ACT 221?

Watch poor Hawaii taxpayers get Wiped-Out in Blue Crush !


Sightings from The Catbird Seat

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October 2, 2006

Tally the benefits of high-tech credit

From an editorial in the Honolulu Star-Bulletin


The state tax department is liberalizing standards to qualify for high-tech credits.

AN analysis to be released next week is expected to present information on the benefits Hawaii may have reaped from a generous tax credit offered to high-tech businesses and investors.

But the report from the Tax Review Commission is not likely to lay open specifics on how much new money and jobs have been generated through the credit, leaving the public largely in the dark as to whether the credit is achieving legislative intent — to advance a tech industry here and diversify Hawaii’s economy.

Without accountability, it seems ill advised for the state Department of Taxation to ease the rules for businesses to qualify for the credit.

Through Acts 221-215, the credit allows a tax break of 100 percent for investing in high-tech ventures in Hawaii. That means for every $1 invested, $1 is taken off a company’s tax bill, up to a total of $2 million.

From fiscal years 2001 through 2004, the state has issued $184.5 million in credits to be claimed over five years. Thus far, the state has waived $74.9 million in claims from its bank account.

Proponents contend the credit has boosted an industry that otherwise would go elsewhere, but absent any data, it is unknown if costs and benefits balance out.

The names of companies that take advantage of the credit are kept confidential even though it would not be unreasonable for their identities to be known. In addition, the state does not compile information, such as job creation and economic impact, that could identify advantages and give legislators and the public a basis on which to judge the program’s value.

Meanwhile, a survey earlier this year by the American Electronics Association pegged the number of high-tech jobs in Hawaii near the bottom nationwide for the last six years, indicating employment growth isn’t robust.

Ann Chung, vice president of the Hawaii Science & Technology Council, contends it is safe to assume that the credits have put money in the state’s economy. That might be, however, with the considerable amount of tax dollars the state is forfeiting, the public should receive a clear accounting, not merely assumptions.



January 29, 2003

$20 million in venture capital
adds to upswing

By John Duchemin, Honolulu Advertiser

Six more Hawai’i technology companies received about $20 million in venture funding in the last quarter of 2002, increasing evidence that the year’s end was one of the most successful investment periods for the small Hawai’i technology community.

The confirmed investments in BIvision Systems, Broadband iTV, Inovaware Corp., Iris Wireless, Trex Hawaii and Loea Corp. bring the total known year-end investments to 12 companies and more than $25 million.

Investors said the venture funding, which will let many of the companies expand operations and hire new workers, adds credibility to the state’s tech sector, which has long struggled to raise investment capital. With a few multimillion-dollar exceptions, venture investments in Hawai’i companies were few and far between until the recent upswing.

“We think this is a major accomplishment for Hawai’i’s tech sector, and for our state,” said Jeffrey Au, a partner in venture firm PacifiCap, which invested in each of the six companies. “Over the past year, we have seen a dramatic improvement in both the quality and the quantity of technology opportunities in Hawai’i.”

Many of these investments were made under the aegis of Act 221, a state law passed in 2001 that provides non-refundable state tax credits worth 100 percent of the amount invested over a five-year period.

Details about the six newly confirmed investments:

Broadband iTV, a Honolulu firm that has developed an interactive advertising channel now running on Oceanic Cable, received about $1 million from PacifiCap and other local investors, company chairman Clif Kagawa said.

Kagawa said the company used the money to cover startup costs of its 10-employee company, whose channel lets consumers browse travel, auto and real estate advertisements using their TV remote controls. He said the company, which has signed up advertisers including Aloha Airlines, Nissan and Prudential Locations, is on track to meet the needs of 250,000 users by mid-February.

BIvision, a San Diego-based software company with its development team in Hawai’i, received between $1 million and $2 million, business development adviser Bassin Karkachi said.

The firm is refining software that helps wireless companies monitor their networks remotely. While BIvision is a recent startup, Karkachi said company president Guy Kalouchko developed the idea over several years while performing consulting work for wireless phone companies….

Inovaware, a Manoa-based billing and service software company with several dozen employees, received an undisclosed amount. Executive vice president Marc Rapoza said the company will use the money to expand into Asia.

Iris Wireless, a wireless software firm that recently moved its headquarters to Hawai’i, received $9 million in November and an undisclosed follow-on investment later in the year, PacifiCap’s Au said.

Company chief executive Peter Rinfret said his firm has designed software that lets text messages pass seamlessly across different wireless communications systems. The company is setting up a research-and-development center here and wants to use Hawai’i as a base for international expansion, Rinfret said.

San Diego-based research firm Trex Enterprises, which has a Hawai’i subsidiary performing millions of dollars’ worth of military and government contracts, received an undisclosed amount. The Hawai’i division has developed several communications and biosensor technologies for the government, and company officials hope to “commercialize” them into viable products.

Loea Corp., a spinoff of Trex Hawaii, received an undisclosed amount. The company has developed a high-bandwidth wireless system, now being used by the University of Hawai’i to transmit data to and from its ocean science labs on Coconut Island in Kane’ohe Bay.

Au said PacifiCap was the lead investor in several of the companies, but joined wealthy local “angel” investors and other venture funds in some of the investments. He declined to give specific details about each of the investments.

PacifiCap is the former firm of Ted Liu, the new director of the state Department of Business, Economic Development and Tourism.

Liu, Au and partner Rick Cho formed the company several years ago with a mission of funding Hawai’i and other companies with international prospects.


March, 2003

Act 221

Is Hawaii’s high-tech tax credit broken?

By Kelli Abe Trifonovitch, Hawaii Business Magazine

Barry Weinman, a part-time Hawaii resident, a venture capitalist since 1980 and the managing director of Allegis Corp., which has more than $600 million under active management.

Jeffrey Au, managing director of PacifiCap Group LLC, Hawaii’s largest venture fund with $30 million under active management. Au is an attorney by training and has been a Hawaii-based financial advisor since 1995.

Both men are active in the Hawaii high-technology scene. Weinman is the president of the business accelerator HiBEAM. In 2001, he and his wife, Virginia, donated $1 million to the University of Hawaii to endow the Barry and Virginia Weinman Chair of Entrepreneurship and E-business.

In 2000, Au formed PacifiCap Group LLC with partner Rick Cho. A third partner, Theodore Liu, was appointed last January by Hawaii Gov. Linda Lingle to head the state Department of Business Economic Development and Tourism (DBEDT). Liu resigned from PacifiCap after the appointment, because the Hawaii Strategic Development Corp. (HSDC), an agency attached to DBEDT, uses state monies to invest in local venture firms, including PacifiCap Group.

The Au-Weinman conflict centers upon the long-term effects of Act 221, Hawaii’s historic tax credit for the high-tech and entertainment industries. Act 221 was enacted by the Hawaii state Legislature in 2001 to nurture the nascent high-tech industry through capital formation. It provides for a 100 percent tax credit (maximum $2 million) over five years for companies that invest in a Hawaii Qualified High Technology Business (QHTB). The law ends or “sunsets” in 2005.

While much of the controversy surrounding Act 221 has focused on film deals, the issues run deeper and broader. In December 2002, Weinman and Au attended a meeting for Enterprise Honolulu’s Act 221 committee. The committee was formed to market Act 221’s investment opportunity and to rally the support of the high-tech community. Weinman was a co-chair at the time.

Accusations flew, tempers flared and the decibel level rose. Two days later, Weinman resigned. Weinman says, “I am on record for saying that the abuses of Act 221 need to be addressed very quickly. If they are not fixed, then I think the act should be repealed – it will soon do more harm than good.”

Au says, “The best defense to Act 221 and the best defense to all these urban legends is getting good companies funded and having good companies succeed. We’ve gotten a bunch of good companies funded this year.” He says that PacifiCap led the investment in seven Act 221-qualified companies in 2002. Those companies raised a total of more than $20 million.

Weinman, on the other hand, sees: “abuses” that are inconsistent with the intent of the law; deals with investors who get high multiples of their investments in tax credits; and complex financing structures, including investor-controlled reserve accounts and questionable subsidiaries. He says, “The abuses have people and tax-paying corporations thinking about tax shelters, not the quality of the entrepreneur and the upside of the startup’s equity.”

According to Weinman, Some early buzz in Silicon Valley is that Act 221 is a tax scheme and that any company with Act 221 money is borderline dishonest and should be avoided.” He says Hawaii does not have a sufficient capital base and needs nonlocal investors, because it will take four to six rounds of funding for a company to go public. And if there is no serious local money to keep the companies here, Hawaii startups will eventually need to relocate to be closer to their later-stage investors.

Au says, “All of this talk that the Mainland investors aren’t going to like it, well, maybe it’s a nice theory, but it’s just factually untrue from the deals that we’ve closed this year.”

Weinman says three changes to Act 221 (either legislative or administrative) are needed to support Hawaii’s high-tech entrepreneurs: 1) cap the tax write-off at 200 percent or two times (2X) the Hawaii taxpayer’s investment; 2) no investor-controlled reserve accounts; 3) no questionable subsidiaries.

Au has a diametrically opposite analysis and a “free-market” outlook. He argues that, as a matter of policy, more tax credits are better. Generating high multiples of tax credits requires more out-of-state money. Au says Mainland investors are still vetting the deal. They still receive equity in tradeoffs, so that high multiples do not reduce the overall risk in the deal. The deal also does not cost the state more in the total dollar value of the tax credits.

Au’s partner at PacifiCap, Rick Cho, says the firm’s average deal is less than 2-to-1. Au says PacifiCap structured reserve accounts in two companies that it funded. These accounts were designed to slow the companies’ burn rates and contain enough to cover about one month’s operating expenses. The cash can be drawn upon under two conditions: 1) the company is solvent, having more assets than liabilities and 2) the company is QHTB-compliant. “What I find so ironic is that these things are specifically there to prevent abuse,” Au says….

View From The Trenches

One of the act’s architects, former state tax director Ray Kamikawa says, “… there is going to be growing pains, and people must recognize that. You do not condemn an initiative as far-reaching as Act 221 on the basis of a few vocal dissenting voices.”

PacifiCap is also an investor in 4Charity Inc., another QHTB. President Tracy Pettingill declined to comment on Pacificap. She did say, “There are people out there who are finding ways to use the tax credit opportunities in ways that are not necessarily in the intent of the law.”

Some Of The Big Guys

Island Holdings Inc., the parent company of Island Insurance, was approached with about 20 deals last year. Island Insurance Cos. chairman and chief executive officer Colbert Matsumoto, says that the company’s private equity investments of around $2.5 million are about 1 percent of its assets. Matsumoto says the highest tax-credit multiple his company received on any investment last year was 4X, or 400 percent. The company has also invested on a straight 1-to-1 basis.

Matsumoto says he initially was skeptical about what he calls, “highly leveraged deals,” but has changed his views. “What’s happening is that more money is entering the private-equity marketplace from outside of Hawaii than might otherwise occur were it not for the fact that you have this kind of leveraged deal situation,” he says.

Island Holdings has also invested about $400,000 in creating its own QHTB subsidiary. Hoike provides a number of services to Island Holdings companies and outside companies, including software development and Web hosting. Hoike President Riki Fujitani says the company has about 30 employees. About one-third of its revenue now comes from outside of its parent company.

Another large local institution, AIG Hawaii, has begun forming its own QHTB subsidiary to develop software for the insurance industry. President Robin Campaniano says he would be interested if someone waived tax credits in his face, but so far has made no private-equity investments outside of AIG. Campaniano says, “We’re not interested in just making investments for the sake of generating tax returns, which is the way that a lot of people are hyping this right now. We’re more interested in looking at whether or not we can make a substantive investment in the QHTB we’ve developed.”

Island Holdings’ Matsumoto adds: “I think lawmakers have to be careful in how they approach changes in the law, so that if they tweak it or tighten it appropriately, they don’t throw out the baby with the bath water.”

Ultimately, Government Will “Fix” It, Or Not

Speaker of the House Calvin Say says, “(Economic Development chair Brian Schatz) just wants to give Act 221 a chance. I’ll support the chair at this point in just leaving it the way it is and having the department promulgate the guidelines for all applications.”

Sen. David Ige, chair of the Science, Art & Technology Committee says, “Is there a way to tweak the law and yet continue the momentum that has been started? I guess that’s the delicate balance that we’ll probably be taking up this year.”

Former state tax director Ray Kamikawa says, “I think we should permit the new administration to give us much-needed guidance.”

Gov. Linda Lingle had not yet appointed a tax director at press time, but deputy director Kurt Kawafuchi had created a draft of administrative guidelines for Act 221.

Kawafuchi says, “If you do something, and you’re not really after the investment, you’re after just the tax credits and you get, for example, more than a 2-to-1 write-off, … then we have concerns about those credits.”…


March 23, 2004 

Audits find tech-tax abuse

The state tax director says up to 20 percent of
Act 221 claims reviewed are fraudulent

By Nelson Daranciang, Honolulu Star-Bulletin

Up to 20 percent of high-technology tax credits claims that have undergone state audit or review are fraudulent, state Tax Director Kurt Kawafuchi said yesterday.

The Tax Department has already consulted the state attorney general and expects to submit cases for civil or criminal legal action within a year, he said. But because tax information is confidential, only those cases that go to court will be made public….

Kawafuchi’s proclamation alarmed state lawmakers.

“If there’s abuse, we need to stop it immediately, and we need to crack down on it immediately,” said Rep. Brian Schatz (D, Tantalus-McCully), House Economic Development and Business Concerns Committee chairman.

Gov. Linda Lingle tried unsuccessfully last year to convince the state Legislature to repeal the law…. (See Update)

Kawafuchi said his estimate of Act 221 “abuse” is based on audits and reviews of claims made for 2001 and 2002.

Schatz questioned Kawafuchi and state Department of Business, Economic Development & Tourism Director Ted Liu why the administration never mentioned the possibly fraudulent claims earlier.

Liu said lawmakers never asked for that information….

Earlier this month, Kawafuchi said he was looking into whether a local insurance company turned a $2,000 investment into a $3.4 million claim for tax credits.

He said the state can reject claims for tax credits if the investment lacks business purpose and economic substance….

Honolulu Star-Bulletin


March 23, 2004

Up to 20% of Act 221 claims may be illegal

By Sean Hao, Honolulu Advertiser

An estimated 15 to 20 percent of all claims for the state’s Act 221 high-technology tax credits could violate criminal or civil law, and prosecutions of claimants could begin within a year, the state Department of Taxation said yesterday.

Lawmakers, who are considering extending the tax credit program for an additional five years, said they were surprised by the disclosure which came from state tax director Kurt Kawafuchi.

“You’ve just said something very alarming,” said state Rep. Brian Schatz, D-25the (Makiki, Tantalus), chairman of the House economic development committee. “It’s just astonishing that we’re at this stage of the legislative session and this is just coming out.”…

Kawafuchi said the types of questionable transactions involve:

>     Drop-down subsidiaries, where companies move information technology operations to a separate business.

>     Companies selling slightly altered off-the-shelf software and calling it high technology.

>     Other deals that don’t result in actual investments or new jobs.

Kawafuchi said there had been no prosecution yet because “we want to be very careful and thorough and make sure it’s a solid case.”…

Among changes to Act 221 being discussed in the Legislature are limiting research credits to high-tech companies and providing guidance meant to curtail investment tax credit returns that in some cases have been higher than intended. There’s also debate over disclosing the identities of companies and certain investors that benefit from the program.

Those most opposed to changing Act 221 include the Hawaii Technology Trade Association and the Hawai`I Venture Capital Association. Bill Spencer, president of the HVCA, said despite Kawafuchi’s claims, there still are no known examples of abuse that would justify drastic changes.

“I just think they haven’t done their homework,” he said. “These estimates are at best ‘guestimates.’”


March 19, 2004

AIG Hawaii leverages Act 221
for new tech division

By Terrence Sing, Pacific Business News

AIG Hawaii President Robin Campaniano has taken the first steps toward bringing a piece of the parent company’s $600 million software-development business to Hawaii.

Campaniano hopes to capture about $80 million of AIG’s software-development business now spread among four offices in Asia and two on the mainland.

He’s relying on Act 221, the state’s technology tax law, to pull it off. AIG Hawaii has invested about $4 million in a newly formed tech-development center at its Restaurant Row headquarters. The tech tax law not only has saved the division’s existing staff of 25, whose jobs were set to be disbursed to the other tech centers, but also added 10 new positions since last year, Campaniano said….

AIG Hawaii created a limited liability corporation to be eligible for the tax credit. Insurance companies and banks have been labeled part of the problems surrounding Act 221 for taking advantage of the act by creating new divisions, claiming they were tech-related and then writing them off under Act 221 to avoid paying taxes.

Campaniano says AIG has avoided dubious investment schemes clearly meant to avoid paying taxes and instead is creating new jobs and investing in high-tech infrastructure.

“We are not looking for a tax writeoff,” he said. “This deal was to create jobs and create a tech industry. In my little way I can help push that cause.”…

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For much more about AIG, GO TO > > > The Allied World Assurance Group; Kajima: Blood, Bribes & Brutality; The Un-American Insurance Group


February 22, 2004

Insurers among investors that
got Act 221 breaks

By Jim Dooley, Honolulu Advertiser

Eleven Hawai’i insurance companies, including one closely tied to the state’s two largest public employee unions, avoided paying $19 million in state taxes in 2001 and 2002 by investing in high technology ventures, including the Blue Crushteen surf movie.

The state won’t identify the firms or reveal full details of their investments because of Tax Department secrecy laws now being questioned by some in Gov. Linda Lingle’s administration and the state Legislature.

But government records, court documents and a local insurance executive identify the Royal State Insurance group of firms as a central player in a hui that invested in the Blue Crush production in 2001, generating millions in controversial state tax credits.

Repeated attempts to reach Royal State chief executive Melvin Higa for comment were unsuccessful. Russell Okata, head of the 40,000-member Hawaii Government Employees Association and chairman of the board of directors of Royal State Corp., declined to comment other than to say through a spokesman that he “had nothing to do with any Royal State business decisions regarding investments.”

Documents contained in a state court lawsuit over distribution of the “Blue Crush” tax credits provide glimpses into the deals worked out in government and business circles over a bonanza of tax breaks available to Hawai’i investors under the 2001 law commonly called Act 221.

These details raise further questions about the public benefit of the tax credits, which cost the state’s general fund $21.9 million in 2001 and are expected to cost $48.4 million this fiscal year and $76.7 million in fiscal 2005, according to state estimates.

The law says every dollar invested in qualifying high technology ventures, including film and television productions, can be used to reduce state tax obligations by $1. The tax credits are spread over a five-year period and are capped at $2 million per investment.

Proponents of Act 221 argue that the credits are a valuable economic tool for promoting business growth and creating new jobs in a state overly dependent on tourism and military dollars. Act 221 supporters also argue that disclosure of who benefits from the credits would be detrimental to the program.

State Rep. Brian Schatz said exposing the identities of investors receiving Act 221 tax credits could discourage further investment.

“I just don’t see the need to know the name. I need to know the numbers,” he said. “I think there are some legitimate reasons that certain investors wouldn’t want their names out there, and it’s not simply a matter of them wanting to hide.”

Critics say the credits are overly generous, have failed to produce tangible economic benefits for the state and have been shrouded in secrecy preventing public accountability.

State Sen. Colleen Hanabusa, D-21st (Nanakuli, Makaha), who opposed passage of Act 221, said she was “stunned and fascinated” by the identification of union-affiliated Royal State as a “Blue Crush” investor.

“That’s the kind of information the public should have,” she said.

“I believe if you receive a tax credit from the state of Hawai’i then Hawai’i taxpayers should know who you are.”

Lowell Kalapa of the Hawaii Tax Foundation, said it was ironic that Royal State Insurance, with its connections to Hawai’i’s public worker unions, is reducing its state taxes by investing in a venture like the “Blue Crush” film.

Public workers are paid from state tax collections.

“It’s like these guys are sucking their own well dry,” Kalapa said.

The identities of some of the “Blue Crush” investors are contained in an Act 221 tax credit lawsuit filed in 2002 by April Masini, a film and television industry figure active in Hollywood and Hawai’i, against the prominent Hawai’i law firm Cades Schutte Fleming & Wright and a partner in the firm, Vito Galati, who had helped draw in investors for “Blue Crush.”

(The firm regularly provides legal representation to The Advertiser but was not involved in the preparation or review of this story.)

Masini claims that she was wrongfully denied “Blue Crush”-generated tax credits after she worked in 2001 to convince Universal Studios to film the movie in Hawai’i.

Masini said she worked with Gov. Ben Cayetano and his high technology adviser, Joseph Blanco, to obtain tax credit approvals for the project and searched for local investors willing to put money into the production.

The law firm and Galati deny any wrongdoing.

Masini said in her suit that she helped pitch the movie tax credit proposal to Hawai’i land-holding giant Damon Estate and two local banks with “high net worth clients” who would be interested in substantially reducing their state taxes.

In one proposal, heirs of the Damon Estate, which at the time owned more than 116,000 acres of property on O’ahu and the Big Island and 13 percent of First Hawaiian Bank, were to receive $11.2 million in tax credits after investing $8.5 million in the “Blue Crush” production, according to court records.

Making a profit in tax credits is one of the controversial aspects of Act 221. The law allows out-of-state investors, who don’t need Hawai’i tax credits, to give, sell or otherwise transfer their credits to Hawai’i taxpayers.

The law also may have created an underground market in the secrecy-shrouded credits, according to paperwork filed in the Masini suit.

The proposal to Damon Estate contained a provision that Masini and a Mainland partner had the right to purchase tax credits from the estate “for resale to third parties.”

Masini’s lawsuit said the estate and banks eventually turned down the “Blue Crush” proposal and the ultimate investors were “insurance companies” brought in by Galati, the Cades law firm partner.

The insurance companies are not identified in the court case because of state tax laws prohibiting public release of “taxpayer information,” according to paperwork filed by Masini’s lawyer, Philip Brown.

However, the Masini suit does list a number of local insurance companies and executives as witnesses to be called — if and when the case goes to trial. A trial date has been tentatively set for next year.

Companies identified

Among the witnesses listed by both the plaintiff and defendants in the suit are executives of four Royal State-affiliated companies, including the Performing Arts Investors and Royal Management that were formed in mid-December 2001 when the Blue Crush investment was being finalized.

According to state business records, HGEA’s Okata was chairman of the board of Royal State at the time the Blue Crush investments were made.

Royal State is listed as the parent company of Royal State Investment Corp., which in turn is listed as the agent for Performing Arts Investors and Royal Management.

Also on the Royal State board with Okata at the time of the “Blue Crush” investment was Gary Rodrigues, then head of the 12,000-member United Public Workers Union, which represents mostly blue-collar state and county employees.

Rodrigues was sentenced last year to more than five years in federal prison in a union fraud and embezzlement case that involved Royal State and a related firm called Voluntary Employees Benefit Association of Hawaii.

Both Rodrigues and HGEA’s Okata were on the board of trustees of VEBAH.

Rodrigues is no longer affiliated with UPW. Acting union administrator Liz Ho could not be reached for comment.

Another local insurance company executive listed as a witness in the case is Colbert Matsumoto, chief executive of Island Insurance Co. Ltd.

Matsumoto wouldn’t discuss many details of his company’s investments, but acknowledged that Island Insurance has made “several investments” in high technology ventures, including the “Blue Crush” production.

Matsumoto said “an investment entity” was formed to receive money from various insurance companies for the “Blue Crush” venture. Asked if the investment entity was Performing Arts Investors, the limited liability company operating from Royal State Corp.’s Beretania Street offices, Matsumoto said: “That sounds right.”

Other executives of insurance companies listed as witnesses in the Masini suit did not respond to repeated requests for comment on “Blue Crush” investments.

The companies include Zephyr Insurance, supplier of much of the hurricane insurance coverage written in Hawai’i, Pacific Guardian Life Insurance, and DTRIC Insurance.

Royal State owns a partial interest in the DTRIC insurance business in Hawai’i, according to state business records.

First Insurance Co. of Hawaii was invited to participate in the “Blue Crush” venture but declined, said company spokesman Steve Tabussi.

“We had a look at the proposal,” Tabussi said. “It didn’t fit our investment needs.”

According to figures compiled by state Insurance Commissioner J.P Schmidt, some local insurance companies quickly took advantage of Act 221 tax credits.

A chart prepared by Schmidt for The Advertiser shows nine insurance companies claimed $6 million in Act 221 tax credits in 2001, the first year the credits were available. The following year, 11 companies reduced their state taxes by $13 million using the credits, a 117 percent increase.

Schmidt said he couldn’t reveal the names of the companies because of Tax Department confidentiality laws. But the numbers make clear that some insurance companies made multiple Act 221 investments or acquired extra credits from other sources in 2001-2002.

Under an annual percentage formula set in Act 221, the maximum allowable tax credit per investment each year is $700,000. But three companies claimed between $890,000 and $1.3 million in credits for the 2001 tax year, showing that they invested in more than one project or bought or otherwise acquired additional credits from other sources.

In 2002, two insurers reduced their state tax bills by more than $2 million each and another three companies avoided more than $1 million in state taxes apiece through Act 221 investments.

Changes to law sought

The state Tax Review Commission, which reviews state tax policies every five years, has called for changes to Act 221.

In a report last year, the commission said: “Every business receiving $2 million in high-tech investment (credits) should report back to the Legislature to justify the investment costs upon which the credit is based, account for all the credits taken, and demonstrate that the cost-benefit has been achieved.”

Kalapa of the Hawaii Tax Foundation said Act 221 credits have left the public with little means of judging their effectiveness.

“We’re all left to wonder if jobs are being created. We don’t know who’s getting the credits so there’s no real way to measure the economic benefits,” he said.

State Tax Director Kurt Kawafuchi said his department is still studying the economic effects of Act 221 and audits of companies that claimed the tax credits in 2001 to 2002 may be under way.

But the law says that Act 221’s provisions must be “liberally construed” by the tax department. Even if audits determine that tax credits were improperly received by Act 221 investors, the law says only 10 percent of previously awarded credits can be “recaptured” by the state.

Information about any recaptures would be confidential, according to Kawafuchi.

Bills to tighten Act 221 eligibility criteria and extend the program another five years beyond its present 2005 expiration date are pending at the Legislature. Provisions that would publicly identify tax-credit recipients have been dropped from the measures.

Ted Liu, director of the state Department of Business, Economic Development and Tourism favors disclosure. “Sunshine is the best disinfectant,” Liu said.

Tax Director Kawafuchi, however, said he sees good arguments on both sides of the secrecy issue and is looking for a “middle ground” solution.

Reach Jim Dooley at jdooley@honoluluadvertiser.com or 535-2447.

© COPYRIGHT 2004 The Honolulu Advertiser, a division of Gannett Co

< < < UPDATE > > >

July 14, 2004

Lingle Oks Act 221 tax credit
extension, criticizes lawmakers

By Dan Martin, Star-Bulletin

Gov. Linda Lingle signed a bill yesterday that extends and tightens Hawaii’s controversial high-technology tax credits for five years and establishes a state private investment fund to provide venture capital for cash-hungry local tech companies.

The extension of the credits, known as Act 221, has raised hopes for a wave of fresh funding for Hawaii technology companies now that uncertainty over the future of the credits has been resolved.

“That extension of (Act) 221 was really important. It removed a big question mark and will probably spur a lot of venture capital off the fence,” said Bill Spencer, president of the Hawaii Venture Capital Association.

Act 221 was revised to tighten the criteria for qualifying for the credits after it emerged last year that some companies with flimsy technology premises may have abused the spirit of the act, costing the state millions in tax revenue. The tax credits were intended to help high-tech firms lure investment and create jobs.

But Lingle said the bill could cause Hawaii to lose still more technology companies because it delays the implementation of the state private investment fund by a year.

“Instead of just talking about creating quality, high-paying jobs, we need to take bold action,” Lingle said. “This Legislature’s delay in implementation may result in successful Hawaii companies moving to the mainland to obtain the financing they need.”

The Democrat-controlled Legislature declined to appropriate funding for the fund’s implementation, which means the Republican governor will have to go back to lawmakers during the next session to work out establishment of the fund.

Rep. Brian Schatz (D, Tantalus-Makiki) said the delay was necessary to allow the state to figure out the final shape of the fund.

“This is one of the most complicated policy issues I’ve ever seen and it’s not something that anybody involved is prepared to rush through. We all need more time to do our due diligence,” he said.

A study released last month by Enterprise Honolulu said Hawaii companies need about $233 million over the next five years.

With the investment fund, the state would borrow tens of millions of dollars, which would be placed with venture capital funds. Those funds would be invested to help kick-start promising start-up companies or help established firms expand.

“There are a number of models that work well and many that do not. We need to look at what is the right model, how it should be governed, and the criterion for investments,” said Schatz.

He said one remaining question mark is how the state Taxation Department’s certification process will work. The revised legislation requires Act 221 claimants first to obtain certification from the state tax director that their claim is legitimate. To do so, they will have to supply the tax department with detailed information on their business.

The tax department has said it was working on certification guidelines.



January 22, 2005

Unity House case detailed

By Jim Dooley, Honolulu Advertiser

A wealth of new information about how Tony Rutledge Sr. operated Unity House Inc. was unsealed in federal court yesterday, including grand jury testimony that the tax-exempt Unity House “sold” Hawaii tax credits to wealthy local investors and allegations that Rutledge used the organization’s money to gain “political influence.”

The information contained in a sworn statement from an Internal Revenue Service agent and a preliminary report on Unity House finance from the court-appointed receiver now running the $42 million nonprofit labor organization, was discussed during a hearing on a motion by Rutledge’s attorneys to declare the government’s December seizure of Unity House illegal.

Chief U.S. District Judge David Ezra denied the motion and issued an injunction allowing the government’s takeover of Unity House to continue until criminal fraud and conspiracy charges against Rutledge and his son, Aaron, are resolved. Trial in the case is set to begin May 10….

New details about Unity House’s activities were contained in a sworn “declaration” from IRS agent Gregory Miki that formed the basis for the government’s Dec. 14 seizure. The declaration had been sealed from public view but was released yesterday, with sections blacked out because of an ongoing criminal investigation of Unity House, according to U.S. Department of Justice attorney Edward “Ted” Groves.

According to Miki and the appointed receiver, Anthony Pounders, Unity House invested $1 million and Rutledge invested $200,000 of his family’s money in Hoana Medical, a local company developing state-of-the-art medical sensory equipment. Hoana Medical investors qualified for state tax credits available to “high-tech” business ventures under Act 221, a controversial law passed in 2001.

The generous tax credits – each dollar invested in a qualifying high-tech venture allows an investor to reduce personal or corporate Hawaii taxes by one dollar over a five-year period – are a valuable tool for creating business growth and new jobs in Hawaii, proponents argue.

Critics have questions the true economic value of the tax credits, in part because the identities of individuals receiving them are shrouded in secrecy, making the benefits of the program to the state difficult to measure.

And provisions of Act 221 that allow well-to-do investors to sell, barter or otherwise exchange tax credits have created an underground market in the tax credits, according to a 2002 Circuit Court lawsuit.

Miki’s statement said Rudy Tam, a Unity House investment consultant, testified before the federal grand jury that Unity House “sold the tax credits” it received from the Hoana Medical investment to other, unspecified Hawaii taxpayers.

Kurt Kawsfuchi, state tax department director, also testified before the federal grand jury, saying that “Unity House is a tax-exempt charitable organization not entitled to the Act 221 tax credit and thus could not sell it to wealthy investors,” Miki’s declaration said.

Kawafuchi declined comment yesterday, saying that “information about a specific taxpayer is confidential.”

Tam could not be reached for comment. His attorney, Eric Seitz, said Tam has served as a Unity House investment adviser and testified before the federal grand jury about his work for the organization and Tony Rutledge….

Tam, who is on the board of directors of Hoana Medical, has been “tied to several failed business investments made by Unity House,” Miki said in his declaration.

Tam does not have a personal bank account because of unpaid federal tax liens and child-support obligations, Miki said in his sworn statement.

Patrick Sullivan, head of Hoana Medical, could not be reached for comment yesterday. Hoana official Ian Kitajima said he was not privy to the details of the Unity House and Rutledge investments or Tam’s involvements in them….

Miki’s sworn statement also said the grand jury investigation has included testimony about political activities of Unity House when it was controlled by Rutledge. “The unchecked use of Unity House contracts and monies have resulted in political influence that has opened doors from which Rutledge has benefited personally,” the statement said.

Those activities included “contributions to individuals such as Robert Awana (Gov. Linda Lingle’s chief of staff), Romeo Mindo (a former state representative who was a Unity House employee) and (state Sen.) Colleen Hanabusa.”

Awana received a “generous consulting contract from Unity House to survey the members” from 1999 to 2000, according to Miki.

“The survey included questions to the members on whom they would vote for in the upcoming mayoral election,” Miki said.

After Lingle was elected governor in 2002, Tony Rutledge “had eleven meetings with the Chief of Staff for the Governor of Hawaii,” Miki said in his sworn statement….

Hanabusa, D-21st (Nanakuli, Makaha), said yesterday that she is Awana’s attorney and that he “testified freely before the grand jury and was told from the beginning of the investigation that he was not a target of the grand jury.”

Hanabusa said she did not know why she was named by Miki as a recipient of “contributions” from Unity House, pointing out that her political campaign is one among many that have received donations from the organization.

According to the criminal indictment of the Rutledges, Mindo introduced legislation in 2003 that allowed Unity House to transform itself from a “membership-based” organization to a “nonmembership-based” one that was directly controlled by Tony Rutledge. Mindo received an unsecured, $40,000 Unity House loan January 2004.

Seitz, who is also Mindo’s lawyer, said the loan was for home repairs and was unrelated to Mindo’s sponsorship of the Unity House legislation.

Lingle signed the bill into law in May 2003. Awana told The Advertiser last month that Unity House employee Michael Tanaka called him about the Mindo bill after it had been approved by the Legislature….

Awana said he did not speak to Lingle about the bill or tell her about Unity House’s interest in it.

Lingle herself worked for Unity House founder Arthur Rutledge in the mid-1970s and was named by the senior Rutledge to the board of directors of the Hawaii Pacific Cinema Development Foundation in 1981, resigning after she was elected to the Maui County Council.

The new criminal charges against Tony Rutledge allege that he improperly diverted $50,000 from the Cinema Foundation for a movie project in which he had a personal financial interest.

Awana said last month neither his past work for Unity nor Lingle’s more remote connection to the nonprofit affected their consideration of the worthiness of the Mindo bill.


March 25, 2005

Local 5 Sues Unity House

By Jim Dooley, Honolulu Advertiser

The Hawai’i hotel-restaurant workers union has filed a civil racketeering lawsuit against Unity House Inc., charging that former president Anthony Rutledge Sr. and other officers used Gov. Linda Lingle’s chief of staff Robert Awana, former state Rep. Romeo Mindo and others to divert millions of dollars of Unity House money for the personal benefit of Rutledge, his family members and associates.

The lawsuit, filed in federal court last weekend, does not name Awana as a defendant but calls him a “co-conspirator and/or wrongdoer” in an alleged scheme to defraud the nonprofit labor organization of assets.

Awana could not be reached for comment yesterday. His attorney, state Sen. Colleen Hanabusa, D-21st (Nanakuli, Makaha), yesterday said, “I don’t know anything about the suit. I can’t comment.” Hanabusa said in January that Awana testified before a federal grand jury investigating Unity House but was told he was not a target of the investigation.

Mindo’s attorney Eric Seitz said he hadn’t seen the suit and had no comment on it. He has previously said Mindo, a former Unity House employee, committed no wrongdoing.

The racketeering lawsuit was filed Sunday by the union and Eric Gill, head of the Hotel Employees and Restaurant Employees Union Local 5 and a longtime opponent of Tony Rutledge. Fourteen other officials and members of Local 5 are plaintiffs in the suit seeking unspecified monetary damages from the senior Rutledge and other defendants.

The lawsuit repeats many allegations in a criminal fraud case against Tony Rutledge and his son Aaron, a former Unity House executive. That case is scheduled to go to trial in federal court in May. Some of the allegations contained in the suit are also drawn from records introduced in court after federal agents seized control of Unity House Dec. 14.

IRS agent Gregory Miki said in a sworn statement justifying the Unity House seizure that, “The unchecked use of Unity House contracts and monies have resulted in political influence that has opened doors from which (Tony) Rutledge has benefited personally.”

One example cited by Miki was a “generous consulting contract” that Unity House gave Awana in 1999-2000 to survey union members. The Local 5 lawsuit said the value of the contract was $250,000 and the survey “included questions on whom they would vote for in the upcoming mayoral and other elections.”

The suit also repeated an allegation from Miki that Rutledge met with Awana 11 times after Awana became Lingle’s chief of staff in 2002.

Jeff Rawitz, defense attorney for Tony Rutledge, declined comment on the lawsuit other than to note that it was filed for Local 5 by T. Anthony Gill, brother of Eric Gill.

“That has the appearance of a conflict of interest because the brother who filed the lawsuit stands to make money from it regardless of the merits of the case,” Rawitz said.

T. Anthony Gill declined to respond to Rawitz’s statement.

Brian DeLima, attorney for Aaron Rutledge, said he had not seen the suit and could not comment on its contents….

Prominent Honolulu criminal defense attorney Michael Green, a former Unity House director, is also named as a defendant in the lawsuit. His office said yesterday Green was out of state and unavailable for comment.

David Louie, an attorney who represents another defendant, former Unity House director Arlene Hae, was unavailable for comment yesterday on the lawsuit.

Hae this month filed a legal protest against the government’s “usurpation of control” of Unity House, saying the takeover “impairs and impedes” the ability of Hae and other officers and directors to protect the rights and assets of Unity House.

In response, Anthony Pounders, the receiver appointed by federal court to run Unity House while the criminal case against the Rutledges is pending, said: “Even if some members of the prior management were not directly involved in any corporate mismanagement or malfeasance, I have found no evidence of any attempts to expose, investigate or otherwise stop such mismanagement or malfeasance.”

Pounders said the net worth of Unity House declined from $49 million at the end of 2001 to $31 million today, owing largely to bad investments.

He also said Unity House last year was billed $793,000 in legal expenses to defend the Rutledges in the federal criminal investigations.

Unity House has paid $50,000 a year for insurance coverages of its officers and directors but “failed to make a claim” for insurance coverage* of the legal bills, Pounders said.

“Instead, Unity House used its own money to pay Anthony Rutledge Sr.’s attorneys’ fees,” said Pounders.

Rutledge lawyer Rawitz yesterday declined comment on Pounders’ statements…

* (Catbird Note: Hmm…. An organization not filing claims when they have insurance? Attorneys Eric Seitz and Michael Green? Smell familiar? Go sniff out Claims By Harmon and Dirty Money, Dirty Politics & Bishop Estate)

~ ~ ~

For more on Governor Linda Lingle, Colleen Hanabusa, Robert Awana, and Eric Seitz, GO TO > > > Predators in Paradise; The Grand (and dirty) Ko Olina; Woo vs. Harmon

< < < FLASHBACK < < <

October 23, 2002

Attorney sued over movie financing deals

By Tim Ryan, Star-Bulletin

In a lawsuit revolving around financial incentives for film and television productions to work in Hawaii, April Masini is suing a local tax attorney and his law firm for malpractice and fraud.

Masini, owner of Hawaii-based Masini Television and Film Enterprises and Masini Enterprises in Los Angeles, filed a lawsuit in Circuit Court charging attorney Vito Galati and Honolulu firm Cades Schutte Fleming & Wright with breach of fiduciary duty, gross negligence, intentional interference of contractual relations, misrepresentation, fraud and unjust enrichment. Masini’s attorney is Philip R. Brown.

The suit alleges Masini had retained Galati for assistance in creating a business to secure film and television production work in Hawaii, with the lure being Act 221, a state law that provides tax incentives for certain high-tech investment, including film and TV production.

According to the suit, Galati would use his tax expertise to explain to Hollywood productions how Act 221 is structured and how to qualify while Masini would market the statute’s benefits to networks, distributors, studios, and producers in Hollywood.

Galati began representing Masini in Hawaii as her attorney beginning in fall 2001, the suit says.

The suit says one of the main reasons Masini retained Galati was to obtain “a comfort letter” from state Tax Director Marie Okamura assuring investors that participating studios or production companies were qualified for the incentives.

The suit alleges that once Galati received the letter he never forwarded it to Masini, not only thwarting her marketing efforts in Los Angeles but using it for his firm’s gain. Masini allowed Galati to approach several potential investors, including Bank of Hawaii and several local insurance companies, on her behalf because even as late as February this year she believed that the attorney was working for her, the suit says.

Galati in numerous e-mails to Masini acknowledges their partnership though apparently no written agreement exists, the suit says.

Masini and Los Angeles attorneys Adam Fields and John La Violette convinced Universal Pictures to use Act 221 for its “Blue Crush” film production, which Galati was expected to structure, the suit says.

When a deal with Bank of Hawaii to invest in the film fell through, Masini and Fields turned their attention to Damon Estate participation, but that also failed….

When Galati created the final “Blue Crush” transaction, Masini was no longer a party but an “agent” – though Galati’s role had “greatly increased,” the suit claims.

Cades moved Masini out of the ‘Blue Crush’ deal to gain an increased role and compensation for itself and its other clients,” the suit says.

In January, Galati allegedly sent Masini a new agreement that drastically altered her and Fields’ fee for the “Blue Crush” efforts and effectively put her in competition with Galati’s other clients for selling the tax credit structure and receiving the benefit of the sale.

“Galati had completely abandoned Masini but continued to use (her) contacts … to establish his position in the industry at Masini’s expense,” the suit says. Since partnering with Masini, Galati has been retained by other productions seeking Act 221 incentives.

Galati was not available for comment. In a written statement, the law firm said the lawsuit is “completely without merit” and they “intend to vigorously defend ourselves.”…



November, 2002

Tanonaka picked to head PBEC

Hawaiian Hard Drive

Dalton Tanonaka has been named as the new president of the Pacific Basin Economic Council (PBEC). PBEC represents more than 1000 international companies across 20 nations who have a total work force of 10-million people and revenues exceeding $4 trillion.

“Dalton’s experience and skills are exactly what we need to move PBEC’s agenda forward,” said PBEC Chairman S.R. Cho. “His credibility and ideas will help us reemphasize our role as the business voice of the region.”

Tanonaka worked at CNN International where he served as a main news anchor and recently left that position to run unsuccessfully for Lieutenant Governor. He has also worked as the City and County of Honolulu’s Economic Director.

Some Tanonaka’s goals include generating more interest from Far East Countries to do business here in the state, positioning Hawaii as the Pacific’s economic hub and convincing local business and government leaders of the importance of keeping PBEC based in Honolulu….

For more on Jeremy Harris and Dalton Tanonaka, GO TO > > > Predators in Paradise … and www.pritchettcartoons.com/expert.htm

For more on PBEC, GO TO > > > Broken Trust; The Indonesian Connection; Paradise Paved; Vultures of the Sandwich Isles; Yakuza Doodle Dandiesand www.keithpr.com/pacificall

For more on Cades Schutte … , GO TO > > > Buzzards of Paradise; Claims By Harmon; Dirty Money, Dirty Politics & Bishop Estate


March 20, 2004

Hawaii Business Leaders Seek
Changes To Act 221

By Sean Hao, Honolulu Advertiser

The state’s high-technology tax credit – which generated $112 million in investment in its first two years without an equal impact on the local technology industry – needs to be tightened, business leaders said.

State lawmakers are considering a five-year extension of the controversial Act 221 tax credit, which was set to expire next year. The recent disclosure that the tax credit led to $112 million in investment in 2001 and 2002 has left many business leaders wondering where that money went, given the small size of the state’s technology sector.

Many now believe that at most $50 million actually went to companies such Hoku Scientific, Hoana Medical, Firetide and other high-tech startups intended to benefit from the program.

If all $112 million was pumped into high-tech companies, “I would think it would be a lot more visible,” said Mike Fitzgerald, president and chief executive of Enterprise Honolulu. “It just can’t be accounted for.”

Proponents of Act 221 argue the credits promote business growth and create new jobs in a state dependent on tourism and the military. Critics contend the credits are overly generous, have failed to produce tangible economic benefits for the state and have been shrouded in secrecy that prevents public accountability….

Act 221 cost the state’s general fund nearly $60 million in its first two years. The cost to taxpayers is expected to reach $48.4 million this fiscal year and $76.7 million in fiscal 2004, according to state estimates.

Where much of the investments generated by those incentives went is unclear, though it’s likely at least a portion went to companies that took advantage of the act by shifting certain technology-related work into subsidiaries that could qualify for the credits. Though legal under the law, such transactions don’t necessarily result in new investment or jobs.

“Here’s where the critics of Act 221 may be right,” Fitzgerald added. “If there’s lots of companies that are just shifting things to qualify, that could be the answer to why it’s so high. If that indeed is happening then it is being abused because that is not new research that is happening.”

The Lingle administration, the Hawaii Technology Trade Association and others are mulling ways to rein in the act while extending it through 2010. However, just what changes are required is a subject of disagreement as is the level of alleged abuse….

Most business leaders and lawmakers agree Act 221 was intended to benefit startup, high-tech companies….

“Intended is always in the eye of the beholder in some ways,” said David Watumull, president and chief executive of Hawaii Biotech, which raised as much as $5 million in 2001 and 2002 with help from Act 221. “In some cases these (subsidiaries) are legitimate and in a number of cases they’re not.”…

The most restrictive changes are being proposed by Honolulu corporate attorney Greg Kim, who represents several technology companies, including Hoku, AssistGuide and Hoana. The Lingle administration and HTTA are proposing less-restrictive changes. 

“I don’t know where that ($112 million) went,” Kim said. “It didn’t go to our clients. I’d be surprised if it all went into startups.”

Kim suspects some of that money went to artificial companies created with the intent of providing tax breaks….

The concern is some companies took advantage of Act 221 to give investors a two-times or greater return on their money through tax credits without doing much to create technology jobs.

That makes it more difficult for traditional technology companies that take a conservative approach to the program, said Dustin Shindo, president of Hoku, which raised $1.6 million in Act 221 investments in 2001 and 2002 and is developing fuel cell technology for Sanyo Electric Co.

“I’ve seen that there’s a lot of those going on, but it’s difficult to quantify,” Shindo said.

$ $ $

April 25, 2004

Local tech firms defend outsourcing

by Dan Martin, Honolulu Star-Bulletin

James Kerr sits down in front of his laptop and types in the Web address of www.rentacoder.com, a virtual marketplace for freelance software programmers around the world. His face brightens as the page loads.

“Is this unbelievable or what?” asks Kerr, president of computer-services company SuperGeeks, while scrolling wildly through the bios of some of the 71,000 programmers – many of them in underdeveloped Asian countries that can offer ultra-competitive rates.

“I’m like a kid in a candy store.”

Others are less enthusiastic about the site’s possibilities. With an election approaching, outsourcing has become a political football due to concerns about the wholesale export of American IT jobs, and several states are considering legislation to staunch the flow.

That leaves small local IT entrepreneurs like Kerr feeling like they’re between a rock in a hard place. They don’t like being painted as anti-American, yet outsourcing is a crucial weapon for staying competitive in the increasingly cutthroat and globalized IT industry….

For Kerr, the numbers speak for themselves. Software programmers in the U.S. charge anywhere from $60-$300 an hour.

“I couldn’t take on a top-notch in-house local programmer for $60,000-$100,000 a year without a ton more work,” he says.

As a result, much of Kerr’s work goes to people like Ricardo Budianto, a programmer in Indonesia who does “coding”, or software programming, for just $15 and hour, a tidy sum in that country.

The flow of jobs to cheaper overseas workers has grown rapidly in the past couple of years as American firms outsource everything from data entry operations to call centers. A recent report by global consultants Ernst & Young LLP said the outsourcing sector in India – a hotbed of outsourcing due to its low-cost, English-educated workforce – grew by 50 percent for the second straight year in the 12 months that ended March 31.

“You can’t go into this type of business these days without that international leverage,” said Kevin Horio, a Maryknoll High School graduate who founded locally based software services firm Dimensia Inc. in 1996. The firm, which crafts software mainly for East Coast clients, began outsourcing programming work to Asian countries about four years ago in order to stay competitive….

Horio said efforts by the state to spur the growth of Hawaii’s high-tech sector, such as the Act 221 tax credit for technology firms, are helpful. But in order for local companies to stay nimble in the ultra-competitive hi-tech field, they need to jump feet-first into outsourcing….

Local entrepreneurs involved in outsourcing admit being stung by the growing anti-outsourcing sentiment.

But that sentiment flies in the face of 15 years of American trade policy, said Virendra Nath, founder of HDEP International, which employs overseas workers to perform data entry and transcription work for mainland insurance companies.

“We’ve put great pressure on other countries to open up their markets. If we now close off the outsourcing market, other countries might shut off their industries again,” he said.

Nath, who now has 650 workers in the Philippines and his native India, founded his company in Hawaii in 1983 to serve insurance companies that could not find stable or dedicated American employees….

It’s a trend that will continue as other countries catch up to the U.S. in technical skills, said Dieter Ernst, an East-West Center expert on the impact of globalization and information technology on economic growth….



April 25, 2004

AIG experiments in reverse outsourcing

By Dan Martin, Star-Bulletin

It seems like a computer glitch.

As a growing number of American companies outsource work to cheaper countries, insurance firm AIG Hawaii has turned that trend on its head by bringing a team of Indian software experts to its Restaurant Row headquarters.

They have come to help launch a new technology wing at the company in a case that illustrates both the challenges and opportunities afforded by cross-border outsourcing.

AIG’s local technical development operations had been on the chopping block as its mainland corporate headquarters sought ways to consolidate some functions in the giant company, said AIG Hawaii president and CEO Robin Campaniano.

Effectively, the Hawaii operations were going to be outsourced to the mainland….

To avoid that, Campaniano used the Act 221 high-technology tax credit for new enterprises to set up a new operation called the AIG Hawaii Development Center, which now competes with six other such AIG centers around the world for software development and database management projects both in-house and from outside the company.

The move has saved 25 jobs and added another 10, Campaniano said. But to make the operation truly viable, AIG had to call on the same sort of Indian computer expertise that has caused many American technical jobs to flow East.

The six Indians now working for AIG Hawaii are here for at least a year to train AIG’s local workers in Java programming language and to implement a more advanced technology platform.

Like a growing number of other Indian computer engineers, Krishnan and his group work for an Indian consulting firm that hires out technicians to American firms like AIG eager for the combination of low prices and increasingly savvy computer skills to be found in India.

The loss of jobs to overseas outsourcing has caused a hue and cry this campaign season, but Krishnan said the AIG Hawaii case shows that ths issue is not so cut and dried….

Campaniano acknowledged the use of the tax credit leaves AIG open to criticism. Concerns have been raised that firms like AIG Hawaii have abused the act, which is aimed at encouraging the creation of new jobs by offering a one-dollar tax break for every dollar invested in a new high-tech venture….

“If we can compete evenly with the other centers and get even one-sixth of that, we’re going to need to hire a lot more people,” he said.

For lots more on AIG, GO TO > > > The Un-American Insurance Group


July 28, 2004

Venture capital hits $16M in Islands

Honolulu Advertiser

Hawaii companies raised $16.3 million in venture capital during the first six months of this year, surpassing the total of $15.6 million raised for all of 2003, according to figures released yesterday.

The bulk of this year’s money – $13.6 million – was raised in the second quarter by Firetide Inc., a wireless computer networking company. The remaining $2.7 million was raised by Hawaii Biotech in the first quarter, according to a survey from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

Firetide, a beneficiary of Act 221 state technology investment tax credits, said the follow-on financing will be used to expand sales and marketing as well as for product development.

Firetide moved its headquarters from Honolulu to Los Gatos, Calif., in February in an effort to attract more investment, but the company maintains offices in Honolulu….

< < < FLASHBACK < < <

October 22, 2003

Tech Exodus Continues

By Tim Ruel, Star-Bulletin

Here we go again.

Tareq Hoque, former head of Adtech in Hawaii, is now the former head of Firetide Inc., a wireless networking technology firm that is moving its management to California from Honolulu.

Hoque, who co-founded Firetide two years ago, is resigning immediately as president and chief executive, though he will remain on the company’s board and have a significant stake in the company’s future….

The pickle is that Firetide, a private company, needs to raise millions of dollars in venture capital on the road to offering its stock publicly. Over the past several months, the company has found there’s not enough venture capital for Firetide in Hawaii, but there is in California, Hoque said.

It’s the same story the state has seen before. Digital Island moved to San Francisco before it went public in 1999 (the company was later sold). Venture capitalists based in California want to be close to their investments, not a five-hour flight away.

Many in Hawaii’s fledgling tech industry have cried out for more money for years, appealing to the state’s vast institutions. The venture capital deals that do happen here – though relatively small – draw fanfare simply because there’s not much going on.

One exception was Internet data center firm Pihana Pacific, which attracted $236 million in venture capital, but closed headquarters here last year in a merger.

Firetide has raised $3.2 million, but it needs more. Hawaiian Electric Industries Inc. has invested in Firetide, but so has Menlo Ventures of Menlo Park, Calif.

It is a story that Hoque is painfully aware of. He’s the former head of the Hawaii Technology Trade Association, which has lobbied the state for high-tech incentives. In 2001, Hoque quit as president of high-tech firm Adtech shortly before the company moved assembly jobs to California.

Hoque said the ability to launch companies in Hawaii has improved, thanks in part to high-tech tax credits, but the ability to keep them is constrained.

He noted that Firetide is also looking for management that can take the company public….

Hoque said the decision to resign was made over the past several weeks between him and Firetide’s board. Only four months ago, Firetide announced it planned to hire bunches of workers in Hawaii….

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August 12, 2003

Biotech Venture Poised for Success

By Sean Hao, Honolulu Advertiser

By locating atop the former Gold Bond building on Ala Moana, Tissue Genesis Inc. hopes to be close to the business opportunities generated by the University of Hawaii’s planned $150 million medical center in Kakaako.

Tomorrow, the biotech company will bless its new office and lab on the 11th floor at 677 Ala Moana. The move represents a $3 million to $5 million investment and one of what’s hoped will be many such ventures that will collaborate with the John A. Burns School of Medicine, which is expected to open its new site nearby in the spring of 2005.

Formed in 2001, Tissue Genesis is developing tissue replacement products to improve survival rates for trauma injuries, cardiovascular diseases, cancer and metabolic diseases. Anton Krucky, Tissue Genesis president and chief executive, said the company moved from Honolulu high-rise Harbor Court to 677 Ala Moana specifically so it could share researchers and facilities with the university….

The company’s main product, called the Bio-Optimization System, is a way of creating an engineered environment for cell and tissue growth …

Tissue Genesis’ work is partially financed by a $5 million a year tissue engineering grant from the Defense Department, as well as investments fostered by technology industry tax incentives such as Act 221, Krucky said….

Krucky was pragmatic about Tissue Genesis’ future, which relies on continued government grants, an infusion of investment capital and attracting additional business partners….

For more on the John A. Burns School of Medicine, GO TO > > > Kajima


January 25, 2003

Court ousts Summit management

A trustee will reorganize the finances of
the Honolulu telecommunications firm

By Tim Ruel, Honolulu Star-Bulletin

A U.S. Bankruptcy Court judge has ordered the management of Honolulu telecommunications firm Summit Communications Inc. to be replaced by an appointed trustee who will attempt to reorganize Summit’s finances while it remains in bankruptcy.

In a hearing yesterday, U.S. Bankruptcy Judge Robert Faris rejected an assertion by management that Summit’s immediate ability to do business would suffer under a trustee. Faris said there were big risks in not appointing a trustee.

The decision brings to an end to a growing dispute between Summit’s management, some of its shareholders and its largest creditors – the state of Hawaii and the U.S. government – over the appointment of a trustee.

The argument goes back to revelations that the company once owed more than $1 million in back taxes, including penalties and interest. Taxes receive a high priority for repayment in bankruptcy. Since Summit’s assets would yield little in a liquidation, the only way to pay the taxes and other creditors is for the firm to stay in business.

The government has long sought the appointment of a trustee, alleging that Summit’s management is made up of essentially the same people that led the company to such a major tax problem.

Summit, which provides call-center and telephone services, was founded in 1996 by Harry Johnston, a former executive of Hawaiian Telephone, and Richard Ichikawa, a former engineer of Hawaiian Telephone.

The firm’s tax problems started in late 1997 and worsened over the next several years, though Summit’s board of directors was not told about the tax liability until late 2001, according to sworn court declarations by Ichikawa and Alan Brown, who were board members at the time.

Harold Johnston resigned as president and was replaced by his son, Grant Johnston.

Ichikawa left Summit’s board shortly before the company filed Chapter 11 reorganization bankruptcy a year ago, though Ichikawa still owns one-quarter of Summit. Ichikawa initially opposed the appointment of a trustee, because he was afraid the firm would be liquidated, but eventually changed his mind.

The government’s call for a trustee was backed by an examiner’s scathing report of Summit in December. The report said the company had kept poor track of its finances, even in bankruptcy and that several questionable thousand-dollar payments had been received by Grant and Harry Johnston, which should be investigated by a trustee….

Following disclosure of the examiner’s report, Summit convened a board meeting and discussed several options, including liquidation, though that was ruled out, Grant Johnston said.

In a court document, Summit said the examiner, Mark Yee, focused on matters that happened before Harold Johnston stepped down, which provided an inaccurate picture of Summit’s situation.

Summit said Yee’s report was based on a superficial review of records, in which the company was not given a chance to give its side of the story. Summit later deposed Yee.

In court yesterday, Summit attorney Steven Guttman said there was no major problem with how Summit presented its finances after filing for bankruptcy.

Judge Faris noted that the examiner did his job as spelled out in an agreement last year between Summit and the government.

In court, Summit conceded that it needs investment badly to stay in business, but said it had found an investor who was willing to put in $500,000.

Judge Faris pointed out that $500,000 would not likely cover the outstanding amount of the tax claims.

After yesterday’s court ruling against the company, Grant Johnston said, “Obviously we’re disappointed because I felt that our argument was compelling.”

The U.S. Trustee’s Office will appoint a trustee to Summit shortly, after talking with all sides in the dispute….

* * *

May 14, 2003

Summit loans questioned

Money loaned to the bankrupt firm’s CEO resulted
in improper payments, a new lawsuit contends

By Tim Ruel, Honolulu Star-Bulletin

A politically adept telecommunications company financed primarily by the federal government has several connections to troubled firm Summit Communications Inc., including a $456,793 loan that is being questioned by a bankruptcy trustee.

Sandwich Isles Communications Inc., headed by Al Hee, loaned the money in March 1998 to Summit through Summit’s then-chief executive and part-owner, Harold C. Johnston, according to a lawsuit. In 2001, Harold Johnston received $8,400 in interest payments from Summit for the loan.

Harold Johnston denied loaning the money to Summit.

Summit filed Chapter 11 reorganization bankruptcy in February 2002, owing more than $1 million in federal and state taxes, including penalties and interest.

Because of revelations over Summit’s tax problem, the company’s management was removed by the U.S. Bankruptcy Court. Now, the trustee in Summit’s Chapter 11 bankruptcy case says Summit’s dependency upon Sandwich Isles was not disclosed to the company’s board of directors.

The trustee, Derek J. Sakaguchi, filed a lawsuit April 30 in U.S. Bankruptcy Court against Harold Johnston and his sons Grant Johnston and Chad C. Johnston, who were all officers of Summit.

The five-count suit said Harold Johnston misled some of Summit’s directors, investors and creditors about the relationship with Sandwich Isles, which allowed the company to continue to operate under the status quo when it was in trouble.

The lawsuit also accuses the Johnstons of receiving excessive compensation and benefits….

Hee, president of Sandwich Isles, and Harold Johnston confirmed that Sandwich Isles made a loan to Johnston. “Whatever happened between me and Sandwich Isles is a private and personal matter,” Johnston said.

They declined to answer any questions about the loan, including its status or its purpose.

However, the lawsuit said: “A loan for $456,793 to SCI made in March of 1998 was shown on SCI’s financial statements as a loan made by Harold Johnston. In fact the $456,793 was loaned and funded by Sandwich Isles.”

The loan was secured by a pledge of Harold Johnston’s stake in Summit, the lawsuit said. Harold Johnston owned 37.7 percent of Summit as of January 2003, while Ichikawa owned 25.1 percent.

Sandwich Isles is working on a $500 million fiber-optic cable telecommunications system that would link all Department of Hawaiian Home Lands residents who lack telephone service.

Of that, $400 million will be paid through a loan from the U.S. Agriculture Department’s Rural Utilities Service, which will be almost entirely repaid by the Federal Communications Commission.

The federal funds are meant to pay solely for the construction of the telecommunications network, a Sandwich Isles spokeswoman said.

Al Hee is brother to former Office of Hawaiian Affairs Chairman Clayton Hee.

Robert Kihune, trustee of the Kamehameha Schools, is chief executive of Sandwich Isles.

Al Hee said the loan to Johnston did not involve any federal funds.

Claiborn Crain, spokesman for the Rural Utilities Services in Washington, D.C., said yesterday he was not aware of any problems with the Sandwich Isles’ federal loan.

Sandwich Isles has another connection to Summit Communications. Summit, founded in 1996, began providing technical services to Sandwich Isles around April 1998, the lawsuit said. That was around the same time that Sandwich Isles loaned the money to Johnston.

Also around that time, Johnston stopped spending time with Summit and became general manager for Sandwich Isles.

Sandwich Isles soon provided nearly half of Summit’s total annual revenue through the technical services arrangement, nearly $1 million a year, the lawsuit said.

But the money began decreasing “dramatically” in the fall of 2001, a few months before Summit filed for Chapter 11 reorganization bankruptcy, the lawsuit said.

Summit has other sources of revenue. Another large source was a contract to provide call-center services to the Hawaii Visitors & Convention Bureau, starting in May 2000, which brought $30,000 to $50,000 in revenue for Summit each month. The bureau said it is negotiating a new contract with Summit….

When asked why Sandwich Isles cut back on its business with Summit, Hee said the decision was handled by his operations people. Hee declined to give their names.

After Harold Johnston began working for Sandwich Isles, Chad Johnston became responsible for day-to-day operations at Summit.

During this time, the company expanded too quickly, misused corporate funds, failed to pay bills and didn’t keep the board informed, the lawsuit said.

In a letter to Summit shareholders, Harold Johnston said he was not aware until January 2001 that Summit was not paying its taxes.

Harold Johnston said an outside accountant had been handling those affairs, and was terminated. He declined to name the accountant.

The court-appointed examiner has described Summit’s pre-bankruptcy books as worthless….

Johnston said he accepts some responsibility for Summit’s financial problems, but he did not commit fraud or other misdeeds.

The lawsuit seeks repayment of the $8,400 in interest that Harold Johnston allegedly pocketed from the loan to Summit, as well as repayment of a $50,245 loan Summit allegedly made to Harold Johnston. The lawsuit also seeks actual damages and punitive damages.

For more, GO TO > > > Vultures of the Sandwich Isles


June 9, 2001

State sues tech firm
to recoup losses

By Tim Ruel, Star-Bulletin

The state is suing one of Hawaii’s former high-tech star companies over an outstanding $810,000 government loan and is seeking to foreclose on the Oahu properties of the firm’s founders.

The lawsuit, filed yesterday in First Circuit Court, is over a 1995 loan of $580,000 to WorldPoint Interactive Inc. under the Hawaii Capital Loan Program, which seeks to help businesses having trouble finding capital. Interest added $230,000 to the initial amount.

The state is suing to get whatever payment it can for the loan….

For more, GO TO > > > Pointing the Finger at Worldpoint

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Last updated October 4, 2006, by The Catbird