Trustees OK changes

Recommendations made
in the master's report win
tentative approval

Rick Daysog and Ian Lind

Trustees of Kamehameha Schools/Bishop Estate today tentatively agreed to review the so-called "lead trustee" management system which the estate's court-appointed master criticized as a potential violation of Bernice Pauahi Bishop's will.

Trustees also agreed to a financial and management audit of the estate's operations by an independent accounting firm.

In all, the estate agreed to abide by 20 of the 21 recommendations in special master Colbert Matsumoto's review of the Bishop Estate's operations for its 1994 fiscal year.

"This addresses the concerns in a focused manner," Matsumoto said. "I'm accepting this as a new spirit of cooperation."

Matsumoto's report charged that the estate recorded $264 million in losses and loss reserves during the year and faulted the lead trustee system which gives individual trustees the authority over specific administrative areas.

Matsumoto said the lead trustee system at worst is an unauthorized division of trusteeship.

At best, it's a sweeping delegation of authority without appropriate safeguards, he said.

The proposed deal was announced in a hearing this morning before Circuit Judge Colleen Hirai. The estate, the attorney general and Matsumoto said they plan to work out the details of the agreement over the next two weeks. Hirai set a hearing for Dec. 19.

Matsumoto and the estate had been at odds in past weeks over Matsumoto's highly critical report of the estate's management. He has charged that the estate withheld information from him and likened his review to an investigation of the CIA's finances.

"The elephant I expected to encounter turned into a Brontosaur," Matsumoto said today. "Then it turned into a hydra-headed monster."

The estate, meanwhile, said that Matsumoto and his accountant, Steven Sakamaki, didn't understand the complexity of the assignment.

Trustees said the estate lost just $23 million for the 1994 fiscal year, not $264 million.

They also argued their investment returns have outpaced the stock and bond markets.

Estate attorney Robert Bruce Graham today welcomed a financial and management audit, saying it would "foster new confidence" in the estate's management.

But he disagreed with Matsumoto's charges that the estate withheld information, noting that much of the items requested by Matsumoto were available to him.

Attorney General Margery Bronster, representing beneficiaries of the estate, called the agreement "an important first step."

But she said the estate is still behind in getting its accounting approved for the 1994 fiscal year.

She said the agreement has no bearing on her investigation into allegations of trustee mismanagement of the estate.

Today's hearing was attended by estate trustee Gerard Jervis, who said the agreement signals a more-open board room.

But Jervis said he and fellow trustee Oswald Stender are "absolutely still out of the information loop" on many estate matters.

Jervis and Stender have argued that trustees Henry Peters, Lokelani Lindsey and Richard Wong made policy decisions without consulting them.

Both sides agree to
20 of 21 recommendations

By Star-Bulletin staff

Kamehameha Schools/Bishop Estate and the state attorney general today agreed to 20 of the master's 21 recommended improvements. Those accepted:

1: Court should require the trustees to consolidate the financial statements of the estate and its subsidiaries to comply with generally accepted accounting procedures, as of the annual account for fiscal year ended June 30, 1997.

2: Court should require trustees to prepare a schedule of contingent loss exposure to be made available annually to the court master.

3: Court should require trustees to prepare a current fair market value listing of estate assets to be filed with the annual account.

4: Court should require trustees to prepare an annual evaluation of estate's income yield and total return on its investment, individually and by category.

Investment expenses and income should be segregated between those involving direct management by Bishop Estate or Pauahi Holdings Inc., and those involving passive investments.

5: Court should require trustees to maintain the asset pricing information upon which an investment was acquired, to be made available to the master annually.

6: Court should require trustees to prepare a supplemental report to the court verifying the extent of investment losses sustained by the estate and its subsidiaries during fiscal year 1995 and the preceding four years.

7: The trustees should complete their strategic plan, which is "a road map for the Trust Estate's future," for review by the court master at the end of fiscal 1997. Hire the best-qualified independent counselors in education, investment and financial planning to assist trust staff in the task.

8: The trustees should update guidelines for investment policy and asset allocation to coordinate with the objectives of the estate's strategic plan.

9: The trustees should compile a comprehensive listing of investments by the estate and its subsidiaries. Information available to court master should include nature of investment and acquisition price, additional capital investment in it, and profit or loss history of the investment.

10: The trustees must explain to the court why details of the 1994 renegotiation of the Kahala Hilton lease was not reflected in board meeting minutes or disclosed to the master. Explain how the economic terms yield a fair-market rental. Identify any other 1994 transaction not disclosed in meeting minutes, and any real estate transaction not disclosed in response to restated guidelines.

11: The trustees should cease the informal practice of designating a "lead trustee" in each area of interest, such as asset management, government relations, legal affairs and educational programs.

12: Trustees should be required to make a report to the court about co-investment in McKenzie Methane Gas by the trust, individual trustees and employees. It should address actual or potential breach of fiduciary duties by trustees, employees and agents.

13: The court should counsel trustees on their affirmative duty to prevent or redress a breach of trust.

14: The trustees should be required to provide a written description of the methodology or formula used to calculate commissions, and a description of any waiver of commissions.

15: The trustees should be required to adopt procedures to ensure that subsequent adjustments to estate's income are taken into account and corresponding adjustments made to trustees' compensation.

16: Court should determine whether interest payment from subsidiaries is considered revenue or income in calculating commissions, and trustees should be instructed to conform accordingly.

17: Court should instruct trustees that commissions are not to be paid upon return of invested capital, which must be distinguished from capital gains on an investment.

18: Court should require trustees to develop procedures making the estate in full compliance with the Intermediate Sanctions Law. It would be a conflict of interest for trustees to adopt a compensation review procedure so the compliance plan should be presented to probate court for approval.

19: Court should instruct trustees to ensure that submission of the 111th annual account complies with the Restated Guidelines.

20: These recommendations should be incorporated in the Restated Guidelines.

The one not accepted:

Not accepted: Approval of this annual master's account should be subject to the outcome of the Internal Revenue Service's audit into the estate.

Fact finder files sealed
report in trust probe

Yim's work addresses allegations
of mismanagement at the schools

By Rick Daysog

The court-appointed fact finder investigating allegations of mismanagement at Kamehameha Schools filed his long-awaited report yesterday with Circuit Court.

Retired Circuit Judge Patrick Yim yesterday filed the report under seal with Circuit Judge Collen Hirai, but copies were provided to attorneys for the estate and the state attorney general.

Yim, appointed last summer at the request of Bishop Estate's trustees, has conducted more than 160 interviews and has received responses from 1,200 questionnaires.

He recently met with Bishop Estate trustees to give a review of his report, prompting criticism from alumni and community leaders.

Judge Hirai will conduct a hearing today on a separate study by Bishop Estate's court-appointed master, Colbert Matsumoto.

Matsumoto's review, which faulted the estate for recording losses and loss reserves of up to $264 million in its 1994 fiscal year, has been criticized by the estate but has been supported by state Attorney General Margery Bronster.

Yesterday, the attorney general's office and Bishop Estate sparred over documents requested in Bronster's investigation of trustees' alleged mismanagement of the $10 billion charitable trust.

The estate yesterday filed an appeal against Circuit Judge Kevin Chang's September order to turn over to the state minutes of the trustees' weekly board meetings dating back to 1993.

Cynthia Quinn, special assistant to Bronster, said the appeal belies the estate's promise to cooperate with the investigation.

That came after the estate filed appeals against Chang's ruling ordering trustee Lokelani Lindsey to testify in the attorney general's investigation, Quinn said. Lindsey since has agreed to meet with the attorney general.

William McCorriston, the estate's attorney, said the move is an effort to limit the scope of Bronster's investigation, which he has criticized as overly broad.

McCorriston said the trustees' minutes already have been turned over, except those that were deemed confidential by Chang.

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