Holt plea bargain:
Guilty of fraud,
5 counts dropped
He faces prison time in thePeters blames woes on tax guru
case involving his personal use
of campaign fund money
Lawsuit seeks trustees' removal
By Susan Kreifels
Former state Sen. Milton Holt pleaded guilty to one count of mail fraud today in a plea agreement with the federal government that will drop five other counts involving the use of campaign contributions for personal use.
Holt, also the former special projects officer for the Bishop Estate, faces up to five years in prison with no parole and a $250,000 fine, as well as $10,000-$20,000 in restitution.
U.S. District Judge Alan Kay is scheduled to sentence Holt on Dec. 6.
Holt, 46, had pleaded not guilty to six counts of mail fraud for allegedly spending more than $8,000 in campaign money for personal use between 1993 and 1997.
Assistant U.S. Attorney Michael Seabright said the government's evidence showed Holt took a presigned blank check from the Friends of Milton Holt campaign committee and wrote a check for $2,051 to Ryan's Graphics Inc., a Honolulu printing company, on May 28, 1997.
The president, Holt's friend, sent Holt $2,000, which went into Holt's bank account. The office manager wrote a backdated invoice saying the money was spent on thank-you cards, Seabright said.
Holt had been free on condition that he obtain treatment for drug abuse and stop using illegal drugs, but he was ordered held without bail last month after he tested positive for crystal methamphetamine.
Holt had once been regarded by his peers as a brilliant lawmaker and power broker.
A Kamehameha Schools graduate, Holt attended Harvard in the early 1970s and became the starting quarterback on the football team. He was first elected to the Legislature as a state representative in 1978 at the age of 26.
Holt, who lost his Senate seat to former state Rep. Suzanne Chun Oakland in 1996, worked as a special projects officer for Bishop Estate until he was removed from that position last month.
Previously, he served as assistant athletic director of the trust-run Kamehameha Schools.
In 1992, Holt spent two days in jail after pleading guilty to a misdemeanor spouse-abuse charge.
The next year, he was arrested in New Orleans for public drunkenness. The New Orleans arrest later was dismissed.
Holt also has acknowledged charging more than $23,000 on Bishop Estate credit cards at local restaurants and strip clubs, such as Misty II and Saigon Passion III. In several instances he entertained lawmakers at hostess clubs. He has said that he repaid the estate for the credit card charges.
Peters blames tax guru for IRS problems
Others say the attorney has been one of the estate's major assetsBy Rick Daysog
For more than a decade, the Bishop Estate and its trustees relied on tax guru Mark McConaghy to keep the Internal Revenue Service off of 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 a 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 McConaghy 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 Schriebman, Peters' California-based tax expert.
McConaghy declined comment last week about potential litigation by former Bishop Estate trustees. He was not available to respond to Peters' filing yesterday, which is scheduled for an Oct. 8 hearing before Judge Chang.
But several of McConaghy's supporters dismissed Peters' complaint as a desperate legal strategy to retain his job. If the former trustees had followed McConaghy's advice in the past, they would not have been in trouble with the IRS, they argued.
"My personal view is that Mark rendered good opinions and good advice," said Gilbert Ishikawa, director of tax administration at the Bishop Estate. "It's questionable if they were followed thoroughly."
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 outside advisers including local attorneys 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.
Former and current staffers credit McConaghy for saving the estate millions of dollars in taxes over the years. They often cite a 1986 private letter ruling he obtained from the IRS that allowed the estate to transfer ownership of the Royal Hawaiian Shopping Center in Waikiki from the estate's for-profit subsidiary to its nonprofit parent.
Such transfers -- which were repeated by other trust subsidiaries -- shielded the nonprofit estate from income taxes while allowing it to retain multimillion dollar tax-carry forwards like a for-profit corporation.
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 a 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.
"He's an asset to any client," said N. Jerold Cohen, an Atlanta attorney and former chief counsel of the IRS during the Carter administration. "He's certainly in the top rank of the tax advisors in this country."
Cohen, who has known McConaghy for decades, pointed to McConaghy's continued influence on national tax issues.
At PriceWaterhouse, McConaghy and longtime partner Bob Shapiro head a team of more than 650 employees, which include lobbyists, economists, 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 of the U.S. tax agency in 1997. He also served as a trustee of presidential candidate Elizabeth Hanford Dole's blind trust.
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 also has 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 taken over by the Bishop Estate after the company sought bankruptcy protection.
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.
Former Bishop Estate trustee Matsuo Takabuki, who hired McConaghy back in the mid 1980s, denied a conflict on the part of the tax attorney. "Mark is one of the best tax men and a person of high integrity," said Takabuki."Mark has been fantastic for the estate." McConaghy invested in the Michigan deal only after he urged him to, Takabuki said.
Peters, WongsBy Rick Daysog
The Bishop Estate stands to lose $750 million to the Internal Revenue Service if the former trustees are not removed permanently from their $1 million-a-year posts, according to a suit filed today seeking the permanent removal of trustees Henry Peters and Richard "Dickie" Wong.
In the court filing, the estate's interim board reiterated charges that former trustees Henry Peters, Richard "Dickie" Wong and Lokelani Lindsey jeopardized the estate's tax-exempt status by taking excessive compensation, failing to implement major management reforms and for neglecting the estate's primary educational purpose.
Peters, Lindsey and Wong "have neglected the educational mission of the trust estate and instead focused on the trust estate's commercial and investment activities and their own private interests," the complaint said.
"The incumbent trustees have breached their fiduciary duties, placed the tax-exempt status of the trust at risk and should be permanently removed."
The removal suit comes as the interim board -- retired Adm. Robert Kihune, American Savings Bank executive Constance Lau, attorney Ronald Libkuman, former Honolulu Police Chief Francis Keala and retired Iolani School headmaster David Coon -- have reached a proposed settlement with the Internal Revenue Service. The IRS has been conducting a four-year audit of the estate's operations and has threatened to revoke the trust's tax-exempt status if the former board members are not removed permanently.
Based on the IRS's threat, trustees Stender and Jervis have resigned from the trust. Today's suit also seeks the permanent removal of Lindsey. However, on May 6, Circuit Judge Bambi Weil removed Lindsey after a five-month trial.
In accompanying court documents filed today, the new board said the estate will owe the IRS about $9 million plus interest for back taxes and penalties for the estate's 1990-1996 fiscal years.
The estate tax liabilities are well below the $65 million initially demanded by the IRS earlier this year and do not include tax liabilities for the estate's for-profit subsidiaries, which could total tens of million of dollars.
Under the proposed deal, the trust will retain its valuable tax-exempt status if the former board members are permanently removed. Failure to do so could force the IRS to seek the revocation of the tax-free status.
The interim board cited a recent study by the Arthur Andersen consulting firm that found that the loss of the estate's tax exempt status for the 1990-1996 period covered by the audit could cost the trust more than $750 million.
The hearing on the removal suit is scheduled for Sept. 3 before Probate Judge Kevin Chang.
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