Friday, August 6, 1999

IRS study: Trustees overpaid

The Bishop trustees should
have been paid less than
$160,000, it says

Henry Peters booked, fingerprinted

By Rick Daysog


Bishop Estate's former trustees, whose annual compensation has exceeded $1 million recently, should have been paid less than $160,000 a year, according to the Internal Revenue Service.

The federal agency -- which has spent four years auditing the $6 billion charitable trust -- believes that individual board members should have been paid between $60,000 and $160,000 a year during the 1990-1996 period, sources familiar with the IRS audit said.

That range represents a fraction of the $681,763 to $844,600 a year that the trustees paid themselves during the same seven-year span. It also indicates that the IRS may be considering hefty penalties against recently ousted board members Richard "Dickie" Wong, Oswald Stender, Henry Peters, Lokelani Lindsey and Gerard Jervis.

"The Bishop Estate is the classic study of excessive compensation," said Paul Streckfus, editor of EO Tax Journal, a Pasadena, Md.-based newsletter covering national tax issues.

"There could be significant pay backs."

The compensation study is part of the IRS's preliminary findings from its top-to-bottom examination of the 115-year-old Bishop Estate. The report's conclusions could be contested during negotiations between the IRS and the estate or in administrative hearings before the IRS.

According to several sources, the study does not simply compare the trustees' compensation to that of outside board members of similar-sized charities. Authors of the report examined the exact duties of the individual trustees acting as co-chief executives of the trust, sources said.

The study also adjusted the pay for each trustee according to specific duties. For instance, the IRS believes that the salaries for the chairmen of the Bishop Estate during the seven-year period - Wong and Myron "Pinky" Thompson - should have been higher than those of the other trustees due to the additional work load, sources said.

'This all shows that they
still don't have the slightest feel
of what it means to
be a fiduciary.'

Samuel King



Streckfus, a former IRS official who has followed the Bishop Estate for more than a decade, believes the trustees could end up paying back significant sums for at least two of the years covered by the report. That's because of a new federal law that went into effect in 1995 barring board members of tax-exempt charities from receiving excessive compensation. The so-called intermediate sanctions law requires trustees to pay back any excessive compensation plus a 25 percent penalty.

If the excessive pay isn't returned in a timely manner, the IRS could levy a 200 percent fine.

The issue of trustees' pay has been a major factor in the two-year controversy surrounding the Bishop Estate. Local community leaders have complained that the high pay has politicized the trustee selection process and has distracted board members from carrying out their primary duty of running the Kamehameha Schools.

Meanwhile, the state attorney general's office is seeking surcharges against individual trustees, arguing that trustees paid themselves much more than their peers at similar-sized trusts.

According to the state, the average salary for a full-time chief executive of the 23 foundations with $1 billion or more was $323,600 in 1997. The average compensation of directors of large foundations was $14,730, the state said.

Trustees, however, have maintained that their compensation is performance-based and had been based on formulas set by state law.

They frequently have cited a recent trustee-commissioned study by a mainland consulting firm -- Strategic Compensation Associates -- which found that board members' pay was comparable to that of mainland corporate executives with similar duties.

The pay dispute came to a head in 1998 when the state Legislature passed a law limiting the compensation of trustees of charitable trusts to reasonable levels.

Despite the new state law, ousted trustees Wong, Stender, Peters, Lindsey and Jervis paid themselves about $1 million during the year ended June 30, 1998.

The trustees took an additional $800,000 during the first 10 months of the trust's current fiscal year before Probate Judge Kevin Chang cut off their pay.

Chang's decision came within days of his historic May 7 order temporarily removing the trustees.

"This all shows that they still don't have the slightest feel of what it means to be a fiduciary," said senior U.S. District Judge Samuel King, a co-author of the 1997 "Broken Trust" article that criticized trustees' management of the estate.

The court-appointed interim trustees for Bishop Estate have asked to be paid $15,000 a month, an annual rate of $180,000 a year.

Bishop trustee Peters
booked, fingerprinted

Two days after his indictment on theft and conspiracy charges, Bishop Estate trustee Henry Peters surrendered to authorities this morning.

Peters appeared at the sheriff's office at District Court downtown, where he was booked and fingerprinted.

Renee Yuen, Peters' attorney, said arraignment and plea are set for Aug. 16.

Peters, who will plead not guilty, also received permission today from Circuit Judge Michael Town to travel to the mainland to consult with counsel.

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