Broken Trust At Hawaii's Bishop Estate?

Assets of $6 billion may have been seriously mismanaged

When Hawaiian Princess Bernice Pauahi Bishop died more than 100 years ago, it was her dream to establish a school in Hawaii that would last forever. To that end, the Princess created a trust that included vast lands in Hawaii to which she was the sole heir. Today, the Princess' assets, called the Bishop Estate, are worth between $6 billion and $10 billion and include prime real estate in Waikiki and a 9.5% stake in Goldman Sachs. But her philanthropic trust--created to ensure that native Hawaiian children get a decent education--is being rocked by a slew of embarrassing allegations. On Sept. 10, State Attorney General Margery S. Bronster charged the estate's trustees with financial mismanagement, excessive compensation, and kickbacks. The five trustees deny any wrongdoing, but two are cooperating with Bronster. Two grand juries and the Internal Revenue Service are also investigating the estate. It's enough to make a princess weep.

Bronster also took the unprecedented step of asking the Hawaii Probate Court to immediately remove four of the five trustees and to place the trust in receivership to prevent further damage to the trust or its beneficiaries--the students of Kamehameha Schools, the ones owned and operated by the Bishop Estate. Probate Court Judge Colleen Hirai is expected to rule on the Attorney General's request in a few weeks.

Three of the trustees claim the investigation reflects the political motives of Governor Benjamin J. Cayetano. They say he used the trust affair to bolster his successful reelection campaign and take the electorate's mind off the faltering economy. "The Attorney General is clearly a political appointee," says trustee Henry H. Peters, a former speaker of the state House of Representatives. "She is only accountable to the Governor."

WEB OF PARTNERSHIPS. The trustees also include former State Senate President Richard S.H. Wong, Democratic Party politico Gerard A. Jervis, and Marion Mae Lokelani Lindsey, a well-connected former state education official. Of the five, the only one with any real business experience is Oswald K. Stender, a former chief executive of the $2 billion Campbell Estate family trust in Kapolei, Hawaii. Stender and Jervis are helping the Attorney General's inquiry.

Bronster alleges that trustees took about $100,000 each in improper commissions to maintain their compensation levels in a year when estate investments performed poorly. And the estate, according to the Attorney General, paid off campaign debts for two Hawaii legislators who have been instrumental in protecting the estate's interests. Bishop Estate attorney William C. McCorriston denied that trust funds were being used directly to pay campaign debts.

Much of the trust's portfolio is shrouded in secrecy and hidden within a Byzantine web ofpartnerships that include for-profit subsidiaries and holding companies. So it's no easy task to pinpoint the estate's performance. The trustees claim that from 1980 to 1994 the estate posted an annualized return on investments of 17.3%. That may well be, but in recent years the record has been abysmal. According to a July, 1998, Arthur Andersen & Co. report commissioned by the Probate Court and released in October, the trust's assets between 1992 and 1996 averaged an annual return of only 2.4%

Lately, things haven't been going too well at the school, either. The Kamehameha Schools, with More than 3,000 students from preschool through 12th grade, has an annual operating budget, according to the school, of $100 million. Officials at the hilltop campus, which overlooks Honolulu and the Pacific Ocean, boast that more than 90% of graduates go on to college. But that amazing statistic may be at risk: As the controversy has heated up, teachers have been departing. Last spring, the school learned that its accreditation might be in jeopardy.

In the meantime, the salaries of the trustees have been on the rise. Selected by the State Supreme Court, the trustees receive compensation based largely on a sliding-scale commission paid on various estate income, including rent from properties and royalities. Annual paychecks have jumped from $30,000 in 1962 to well over $800,000 in 1997, making the trustees the highest paid at any educational trust in the country, according to the Attorney General. But in May, in the face of growing public outrage, the Hawaii legislature passed a law that would allow it to limit the trustees' compensation.

The estate's fortunes began sagging in the early 1990s, when Hawaii real estate went into free fall, producing sharp financial setbacks. In a number of mainland real estate investments, Bishop Estate got stuck with bad commercial paper and took an equity stake or purchased the entire property rather than foreclosing on the loans. Some of the investments have been recouped, but many have failed to turn around. The Arthur Andersen report found that the trustees repeatedly ignored the advice of outside advisers to diversify their holdings into liquid equities.

During the Attorney General's investigation, it was also discovered that a Bishop Estate employee, who is a former Hawaii state senator, charged $21,000 on estate credit cards for bar tabs at strip clubs. The employee, Milton Holt, has reimbursed the estate but only after he was issued a retroactive pay raise. The Attorney General also alleges that a handful of prominent politicians and friends of the trustees are on the Bishop Estate payroll in do-nothing jobs.

The estate, according to Bronster, awarded a $3.4 million computer contract in 1994 to a company at the behest of trustee Lindsey, overriding staff recommendations. The company, Educational Management Group, flew Lindsey in a private jet to the 1997 Super Bowl in New Orleans. Her lawyer said she reimbursed the company for the flight.

The trust tried to make money in high tech. But it lost $1.5 million in a 1997 investment in KDP Technologies, which planned to put actors' resumes and video clips on the Internet for casting calls. Randy Stone, the brother-in-law of estate trustee Wong, was a paid consultant to KDP. Estate attorneys say Stone, a movie producer, was a valid consultant. KDP's treasurer, Benjamin Franklin Bush III, was later convicted of money laundering and fraud.

The trustees still maintain the trust's performance is better than comparable charitable trusts. They claim some of their investments--including the $500 million put into the Goldman Sachs deal--were home runs.

HIGH SCHOOL PETITION. But such home runs could well turn into fouls. The estate's stake in Goldman, once estimated to be valued as high as $3 billion, could now be worth only half that, because of the decline in financial stocks. The estate's 22% share in People's Bank of California looked solid when it went public in May at 14 3/4. It is now trading at $10.

Half of the high school students at Kamehameha Schools have signed a petition to remove the trustees. The investigation and court proceedings could result in heavy fines or the revocation of the estate's tax-exempt status. And if the grand juries return recommendations to pursue criminal charges against some or all of the trustees, Hawaii's old-boy network would be dealt a crushing blow. The benevolent act of a princess has turned into a legal war in paradise.

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