The state had sued Bank of America-Hawaii in August 1995 alleging that the bank's predecessor, Honfed Bank, misled customers when it sold them Investor Equity tax-deferred annuities during the 1980s. Honfed, which was bought by BankAmerica Corp. in 1992, had implied that the annuities were backed by the bank and the federal government, according to the state.

Gov. Ben Cayetano announced the settlement this morning, saying it will "allow full restoration of account values to policyholders who purchased Investors Equity annuities through Honfed."

The governor also said that the state and the bank will set up a special fund to pay Honfed policyholders for damages on top of their investment amounts. The fund will have a maximum of $20 million.

"This is a huge building block in resolving the problems," said John Yamano, attorney for the state.

For policyholders, the settlement is timely given that many weren't expecting to see full restitution. According to Cayetano, the average age of the policyholders is about 70. The state originally didn't expect to reach a settlement with the bank in less than seven years, he said.

The state seized the company in June 1994 after its management ran up about $100 million deficit due largely to investments in speculative investments known as derivatives. At the time of the seizure, Investors Equity had about 13,000 policyholders. Today's settlement affects only the 4,000 policyholders who bought annuities through Honfed.

In December, a Circuit Court judge approved a deal between the state and Gary Vose, Investors Equity's sole shareholder when the company was seized. In that settlement, the state received the Meadows, a 4,000-acre Colorado subdivision and another smaller project owned by Vose. The properties were valued at about $40 million and the state is selling them to reimburse policyholders.

The state has also sued a number of brokerages, including Dean Witter, Merrill Lynch & Co. and Goldman Sachs, over the annuity sales. The suits against the brokerages are pending.