HARMON’S LETTERS TO THE SECURITY & EXCHANGE COMMISSION
A sighting from The Catbird Seat
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October 20, 2000
Mr. Arthur Levitt, Jr., Chairman
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0202
RE: Fraud/Conflicts of Interest – PricewaterhouseCoopers and Kamehameha Schools
Dear Mr. Levitt:
Relating to your reported probe of the operations of PricewaterhouseCoopers, I am bringing to your attention several serious conflict of interest situations that exist between PricewaterhouseCoopers and Hawaii’s Kamehameha Schools.
In 1999 I filed a RICO lawsuit, Civil No. 99-00304 DAE: Harmon v. Federal Insurance Company, P&C Insurance Co., Inc., Marsh & McLennan, Inc., Trustees of Kamehameha Schools/Bishop Estate, PricewaterhouseCoopers, et al. The following are excerpts from that lawsuit:
. . . Defendant PricewaterhouseCoopers is one of the nation’s largest accounting firms, and conducts business in Hawaii and throughout the United States.
Despite written opinions from Pricewaterhouse that P&C should operate at “arms-length” from KSBE, all or some of the Trustees of KSBE, and all or some of the directors and officers of P&C, conspired to disregard these opinions and to conceal violations of I.R.S. “interim sanctions” regulations.
Plaintiff Harmon personally reported his concerns regarding the apparent “sweetheart deals” with Marsh & McLennan at the direction of Peters, Aipa and Kam, to representatives of Coopers & Lybrand in October, 1996, and followed this up in writing on November 20, 1996. At this meeting and in his letter, Plaintiff explained that he would not sign P&C’s annual financial statements due to the apparent conspiracy between certain trustees, managers, directors and officers at KSBE, P&C and M&M, to defraud KSBE, P&C, and the I.R.S.
Plaintiff also sent a copy of this letter to the Insurance Commissioner, State of Hawaii, along with all enclosures which provided documentary evidence of these wrongful activities. Neither entity responded to this report. Plaintiff later learned that Nathan Aipa had approved P&C’s annual financial statements, and that Coopers & Lybrand had not disclosed in their review the information that M&M was charging excessive fees, and that certain claims were intentionally inadequately reserved.
Plaintiff alleges that Pricewaterhouse had knowledge of these improper activities and financial statements, had a professional duty to report improper and illegal conduct regarding the preparation of these financial statements, and knowingly and wrongfully colluded with some or all of trustees of KSBE, with officers and directors of P&C, in a conspiracy to defraud the beneficiaries of the Estate of Bernice Pauahi Bishop and P&C; racketeering; mail fraud; wire fraud; and violations of the “interim sanctions” regulations of the I.R.S., as detailed in Plaintiff’s complaint….
The following is from the Honolulu Star-Bulletin, 02/12/00, by Rick Daysog:
Dispute has cost estate millions. . . The state probes and IRS audit pushed related bills from law and accounting firms to $5 million. . . . The three-year Kamehameha Schools controversy continues to take a heavy financial toll on the nonprofit charitable trust. . . .
A Star-Bulletin review of the $6 billion estate’s voluminous expenditures for its 1999 fiscal year found that the trust paid about $5 million to law firms and accounting firms that were involved in defending it from the Internal Revenue Services’ massive audit and the state attorney general’s criminal and civil investigations. . . .
The financial records, which were filed in state probate court on Dec. 30, ALSO INDICATE FORMER TRUSTEES CONTINUED TO REWARD THEIR FRIENDS WITH LUCRATIVE OUTSIDE CONTRACTS. . . .
In many ways, the records offer a snapshot of a boardroom under siege. . .
That point is underscored by the enormous amount of legal and tax work awarded to PricewaterhouseCoopers LLP. The firm billed the Kamehameha Schools $1.2 million last year, largely for legal and tax work involving the IRS audit. The firm, recently merged with Coopers & Lybrand, which also conducts work for the trust. . . .
Much of the Pricewaterhouse work came after January 1999, when the IRS issued its scathing preliminary findings of the estate’s operations. The IRS later threatened to revoke the trust’s tax-exempt status, setting off a chain of events that resulted in the resignation of former board members Henry Peters, Oswald Stender, Richard “Dickie” Wong, Lokelani Lindsey and Gerard Jervis. . . .
The following is from The Honolulu Advertiser, 02/05/00, by Sally Apgar: . . . Trustees helped by Inouye, Akaka in fighting pay limit. . . . The ousted trustees of Kamehameha Schools enlisted the aid of Sens. Dan Inouye and Daniel Akaka in 1995 to influence fellow members of Congress to vote against a bill that threatened the trustees’ $1 million-a-year paychecks, according to internal trust documents obtained by The Advertiser. . . .
Thirteen confidential memos during the fall of 1995 through April 1996 detail the trustee’s strategy against the bill, which called for intermediate sanctions that penalize high-ranking insiders of charitable organizations for taking excessive personal benefits…
The memos express the trustees’ intent to “kill the measure” and their recruitment of influential contacts, such as Inouye, Akaka and the Rev. Jesse Jackson. They also targeted others, including Senator Patrick Moynihan of New York and even White House insiders such as Leon Panetta, then President Clinton’s chief of staff, to win support. . . .
The memos give a glimpse of the behind-the-scenes political power and influence the former trustees once wielded and describe a costly, intensive effort to protect their interests. . . .
Mark McConaghy of PricewaterhouseCoopers, a longtime tax adviser to the trust, was charged with contacting Leslie Samuels, then assistant secretary for tax policy.
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1998 Profile – PricewaterhouseCoopers:
Total Lobbying Expenditures: $960,000.
Total Lobbying Income: $6,500,000.
Some of PricewaterCoopers’ Listed Lobbying Clients
Goldman, Sachs & Co
Morgan Stanley Dean Witter & Co
Multinational Tax Coalition
Section 41 Coalition
Securities Industry Assn
Starwood Capital Group
Walt Disney Co.
From The Honolulu Star-Bulletin, 08/24/99, by Rick Daysog: Peters Blames Tax Guru for IRS Problems: . . . For more than a decade, the Bishop Estate and its trustees relied on tax guru Mark McConaghy to keep the Internal Revenue Service off their backs. . . .
But these days, the estate’s former board members blame the Washington, D.C., tax lawyer for much of their recent troubles with the IRS. . . .
In court papers filed yesterday, ousted trustee Henry Peters asked Probate Judge Kevin Chang to vacate his historic May 7 order temporarily removing the estate’s board, saying McConaghy, co-managing partner of PriceWaterhouseCoopers’ Washington National Tax Service, and other key tax experts have undeclared conflicts of interest that have tainted the judge’s removal order.
Former trustee Gerard Jervis, who resigned permanently on Friday, also is considering legal action against McConaghy and several outside consultants, saying he relied on the experts’ advice for decisions that the IRS is now questioning. . . . Other former trustees are exploring similar options. . . .
“PriceWaterhouse and Mr. McConaghy have conflicts of interests with that of KSBE,” said Peters, who also is asking Judge Chang to disqualify the estate’s interim board of trustees. . . . These conflicts of interest now extend to the interim trustees because they have retained and rely upon the advice and services of PriceWaterhouse.” . . .
Peters’ complaint — which also alleges conflicts of interests on the part of the estate’s acting chief operating officer Nathan Aipa and the trust’s mainland law firm of Miller & Chevalier — comes as the Bishop Estate’s interim trustees filed a lawsuit today seeking Peters’ permanent removal from the estate’s board. . . .
The removal suit — which also will call for the permanent ouster of Richard “Dickie” Wong — is in response to the IRS’s threat in April to revoke the estate’s valuable tax-exempt status if the former board members were not replaced. . . .
Fellow trustees Oswald Stender and Gerard Jervis have already resigned. Circuit Judge Bambi Weil permanently removed Lokelani Lindsey on May 6 after a five-month trial.
In his 17-page petition, Peters said that McConoghy could be a target of legal malpractice claims since he played an integral part in past Bishop Estate transactions that are now being questioned by the IRS in its four-year audit of the $6 billion dollar charitable trust. McConaghy’s continued role in negotiating with the IRS places his allegiance to the estate in conflict with his personal interest in fending off a potential malpractice claim, Peters said. . . .
“I believe that the current reliance on the recommendations of the firm of PricewaterhouseCoopers is highly improper due to the fact that this firm initially was instrumental in recommending the creation of the various entity structures that have caused the IRS to issue substantial proposed deficiencies and penalties for negligence,” said Robert Schrichman, Peters’ California-based tax expert.
In many ways, McConaghy — who was a finalist for the trustee post in 1994 when the state Supreme Court selected Jervis — is one of a handful of outsider advisers including local attorney Michael Hare and Stanley Mukai who have held considerable influence over the affairs of the 115-year-old Bishop Estate.
He’s also one of the trust’s best paid consultants. Since 1989, McConaghy and the PriceWaterhouse firm has billed the estate more than $3.4 million for tax and legal services. Since January, PriceWaterhouse, which merged with the Coopers & Lybrand accounting firm last year, has wracked up more than $700,000, estate sources said. . . .
McConaghy and his staff at PriceWaterhouse also played a big role in the estate’s successful investment in Goldman Sachs Group L.P. Back in 1992, when the Bishop Estate invested its initial $250 million in Goldman Sachs, the PriceWaterhouse firm assembled due-diligence team screened the investment for tax and securities law implications. The value of the estate’s Goldman Sachs investment, which included a second $250 million infusion in 1994, has risen to about $3 billion. . . .
At PriceWaterhouse, McConaghy and longtime partner Bob Shapiro head a team of more than 650 employees, which include lobbyists, economists, and former IRS officials who represent scores of Fortune 500 companies. . . .
McConaghy — an associate of former Sen. Robert Dole — recently served on the National Commission on Restructuring the IRS, which recommended major reforms on the U.S. tax agency in 1997. He also served as a trustee of presidential candidate Elizabeth Hanford Dole’s blind trust. . . . [Bishop Estate was also involved with Elizabeth Hanford Dole through the buyout of her company, Hanford’s Creations, Inc.]
Before joining PriceWaterhouse in 1983, McConaghy worked for the IRS and later became chief of staff of the Joint Tax Committee, the powerful congressional panel which writes most of the tax laws. . . . To be sure, McConaghy is no stranger to controversy at the estate. Sources said that he played a significant role in the estate’s much-maligned efforts to lobby against federal legislation barring excessive compensation for directors of nonprofit trusts.
He has also invested personal money in several Bishop Estate deals. Court records show that McConaghy invested about $25,000 in McKenzie Methane Inc., the troubled Houston-based natural gas producer that was taken over by the Bishop Estate. … McConaghy also had a personal stake in a Michigan venture in which the estate acquired about 292,000 acres of raw timberland for about $25 million in 1991. . . . The timber venture, now known as Shelter Bay Forest, initially was a partnership with New Hampshire timber executive Ben Benson, who is a friend of McConaghy’s. . . .
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From Equity No. 2048, Vol. 151 – In the Matter of the Estate of Bernice P. Bishop – SUBPOENA DUCES TECUM issued Apr 17, 2000:
To: Custodian of Records, PricewaterhouseCoopers LLP : . . . YOU ARE FURTHER ORDERED to bring with you all Documents referred to in the attached exhibit 1.
Among the documents requested:
1. Written policies of PricewaterhouseCoopers (the Firm) and of professional associations to which Firm member belong concerning co-investing with or entering business transactions with clients;
2. Co-investments and other business transactions of Mark McConaghy or other Firm members with Kamehameha Schools Bernice Pauahi Bishop Estate (KSBE) or any of KSBE’s subsidiary or related partnerships, limited partnerships or other business entities;
3. Disclosures by any member of the Firm of co-investments with KSBE or any of its subsidiary or related partnerships, limited partnerships, or other business entities;
4. Statements sent by PricewaterhouseCoopers to KSBE or any of its subsidiary or related partnerships, limited partnerships or other business entities. . . .
Marsh & McLennan Companies
From Harmon vs. Marsh & McLennan, Inc., Trustees of Bishop Estate, Pricewaterhouse Coopers, et al: Defendant Marsh & McLennan Companies, Inc. (M&M) is the world’s largest insurance brokerage firm that conducts business throughout the United States and in many foreign countries, and is a licensed General Agent for Federal in the State of Hawaii.
On or about May 25, 1994, Plaintiff, in his capacity as Risk/Insurance & Safety Manager for KSBE, obtained a Captive Management Fee Proposal from Peter Lowe, VP, M&M Insurance Management Services, Inc. (M&MIMS), which detailed their proposed services and fees for managing P&C. Their services were to be on a time and expense basis, with an estimated annual cost of around $70,000. There was no mention in this proposal that their related subsidiary, M&M, would charge an additional flat annual fee of $200,000 for providing “brokerage”, “risk management” or other purported services to the captive.
This proposal, the subsequent contract, and periodic invoices from M&MIMS and M&M were transmitted by mail and/or wire. Plaintiff relied upon this proposal, its costs and representations, as an inducement to contract for these captive management services. Plaintiff alleges that M&M’s failure to disclose in their proposal an additional flat annual fee of $200,000 constitutes wire fraud, mail fraud, fraudulent inducement and misrepresentation.
Defendants M&M and M&MIMS, their employees, Rocco Sansone and Peter Lowe, and others in their organizations benefitted financially from these excessive fees in the form of salaries, commissions, bonuses, or other manner of compensation. Plaintiff alleges that M&M’s acts in collusion with some or all of trustees of KSBE, with officers and directors of P&C, and with Federal constitutes a conspiracy to defraud P&C and the beneficiaries of the Estate of Bernice Pauahi Bishop; racketeering; mail fraud; wire fraud; extortion; and violations of the “interim sanctions” regulations of the IRS . . .
From Harper’s Magazine, Feb, 2000: How George W. Bush Got Rich — A heartwarming tale of influence, cronyism, and $1.7 billion, by Joe Conason: . . . On December 6, 1994, one month after he defeated Ann Richards to become governor of Texas, George W. received a large but belated campaign contribution from an acquaintance named Thomas O. Hicks . . .
While the University of Texas invested hundreds of millions of dollars with Republican-linked partnerships under the guidance of Tom Hicks, it also placed hundreds of millions of dollars more with his friends and associates as well as with firms that did business with Hicks, Muse…
Two former classmates of Hicks’ at the University of Texas also were awarded large investments by UTIMCO. One was his old fraternity brother Bruce Schnitzer, a New York insurance man who set up Wand Partners, which received more than $60 million in at least three separate deals with UTIMCO between 1996 and 1998. Schnitzer’s record of success was mixed at best; his companies’ rates of return lagged behind the Dow average. . . .
Nor was it reassuring that he had resigned in 1985 as the president of Marsh & McLennan, then the world’s biggest insurance brokerage . . . after the company lost $165 million in unauthorized trading and was fined by the New York State insurance department. …
Despite those problems, Schnitzer maintained close connections not only with Hicks, Muse but with Richard Rainwater and the Bass family. After quitting Marsh & McLennan he had done multimillion-dollar deals with all of them. . . .
Texas University Investment Mgt Co is one of the largest institutional investors in Bedford Property Management. Other large investors in Bedford are Barclays Bank and Invesco Management & Research. Among the largest institutional investors in Marsh & McLennan are Barclays Bank and Invesco. Bedford is one of the nation’s largest real estate development and property management companies, doing millions of dollars a year in business with Bishop Estate.
McKenzie Methane, Inc. and Kukui, Inc.
McKenzie Methane was a Texas methane gas company in which Bishop Estate was the majority investor– AND IN WHICH THE BISHOP ESTATE TRUSTEES, MANAGERS, FRIENDS AND OTHER INSIDERS CO-INVESTED THEIR PERSONAL FUNDS, THEN LET THE ESTATE BAIL THEM OUT WHEN THE DEAL FIZZLED.
From the RICO lawsuit, Harmon v. Trustees of Bishop Estate, et al.:
. . . Plaintiff alleges that Aipa’s wrongful acts are multitudinous. These acts include, but are not limited to: . . . Facilitating and concealing co-investments in KSBE deals by the Trustees, employees, family members and business associates.
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’. . .
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 to the Honolulu Advertiser, other co-investors included:
Henry Peters (trustee)
William Richardson (former trustee and subsequent consultant, 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 Mash actor, who later brought many suits 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. He 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 the state Supreme Court list of nominees to fill the latest vacancy on the estate board of trustees, losing out to Gerard Jervis.)
Michael Chun (President of Kamehameha Schools)
Gilbert Tam (then-Director of Administration, KSBE; currently, an officer of Bank of Hawaii and director, P&C)
Guido Giacommetti (then Director of Asset Management, KSBE; now court-appointed trustee for the Sukamto Sia mega-bucks bankruptcy)
Anthony Sereno (deceased, then Board of Directors, Royal Hawaiian Shopping Center)
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 Dir, Admin Group, and President, P&C)
Wally Chin (then Deputy Controller; currently Controller, KSBE)
Donald K. H. Pang (father of KSBE employee, Leeanne Crabbe)
AIPA and others did such a good job of concealing this information, that Plaintiff was unaware of these co-investments until he read about them in the newspaper — even though his job at the estate required him to be informed of the details of mergers and acquisitions for insurance and risk management purposes. . . .
For example, in March 1993, B. M. McKenzie and McKenzie Methane Corporation filed a lawsuit for $2.3 billion against the trustees and KSBE. Additional defendants were the HAK Partnerships I, II, III, IV and V; Smith-Gordy Methane Co.; SG Methane Co., Inc.; Gordy Oil Co.; L. H. Smith; R. D. Gordy; D. A. Barras; Lee H. Henkel, III; Mitch Gilbert; Royal Hawaiian Shopping Center, Inc.; Maralex, Inc.; M. O’Hare; Kukui, Inc.; JGI Resources, Inc; and Northwestern Mutual Life Insurance Co.
AIPA initially did not report this lawsuit to the insurance company, United Educators. Plaintiff learned of this lawsuit several months after it was filed, and only as a result of his inquiring about unreported claims in preparation for the renewal of this policy. When Harmon did report this claim to the insurance carrier, Aipa immediately took control and directed that all correspondence to or from the carrier would be made by him.
AIPA repeatedly refused to furnish information to the insurance company regarding the claim, despite frequent and urgent requests. Eventually, the insurance company closed its files on the case due to Aipa’s failure to respond to the carrier’s request for information. The actual cost to the estate is unknown, but Plaintiff estimates that the loss of legal defense costs alone could easily have been in excess of a million dollars.
Mid Ocean Reinsurance Company
In 1993, Bishop Estate invested $30 million in Mid Ocean Reinsurance, a Bermuda company, with partners J. P. Morgan, Marsh & McLennan, and Texas deal maker, Richard Rainwater. Bishop Estate’s trustee, Henry Peters, was appointed a director of Mid Ocean. In 1998, Exel Ltd, a Bermuda insurer, acquired the 75% of Mid Ocean Ltd. it didn’t already own in a stock swap valued at $2.2 billion. The transaction was negotiated for Mid Ocean by J.P. Morgan & Co. while Goldman Sachs advised Exel.
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From Equity No. 2045 – 2nd Amended Petition of the Atty Gen to Remove and Surcharge Trustees: . . . In 1992, the Trust invested approximately $31 million in Mid Ocean, Ltd., a Bermuda-based insurance company, and acquired 310,000 Mid Ocean Class A shares. . . .
In 1993, when Matsuo Takabuki retired as a Trustee of the Trust, (Henry) Peters succeeded to Takabuki’s seat as a director of Mid Ocean. . . . Peters’ service as a Mid Ocean director fell within his duties as Trustee and was a Trust opportunity. . . . Peters used Trust personnel to prepare him for Mid Ocean directors’ meetings. . . .
While a director of Mid Ocean, Peters received substantial director’s retainers and attendance fees and acquired shares of Mid Ocean stock through a stock and deferred compensation plan for non-employee directors. . . .
The Mid Ocean fees and stock options are assets that belong to the Trust and not to Peters individually… Peters has enriched himself at the expense of the Beneficiaries by retaining the fees and stock options for his personal benefit. . . .
Henry H. Peters
From the RICO lawsuit: Civil No. CV 99 00304-DAE – Harmon v. Federal Insurance Co., P&C Insurance Co. Inc.; Marsh & McLennan, Inc., PricewaterhouseCoopers, et al: . . .
Defendant Trustee Henry H. Peters, was appointed in 1984 by the Justices of the Supreme Court of the State of Hawaii, acting as individuals, and was entrusted with the fiduciary duty to administer the Estate of Bernice Pauahi Bishop for the education of the children of Hawaii. . .
Defendant Peters is also Chairman of the Board of Directors of P&C. Peters has also served on the Board of Directors of Mid-Ocean Reinsurance Co. (a Bermuda company); Underwriters Capital (Merritt) Insurance Co. (a Bermuda company); SoCal Holdings, Inc.; and numerous other companies owned by, or related to, KSBE. . . .
Beginning around March 1996, Harmon began questioning what appeared to be excessive premium charges being made by Marsh & McLennan … and for fees M&M was billing to P&C.
For the next several months, Plaintiff was subjected to threats, intimidation and various abuses from Aipa and Kam for questioning the excessive fees of M&M . . . Harmon asked Aipa about the status of his transfer (to P&C). Aipa’s response was that it wasn’t going to happen because “arms-length was no longer an issue,” (referring to previous legal opinions from Price Waterhouse that the IRS might revoke the Trust’s tax-exempt status if it did not maintain arms-length from its taxable subsidiaries). . . .
* * *From Equity No. 2048, Petition of the Attorney General on Behalf of the Trust Beneficiaries to Remove and Surcharge Trustees:
. . . “The Trustees have been unfaithful to the Will and the purpose of the Trust. They have failed to comply with clear directives of the Will. They have subordinated the sole purpose of the Trust to their personal gain. They have squandered Trust assets intended for education by their excessive compensation, and by imprudent and improper Trust management and investments. They have violated Hawaii statutes and court orders. They have engendered hostility between themselves and the Beneficiaries whose interests the Trustees were appointed to serve. . .
Peters became lead trustee for asset management in 1993 and assumed responsibility for Trust investments and for due diligence on prospective investments. . . .
Peters as lead trustee purposely withheld information on existing and potential investments from his co-Trustees, dismantled the Trust’s internal audit function, instructed staff employees to withhold information from the co-Trustees, and used his position to approve Trust payment of improper non-Trust expenditures. . . .
As to Peters, the effect of these violations has been that Trust assets have been mismanaged and misspent to the detriment of the Trust purpose. . . .
Trustees Peters, Wong, and Lindsey have violated their duty of loyalty to the Beneficiaries by using their positions as Trustees and by using Trust assets and opportunities to benefit themselves and their relatives and friends. . . .
In 1992, the Trust invested approximately $31 million in Mid Ocean, Ltd. (Mid Ocean), a Bermuda-based insurance company, and acquired 310,000 Mid Ocean Class A shares. . . . In 1993, when Matsuo Takabuki retired as a Trustee of the Trust, Peters succeeded to Takabuki’s seat as a director of Mid Ocean. . . . Peters served as a Mid Ocean director until early 1998. . . . Peters’ service as a Mid Ocean director fell within his duties as Trustee and was a Trust opportunity. . . . While a director of Mid Ocean, Peters received substantial director’s fees and received options to acquire 6,000 shares of Mid Ocean stock. . . . The Mid Ocean fees and stock options are assets that belong to the Trust and not to Peters individually. . . . Peters has enriched himself at the expense of the Beneficiaries by retaining the fees and stock options for his personal benefit. (Note: Marsh & McLennan, and its subsidiary, Guy Carpenter, were major players in the creation and management of Mid-Ocean.)…
From Honolulu Star-Bulletin, 4/14/99, by Rick Daysog:
EMBATTLED EMPIRE . . . Larry Landry, former chief financial officer for the $4 billion John D. and Catherine T. MacArthur Foundation, which is a co-investor with the estate in a Boston-based investment fund and a Florida apartment complex, describes Peters as a savvy and thorough investment manager. . . . Deal promoters often approach large foundations and charitable trusts thinking they have deep pockets. But Peters brings a healthy skepticism to anyone who brings an investment to the estate, according to Landry.…
“Henry is extremely bright and has the right kind of conservative (investment) philosophy,” said Landry, who now serves as CEO of Florida-based Westport Realty Advisers. . . .
In his review of the estate’s 1994-1996 accounts, court-appointed master Colbert Matsumoto and the accounting firm of Arthur Andersen said the estate — during Peters’ tenure as acting asset manager — generated an embarrassing return on investment of minus 1%. During that period, the trust set aside more than $240 million in reserve for future losses. . . .
That woeful performance came as Wall Street was in the midst of a record bull run in which investors could have made double-digit returns just by putting their money in an index fund. . .
Peters, charges stand out in lengthy Bishop Estate investigation. The state’s exhaustive investigation into the Bishop Estate appears to focus on trustee Henry Peters as a central figure in the two-year controversy that’s rocked the multibillion-dollar charitable trust….
In a September Probate Court petition to permanently remove several trustees, Attorney General Margery Bronster alleged that Peters took part in repeated acts of self-dealing and mismanagement. The state’s charges include: … Between 1993 and 1998, Peters received options to acquire 6,000 shares of stock as well as substantial director’s fees from a Bermuda-based insurance company, Mid Ocean Ltd. The estate was a big investor in Mid Ocean. Peters has since declined to exercise the stock options, which would have been worth more that $400,000 under Mid Oceans’s 1993 merger with competitor Exel Ltd. [another Marsh & McLennan financial venture]. . . .
Peters directed trust managers and the estate’s former Royal Hawaiian Shopping Center subsidiary to hire his friends and relatives for unbudgeted positions and outside consulting work, according to the state. The employees included former state Rep. Terrance Tom, local attorney Albert Jeremiah and Office of Hawaiian Affairs trustee and former state Sen. Clayton Hee. . .
Along wih his fellow trustees, Peters received compensation well above that of comparable organizations. In 1997, each trustee earned about $840,000 in commissions.
Peters and fellow trustees also spent more than $900,000 of trust money to lobby Congress against the passage of federal legislation limiting salaries for board members of charitable trusts. . . .
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Reporter Sally Apgar, in the 02/18/00 edition of The Honolulu Advertiser, revealed that the ousted trustees used the trust money to “enlist” the aid of U. S. Sens. Dan Inouye and Daniel Akaka in 1995 to influence fellow members of Congress to vote against “interim sanctions” regulations that threatened the trustee’s $1 million-a-year paychecks. According to Apgar:
Thirteen confidential memos during the fall of 1995 through April 1996 detail the trustees’ strategy against the bill . . .
The memos express the trustees’ intent “to kill the measure” and their recruitment of influential contacts such as Inouye, Akaka and the Rev. Jesse Jackson. They also targeted others, including Sen. Daniel Patrick Moynahan of New York and even White House insiders such as Leon Panetta, then President Clinton’s chief of staff, to win support. . . .
The memos give a glimpse of the behind-the-scenes political power and influence the former trustees once wielded and describe a costly, intensive effort to protect their interests.
As previously reported, the ousted trustees hired former Gov. John Waihee and his Washington, D.C.-based law firm Verner Liipfert Bernhard McPhearson Hand to lobby against the federal legislation… Other Verner firm members enlisted in the effort included former Treasury Secretary Lloyd Bentsen of Texas, former Senate Majority Leader George Mitchell of Maine and former Texas Gov. Ann Richards. . . .
The state Attorney General’s Office has said previously that the trust paid the firm more than $900,000 for its lobbying efforts on intermediate sanctions legislation between 1995 and 1998.
Waihee alone was in charge of swaying Erskine Bowles, then assistant to the president and deputy chief of staff, and Doug Sosnick, then assistant to the president and director of political affairs. . . .
Mark McConaghy of PriceWaterhouseCoopers LLP, a longtime tax adviser to the trust, was charged with contacting Leslie Samuels, then assistant secretary for tax policy. . . .
Congressman Neil Abercrombie (D-HI) is also mentioned in the memos. For example, the Oct. 12 memo said, “Congressman Abercrombie is prepared to speak to Rep. Gibbons, the ranking minority member, Charles B. Rangel (D-NY) and Andrew Jacobs, Jr. (D-Ind) as well as GOP Rep. Nancy Johnson. . . .
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From Honolulu Star-Bulletin, 5/21/99, by Rick Daysog:
It is alleged that trustees Peters and Wong helped conceal $350 million . . . Two weeks after a state judge temporarily removed four of the five trustees of the Bishop Estate, the state attorney general’s office today filed court papers in a separate proceeding spelling out why trustees Henry Peters and Richard “Dickie” Wong should be temporarily ousted from their $1 million-a-year jobs. . . . In an 89-page proposed findings of fact, Deputy Attorney General Hugh Jones argued that Peters and Wong helped conceal $350 million in trust income that should have been spent on the estate-run Kamehameha Schools, paid themselves $131,000 more than they were entitled to and failed to adopt strict conflict-of-interest policies at the trust. … The result of these actions deprived scores of native Hawaiian children of an education at the Kamehameha Schools, Jones said. . .
These are only a few examples of fraud and conflicts of interests involving these entities. Kamehameha Schools continues to contract with PricewaterhouseCoopers, Marsh & McClennan, and Federal Insurance Company even though the five previous trustees have resigned and have been replaced with interim trustees. A majority of top management personnel remain employed by Kamehameha Schools, and continue to control their legal and financial transactions and reports. If you wish to read more, I recommend the following web-site:
I appreciate and applaud your efforts to halt the abuses of all these powerful auditor-consultants who have betrayed the trust of stockholders and the public for too long.
I wish you success in your investigations.
Very truly yours,
Bobby N. Harmon
cc: Dr. Hamilton McCubbin, CEO, Kamehameha Schools
Mr. Robert K.U. Kihune, Trustee, Kamehameha Schools
Mr. Ronald D. Libkuman, Trustee, Kamehameha Schools
Mr. Constance H. Lau, Trustee, Kamehameha Schools
Mr. David P. Coon, Trustee, Kamehameha Schools
Mr. Francis A. Keala, Trustee, Kamehameha Schools
Ms. Janet Hughes, Internal Revenue Service
Ms. Dorothy Sellers, Esq., Office of the Attorney General
Mr. Billy Beaver, U.S. Dept of Labor
Mr. Tai K. Lee, Special Agent, U.S. Department of the Treasury
Federal Bureau of Investigation
Janet Reno, United States Attorney General
Trustee Screening Committee
Dr. Randy Roth, President, Hawaii Bar Association
November 25, 2000
Mr. Arthur Levitt, Jr., Chairman
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0202
RE: Fraud/Conflicts of Interest – PricewaterhouseCoopers and Kamehameha Schools
Dear Mr. Levitt:
The enclosed letter dated November 25, 2000 to Janet S. Hughes of the Internal Revenue Service provides additional information regarding Kamehameha Schools and one of their subsidiaries, Westport Advisors, Ltd.
This supplements my previous letter to your office dated October 20, 2000.
Very truly yours,
Bobby N. Harmon
January 5, 2001
Mr. John M. Gannon, Deputy Director
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0213
RE: File No. HO-289003
Dear Mr. Gannon:
Thank you for your letter dated December 11, 2000.
As requested, I am enclosing a copy of my letter dated October 20, 2000, addressed to Chairman Levitt.
I also wish to acknowledge receipt of the response sent on November 27, 2000, designated as file number HO-287454, which indicated that the issues I had raised were not within the SEC’s jurisdiction.
As you will see from my October 20th letter, the issues initially addressed concerned conflicts of interest principally between PricewaterhouseCoopers, and Kamehameha Schools, and was prompted by the SEC’s reported investigation of the giant accounting firm.
I realize that the SEC may not have jurisdiction over partnerships, non-profits and other organizations; however, this web of fraud, moneylaundering and racketeering extends to many corporations in the U.S. and worldwide. If your jurisdiction extends only to U. S. corporations, then you might want to pick up the trail at Goldman Sachs on the following website:
My major concern is that many of the wrongful activities that resulted in the scandals at Kamehameha Schools/Bishop Estate are still continuing. Despite the fact that all five previous trustees were removed, and the IRS and Hawaii’s Attorney General have reportedly concluded their investigations, Goldman Sachs, PricewaterhouseCoopers, Marsh & McLennan, Miller & Chavlier, Apollo Advisors, McKenzie Methane, Inc., and other firms apparently continue their questionable activities involving the estate.
If none of these entities or activities are within the jurisdiction of the SEC, then please advise me and I will not feel the need to send any future information.
If, however, you have any questions or need further information regarding these matters, please feel free to contact me at my new address shown above.
I wish you success in your efforts to crack-down on fraud and corruption in the securities markets.
Very truly yours,
Bobby N. Harmon
MORE SIGHTINGS FROM THE CATBIRD SEAT
KAMEHAMEHA SCHOOLS’ INTERROGATORIES OF HARMON > > > INTERROGATORIES
NEWS ARTICLES ABOUT KAMEHAMEHA’S LEGAL ARMY > > > BUZZARDS OF PARADISE
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HARMON’S LETTER TO THE BISHOP ESTATE MASTER > > > KSBE MASTER
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HARMON’S LETTERS TO THE FBI > > > FBI
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HARMON’S LETTER TO THE IRS > > > IRS
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HARMON’S LETTERS TO INSURANCE COMMISSIONERS > > > INSURANCE COMMISSIONERS
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HARMON’S LETTERS TO KAMEHAMEHA’S CEO > > > McCUBBIN
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RICO LAWSUIT, HARMON vs. FEDERAL INSURANCE CO, BISHOP ESTATE et al. > > > RICO
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MORE ON THE KAMEHAMEHA SCHOOLS SCANDALS > > > DIRTY MONEY, DIRTY POLITICS and BISHOP ESTATE
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MORE ON THE SECURITIES & EXCHANGE COMMISSION > > > SPOTTING THE SEC
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TO GO TO THE CATBIRD’S HOME PAGE > > > THE CATBIRD SEAT
Last updated January 5, 2003, by The Catbird