Thursday, February 4, 1999

Five trustees removed from IRS case

Probate Judge Kevin Chang
will pick an interim panel

The state attorney general's office
calls the ruling significant; the trustees'
attorney calls it 'bizarre'

Expert blasts Lindsey report
By Rick Daysog


A state judge this morning removed all five Bishop Estate trustees from matters involving the Internal Revenue Services' audit of the multibillion dollar trust, in a decision that could have major impact on the 2-year-old controversy surrounding the estate.

Probate Judge Kevin Chang said that trustees have actual, adverse and material conflicts of interest in matters involving the IRS audit. Chang also said the initial findings of the IRS audit "constitute extraordinary and unprecedented" circumstances that were not anticipated by the estate's founder, Princess Bernice Pauahi Bishop.

Chang said he will appoint a panel of five special administrators to address issues raised by the IRS's exhaustive, four-year audit. Chang's ruling does not remove board members' powers relating to all other duties that they perform for the trust and the estate-run Kamehameha Schools.

"This a significant ruling," said a spokeswoman for Attorney General Margery Bronster, who is conducting a separate state investigation into alleged breaches of duty by trustees.

"The mere fact that there will be different people in there is a huge step."

Chang did not give details on the "extraordinary and unprecedented" circumstances raised by the IRS audit. But he did indicate that the IRS's initial findings, known as IRS Form 5071 or notices of proposed adjustments, address the issue of unreasonable or excessive compensation for trustees.

He also cited court papers by trustee Oswald Stender stating that the IRS expects to issue preliminary findings in about two weeks to one or more trustees relating to the new federal intermediate sanctions law. That law bars trustees of a charitable organization from receiving inappropriate benefits at the expense of the trust.

If a trustee is found to have received improper benefits, he or she could face substantial fines by the IRS.

Chang's order represents a major setback for the estate's majority trustees -- Richard "Dickie" Wong, Henry Peters and Lokelani Lindsey -- who argued that they have no real conflict and should not delegate their duties relating to the audit.

William McCorriston, attorney for the trust, called Chang's decision "bizarre," saying it goes against 150 years of established trust law and represents a step in the process of dismantling the Bishop Estate. He cited a recent declaration by Jerry Cohen, an Atlanta tax attorney and former IRS chief counsel, who said that trustees would not have a conflict of interest at this stage of the audit.

McCorriston added that the trustees are now studying their legal options. In the past, the majority trustees have filed appeals and writs of mandamus with the state Supreme Court, seeking to overturn lower court decisions related to the controversy.

"This whole thing confirms my view that in Hawaii, there are two systems of justice: one for everyone else and one for the trustees of the Bishop Estate," said McCorriston, who declined comment when asked whether the trust's tax-exempt status is at risk.

"This decision, we think, is strange and beyond the boundaries of what the courts in the United States do. It should be reversed."

Today's ruling is in response to a petition by trustees Stender and Gerard Jervis who asked the court to bar trustees from responding to the IRS probe. Stender and Jervis, who have voluntarily recused themselves from the audit process, argued that trustees have a conflict and that all matters relating to the audit should be handled by an outside panel.

Chang's ruling calls for the estate's court-appointed master Colbert Matsumoto to come up with a list of eight candidates for the special panel by Feb. 19. Chang said he will select the five panelists from that list.

Educational testing
expert calls Lindsey

By Rick Daysog


An expert in educational testing blasted Bishop Estate trustee Lokelani Lindsey as "incompetent and unfair," saying her controversial report criticizing the educational quality of the Kamehameha Schools is flawed.

In testimony in the trial to remove Lindsey as a trustee, James Popham, retired professor at the University of California-Los Angeles' graduate school of education, said yesterday that the so-called Lindsey report was full of basic errors that indicated that she may have an agenda.

Popham also called Lindsey "irresponsible" for failing to consult with experts in the field of educational testing when she released her report. He believes that Lindsey should be removed from evaluating and overseeing educational programs at the estate-run Kamehameha Schools.

"My conclusion is that the author is both incompetent and unfair and is not qualified as an educational policy maker because she is likely to make unsound policy decisions and those decisions will harm children," said Popham, who retired from UCLA in 1991 and now resides in Kauai.

"It sounded like a report from someone with an ax to grind."

indsey's 1997 report, dubbed "An Imperative for Educational Change," said that the longer students stayed at Kamehameha Schools, the worse they performed as measured by standardized test scores.

The Lindsey report also said that only 48 percent of the students in the Kamehameha Schools 1997 graduating class scored the minimum SAT level for entrance into the University of Hawaii and that 30 graduating students could barely read at the 12th-grade level.

Bishop Estate trustees Oswald Stender and Gerard Jervis argued that the Lindsey report is inaccurate, hurt student and teacher morale and is designed to deflect blame from Lindsey in the controversy surrounding the Kamehameha Schools.

They are seeking Lindsey's removal from the Bishop Estate board, alleging she breached her fiduciary duties and is unfit to serve as a trustee.The removal trial, before Circuit Judge Bambi Weil, is in its third month.

Yesterday, Popham called the Lindsey report "wrongheaded" in assuming that standardized test scores are an accurate indicator of the educational quality at the Kapalama Heights campus.

Such tests not only measure skills that a student learns in the classroom but they also measure a students' inherent learning abilities and skills they pick up outside the classroom. Oftentimes, students' socioeconomic background is a factor on how well they score on such tests, he said.

Lindsey defended the release of her education report yesterday, saying she did it to call attention to deficiencies of Kamehameha Schools' learning programs. She has said her report does not attempt to blame students and teachers for the lower test scores but faults the lack of an articulated curriculum."The sole purpose was to present trustees with information to see how well we were doing in fulfilling our mission," Lindsey said.

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