Bobby N. Harmon, CPCU, ARM

October 10, 2000

Janet S. Hughes, Mgr.
Employee Plans & Exempt Organizations
Internal Revenue Service
1244 Speer Blvd., Ste 442
Denver, CO 80204-3583

RE: Reasons the IRS Should Not Approve Kamehameha Schools’ Insurance Settlement

Dear Ms. Hughes:

According to recent news articles, the insurance settlement reached between Kamehameha Schools, the State of Hawaii and Federal Insurance Company is dependent upon approval by the Internal Revenue Service. Because the terms of the agreement are under Court seal, and thus hidden from the taxpaying public, I feel compelled, once again, to comment on this matter. And because the settlement negotiations were held in secret, my comments must necessarily take a “shot-gun” approach rather than zeroing in on particular issues.

To keep things as brief as possible, however, these comments will be limited to certain entities and individuals involved in activities which resulted in “excess compensation” as defined under the “interim sanctions” regulations, and which, apparently, are still continuing under the current management:

I. Attorneys and Law Firms

Nathan Aipa, Louanne Kam, Lyn Anzai and Colleen Wong directly engaged the following firms to handle insurance claims without the required authorization of the insurance companies, including P&C:

            Cades Schutte Fleming & Wright (Michael Hare)

            Chee & Markham (Kevin Chee)

            Devens Lo Nakano & Youth

            Watanabe Ing & Kawashima (Douglas Ing and James Kawashima)

            Goodsill Anderson Quinn & Stifel

            Law Offices of Stanford Manuia (Stanford Manuia)

            Torkildson Katz Jossem Fonseca Jaffe Moore & Heatherington

            Carlsmith Ball Wichman Murray Case & Ichiki

Once the firms were engaged, the named KSBE employees “controlled” and “managed” the claim directly with outside counsel, deliberately disregarding insurance company guidelines regarding the use and payment of these firms.

Nathan Aipa, as principal executive of the Legal Group, had ultimate approval of all legal bills including P&C Insurance Company’s, which violated “arms-length” guidelines. Aipa would frequently pay these legal fees and costs from his General Counsel Account, without approval from the insurance companies. Often the amounts billed by the law firms exceeded allowable fees and costs provided in the insurance company guidelines. When, if ever, KSBE submitted the legal bills to the insurance company, many of the charges were disallowed. This practice led to the loss of millions of dollars that were never recovered from the insurance companies.

In the case of claims under P&C Insurance Company policies, Nathan Aipa, Louanne Kam or other KSBE attorneys directed that P&C pay the bills even though the outside firms flagrantly disregarded P&C’s written guidelines.

These outside legal firms reported directly to in-house counsel, rather than to the insurance companies. In-house attorneys, including Aipa, often would not disclose critical information to the insurance carriers in these “sensitive” claims, resulting in further millions lost to the estate due to “non-cooperation”.

This situation became particularly suspect and troublesome when these same KSBE employees handled claims in which they had also participated in the original activity which led to the claims. They may have been potential witnesses— even defendants— in resultant lawsuits. These were extremely serious “conflict of interest” situations.

With P&C this became even more critical due to the obvious violation of “arms-length” principles, which potentially exposed the estate to unlimited losses beyond the actual insurance policy coverages and limits of liability.

During my years at KSBE, the following are just some cases in which KSBE and P&C funds were misused in the handling of insurance claims which resulted in “excess benefits” to outside attorneys:

            McKenzie Methane

            Kona Enterprises

            Ted Fields

            Robert Trent Jones Golf Club

            McConnell vs. KSBE

            William Rosehill

From all public accounts, these corrupt practices appear to have continued— unhindered and unabated— from the time of my departure until the present, under both the ex-trustees and the interim trustees, and under present top management.

II. Accounting Firms/Representatives

The roles that these two firms played are well-documented in my own RICO lawsuit against the estate, and will not be repeated here:

            Coopers & Lybrand LLP (Dennis Tsuhako)

            Price Waterhouse (Mark McConoghy)

These two firms, as you no doubt are aware, have since merged and the single entity is now PricewaterhouseCoopers.

III. Insurance Companies and Agent/Brokers

The roles of the following firms are also detailed in my RICO lawsuit:

Marsh & McLennan (Hawaii) (Rocco Sansone, Christine Lee)

M&M Insurance Management Services (Peter Lowe)

Federal Insurance Company

My estimate of excess payments to Marsh & McLennan by Kamehameha Schools and P&C Insurance Company during the term of my employment with them would approach one million dollars. From all indications, these excessive payments to Marsh & McLennan have continued unabated during the nearly four years since my termination, under both the ex-trustees and the interim trustees.

IV. Other Subsidiary Companies and Independent Contractors

In my letter dated November 11, 1997, addressed to Carolyn Woods of the IRS, I provided information regarding what were suspected to be fraudulent tax returns filed by Bishop Estate, P&C Insurance Company, and Pauahi Holdings Corp. Among other things, I reported that:


1.         There was a failure to disclose conflicts of interest and other financial information in federal tax returns as regards personal investments by certain trustees, executives, managers and employees in related for-profit companies controlled by KSBE.


2.         IRS rules regarding the maintaining of “arms-length” relationships between a tax-exempt charitable organization and its for-profit subsidiaries were apparently being breached.


For example, at the direction of Henry Peters, Nathan Aipa, Louann Kam, Eric Martinson, and others, KSBE paid premium charges, legal fees and claims costs that should have been paid by the for-profit subsidiaries (e.g. Kukui, Inc., Sino Finance, Unison Pacific, SoCal, AFCO, Paradise Petroleum, etc.), or by individual trustees, officers, directors or employees.


Services were being provided by KSBE employees to P&C and other for-profit entities at no cost to the subsidiaries. In effect, KSBE was subsidizing these for-profit entities, which resulted in larger profits for the subsidiaries (and larger commissions for the Trustees).


The operations of P&C, including claims and investments, were being controlled by Henry H. Peters, Nathan Aipa and Louanne Kam. This included directing the payment of “excess benefits” to independent contractors for non-bid or non-existent contracts. . . .


Insurance premiums and loss costs were being improperly allocated to lessees and tenants of KSBE properties. Many of the insurance policies for KSBE and its subsidiaries combine coverages for all entities under the same “blanket” policies. These insurance premiums, as well as the claims costs which were paid under self-insured retentions and deductibles, were allocated to the Kamehameha Schools, to Bishop Estate, and to covered subsidiaries. These charges, in turn, were further allocated to specific commercial projects, such as Royal Hawaiian Shopping Center, Windward Mall, Keauhou Shopping Village, Bishop Commerce Center (Georgia), Desert Springs Marketplace (California), etc. . . . Costs which were allocated to the commercial projects were nearly 100% recovered from the lessees and tenants through their monthly maintenance fees. Due to directives of Nathan Aipa, Louann Kam, Eric Martinson and others, these insurance costs were being improperly allocated, resulting in unfair charges to the tenants and lessees of these projects. The “overcharges” being made by M&M would also be included in these insurance costs that were passed through to tenants and lessees.


A portion of these improperly allocated insurance costs were also paid from the millions of dollars of Federal grant funds….


Several of P&C’s claims were being directed by Louann Kam or other KSBE in-house attorneys. An example was the Larry Ching flood damage claim. Kam, in conjunction with Aipa, wanted to hire an outside attorney and an expert to handle this claim. In keeping with P&C’s “arms-length” guidelines and its Operations Manual, only P&C’s contracted independent adjuster, John Mullen & Co., was authorized to hire attorneys and experts. Furthermore, this involvement by Aipa and Kam was ,,, at the direction of Trustee Richard Wong who wanted to see what we could do to “settle this claim”, which had previously been denied by Mullen …


3.         Annual financial statements for KSBE and P&C, which were prepared by Coopers & Lybrand, failed to disclose large claims, and to show adequate financial reserves for these claims (e.g., the McKenzie and Kona Enterprises, claims).


4.         It was reported that KSBE guaranteed several large bank loans (including loans from Bank of Hawaii) to “insider partners” in several investments.


5.         It was reported that an “insurance policy” was issued to Robert Rubin to protect his financial interests in Goldman Sachs while he is serving as U.S. Treasury Secretary. … to my knowledge, no actuarial studies were made, no reinsurance was obtained, and no reserves were established to cover this substantial financial guarantee. …


6.         There was coercion of employees, by means of threats of discipline or termination, to violate laws or to “look the other way” while superiors engaged in illegal or unethical acts, such as: the altering and/or falsifying of staff reports, board minutes and contracts; directing notaries public to notarize documents without their witnessing the signatures or personally signing the notary logs; collusion with independent contractors to conceal and cover-up wrongful acts; and misuse of the “attorney-client privilege” to prevent the disclosure of these acts.


7.         In my capacity as president of P&C, I refused to sign the annual financial statements prepared by Coopers & Lybrand for the fiscal period July 1, 1995 to June 30, 1996. The basic reasons that I declined to sign was due to the attempts by Henry Peters, Nathan Aipa and Louann Kam to direct all areas of P&C’s operations and investments, including the improper awarding of contracts and settlement of claims. I discussed these irregularities with Cary Okawa and Dennis Tsuhako of Coopers & Lybrand on October 18, 1996, and followed-up with a letter dated November 20, 1996, in which I enclosed documents that provided evidence of these wrongful acts. A copy of this letter was sent to the Hawaii Insurance Commissioner. . . .

A basic scheme with P&C Insurance Company involved having KSBE employees provide free services to P&C’s operations while being paid by KSBE. Then Marsh & McLennan would invoice P&C for the services which were actually performed by KSBE’s employees (myself included). During my tenure, the amount billed by M&M to P&C was $200,000 a year.

A second scheme probably cost KSBE even more in dollars, but is more difficult to prove and to determine an exact amount: the premium overcharge for various insurance coverages that were handled by Marsh & McLennan as KSBE’s broker.

From all indications, this subsidizing of P&C Insurance Company by Kamehameha Schools is still continuing. According to the Attorney General’s office, the latest annual report for P&C showed Henry Peters as Chairman of the Board, and Louanne Kam as an officer. Rodney Park was President.

A more recent indication: On October 8, 2000. Kamehameha Schools ran a Help Wanted advertisement in The Honolulu Advertiser for a “Risk Management Claims/Safety Administrator.” The listed qualifications included: “Bachelor’s degree in Business Management and more than ten years with Independent Adjusters license. Demonstrated ability to prepare reports & analysis of loss ratios, experience modifications, and market trending of the P&C industry and apprises appropriate parties of findings. … Ability to work with extremely sensitive and confidential information.”

From what I know of the job descriptions for employees of Kamehameha Schools and P&C, this position would more appropriately fall under the operations of the insurance company (P&C) rather than the insured (Kamehameha Schools and its subsidiaries). Normally, only insurance companies (and independent claims adjusters) would require someone with more than ten years of experience and an Independent Adjuster’s license. This strongly suggests that the tax-exempt entity is continuing to subsidize a for-profit subsidiary.

Kamehameha Schools even lists one possible reason for their keen desire for this arrangement — so that their legal department can continue to control and hide “extremely sensitive and confidential information.” This is again reminiscent of KSBE’s improper involvement in handling the McKenzie Methane, Kona Enterprises, William Rosehill, Ted Fields, McConnell, and Robert Trent Jones claims during my tenure.

A number of other outside contractors and entities that were allegedly involved in “kick-backs” and other schemes were described in detail in various Masters’ Reports and Attorney General Reports. They are too numerous to describe here. However, I would like to mention a few entities which seem to have escaped unscathed:


Stay and Sons

            National Housing

            Bank of Hawaii

            WCI Communities

            Orion Partners

            Kukui, Inc.

            Xiamen International Bank

            Azabu Building

            Mitsui Trust

            Sukamto Sia

The scheme involving Stay and Sons was detailed in my RICO lawsuit. The alleged kick-back scheme with National Housing, Jeff Stone, Henry Peters and Richard Wong was revealed in the Attorney General’s investigations and Master’s Reports. I have previously reported to the IRS the connections between WCI Communities, Orion Partners, the MacArthur Foundation, Adele Smith, Charles Harmon, Marsh & McLennan and Bedford Properties (in connection with the Paul Silvester and Connecticut State Treasury scandals). Bank of Hawaii’s involvements were described in my RICO lawsuit.

To my knowledge, no agency has yet officially reported on the suspicious relationships with the other entities listed above. In my opinion, someone should— before letting the insurance companies off-the-hook with a global settlement.

V. Kamehameha Schools’ Executives and Employees

It is clear that the ex-trustees did not operate alone in the alleged theft of hundreds of millions of dollars from the estate. It takes the consent and cooperation of key executives and managers to facilitate such a broad misuse— even embezzlement— of trust funds. Details were given in documents which were previously provided to your office by a third party.

VI. P&C Insurance Company, Inc.

The following individuals were involved in the alleged schemes to defraud P&C Insurance Company, and its insureds (including commercial lessees,) and to provide excess compensation to the ex-trustees (in the form of commissions) and to independent contractors:

            Henry H. Peters, Chairman, Board of Directors

            Gilbert Tam, Director

            William Richardson, Director, Secretary/Treasurer

            Peter Lowe, Vice-President

            Nathan Aipa, Asst. Secretary/Asst. Treasurer

            Rodney Park, President

            Louanne Kam, Officer

            Marsh & McLennan, Inc.

            Bank of Hawaii

            William M. Mercer, Inc.


Details of the culpability of these various entities are provided in my RICO lawsuit.

VII. Individual Co-Investors in KSBE For-Profit Businesses

According to newspaper reports, in 1989 the four KSBE Trustees, Peters, Takabuki, Richardson and Thompson approved of the investment of approximately $85 million in a Houston-based energy venture with McKenzie Methane. (Trustee Lyman had recently passed away and a fifth trustee had not been appointed.) This same venture also received more than $3 million in personal funds from all four trustees and employees and business associates of the estate.

The Honolulu Advertiser reported in their February 26, 1995 issue that: “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 Byrne. . . 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’. . . The current board is almost completely different from that of 1989. Only one trustee, Henry Peters, remains. But the current board still holds that the old one did nothing wrong, according to Aipa. ‘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.”

This same news article went on to describe 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 firm 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. . .

According the Honolulu Advertiser article, other co-investors included:


Henry Peters (trustee)

William Richardson (former trustee and Sec./Treasurer of P&C)

            Myron Thompson (former trustee)

            Matsuo Takabuki (former trustee and subsequent consultant)

Dave Thomas (owner of Wendy’s restaurants and co-investor with KSBE on several other projects)

William E. Simon (former U.S. Treasury Secretary, and co-investor with KSBE on several other projects, including HonFed Savings & Loan, Sino Finance, Xiamen Bank (China), and SoCal Holdings)

Wayne Rogers (the actor, who later brought suit against KSBE for the Kona Enterprises deal)

            Bruce Nelson (treasurer of the Rockefeller Group)

            Raymond Pettit (CFO of the Rockefeller Group)

Frederick “Ted” Field (three Field employees also invested. . .Field was the estate’s partner in the corporate takeover of European conglomerate DRG, Inc. Field later brought suit against the estate in a co-investment deal involving The Pantry)

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, KSBE; currently, an officer of Bank of Hawaii and director, P&C)

            Guido Giacommetti (then Director of Asset Management, KSBE)

Anthony Sereno (deceased, then Board of Directors, Royal Hawaiian Shopping Center, Inc.)

            Neil Hannahs (head of the estate’s Kakaako development project)

            Charles Maeda (head of Information Services Division, KSBE)

            Richard Wong (president of RHSC and Pauahi Holdings Corp.)

            Wallace Tirrell (then president of Kamehameha Investment Corp.)

            Gilbert Ishikawa (KSBE tax manager)

            Ed Hendrickson (KSBE Financial Assets Division)

Rodney Park (then KSBE Controller; currently Director, Administration Group, and President, P&C)

            Wally Chin (then Deputy Controller; currently Controller, KSBE)

            Donald K. H. Pang (father of KSBE Budget Dept. employee, Leeanne Crabbe)

Many important questions remain unanswered (or at least hidden from the public) regarding these co-investment deals:

Were special deals made whereby “insiders” gained excess financial benefit at the expense of the estate or its subsidiaries?

Did KSBE improperly guarantee the loans of any of these individuals with the Bank of Hawaii or other lending institutions?

Did KSBE or any of its subsidiaries illegally “bail out” the individual co-investors when McKenzie Methane, Accessory Place, and other subsidiaries declared bankruptcy?

Did the insurance companies and the individual investors pay their fair share of the millions in legal costs involved in the many suits and countersuits— or were they borne in their entirety by the estate?

Will the recovery of funds from outside legal firms, as recommended by Special Master Robert Richards, be pursued by current or future management and trustees?

To summarize, then, some of my major concerns:


1.         The undisclosed settlement agreement. With the settlement documents sealed, how are the beneficiaries and the general public to know whether the final settlement was fair and reasonable? Have the current trustees and CEO, for example, pursued legitimate fidelity insurance claims against Milton Holt, Yukio Takemoto, Rodney Park, Nathan Aipa, Henry Peters and others for their roles in the illegal scheme to pay Holt’s campaign finance debts, and the illegal lobbing activities in which Holt used a KSBE credit card to entertain politicians at local “strip” clubs.


2.         According to my understanding of the “interim sanctions” legislation, the ex-trustees, Marsh & McLennan, and all others who improperly received “excess benefits” are supposed to return the excess portion to the estate, plus a healthy penalty. My understanding is also that these excess benefits and penalties are NOT COVERED BY ANY INSURANCE POLICY. Therefore, a waiver of these sanctions should NOT be a requirement in any insurance settlement agreement!


3.         Many of the same breach-of-trust activities which led to the long, hard-fought and expensive ouster of the old trustees appear to be continuing under the watch of the interim trustees. A majority of the “old” managers and independent contractors which facilitated, and personally benefitted from, the illegal activities are still in place (with the exception of Nathan Aipa who is on PAID leave pending the outcome of an “internal” investigation).

For further information which is too extensive to include in this letter, I refer you to the following Web site:

As this matter hopefully nears its end, I wish to personally thank you for all your efforts on behalf of the many concerned citizens who hope to see that justice is ultimately achieved and “pono” is restored to this worthy institution.

If I can be of any further assistance, please feel free to contact me.

Very truly yours,

Bobby N. Harmon


cc:        Robert K.U. Kihune, Trustee

            Ronald D. Libkuman, Trustee

            Constance H. Lau, Trustee

            David P. Coon, Trustee

            Francis A. Keala, Trustee

            Dorothy Sellers, Esq., Office of the Attorney General

            Dr. Randy Roth, University of Hawaii

            Trustee Screening Committee

            Robert P. Richards, Esq.