1997-10-04 - LETTER TO IRS REPORTING TAX FRAUD

 

 

 
 

 

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 of M&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 Hendrickson (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, Inc.; 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...  

"...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": 

"A Circuit Court judge has approved a settlement between state Insurance Commissioner Wayne Metcalf and Gary Vose, the sole shareholder of Investors Equity's parent company at the time the insurer was placed into liquidation in June 1994..." 

"The state seized the insurance company after its numagement ran up a $90 million deficit largely because Vose lost policyholders' money in highly speculative leveraged investments known as derivatives, the state charges..."  

(I have since been advised that Investor's Equity was given a letter by Robin Campiano, former Hawaii insurance commissioner, that gave permission for them to deviate fom the requirement that insurance companies maintain a large percentage of its reserves in "low-risk" investments, and allowed Invertors Equity to invest in "higher-risk" instruments.) 

"Metcalf said the settlement is part of a series of actions against Bank of America, several brokerage companies incIuding...Goldman Sachs, accountants and attorneys associated with the failure of Investors Equity Life..." 

"A state lawsuit accused Vose of racketeering, fraud and other misconduct... The suit alleges that the holding company that controlled Investors Equity conducted sham real estate deals and used the insurance firm's assets to pay large fees to Vose and companies connected with him... " 

Bishop Estate and William Simon had other tie-ins with Investors Equity Life through their major HonFed investment. 

The Honolu/u Advertiser reported in its April 3, 1995 issue under the headline, "Estate had $26.9 million in AutoFuel" - Its investment coincides with bank loans": 

"The Bishop Estate is AutoFuel's single largest secured creditor. " 

"According to paperwork filed by the Bishop Estate at the Bureau of Conveyances here, the estate and AutoFuel signed a business agreement October 16, 1990. On the same day, the Bank of Hawaii and Bank of New York signed a revolving credit agreement and loan agreement with AutoFuel..." 

"In December 1991, AutoFuel signed a stock pledge and security agreement with Bishop Estate... " 

"The Bank of Hawaii was also involved in another estate deal in Texas. According to bankruptcy records in Houston, the estate guaranteed loans made by the Bank of Hawaii to individuals and companies that invested in McKenzie Methane Inc. The estate later assumed those loans when the borrowers failed to make payments to the bank. " 

"AutoFuel Co. entered bankruptcy reorganization in Dallas in March 1993. Some four months later, a wholly owned Texas subsidiary of Bishop Estate called Kukui Inc. filed a claim in the AutoFuel bankruptcy for recovery of $26.9 million." 

"Of that total debt, $24.76 million was fully secured by unspecified collateral, according to the claim." 

The remainder, $2.16 million, was unsecured... 

"Kukui Inc. is a subsidiary of Royal Hawaiian Shopping Center Inc., itself a profit-making subsidiary of the nonprofit, charitable Bishop Estate. " 

Another article which appeared in the April 25, 1995 issue of The Wall Street Journal, under the headline, "Bishop's Gambit - Hawaiians Who Own Goldman Sachs Stake Play Clever Tax Game - Their Trust Is Educational But Investments Produce Big Incomes for Trustees, " contains these comments: 

"The giant Hawaiian trust that now owns 11% of Goldman, Sachs & Co. bills itself as a charity. It's an increasingly tough sell" 

"A close look at the trust reveals a much-different operation, one that has more in common with a big investment concern like Goldman Sachs than with even the busiest U.S. charities.". 

"Take executive pay: For the year ended June 30, 1993, Bishop's five governing trustees earned $820,000 each - payments calculated, in unusual fashion, partly as a percentage of the trust's tax-free investment income. In their best year, the trustees got $925,000 apiece. In contrast, the highest paid official at the American Red Cross earned $342,700 in 1993." 

"Wheeling and Dealing - Bishop Estate doesn't invest like a traditional charity either: Instead of passively pursuing rent, interest and dividends, Bishop wheels and deals in the world of shopping centers, apparel chains and drilling ventures. Several of its investment partners say that when deals turn sour, the Bishop trustees don't hesitate to intervene aggressively..." 

"Also, despite $8 billion to $10 billion in assets - which make Bishop the nation's wealthiest charity - the trust has attracted nearly $30 million in federal subsidies for native Hawaiians since 1987. Maintaining support for such largess falls to Hawaii's Democratic congressional delegation, which has close ties to Bishop's trustees, many of whom are former top Democratic politicians." 

"...by the late 1980's, Mr. Takabuki's acquisitions were turning Bishop into a diversified investment concern with two distinct branches: taxable units the trust played a role in operating and traditional tax-free holdings. Then, innovatively, the trustees started moving investments from one branch to the other. " 

“The first big move involved the Royal Hawaiian Shopping Center, Inc... In 1986, Mark McConoghy, an influential tax lawyer at the accounting giant Price Waterhouse, concluded that the shopping center could be transferred from the taxable subsidiary to its tax-free parent...  

"Mr. McConoghy's coup also markedly enhanced the trustees' income, since under Hawaiian law the board members are paid 2% of the trust's tax-free revenue...  

"...Bishop Estate's principal watchdog is a "special master,” who each year files a report on the trust's educational and investment activities to the probate court that is supposed to enforce the terms of the princess's will. But Bishop foots the bill for these reports, which usually lag several years behind, and even special masters have been caught up in Bishop's tangled web of business dealings. " 

"In 1990, for instance, when special master Peter Trask was reviewing the estates activities for the year ended June 30, 1989, Bishop was finalizing what would become a $27 million investment in a company whose subsidiary employed his father, David. The young Mr. Trask also did legal work for the company..." 

"Bishop's cozy rapport with the state's entrenched Democratic Party also helps insulate it from scrutiny. " 

"...Many (trustees) are drawn from the upper reaches of Hawaii's political and judicial life... Current trustee Mr. Peters actually became a trustee while still speaker of the state House of Representatives. Until 1993 the newest trustee Gerard Jervis, was chairman of the selection commission that screens judicial candidates for the governor. So, in effect, Mr. Jervis helped select the judges who subsequently selected him to the Bishop board.” 

"Who appointed Mr. Jervis to the judicial-selection committee in the first place? None other than Mr. Wong, the current Bishop trustee who then presided over the state senate.”  

Once in power, the trustees have been known to favor powerful friends. Consider, for example, the case of former Gov. John Waihee. He selected all five of the current state Supreme Court justices. These judges in tum named three of the current Bishop

trustees, including the chairman, Mr. Wong. Mr. Waihee also appointed trustee Mr. Peter's mother, Hoaliku Drake, to head the Department of Hawaiian Homelands, a post she held until last year." 

"Shortly after Bishop made its second $250 million investment into Goldman Sachs last November, Mr. Peters asked Goldman to steer legal work to Mr. Waihee, who is now in private practice, according to people familiar with the matter..." 

On the federal level, some warn that Bishop risks violating the IRS prohibition against 'excessive personal benefit'... 'The IRS is quite concerned with organizations where people are being paid a great deal, says Dan Langan, a spokesman at the National Charities Information Bureau, a watchdog group. 'You've hit the jackpot with this group’." 

"In addition, some people familiar with Bishop's practices question whether trustees' relationships with...subsidiaries are sufficiently at arm's length to satisfy IRS rules. For instance, as chairman of the Royal Hawaiian Shopping Center, Mr. Peters handles a wide range of matters, from the entity's current rent negotiations... to the hiring of a receptionist... " 

"Tax experts...point out that the IRS seldom revokes an organization's tax-exempt status, and it has no other penalties at its disposal (This has changed since the article was written, and the IRS now has the ability to impose "interim sanctions" against intlividuals who wrongfully gain excessive personal income.) Moreover, during the past several decades, Bishop has nurtured dose ties with the IRS, whose employees in Washington and Los Angeles are visited periodically by Bishop officials sometimes bearing chocolate-covered macadamia nuts. " 

"'This is a group that has so much clout that no one stops them, ' says Paul Streckfus, an expert on tax-exempt organizations who dealt with Bishop as an IRS official in the 1970's..." 

"There are signs... that Bishop Estate is looming larger on the politicians' radar screen these days-thanks in part to Treasury Secretary Robert Rubin, former chairman of Goldman Sachs. In December 1992, shortly after Bishop purchased its first Goldman stake, Mr. Rubin, who had just been appointed head of the National Economic Council, needed to sever his ties with his former firm. In just one phone call from Goldman, Bishop agreed to guarantee, for a fee, Mr. Rubin's limited partnership interest in the unlikely event that the firm ever went under, Bishop will get to pocket about $1 million in fees from Mr. Rubin and to enjoy the satisfactions, however intangible, of having a lasting relationship with the man who now, it turns out, oversees the IRS." 

"Mr. Rubin, who has reclused himself from Bishop and Goldman matters, disclosed the arrangement last February when questions were raised about his and Goldman Sach's potential stake in the Mexican bailout Now the House Banking Oversight and Investigations subcommittee is planning hearings in which Mr. Rubin may be questioned about his financial links both to Goldman Sachs and Bishop Estate." 

"...So what does Goldman's $500 million investor really want? Apparently, an initial public offering of Goldman's stock-the worst nightmare of the last remaining private powerhouse on Wall Street." 

"Without being asked, Mr. Peters raises the topic of Goldman's 'IPO potential,' then coyly says he won't comment. But in the next breath, Mr. Peters blurts out: 'Heck, I see an opportunity.'" 

There were questionable arms-length issues with many other deals, such as the one with Benson Forests (now Shelter Bay Forests). This deal, in which Mark McConaghy also had a hand, in volved a number of partnership transactions with Ben Benson, which concluded with KSBE buying Benson's remaining interests in the partnership. During the time Benson was still a partner, the estate arranged and paid for a life insurance policy on Benson. The policy was purchased through Marsh & McLennan. Shortly after Benson sold his interests to Bishop, he and his wife made a large charitable donation of an island in the Atlantic to KSBE. 

Critics of the estate have often stated that the Trustees are spending too great a proportion of the estate's assets on the investments and neglecting the primary purpose of the estate which is to educate Hawaii's children. This action, in itself: could also result in "private inurement" to the five Trustees who are compensated on a "commission" basis. (They receive 2% of the estate's annual income.) Ifmore of the estate's funds are used to invest in income generating investments, and less is being spent to fund the operations of the schools, the result can be higher commissions to the Trustees. 

During the period the formation of the captive insurance company was under discussion, the plan was that I be transferred from KSBE to the captive in large part due to the arms-length issues. I drafted a staff report for this transfer which was submitted to Nathan Aipa for his review and approval before the report could be submitted to trustees. I included an estimated $200,000 in the initial budget for P&C to establish and operate a separate office. This staff report was never presented to trustees by Aipa.

This proposal for my transfer to P&C was placed on the agenda for P&C's last annual Board of Directors meeting. During discussion on the issue, Henry Peters indicated that the matter should be presented first to the estate's trustees for approval, and the board's decision on the matter was deferred. Despite this board action, Aipa would not present the staff report to trustees. 

Aipa disregarded the fact that work was being performed for P&C by KSBE management and staff at no charge to the subsidiary. I, for one, spent hundreds of hours on KSBE time performing work for P&C which was never charged to that entity. Others providing "free" services included Virginia Mau, David Dunnigan, Louanne Kam, Colleen Wong, Carol Koza and Nathan Aipa. According to the opinions expressed in Price Waterhouse's letter, this would be considered by the IRS as "improperly subsidizing a for-profit subsidiary. " 

Taxpayer Bill of Rights II - Intermediate Sanctions for Tax-Exempt Organizations. 

Under a bill signed July 30, 1996, Congress enacted rules which allow the IRS to assess penalty excise taxes on individuals who are involved in transactions with tax-exempt organizations that constitute private inurement. The law applies retroactively to "excess benefit" transactions occurring after September 13, 1995. 

According to articles provided to me by Coopers & Lybrand, penalty excise taxes can also be imposed on "organization managers" (an officer, director, or trustee) who knowingly permits the organization to engage in an excess benefit transaction, even if that manager did not personally benefit Tax-exempt organizations cannot circumvent the rules by causing a controlled entity to engage in the excess benefit transaction. 

An article entitled, "No More Sweetheart Deals", in the September 23, 1996 issue of Forbes includes the following comments and example: 

Under the new rules, trouble starts if the IRS determines that there has been a misdeed with an "excess benefit". It could be a fat salary, a sweetheart contract or an embezzlement. If someone got an excess benefit, the IRS can both fine the recipient 25% of the benefit and declare that the benefit be given back to the charity. If the guilty party doesn't pay the money back, he or she owes twice the excess benefit to Uncle Sam.  

”Say a board member convinces the president of a college to let the school's insurance contracts to her firm, even though going with a rival would save the school $150,000. In turn, the board member is influential in voting the president a lavish salary, perhaps $200,000 higher than the norm at comparable universities. The IRS could force the repayment of both the $150,000 and the $200,000..." 

"What about directors who sit still for this kind of mischief! They can be fined a collective $10,000, even if they didn't profit.. " 

It would appear that the IRS could interpret several transactions between Marsh & McLennan and KSBE/P&C as resulting in "excess benefit". For examples: 

1. I obtained a property insurance proposal £rom Hobbs Group which was approximately $600,000 less than KSBE was paying for coverages placed through the incumbent broker, Marsh & McLennan. MMI's account representative, Rocco Sansone, represented that M&M could obtain the same coverages with the same companies at the same price. Aipa and Louanne Kam conspired with Sansone to keep MMI on as KSBE's exclusive broker They gave Hobbs' proprietary proposal to MMI for review and recommendations before allowing my staff report to go to Trustees. I was pressured by Aipa/Kam/Sansone to give :MMI an exclusive broker of record letter to enable :MMI to take over the Hobbs proposal. I refused to do this as I considered it unethical and not in the best interests of the estate. When MMI was unable to get a resident agent appointment £rom Arkwright Insurance Company as Sansone had represented, MMI's policies were cancelled and the business went to Hobbs. The 45-day delay caused by Aipa/Kam/MMI in rewriting the policies, however, cost the estate and its Subsidiaries nearly $75,000. MMI benefited not only from the commissions they received from the $600,000 past "overcharge", but they also received commissions for the extra 45 days they delayed the transfer. 

2. On June 7, 1994, I received a fee proposal from Peter Lowe, Vice President of M&M Insurance Management Services, Inc., (IMS) for services for the formation and ongoing management of a captive insurance company. Fees were quoted on a time and expense basis. The total annual estimated fee for ongoing captive management services was $66,500. 

MMI, however, billed P&C an additional $200,000 flat fee for "brokerage services" which had not been included the proposal or in the captive management contract with IMS. 

Over my repeated objections, Aipa and Kam directed me to have P&C continue to pay MMI the $200,000 annual flat fee. On October 8, 1996, a meeting was held at the direction of Ms. Kam to discuss MMI's fees. Attending the meeting were Ms. Kam, Rocco Sansone, Peter Lowe and Garrett Liu. As Mr. Liu's meeting notes indicate, I expressed my desire to be able to justify MMI's fees for the services performed, and to keep P&C's costs separate £rom KSBE's costs. 

After this meeting, I obtained "time and expense" estimates and sample agreements from two other captive managers. These competitive cost estimates ran from $25,000 to $50,000 a year and included all the services being provided by MMI and IMS at a cost of $287,527. 

On P&C stationery, and signing the letter as President of P&C, I responded to Mr. Sansone with my findings and again requested a service proposal from:MMI. Ms. Kam rescinded my letter without any prior notification, and issued another reprimand letter dated October 31, 1996. In this memorandum she states: 

"I was shocked to read your letter of October 29, 1996 which was sent to Mr. Sansone and Mr. Lowe. This letter was not previously reviewed or approved by either Nathan or myself. This is a flagrant failure to follow clear and express directives from your supervisors and amounts to insubordination. Any further incident in which you fail to follow directives will be grounds for further disciplinary action including immediate termination." 

By this time I had strong suspicions that "private agreements" had been made between Nathan Aipa, Louanne Kam, Rocco Sansone and Peter Lowe to which I had not been a privileged party. Looking at the income MMI and its affiliates were receiving from KSBE and P&C, I could definitely see the opportunity for "excess benefit". 

If my understanding of the Taxpayer Bill of Rights II is correct, as an officer of P&C I could be fined $10,000 by the IRS if it were determined that I knowingly permitted the organization to engage in an excess benefit transadion. In my mind, if I "looked the other way" and allowed this activity to continue, I would be breaching my fiduciary duties to the organization. 

Another example of "private benefit" is a "bogus" bid deal which resulted in awarding an environmental clean-up contract for the Waterpark Tower site to Stay and Son, an unlicensed contractor which employed Trustee Lindsey's son. 

Another example of the disregard for "arms-length" issues, was the attempt by Aipa, Kam and Marsh & McLennan to gain "control" of P&C's claims handling by arranging to have all of P&C's policies endorsed with a "Consent to Settle" clause. This scheme was carried out directly between Ms. Kam and Mr. Sansone, as indicated in Sansone's memorandum of November 7, 1996, addressed to Kam. It states, "This endorsement provides KSBE with the option of controlling the settlement process..." This "Consent to Settle" clause would, in effect, take the control of claims settlements away from P&C's independent adjuster and turn it over to KSBE. 

Another example of "excess benefit" and breach of the arms-length guidelines was the Kona Enterprises, Wayne Rogers et al claim. When the first lawsuit in this case was filed in North Carolina, Aipa did not report the claim. Consequently, the insurance company did not pay any defense costs in the North Carolina case. All claims costs were paid out of the General Counsel's account, and not the insurance account. 

I did get word of a second lawsuit filed in Utah and gave notice of the claim to United Educators Insurance Co. (UE). Aipa assigned Lyn Anzai to handle the claim. In a letter to Ms. Anzai dated August 13, 1993, UE's claims adjuster, Joseph McCullough, points out: 

"As we discussed, the plaintiff has made allegations and seeks certain remedies which fall outside the coverage of the insurance policy..." 

"Several of the trustees of the Bishop Estate also made individual investments and became shareholders in Kona. While your investigation indicates that they did not act outside of the scope of their duties to the Estate, should it be determined that they did act outside this scope, the United Educators policy would not be able to indemnify for that liability." 

"The policy also excludes any loss arising out of any insured gaining a profit or advantage to which they were not entitled " 

"It is further alleged that the Bishop Estate violated Rule 1 Ob-5 of the Securities Exchange Act of 1934. The policy excludes damages arising from a willful violation of a statute or governmental regulation and the policy will not apply to any damages arising out of this allegation." 

A third lawsuit was filed in Hawaii. Despite the admonitions of United Educators, KSBE retained, without the required prior consent of the insurance company, C. Michael Hare of Cades Schutte Fleming & Wright, as well as William Raper of Womble Carlyle Sandridge & Rice. 

With Aipa's consent, the Cades firm continued to disregard many of UE's Guidelines. This resulted in fees and expenses that UE would not approve. As a consequence, Aipa paid the Cades firm from the General Counsel's account rather than from my insurance account. A memorandum from McCullough dated March 21, 1996 states that many of the Cades fees were disallowed due to noncompliance with the policy terms. 

I do not know the total defense costs to date for this case, or how much UE has paid. But if the original lawsuit had been reported, and if UE's Guidelines and policy conditions had been followed, the total costs to KSBE should have been limited to the self-insured retention of $250,000. I do know that the Cades firm alone had billed over $759,000 as of September 30, 1996. (As a side note, Cades billed over $12,000 for a review of the Master's inquiries of this litigation.) 

I do not know how many dollars, if any, the individual defendants who personally invested in this venture have contributed to the defense costs in this case, or if they are getting a "free ride" and private benefit or Private inurement at the expense of the beneficiaries of the estate and the tax-payers. 

The McKenzie Methane claim is probably the best example of Aipa's non-disclosure of financial information, conflicts of interest, private benefit and private inurement. 

This lawsuit was filed in March, 1993. I did not learn of it until August, 1993, in the course of gathering information for the October 1st renewal of KSBE's ELL policy. I gave notice of the claim to the insurance carrier, United Educators (DE), hoping it would not be denied due to non-compliance with the prompt reporting requirement. The amount claimed was $2,300,000,000. 

KSBE, Pauahi Holdings Corporation, Royal Hawaiian Shopping Center, Inc., and Kamehameha Investment Corporation, as well as their trustees, directors, officers and employees were entitled to defense under this policy. Nathan Aipa was the responsible attorney. 

In this case, Aipa did not respond to UE's repeated requests for information and the insurance company eventually closed their file without paying any defense costs. No defense. costs were paid from my insurance claims account Defendants in the suit included for-profit subsidiaries and individual employees in addition to KSBE and its trustees. Other entities and individual defendants named would not have coverage under the policy. I question if these subsidiaries, employees, non-related entities and other individuals paid their fair share of these defense costs, or did all funds come from the estate? 

Another example of improper claims handling which resulted in private benefit to a third party was the flood claim. Mr. ----- had flood damage to his home on Kauai after heavy rains. His home is on Bishop Estate leasehold property. P&C's independent adjuster investigated the case and concluded that this was an "act of God" and not the liability of KSBE and P&C. Louanne Kam actively involved herself in the handling of the claim, reportedly at the request of Trustee Wong. 

Particularly disturbing to me in this case was the blatant manner in which Kam attempted to breach the anns-length relationships between KSBE and P&C by indicating that we should pay the claim "because Trustee Wong wanted to see it settled". 

P&C Insurance Company's financial statements 

In October, 1996, I met with P&C's auditors from Coopers & Lybrand to discuss the reasons why I had not yet signed off on the annual financials for P&C. I reported the arms-length irregularities and other questionable activities being directed by Henry Peters, Richard Wong, Nathan Aipa and Louanne Kam. I also provided them documents which provided evidence of their dealings with Marsh & McLennan which was resulting in what the IRS might consider to be excess benefit transactions. 

On November 20, 1996, as president of P&C, I wrote to Coopers & Lybrand to document our conversations, and explained that I was declining to sign the annual financial statements because the irregularities and questionable issues had not been resolved. A number of documents giving evidence of these irregularities was enclosed with the letter. A copy of the letter and its enclosures were sent to the insurance commissioner, State of Hawaii. No response was received from either Coopers & Lybrand or the insurance commissioner. Upon my telephone inquiry to Coopers & Lybrand, I was advised that Nathan Aipa had signed off on the financial statement, and that the insurance commissioner had advised that Aipa's signature satisfied the department's requirements. 

In February, 1997, P&C and the trustees of KSBE filed for an injunction to prevent the release of all letters and documents to any third party. As a consequence, these letters and documents were returned to the court, and eventually back to the estate. In August, 1997, I attempted to release summaries of these documents to Attorney General Margery Bronster to aid in her investigation of the estate which has been requested by Governor Benjamin Cayetano. KSBE filed a contempt of court motion against me which prevented this release. 

These are only a few examples of the many irregular and irresponsible activities that I witnessed while employed at this charitable estate and while president of P&C. Any in-depth investigation of the activities and financial records of the trustees and top executives of the estate, and those of its for-profit subsidiaries will, no doubt, uncover many other illegal activities. 

If the IRS is presently investigating the trustees and executives, or plans to begin such an investigation, I am willing to give you my full cooperation and assistance. You may contact me by phone at (808) xxx-xxxx. 

I look forward to your prompt response to this urgent request. 

Very truly yours,  

Bobby N. Harmon, CPCU, ARM 

cc’s: 

Margery Bronster, Attorney General, State of Hawaii 

Tax Director, State of Hawaii 

Rey Graulty, Insurance Commissioner, State of Hawaii  

Janet Reno, U. S. Attorney General 

 
 
 
 
 
 
RELATED SIGHTINGS
 
 
 
 
 

 
 

 
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and here for even more...
 
 
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Nature Sound
I hear the whispering voice of spring,
the thrush's trill, the catbird's cry.
Oliver Wendell Holmes
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KYCBS

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