In Unusual Move, Hawaii Seeks to Remove Trustees of Embattled Bishop Estate

Hawaii’s Attorney General has asked the state probate court to take the drastic step of removing all five trustees of the state’s wealthiest charity for numerous breaches of their fiduciary duty.

Attorney General Margery S. Bronster says such a highly unusual move is required because trustees of the Bernice Pauahi Bishop Estate have routinely mingled their personal interests with those of the estate’s sole beneficiary, the Kamehameha School.

She says the trustees continue to drain trust assets, mismanage the school, and impede her continuing efforts to investigate the estate’s complex affairs. Several trustees have granted improper benefits to themselves or their cronies, she says, through plum contracts, kickbacks, or other schemes.

“We have found multiple profound breaches of trust,” Ms. Bronster said in her report to Governor Benjamin J. Cayetano, who in August 1997 had asked her to look into the charity’s affairs. “Foremost, trustees have neglected their primary duty to educate the children. Instead, some trustees are more concerned with promoting their own self-interest and expanding the political influence and commercial interests of the trust. Some of their actions may involve criminal violations.”

In light of her findings, Ms. Bronster petitioned the court to promptly oust the trustees, at least temporarily, and to order them to repay all the money they are alleged to have diverted from the trust’s proper beneficiaries. By some estimates, that figure could total several million dollars for each of the trustees, who receive about $840,000 a year in compensation for what they say is full-time work managing various aspects of the estate’s operations.

The Attorney General is asking the court to appoint a receiver to take over the estate’s day-to- day operations until new trustees could be selected. She has identified two potential candidates for the post: Harold Williams, a former president of the J. Paul Getty Trust, in Santa Monica, Cal., and a former chairman of the Securities and Exchange Commission; and Bevis Longstreth, a Wall Street lawyer. A hearing on her petition is set for October 23.

Ms. Bronster’s report caps a year-long state investigation of the Bishop Estate, which since spring of last year has been the target of mounting criticism from students, teachers, parents, and alumni of the school, which educates children of native Hawaiian descent.

Reports issued by a court-appointed fact finder, a court-appointed special master, a school-accreditation committee, and a major accounting firm have all been highly critical of the trustees on issues ranging from their accounting practices and investment strategies to their annual compensation and management procedures.

Even more headaches may be on the way. The Internal Revenue Service has been looking into such matters as trustee compensation and benefits, lobbying activities, and the relationship of the estate’s business activities to its tax-exempt purpose. What’s more, state and federal grand juries reportedly have been impaneled to look into possible criminal wrongdoing by trustees or other estate officials.

The trustees themselves are far from united in their response to the barrage of criticism. Three of them — Lokelani Lindsey, Henry Peters, and Richard S. H. Wong — have vowed to fight to retain their posts, dismissing the allegations as the work of politically motivated adversaries.

Two other trustees — Oswald Stender and Gerard Jervis — have themselves called Ms. Lindsey unfit to serve as trustee and have asked the probate court to remove her. The two of them have complained that the other trustees have excluded them from board deliberations on key issues. And Mr. Stender, who reportedly has cooperated with investigators, has made no secret of his desire to see major changes in how the Bishop Estate is run.

The trustees manage a charitable trust that was established in 1884 by the will of Princess Bernice Pauahi Bishop, the last direct descendant of King Kamehameha I. The princess’s bequest — royal real estate totaling about 10 per cent of Hawaii’s land area — has since been parlayed into an international business empire now estimated to be worth some $10-billion. Its manifold investments include shopping centers, oil and gas wells, and an 11-per-cent stake in the investment-banking firm Goldman, Sachs.

Ms. Bronster says in her petition that the trustees “have subordinated the sole purpose of the trust to their personal gain. They have squandered trust assets intended for education by their excessive compensation, and by imprudent and improper trust management and investments.”

Among the Attorney General’s allegations:

* That trustees covertly diverted $350-million in investment income from the estate’s principal purpose — the education of Hawaiian children — to beef up its far-flung business ventures. Princess Pauahi’s will specifies that the estate’s income be used to finance education; had it been spent accordingly, the money could have gone to educate thousands of additional Hawaiians, Ms. Bronster says.

* That trustees have awarded valuable contracts to their friends and relatives, have used estate employees for their own benefit, and have endorsed payments to state politicians for doing little work.

* That trustees not only have accepted excessive compensation for years, but that they also have spent more than $900,000 of estate money in lobbying against passage of federal and state legislation aimed at curbing such overly generous fees.

* That trustees have mismanaged the Kamehameha School, resulting in a tense and hostile atmosphere on campus, and also mismanaged the estate’s assets by failing to invest prudently and by making questionable purchases and investments.

* That three of the trustees — Ms. Lindsey, Mr. Peters, and Mr. Wong — have consistently enriched themselves at the estate’s expense. Mr. Peters and Mr. Wong received kickbacks from a real-estate deal involving the estate and Mr. Wong’s brother-in-law, Ms. Bronster says, while Ms. Lindsey used estate employees to make improvements on her home.

Mr. Wong, the trustees’ chairman, said in a prepared statement: “Those who know me already know the charges are untrue. The suggestion that I took a kickback to perform my duties is a lie.”

He added: “I will vigorously defend the princess’s will and my honor against these defamatory charges.” Mr. Wong previously had said that he recused himself during trustee negotiations for the real-estate deal in question.

Michael Green, a lawyer for Ms. Lindsey, says she subsequently reimbursed the estate for the work done on her home by estate employees. Although she eventually became a lightning rod for criticism of the trustees, Mr. Green says, the other trustees initially had asked her to oversee the entire school because, as a former public-school administrator, she had an expertise in education that the others lacked.

“This is a lady who was trying to do her job,” Mr. Green says. “Maybe they didn’t like her style, but she’s got a duty to make sure that the money is well-spent, according to the will of the princess. I’d rather have a trustee micromanage than ignore what was taking place.”

Renee Yuen, a lawyer who represents Mr. Peters, says the investigation is an attempt by Governor Cayetano to bolster his sagging political fortunes in an election year. “Hawaii has been in a seven-year recession, and he’s done nothing to turn the tide,” said Ms. Yuen. “This is the only issue that’s been shown to be favorable to him in the polls.” It was no coincidence, she suggested, that the Attorney General filed her petition shortly before the state’s primary election.

Mr. Peters, for his part, has asked the probate court to disqualify Ms. Bronster from overseeing the affairs of the Bishop Estate in the public’s behalf, a role known as parens patriae. His petition contends that her adversarial investigation into the estate’s affairs as Hawaii’s chief law-enforcement officer “is diametrically opposed to her role as parens patriae to seek information or to problem solve with the trustees.”

“Through her political manipulation,” Mr. Peters says, “Ms. Bronster has brought harm to the very institution she has a duty to protect.”

The Attorney General has responded that there is no basis in law for relieving her of her role of overseeing charities.

Her office says that, on the other hand, there is precedent for a judge to remove trustees from their posts, and it cites a 1935 decision by Hawaii’s Supreme Court upholding just such an action.

Deputy Attorney General Hugh R. Jones declines to estimate how much money the state believes the trustees should repay to the Bishop Estate, because investigators may still lack sufficient information to make that determination.

“This trust has proven a desire to operate in total secrecy, and it has fought nearly every subpoena we’ve issued for this type of data,” Mr. Jones says. “We’re not confident we have all the data.”

But he adds: “Whether that money was spent on lobbying against intermediate sanctions [federal legislation that imposes penalties on excessive compensation of charity officials], on kickbacks, or on payments to legislators who did no meaningful work, we’re asking the court to make this trust whole.”

Randall Roth, a law professor at the University of Hawaii who has followed the Bishop Estate case closely, says he believes that the trustees should return every penny of their compensation to the estate as well — which would amount to more than $3-million apiece for the past four years under review.

“The job they have done is so substandard, the instances of their putting their own individual interests ahead of those of the beneficiaries are so numerous, that it strikes me as totally inappropriate for them to be compensated for having set a world record for the number and seriousness of their breaches of trust,” says Mr. Roth.

He adds: “On a scale of 1 to 10, the case for removal appears to be an 11.”

If the court does agree to remove the trustees, the next step is unclear, because it moves the charity into uncharted territory. Princess Pauahi’s will stipulates that trustees be selected by the state’s Supreme Court justices, sitting in their private capacities. But that provision has been widely seen as contributing to the politicization of the trustee-selection process.

The Governor appoints Supreme Court justices, who in turn have appointed Bishop Estate trustees — and that lucrative position has been considered a political plum for powerful politicians. In recent years, the trustees have included top officials in the state’s Democratic Party, including a former Supreme Court justice. Among the current trustees, Mr. Wong is a former state Senate president, Mr. Peters a former speaker of the House of Representatives, and Mr. Jervis a friend and confidant of former Governor John D. Waihee III.

In response to widespread criticism of that process, however, four of the five current justices announced last December that they would decline to appoint future trustees — although their decision is not binding on their successors. The probate court now must fashion a new selection process — and it is getting plenty of suggestions about how to do so.

An organization of Kamehameha School students, parents, and alumni believes that the court should recognize it as a major beneficiary of the estate and give it a principal role in selecting future trustees and officials. The group — called Na Pua a Ke Alii Pauahi — has more than 3,000 members.

Toni Lee, the group’s president, says Na Pua hopes that the court will dismiss the current trustees and appoint a qualified receiver, who would then hire a chief executive officer for the estate, with input from Na Pua and others in the Hawaiian community.

“We’ve put in a proposal to the court asking that Na Pua take the lead” in the process of selecting future trustees, says Ms. Lee, whose grandparents, mother, brother, and three children all graduated from Kamehameha School, as she did herself. “We’d form a committee of leaders in the community and get together a set of criteria for trustees,” she says. Na Pua would screen the applicants and submit a list of five or 10 candidates to the probate court for its final selection.

Any new arrangement would break a chain of 114 years of tradition, and would be unlikely to please everyone.

“Like most observers, we are concerned about what will follow the removal of trustees,” said an opinion piece published last week in a Honolulu newspaper and signed by Na Pua and groups representing Kamehameha School faculty and alumni. “But we would rather place our faith in the ability and good will of Judges Chang and Hirai, Master Colbert Matsumoto, and Attorney General Margery Bronster than to suffer any longer from the incompetence and self-serving behavior of certain current trustees.”

Kevin Chang and Colleen Hirai are judges presiding over the court hearings on the various petitions involving the Bishop Estate; Mr. Matsumoto, as a special master appointed by the court to review the charity’s affairs, submitted a report highly critical of the trustees in August.

“We love and admire trustee Stender and expect that he eventually will be reinstated as a trustee and recognized by the entire state of Hawaii as the hero we know him to be,” the statement said, adding that each trustee should be free to seek reinstatement. “But it could be years before that is fully and finally litigated, and too much is at stake to leave them in power during what for them is likely to be a challenging process.”

The revolt by Kamehameha School students, faculty, staff, and alumni against what they consider to be arrogant and self-interested behavior by several of the trustees is still rippling across the campus overlooking Honolulu. Whatever happens with the Attorney General’s recommendations, some observers say, the Bishop Estate has been forced to change forever.

“I don’t think the princess expected her trustees to be doing all these breaches of their fiduciary responsibilities,” says Ms. Lee of Na Pua. “I think she intended them to be above reproach — fine upstanding citizens to carry out her will.

“It doesn’t seem like that’s been happening.”