Bankrupt isle firm The trustee overseeing the bankruptcy of Oahu wholesaler Hawaiian Grocery Stores claims in a federal lawsuit a California company that bought the local business in 1996 systematically looted it with help from the local office of one the nation's big accounting firms, KPMG.
raided, suit claims
Hawaiian Grocery Stores money
was funneled to a parent company,
a bankruptcy trustee saysBy Russ Lynch
rlynch@starbulletin.comMark J.C. Yee, the trustee overseeing Hawaiian Grocery's bankruptcy, is seeking $13.9 million he says is owed to Hawaiian Grocery's creditors by Southern California-based Unified Western Grocers and related companies. Unified Western, as a result of a merger, is the successor to Certified Grocers of California, which bought HGS in 1990.
KPMG is also listed as a defendant because Yee claims the national accounting firm was an accomplice in draining off money that belonged to creditors. A lawsuit filed by the trustee in federal court last week also seeks $10 million in punitive damages.
KPMG's Hawaii managing partner, Robert Gagliano, broke company rules against commenting on such matters to flatly deny the claim.
"We didn't help anybody do anything," Gagliano said. "We don't normally comment on lawsuits but this is categorically unjust and untrue."
Unified officials did not return calls seeking comment.
Yee said yesterday he is confident in his case. "We're alleging that it's a faulty audit" that led lenders to believe HGS was solvent when it wasn't, Yee said. "The lawsuit pretty much speaks for itself. We believe that we have a strong case."
Hawaiian Grocery Stores was founded as a wholesale business in Honolulu in 1950 and brought in owners of small retail groceries as shareholders. In 1990, Certified Grocers bought out the shareholders for $2.4 million and took over the business, the lawsuit says.
Certified managed the business as a wholly owned subsidiary for the next six years, while investing $7 million in it.
The island company's business deteriorated under Certified's management and it borrowed heavily, running up more than $5 million in debt by 1996. Certified, seeing an inevitable collapse, "embarked on a series of transactions to take as much money as possible out of HGS before it collapsed," says the lawsuit filed by attorneys Patrick Jaress and Ronald Kotoshirodo on behalf of Yee.
Certified allegedly secured a line of credit for Hawaiian Grocery from a mainland bank. Of that, $2.4 million was supposed to be used to pay off HGS shareholders for their interest. The lawsuit says the money instead was transferred to Certified. With its business slipping, HGS continued to pay preferred-stock dividends to Certified's owners, shifted cash to the parent company and incurred "useless operating expenses," Yee alleges.
By August 1996, HGS was not paying Hawaii state taxes and now owes the state more than $7 million, the lawsuit says.
Yee alleges a number of illegal transfers of money and other assets to Certified before HGS filed for debtor-in-possession bankruptcy reorganization in 1999. Hawaiian Grocery kept operating for a time under bankruptcy court supervision but in February 2000 it closed its doors and entered Chapter 7 liquidation.
Yee was appointed trustee by the bankruptcy court to watch over the disposition of the assets. He has been able to recover only about $125,000, mostly from the sale of company trucks, while nearly $14 million in debt remains unpaid, he said.
KPMG failed to disclose in a 1996 audit that there was doubt the company could keep going, Yee said, despite clear evidence to the contrary. When HGS needed another loan, for $2.5 million to buy another business in 1997, it could not have done so without a "clean audit," KPMG provided it even though it knew the figures were worse, the suit claims.
Yee alleged KPMG issued a clean audit because it had a relationship with the business HGS was buying and stood to receive a fee if the deal was completed.
"During this period, KPMG changed the HGS net loss of $195,058 to a profit of $10,046," the lawsuit claims. "If the audits had been properly prepared, HGS would not have been able to continue operating and losing unnecessary amounts of money."
KPMG's Gagliano disputes the allegation. "That has been taken totally out of context," he said.