Ousted Trustees Should Repay $5-Million to Hawaiian Trust, Report Says

The five ousted trustees of Hawaii’s wealthiest charity should repay the trust more than $5-million for legal and accounting expenses they charged as they were fighting to retain their lucrative jobs, a court-appointed official has recommended.

If the trustees are unable to repay the full amounts, he suggests, several of the law firms they retained should be required to refund much of the difference.

“Millions of dollars in trust funds were wasted” in a vigorous attempt by the embattled trustees to quash or impede investigations by the Internal Revenue Service and Hawaii’s attorney general into their alleged mismanagement and breach of fiduciary duty in overseeing the Kamehameha Schools, says the official, Robert P. Richards, in his blistering 75-page report.

“When one reviews the legal invoices one is drawn to the inescapable conclusion that the trustees thought of the assets as their own,” he says.

“A strategy was adopted to obstruct the legal process, to delay wherever possible, to object wherever possible, to utilize so many lawyers and so many arguments that the opposition would be overwhelmed and would choose to give up.”

Attempts to halt the investigations proved futile, however. A year ago, Probate Judge Kevin S. C. Chang ordered the temporary removal of the trustees, all of whom have now resigned permanently. And the interim trustees whom the judge appointed last year have agreed to pay the I.R.S. millions of dollars and to overhaul the charity’s management structure to retain its tax-exempt status (The Chronicle, December 16).

In his report, Mr. Richards portrays at least three of the former trustees as willing to spend the charity’s money freely on legal advice and assistance in fighting investigators’ attempts to look into their alleged misconduct. Such advice was of great benefit to them personally but poorly served the trust’s beneficiaries, he says.

“The trustees clearly had a right to contest those allegations,” says Mr. Richards. “They had no right to contest them with trust assets without seeking prior court approval” — which he says they did not do.

Instead, he says, “they constantly took action to attempt to question and at least limit the authority of the attorney general and also instituted Herculean efforts to avoid full disclosure of information.” At stake, he says, were their powerful jobs and annual compensation of more than $1-million apiece.

William C. McCorriston, one of the lawyers whose actions the report calls into question, called “patently erroneous” the charge that lawyers strenuously opposed all requests for information. Of more than 200 subpoenas issued by the attorney general’s office, he said, his firm objected to just nine.

“Many of the attorneys’ fees expended were also necessary to defend against unwarranted actions by the state attorney general,” Mr. McCorriston added.

Cades Schutte Fleming & Wright, another Honolulu law firm criticized in the report, said in a statement that “the work we have done for the trust has been entirely appropriate.” That work, it said, “has always been intended to benefit the trust, and to enhance and preserve the assets of the trust.”

The firm said it was “amazed and disappointed” that Mr. Richards spent several months preparing his report “without ever asking our attorneys or staff members about what they did, or why.” It concluded: “We expect to be fully vindicated.”

Mr. Richards was appointed special master last year by the probate court to look into allegations that a majority of the trustees had hired lawyers and other advisers to defend their personal interests at the charity’s expense between August 1998 and May 1999. The complaints were lodged by two of the trustees — Oswald K. Stender and Gerard A. Jervis — against their three colleagues: Richard S. H. Wong, the then-chairman; Marion Mae Lokelani Lindsey; and Henry H. Peters.

After reviewing the activities of 10 law firms and two accounting firms, the special master concluded: “No stone would be left unturned by the trustees in attempting to silence or at least discredit their critics. To charge the trust for such legal work is outrageous!”

The day after Mr. Richards submitted his report, Kamehameha Schools announced that it would immediately stop using several of the firms while it conducted its own investigation.

Among the special master’s allegations and his proposed remedies:

* Arthur Andersen, an international financial-services firm, was paid an unspecified sum for accounting services, of which $268,290 should be surcharged to the trustees.

* Cades Schutte Fleming & Wright received $1,113,471 for acting as “shadow” lead counsel in the charity’s legal affairs and for doing “work that was wholly inappropriate to any defense of the trust.” One or more of the trustees should repay various parts of that sum.

* McCorriston Miho Miller & Mukai, a Honolulu law firm, received $1,381,291 as lead counsel in matters pertaining to the attorney general’s investigation. Part of that sum should be surcharged to all trustees, and part to just three of them — Ms. Lindsey, Mr. Peters, and Mr. Wong.

* Miller & Chevalier, a Washington law firm, received $653,511 “for substantively ‘defending’ the trust against the I.R.S. action,” to preserve its tax exemption or to minimize any tax liability. The entire amount should be surcharged to the trustees.

* Pricewaterhouse Coopers, an international auditing and consulting company, received $1,130,383 for work related to the I.R.S. audit. The entire amount should be surcharged to the trustees.

* Verner Liipfert, a Washington law firm, received $347,564 for doing work that was of “no legal benefit” to the trust. The entire amount should be surcharged to the trustees.

Some of the legal expenses evoked particular ire. Mr. Richards notes, for example, that a senior federal district court judge, Samuel King, was one of five authors of a 1997 article harshly critical of the trustees. Shortly after that article appeared, the Cades firm spent 16 hours of “chilling and wholly inappropriate legal work,” Mr. Richards says, researching what limits there might be on federal judges’ freedom to make public statements on social and legal issues.

The same law firm also conducted research into whether a reporter for the Honolulu Star-Bulletin could be forced to divulge his sources, Mr. Richards says, and into possible conflicts of interest that might disqualify the attorney general from pursuing an investigation.

Using the McCorriston law firm, the trustees apparently adopted a “destroy the opposition” strategy, the master says. “There was a constant effort made to take steps to silence or discredit what was perceived as the ‘opposition,’ whether that was an employee, a reporter, the attorney general, a judge, or a master.”

Randy Roth, a University of Hawaii law professor who has persistently criticized the former trustees, said he was “embarrassed that so many lawyers would be feeding at the trough” while ignoring their duty to report any malfeasance they uncovered to the court.

“It’s outrageous when you look at it from the point of view of the trustees,” he said, “but it’s also the responsibility of attorneys not to look the other way.”

The special master’s report is available at the Web site of Na Pua a Ke Ali’i Pauahi, a group of Kamehameha Schools parents, students, and alumni. Go to http://www.napua.com/right_frame_home.htm.