Saturday, October 3, 1998

Judge set to
hear state’s request
to dump trustees

The judge asks for more
information on the candidates
for receiver should the trustees
be forced out

Full text of Colbert Matsumoto's
first supplement to the Master's Report

By Rick Daysog


As Bishop Estate's trustees agreed to sweeping management changes at the multibillion-dollar trust, a state judge has scheduled a new hearing on Attorney General Margery Bronster's request for the temporary removal of all five of the estate's trustees.

Probate Judge Colleen Hirai yesterday asked Bronster to provide additional information on two candidates who could serve as the court-appointed receiver of the nonprofit charitable organization. A receiver would be named only if Hirai ordered the trustees to step down.

Hirai also approved a recommendation by estate special master Colbert Matsumoto to appoint a chief executive officer to take over the daily management duties of the five trustees.

Some observers believe Hirai is taking a hard look at removing the trustees, who now are the subject of inquiries by law enforcement agencies.

For more than a year, Bronster has been investigating allegations of financial wrongdoing by board members while the Internal Revenue Service has been conducting an extensive audit of the trust's operations.

An Oahu grand jury also is investigating allegations that two trustees -- Richard Wong and Henry Peters -- received kickbacks from Wong's brother-in-law. All three men deny the charge.

"Clearly, Judge Hirai is giving serious thought of removing the trustees, at least temporarily," said Randy Roth, a local trust law expert and co-author of the "Broken Trust" article that prompted Gov. Ben Cayetano to open the state investigation.

"This is a very positive development."

A Bishop Estate spokesman declined comment.

The estate, Hawaii's largest private landowner, was founded in 1884 by the will of Princess Bernice Pauahi Bishop to educate children of native Hawaiian ancestry.

Income didn't go to schools

During a crowded hearing yesterday on the master's annual review of the estate's operations for the 1994-1996 fiscal years, Bronster argued that trustees violated Bishop's will by accumulating $350 million in trust income instead of spending it on the estate-run Kamehameha Schools.

Bronster believes that trustees actively attempted to conceal the amount of the accumulated income from the probate court and past masters of the estate.

"The question is, how many potential beneficiaries are going to lose out because of this?" Bronster asked. "It's time for the court to act."

Trustees deny hoarding

Robert Bruce Graham, attorney for the estate, denied that trustees hoarded school funds. He said the money is accounted for and is being spent properly.

According to Graham, Bronster's removal request requires a full evidentiary hearing. He argued that the issue of accumulated income is not grounds for dismissal.

Graham also took offense to Bronster's call for the appointment of a receiver, deriding Bronster's nominees as mainland "lunas" -- a reference to plantation foremen in Hawaii.

The two candidates are Harold Williams of Los Angeles, a former Securities and Exchange Commission chairman and president emeritus of the $4.4 billion J. Paul Getty Trust, and Bevis Longstreth, a Columbia University law professor and former SEC commissioner.

Bronster argued that the two have an extensive understanding of the business world and are knowledgeable in the field of charitable trusts.

Under Bronster's plan, a court-appointed receiver would take over the daily operations of the trust until a chief executive officer can be hired.

Yesterday's hearing was attended by dozens of supporters and critics of the Bishop Estate. Also attending was Richard "Dickie" Wong, the estate's board chairman, who declined comment on the proceedings.

Agreement on some issues

Attorneys for trustees Gerard Jervis and Oswald Stender, meanwhile, argued that their clients should not be removed since they confronted many of the problems cited by Bronster.

Indeed, the trustees reached much common ground with the attorney general's office and Matsumoto, whose master's reports and supplements made 21 recommendations on improving trust operations.

The trustees agreed to 16 of the recommendations, which subsequently were approved by Hirai.

Most important, all three sides agreed to replace the current trustee-based management system with a single-voice management system headed by a chief executive.

Under the plan, the chief executive would be responsible for the day-to-day operations of the trust, while the trustees would serve as policy makers. As in most modern corporations, the chief executive would make the key decisions but would be answerable to the full board.

A similar management system is in place at the $2 billion Estate of James Campbell, which is headed by a chief executive officer who reports to a four-member board of trustees.

According to Matsumoto, the estate must hire a chief executive within 180 days. Both the master and the attorney general's office will monitor the implementation of the new management system and the hiring of the top executive.

The estate said it's too early to talk about potential candidates and salary levels.

Stricter policies accepted

Trustees also agreed to stricter conflict-of-interest policies. And they will commission a new study on "reasonable" trustee compensation.

Their $800,000-a-year commissions have long been considered a lightening rod for criticism. Congress recently enacted a law designed to prohibit excessive compensation by trustees of charitable trusts, and the state Legislature this year approved a plan to limit trustee pay to a reasonable amounts set by the probate judge.

"I don't think people can now say that 'it's business as usual' at the Bishop Estate," Matsumoto said.

Star-Bulletin writer Susan Kreifels contributed to this report.


What's next?

bullet Oct. 16: Attorney General Margery Bronster must provide the probate court with information on the candidates she wants to temporarily take over control of the estate.

bullet Oct. 30: A hearing on the issue of removing the trustees and unresolved matters involving the master's report.

Bishop Estate

Probate Judge Colleen Hirai approved the following stipulations Concerning Master's Recommendations (109th, 110th, and 111th Annual Accounts)

bullet Stipulation No. 1: New Financial Statement Presentation Shall be Adopted.

The trustees shall adopt the format of the financial statement and supplemental schedules recommended in the Andersen report, with the same level of detail, and shall file the audited financial statement and supplemental schedules with each annual account, beginning with the 112th Annual Account (FY 1997).

bullet Stipulation No. 2: Corpus And Revenue Activity Shall be Specifically Reported.

Effective with their 112th Annual Account (FY 1996-1997) and for each Account thereafter, the Trustees shall submit a special purpose financial statement which conforms to the trust accounting format as proposed by the Andersen report.

bullet Stipulation No. 3: Accumulated Income Shall be Restored To The Revenue Account.

The trustees shall not reclassify accumulated or unexpended income to corpus and shall restore to the revenue account all accumulated income which previously was reclassified to corpus.

bullet Stipulation No. 4: An Accounting of Accumulated Income and Independent Verification Shall be Provided.

The trustees shall provide to the master an accounting of all accumulated income within 60 days from the date upon which the court enters its order approving this Stipulation.

bullet Stipulation No. 5: Strategic Planning Shall Incorporate Planning for Expenditure of Accumulated Income.

The trustees' strategic planning process, which is described more fully below, shall incorporate planning for the expenditure of accumulated income.

bullet Stipulation No. 6: No Future Reclassification of Accumulated Income Shall be Made Without Prior Court Approval.

The trustees shall not reclassify accumulated or unexpended income to corpus pursuant to H.R.S. Chapter 517D, the Uniform Management of Institutional Funds Act, except with the prior approval of the court obtained upon a petition for instructions with notice to the attorney general as parens patriae of the trust estate.

bullet Stipulation No. 7: The Replacement Cost Reserve Shall be Discontinued Pending Further Instructions of the Court.

The trustees shall discontinue the replacement cost reserve pending further instructions of this court obtained upon a petition for instructions with notice to the attorney general as parens patriae of the trust estate.

bullet Stipulation No. 8: Investment Performance Schedules Shall be Regularly Prepared And Shall be Incorporated As Supplemental Schedules to the Financial Statements.

Beginning with the 112th Account and at least annually thereafter, the trustees shall cause benchmarked investment performance schedules to be prepared. If the trustees believe an appropriate benchmark does not exist or cannot reasonably be developed, the trustees shall provide a reasonable explanation in the schedules for their inability to identify or develop such a benchmark. The presentation of this information shall evolve to include at least one-year, five-year, and ten-year annualized income yield and total return analyses.

bullet Stipulation No. 9: Investment Return Analysis Shall Use Appropriate Performance Measures.

In preparing performance return analyses, the trustees shall utilize appropriate measure such as time weighed return and internal rate of return for various time spans to allow meaningful comparisons against performance benchmarks.

bullet Stipulation No. 10: Investment Policies Shall be Reviewed.

The trustees shall undertake a comprehensive review of their investment policies as recommended by the Andersen Report in conjunction with the overall strategic planning process described below.

bullet Stipulation No. 11: Due Diligence and Investment Monitoring Policies, Practices and Procedures Shall be Strengthened.

The trustees shall improve and strengthen the due diligence and investment monitoring policies, practices, and procedures as recommended in the Andersen report.

bullet Stipulation No. 12: Investment and Management Decisions Shall be Properly Documented.

The trustees shall ensure that appropriate documentation of their investment and management decisions is prepared and maintained as recommended in the Andersen report.

bullet Stipulation No. 13: Strategic Planning Shall be Implemented.

The trustees shall prepare a request for proposals, the objective of which shall be the development of a comprehensive educational and financial strategic plan for consideration and adoption by the trustees. The RFP shall more specifically define the scope of the strategic planning project to be undertaken. The RFP shall be disseminated to strategic planning firms. The RFP shall identify the qualification criteria of the strategic planning firms from which proposals shall be solicited. Such qualifications should include expertise in education, investments and financial planning.

The trustees shall review the responses to the RFP and, subject to the review and approval by the court, through a stipulation or order, the trustees shall select one or more qualified strategic planning firms within 120 days from the date on which the RFP is approved by the court.

The scope of the strategic planning project should involve the development of an educational plan in conjunction with an investment plan.

bullet Stipulation No. 14: A New CEO-Based Management System Shall be Instituted.

The trustees shall cease to employ the lead trustee system of management in administering the Trust Estate.

The trustees shall adopt and implement a CEO-based system of management for the trust estate consistent with the concept recommended in the Andersen report and hire a CEO within 180 days after the date on which the Court enters its order approving this Stipulation.

bullet Stipulation No. 15: A Compliance Plan For Determining Trustee Compensation Shall be Prepared.

On or before Nov. 13, 1998, the trustees shall submit to this court for its review and approval a plan for determining trustee compensation that is in compliance with and satisfies applicable requirements of the state and federal law, including without exception, federal Intermediate Sanctions legislation and Treasury regulations incident thereto, and H.R.S. Section 607-20, as amended by Act 310 of the 1998 Hawaii State Legislature.

The plan shall include provision for the preparation of an independent professional study concerning reasonable trustee compensation which utilizes relevant and appropriate criteria.

bullet Stipulation No. 16: Stricter Conflict of Interest Policies and Procedures Shall be Adopted.

The trustees shall develop and adopt stricter guidelines and procedures to ensure appropriate compliance with fiduciary standards.

The Restated Guidelines shall be further amended to include a provision requiring that future masters review the Trustees' compliance with conflict of interest policies and procedures in connection with their review of the trustees' annual accounts.

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