Ouster at Charity May Shake Up Hawaiian Politics

By Todd S. Purdum, New York Times, May 15, 1999

A portrait of Bernice Pauahi Bishop, whose trust finances the Kamehameha Schools in Honolulu, from 1997 article
HONOLULU -- In a raffish waterfront bar in a warehouse district, an unlikely band of allies gathered here this week to toast what they hope will prove a watershed victory in Hawaii's feudal world of one-party politics. The celebrants included a senior federal judge, an outspoken law professor, the head of the state's Democratic Party and its former attorney general -- plus scores of alumni, faculty and friends of the world's richest private school. Three days earlier, a state probate court judge had ordered the ouster of four of the five trustees of the mighty Bishop Estate, a charitable trust that owns 8 percent of the land in Hawaii and investments from China to Wall Street -- over $6 billion total -- all for the benefit of the Kamehameha Schools, a 3,000-student institution for boys and girls in the green hills above the harbor. The judge ordered the removals -- and accepted the resignation of the fifth trustee -- after the Internal Revenue Service threatened to revoke the tax-exempt status of the trust, the cherished legacy of a childless 19th-century Hawaiian princess, amid an investigation into financial mismanagement and self-dealing by trustees, each of whom was paid about $1 million a year. The estate, an institution of almost medieval power, was long a source of intense native pride, but in recent years had come to be seen as the embodiment of Hawaii's brand of inbred, closed-door politics, as secretive and suspect as it was impregnable. Most of the trustees were closely connected to the state's ruling political establishment, so their dramatic ouster -- and the long fight that led up to it -- has led to predictions of a shakeup in institutions from the Legislature to the state Supreme Court, whose members used to select the Bishop trustees. "I think there's an important message here that the system does work," said Randall Roth, a professor at the University of Hawaii Law School and president of the State Bar Association, and co-author of "Broken Trust," a scathing manifesto published in the Honolulu Star-Bulletin by a group of five Hawaiian elders in 1997 that called for the removal of the four trustees ousted last week. "I think a lot of people in Hawaii have a lot more confidence in the system than they did a week ago. There really is an uplifting side." When Roth's group came together with friends and faculty of Kamehameha Schools at the La Mariana Sailing Club the other night, tears flowed, cheers went up and heartfelt cries of "Mission accomplished!" rang out.

But the controversy took a terrible toll. One trustee attempted suicide after being caught in a sexual tryst in a hotel restroom with a lawyer for the trust, who succeeded in killing herself with carbon monoxide. Barely a week before the probate court's ruling ousting the trustees, the state Senate retaliated against the state attorney general who had headed the investigation, Margery Bronster, by declining to confirm her for a second term. Old friends were pitted against each other in a state where the Democrats have ruled supreme since the beginning of statehood, including Gov. Benjamin Cayetano, who served in the legislature with two of the trustees but ordered the attorney general's inquiry that helped lead to their removal. "When it started, of course, no one knew the scope of what would be discovered," Cayetano said in an interview. "But I was troubled enough to realize there should be an investigation. What's happened is sad and tragic for their families, and I feel badly about it. But in a job like this, you do what has to be done." The Senate vote against Ms. Bronster so embarrassed the state establishment that Walter Heen, retired appellate judge who is also head of the state Democratic Party and one of the group that had pressed for the trustees' ouster, issued a statement saying that the 13 Democratic senators who voted against the attorney general "contravened the philosophy and principles of Democratic governance."

In many ways, the Bishop Estate is a telling reminder of how much Hawaii still stands apart from the other 49 states. It was created, under conditions that could never be equaled in the modern world, by Princess Bernice Pauahi Bishop, the last direct descendant of King Kamehameha I, the 18th-century king who unified the islands. Against her family's wishes, the princess married an American adventurer and banker named Charles Bishop, and when she died childless in 1884, left over 400,000 acres of royal lands in trust to create a school. The princess wanted her bequest to benefit native Hawaiians, whose population had been decimated by diseases brought by white settlers. She did not specify that the school should give preference to native Hawaiian children, but that has been its policy in practice over the years, and this has itself sparked controversy and drawn the attention of regulators.

For most of its 115 years, the estate was land-rich and cash-poor, but in the early 1980s, the U.S. Supreme Court upheld a state law that forced the trust to sell off land to homeowners who had leased it for years, generating a huge cash windfall for investment. In recent years, the estate has been dominated by the state's all-Democratic political establishment. One of the ousted trustees, Henry Peters, is the former speaker of the state House of Representatives, while another, Richard Wong, is the former president of the state Senate. A third, Lokelani Lindsey, is a former public school official and mayoral candidate from Maui, while Gerard Jervis, who tried to take an overdose of sleeping pills, is a close friend of former Gov. John Waihee. Only Oswald Stender, the trustee who secretly helped the attorney general fight his colleagues and resigned voluntarily, had experience managing another large, for-profit land trust here -- and only he is a graduate of the Kamehameha Schools.

The bill of particulars against the majority trustees is extensive, and ranges from a lack of a coherent professional management system to accusations of irresponsible and self-dealing investments that shortchanged the school, while enriching the trustees and passing lucrative business to their friends. That is a particularly sensitive charge since native Hawaiian children are often underprivileged and lack access to adequate education. Peters and Wong both face criminal charges related to an alleged kickback scheme involving estate land. Mrs. Lindsey was permanently removed from her trustee post by a state judge in a mismanagement suit brought by Stender and Jervis just one day before Probate Court Judge Kevin Chang ordered the interim removal of the trustees in favor of a special panel he had named earlier when the IRS refused to conduct negotiations with the incumbent trustees.

The majority trustees contend that they have managed the estate's investments wisely, and point to the $600 million the trust made last week, just days before their ouster, as a result of the initial public stock offering of Goldman, Sachs, the Wall Street investment partnership, in which the estate had held a 10 percent stake. They also accuse the IRS, which has been auditing the estate for nine years, of prejudgment without due process. "I thought I was living in Russia," Mrs. Lindsey said in a telephone interview. "I'm just completely floored by the heavy-handedness of the IRS."

But the implications of the controversy reach well beyond the trustees themselves. "It's not only the trust that's broken," said Ms. Bronster, the former attorney general, who since her ouster has been stopped on the street and thanked by strangers and even received a $25 Neiman-Marcus gift certificate of gratitude from a woman she had never met. "I think it's the whole political culture of the island. It takes people a long time to anger here, but I'm hopeful that this will be the beginning of something important, that people will not stand for disconnection and arrogance in their institutions." Beadie Kanahele Dawson, a longtime local lawyer who helped a Kamehameha alumni group organize its campaign against the trustees two years ago after Mrs. Lindsey angered school officials by interceding in day-to-day school affairs, agreed. "This political disease that has permeated the boardroom of the Bishop Estate also permeates our government," Mrs. Dawson said. "And most of us know this, but we have been absolutely unable to do anything about it. But I believe that the Bishop Estate controversy -- a small in-group being benefited at the expense of the larger group -- I believe that you're going to find in Hawaii a much more passionate electorate."

Not all local experts are so sure. Cayetano noted that it was his Democratic administration that began the investigation, though he readily acknowledged, "This cannot endear anyone to politics." Dan Boylan, a professor of history at the University of Hawaii-West Oahu, said that he thought the current controversy was mainly the result "of a particularly bad board of trustees," and that he was "loath to make large predictions." "I think it may be harder to draw any bigger lessons," Boylan said. "I think only time is going to tell. I hope that what at least comes out of this is that the estate goes to a professional CEO form of governance and the trustees are paid a relative pittance."

That seems assured. A special court-appointed master has already recommended such a course, and last week the probate court judge scolded the ousted trustees for failing to follow through. Similarly, the process of selecting trustees, long a focus of controversy, seems certain to change. In her will, the princess stipulated that the trustees should be chosen by a majority of the justices of the state Supreme Court, which at the time was also the probate court. But in recent years, that practice has led to the appointment of politically connected insiders like Peters and Wong, and since the controversy erupted, a majority of the current justices have said they will no longer participate in selecting trustees.

That would leave the probate court in charge. Chang's order last week gave the interim trustees -- a group of respected citizens including a retired admiral and the former Honolulu police chief -- or the attorney general's office 90 days to seek permanent removal of the ousted trustees, and that is expected to happen. The IRS has already told the interim trustees that permanent removal is a non-negotiable condition."As a practical matter," Roth said, "the five trustees are out for good. They're never, ever going to be back in their offices." Copyright 1999 The New York Times Company