 billion trust's strategy to divest itself of the speculative investments that it acquired during the late 1980s and 1990s and invest in more liquid, blue-chip holdings that better suit the trust's core educational mission.

The $160 million price tag allows the estate to post a $70 million profit on an investment that critics had written off years ago as one of its biggest money-losing holdings, people familiar with the deal said.

Dennis Fern, Kukui's president, had no immediate comment this morning. An estate spokesman could not be reached.

Representatives of the Southern Ute Tribe, who are in Honolulu this week, could not be reached.

The Southern Ute Tribe owns the fee interest to much of the land on which Kukui's drilling properties are located.

In the deal, the tribe will acquire the drilling rights and the leases owned by Kukui and will merge Kukui's assets into its operating company. No land was involved in the sale.

Kukui, formerly known as McKenzie Methane Inc., operates 150 coal bed methane wells in Alabama, Colorado, New Mexico and Texas.

Led by former trustee Matsuo Takabuki, the estate initially acquired a minority stake in the oil and gas operator during the 1980s. At the time it was run by the McKenzie family of Houston.

The Kamehameha Schools took over the venture after McKenzie was forced into bankruptcy protection in 1989.

The estate initially posted an $85 million loss on the venture when McKenzie went into bankruptcy protection. It recorded another $40 million capital loss in 1996.

At the direction of Fern and former trustee Oswald Stender, the estate later restructured Kukui and the company has since become profitable and has acquired additional oil and gas properties.

The Kukui investment also received notoriety when the bankruptcy proceedings revealed that former Kamehameha Schools trustees Takabuki, Myron "Pinky" Thompson, William Richardson and several former staffers invested more than $2 million in McKenzie Methane.

The personal investment was cited by critics as a conflict of interest while others argued that the deal was unsuitable for a charitable trust....

May 16, 2002

Kamehameha uses Enron firm in audit

By Jim Dooley, Honolulu Advertiser

The beleaguered accounting firm Arthur Andersen, on trial in Houston for obstructing justice in the federal investigation of Enron Corp.'s collapse, was paid $2.1 million last year to help audit Hawaii's largest nonprofit organization, the $6 billion Kamehameha Schools, according to the organization's tax return, made public yesterday.

Eric Yeaman, chief financial officer of Kamehameha Schools, was an Arthur Andersen employee, working as "internal auditor" of the schools, when the Kamehameha trustees decided to hire him for the CFO post in July 2000.

Arthur Andersen has continued to serve as internal auditor and provides other services to Kamehameha Schools. The company will receive a slightly lower sum this year than the $2.1 million it was paid last year, according to Yeaman and to the tax return.

Yeaman said he has a conflict of interest in dealing with Arthur Andersen and "leaves the room" when there is any discussion at Kamehameha Schools about a business transaction with the accounting firm.

Hamilton McCubbin, chief executive officer of the schools, said the Honolulu office of Arthur Andersen has demonstrated "outstanding integrity" in its dealings with Kamehameha Schools.

The internal auditing contract with Arthur Andersen expires this summer, and the schools plan to hire their own internal auditing staff rather than rely on an outside company for the work, McCubbin said.

But an outside firm will be needed to help in that transition and to provide independent expertise when needed by the internal auditing staff, McCubbin said.

Arthur Andersen will be free to bid for that work, he said.

Once the fourth-largest accounting firm in the world, Arthur Andersen has lost clients steadily in the wake of the Enron scandal. In addition to the criminal trial now going on in Houston, Arthur Andersen has been named in a class action lawsuit filed by Enron shareholders. The firm has been selling offices and assets around the country, and could face bankruptcy in the near future, according to news reports.

The Kamehameha Schools tax return shows net assets of more than $4 billion. A wholly owned subsidiary, Kamehameha Activities Association, filing a separate return for the first time, listed assets of more than $2 billion....

For more on Arthur Andersen, GO TO > > > P-s-s-t, wanna buy a good audit?

* * *

May 23, 2002

CEO's daughter gets job at Kamehameha

Hamilton McCubbin played
no role in the hiring, the trust says

By Rick Daysog, Honolulu Star-Bulletin

The Kamehameha Schools has hired the daughter of Chief Executive Officer Hamilton McCubbin to a part-time position in a potential conflict of interest.

In a 38-page report recently sent to the Internal Revenue Service, the estate's internal auditor Arthur Andersen LLP said that the trust hired "an immediate family member of a top (Kamehameha Schools) executive" to a temporary job, starting March 26.

Arthur Andersen's report -- which also was given to the estate's five trustees, the Attorney General's Office and the trust's court-appointed master Ben Matsubara -- did not identify the executive and his relative. But the trust confirmed that McCubbin's daughter, who is a doctoral candidate at a mainland college, was hired at the estate as a research assistant for the summer....

Peter Hanashiro, an Arthur Andersen partner, declined comment when asked why the firm did not identify McCubbin in the report. Deputy Attorney General Hugh Jones also declined comment.

Arthur Andersen has served as the estate's internal auditor since February 2000. For the fiscal year ending June 30, 2001, the estate paid the accounting firm $2.1 million.

The report, known as the Closing Agreement Compliance Monitoring Report, was required under the February 2000 closing agreement between the IRS and the Kamehameha Schools.

In the closing agreement, the IRS reaffirmed the estate's tax-exempt status after the $6 billion charitable trust agreed to implement major management reforms and remove former board members Henry Peters, Richard "Dickie" Wong, Lokelani Lindsey, Gerard Jervis and Oswald Stender.

The IRS and the Attorney General's Office alleged that the former trustees engaged in numerous conflicts of interest and self-dealing.

The reforms included a strict conflict-of-interest policy.

The Star-Bulletin obtained a copy of Arthur Andersen's report from the Attorney General's Office after filing a formal request under the state's open-records law.

The Star-Bulletin initially asked the estate for a copy of the compliance monitoring report, but trust officials denied the request. The estate said such reports typically cover internal and operational matters that are "often of a sensitive nature."

The bulk of Arthur Andersen's report described how trust officials have complied with the terms of the IRS closing agreement.

The report also described a management dispute involving the head of Kukui Inc., a for-profit trust unit which owns McKenzie Methane Corp., a Houston-based natural gas producer.

In a Feb. 27 letter to senior trust executives, Kukui President Dennis Fern alleged that Wendell Brooks, the former head of the estate's nonprofit Bishop Holdings Corp., abused his power and intimidated Kukui's management.

Fern, the estate's former internal auditor, complained that several activities involving Kukui and Bishop Holdings were not conducted at arm's length and were driven by the estate's asset allocation strategies, Arthur Andersen said.

Bishop Holding is the parent of Kukui's sole shareholder.

The estate said it hired an outside law firm to review Fern's allegations.

The law firm found that the trust did not violate any of its internal policies and that there were sufficient checks and balances to avert potential abuses of power.

Fern, the estate's former internal auditor, could not be reached.

Brooks declined comment....

- For more on the IRS Closing Agreement, GO TO > > > Harmon's Letter to the IRS

- For more on Kamehameha's outside law firms, GO TO > > > Harmon's Letters to Hamilton McCubbin

< < < FLASHBACK < < <

June 16, 2000

Kamehameha Schools' statement of losses may provide grist
for a state suit against the ex-trustees

By Rick Daysog, Star-Bulletin

Despite unprecedented financial growth, the Kamehameha Schools recorded more than $335 million in losses and writeoffs during the past decade.

An internal trust document included in recent court filings reveals the $6 billion charitable trust declared more than $235 million in capitol losses and wrote off more than $100 million in bad investments since 1989.

The losses and write-offs -- more than three times the Kamehameha Schools' annual $100 million educational budget -- were covered by about $3 billion in revenues that the trust took in during the same 10-year period. But the troubled investments underscore criticisms that the estate's embattled former trustees mismanaged assets and took ill-advised bets on speculative ventures.

"The former trustees like to tell the public about their home runs but not their strikeouts," said Randy Roth, University of Hawaii law professor and co-author of the 1997 "Broken Trust" article that prompted the state to open its investigation of the former trustees.

"One gets the impression that the investments were made on an ad hoc basis without much attempt to diversify in meaningful ways."

A write-off means that the estate considers the complete investment a loss. A capital loss, on the other hand, represents that portion of an investment that is impaired.

The trust's statement of losses -- which covers the period between June 30, 1989 and Jan. 20, 2000 -- will likely serve as a key exhibit in Attorney General Earl Anzai's suit seeking multimillion-dollar surcharges against former trustees Henry Peters, Richard "Dickie" Wong, Lokelani Lindsey, Gerard Jervis and Oswald Stender.

The state's suit, which is scheduled to go to trial Sept. 18, alleges the ex-board members took excessive pay, mismanaged Kamehameha Schools' educational programs and incurred more than $200 million in investment losses during their tenures.

The former trustees have denied wrongdoing, citing the estate's recent string of record revenues. They point to the $552 million windfall from last year's initial public offering of Goldman Sachs Group, which pushed the trust's 1999 revenues to more than $800 million.

An estate spokesman had no comment. But the Kamehameha Schools' interim trustees are taking steps to clean up the trust's investment portfolio. They recently wrote off $50 million in bad investments and are implementing a new investment policy that focus on blue-chip investments.

The loss statement compiled by the interim board of trustees provides a broad and more detailed look into the estate's troubled holdings, many of which were initiated in the mid-1980s by former trustee Matsuo Takabuki.

The estate's largest write-off was for $50 million. It involved a 1987 investment in Cadillac Fairview Corp., a Toronto-based office and retail property developer.

The estate, following the advice of Chicago-based JMB Realty Corp., joined 38 institutional investors in the $2.6 billion leveraged buyout of Cadillac Fairview, but the investment went south after the mainland recession of the early 1990s forced the developer into bankruptcy protection.

In 1996, the Kamehameha Schools suffered a $40 million capital loss in McKenzie Methane Inc., a Houston-based natural gas producer. The loss came after McKenzie Methane was placed under federal bankruptcy protection.

McKenzie Methane has since emerged from bankruptcy and has been producing operating income for the estate.

The estate also recorded a $30 million loss in 1992 from its investment in Pembridge Associates, a mainland investment company that acquired a large England-based paper products and packaging materials conglomerate named DRG in a $900 million leveraged buyout in 1989.

The Kamehameha Schools partners in the deal included Frederick "Ted" Field, an heir to the Marshall Field department store fortune and an investor in McKenzie Methane, and North Carolina investor Clay Hamner.

Hamner figures in a number of money losing ventures for the estate, including Hanford's Inc., a North Carolina ornament maker founded by the family of former presidential candidate Elizabeth Hanford Dole, and DC Land Group, which developed the posh Robert Trent Jones golf course in Virginia.

During the year ending June 30, 1993, the Kamehameha Schools realized a $7.4 million loss in Hanford's and a $2 million loss from DC Land.

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July 12, 2000

Kamehameha Schools Hires
Financial Officer

By Rick Daysog, Honolulu Star-Bulletin

The Kamehameha Schools announced today that it has hired accountant Eric Yeaman as its first chief financial officer.

The $6 billion charitable trust said Yeaman, a senior manager in the accounting firm of Arthur Andersen LLP and a director of the estate's internal audit office, will oversee budget functions, short-term investments, tax issues and financial planning.

Hamilton McCubbin, chief executive officer, said Yeaman will strengthen the trust's management team as it expands its educational programs.

"Mr. Yeaman's extensive knowledge of the Kamehameha financial and accounting system ... his proven integrity and sterling reputation as a leader and financial officer and his consultative management style make him the perfect fit with our 'go forward' plans for the future of Kamehameha Schools," McCubbin said.

Yeaman's appointment fills the last vacancy on the executive management team. The trust, which has been under court order to implement a CEO-based system of management, recently named local real estate executive Wendell Brooks as chief investment officer and attorney Colleen Wong as chief legal officer.

Retired Brig. Gen. Dwight Kealoha is serving as the trust's acting chief operating officer, filling in for former general counsel Nathan Aipa.

Aipa took a paid leave of absence in May after the trust initiated an internal investigation into trust's outside law firms and accountants.

Yeaman, who assumes his new post Monday, was part of the Arthur Andersen team that conducted a court-mandated financial and management audit of the Kamehameha Schools that led to major reforms of the trust's operations.

The 336-page audit found that the estate under former trustees Henry Peters, Richard "Dickie" Wong, Oswald Stender, Gerard Jervis and Lokelani Lindsey generated subpar investment returns and withheld more than $300 million of trust income from its primary mission of educating native Hawaiian children....

For more on Arthur Andersen, GO TO > > > P-s-s-t, wanna buy a good audit? ; The Story of Enron

* * *

August 1, 1998

Landowners propose methane settlement

By Bret Bell, Herald Staff Writer

A coalition of non-Indian mineral owners accepted the Southern Ute Tribe's offer to negotiate a settlement in its coal-bed methane lawsuit Friday, saying it wants a deal identical to the one some other landowners got when the operating companies they leased to decided not to fight the tribe's claims.

The La Plata County royalty owners, represented by the nonprofit Land Owners Coalseam Committee (LOCC), offered the settlement in a proposal to the tribe sent to the Herald. It came a week after Southern Ute Chairman Clement Frost sent a letter to the Herald asking for a settlement rather than risk further antagonism with the tribe's neighbors.

The public exchange of letters comes in the aftermath of a July 20 federal appellate court ruling that the Southern Ute Tribe owns the gas landowners had previously thought was theirs. The judges decided that coal-bed methane is part of the coal estate reserved by the federal government for the benefit of the tribe earlier this century.

It is not known whether the tribe will seek or win back-royalties from the 2,000 to 3,000 La Plata County mineral owners, retroactive to when the tribe sued in 1991.

An estimated 30 percent of the royalty owners are protected from suspension of their checks -- at least until a final, nonappealable decision favoring the tribe has been reached in the case -- because about 10 operators working their leases entered into settlement agreements with the tribe.

But Amoco Production Co. -- the largest coal-bed methane producer in the county -- and a few other operators decided to fight it out in court. They stopped making royalty payments directly to the mineral owners last year, placing the money in escrow instead.

The LOCC says it is confident the case will eventually be won on appeals, but concedes it could be more than a decade before a final decision is made -- too long of a time for landowners who say they depend on the royalty income.

"If we had to litigate all the way through to the Supreme Court, I feel strongly that we can win. But, I don''t know if at that point you can win," said Don Gosney, who sits on the LOCC executive committee and is one of the biggest mineral owners in the county. "We''ve got a gun to our heads right now. Personally, I''d really like to settle."

Members of the Southern Ute Tribal Council and lawyers for the tribe could not be reached for comment Friday.

In addition to the abrupt loss of income, the landowners fear they will have to pay the back-royalties and then be required to repay the Internal Revenue Service tax credits previously taken for natural gas produced from the coal.

"It's unfortunate not to be leased to (one of the operators) that settled," Gosney said. "If the tribe goes after the back-royalties, it could cause hardship and damage almost beyond belief." Gosney said he stands to lose about $1 million annually from royalties if the appellate court ruling stands.

The LOCC's proposal asks the tribe to extend to all mineral owners the benefit of settlements previously entered into with the 10 or so gas well operators last year.

Among the operators that settled were MarkWest, SG I, SG II, Palo, Arco, Conoco, McKenzie Methane, Tiffany, Meridian and Emerald.

The settlement reached gives the tribe 5 percent of everything those operators produce. As part of the deal, the Southern Utes agreed not to seek back-royalties from the landowners regardless of the court decision and allowed them to continue receiving payments until a definitive court judgment was made.

The LOCC is asking for the same deal, absent the settlement offered to the oil and gas operators. It is asking that Amoco participate in negotiations with the LOCC and the tribe.

"(We) are requesting that the Southern Ute Indian Tribe act out of its generosity, as a good neighbor, to remove at least a portion of the uncertainty and potential hardship from mineral owners affected by the pending litigation," the proposal said.

Gosney said in exchange, the tribe would gain a friendly neighbor and an end to costly litigation.

"The lawyers are going to be the only ones who really win here if we don't settle," he said. "We should all start sending our children to law school."

He said if the tribe were not to settle, the potential backlash would be severe. He said the animosity might prompt some of those affected to start fighting the long-stalled Animas-La Plata water project or oppose tribal sovereignty.

"There is a change in attitude nationwide that could be influenced by the people in the western United States," Gosney said.

In his letter calling for a settlement, Frost said he wanted to strike a deal rather than "disrupt the community" and "turn our neighbors against us."

Gosney said he was glad to see the offer, but now he hopes the tribe will follow through.

"Of course we were pleased, and we are willing to negotiate and interested to see if they're reasonable or not," he said. "I hope the tribe and its attorneys are serious and are not doing it just for good public relations."....

Arthur Andersen, LLP - KUKUI, Inc.'s auditor that should write a book entitled, "The Joy of Cooking Books with Methane".

May 23, 2002

CEO's daughter gets job at Kamehameha

Hamilton McCubbin played
no role in the hiring, the trust says

By Rick Daysog, Honolulu Star-Bulletin

The Kamehameha Schools has hired the daughter of Chief Executive Officer Hamilton McCubbin to a part-time position in a potential conflict of interest.

McCubbin did not return calls, but the trust said he was not involved in his daughter's hiring and had no influence in the process.

The estate, in a statement approved by trustees, also said the position was advertised internally and externally. The position ends June 30.

Arthur Andersen said the division that hired McCubbin's daughter reports to the chief executive officer, but the accounting firm described the hiring as an "isolated personnel matter" that was conducted through the normal employment process.

The trust's in-house lawyers concluded that matter did not violate the estate's conflict-of-interest policies, Arthur Andersen said.

The trust said McCubbin's annual conflict-of-interest disclosure form was filed in February and predated his daughter's hiring.

Subsequently, McCubbin has amended his disclosure form to list her employment.

Arthur Andersen indicated that McCubbin filed his amended disclosure form after the issue was first raised in April by the internal auditing team. The executive did not immediately update his disclosure form "due to an oversight," Arthur Andersen said.

Peter Hanashiro, an Arthur Andersen partner, declined comment when asked why the firm did not identify McCubbin in the report. Deputy Attorney General Hugh Jones also declined comment.

Arthur Andersen has served as the estate's internal auditor since February 2000. For the fiscal year ending June 30, 2001, the estate paid the accounting firm $2.1 million.

The report, known as the Closing Agreement Compliance Monitoring Report, was required under the February 2000 closing agreement between the IRS and the Kamehameha Schools.

The IRS and the Attorney General's Office alleged that the former trustees engaged in numerous conflicts of interest and self-dealing.

The reforms included a strict conflict-of-interest policy.

The Star-Bulletin obtained a copy of Arthur Andersen's report from the Attorney General's Office after filing a formal request under the state's open-records law.

The bulk of Arthur Andersen's report described how trust officials have complied with the terms of the IRS closing agreement.

The report also described a management dispute involving the head of Kukui Inc., a for-profit trust unit which owns McKenzie Methane Corp., a Houston-based natural gas producer.