Bishop Estate Update
Price of Paradise · Hawaii Public Radio · aired 1998-08-16
Guests: Randall Roth (host — no studio guests; callers only)
Duration: 1:05:01

[00:00:05] Randall Roth: Aloha, this is Randy Roth, host of the Price of Paradise show. We're broadcast live Sunday mornings on KHPR and KKUA, and then rebroadcast Sunday evenings beginning at 8 o'clock on KIFO. Everyone who works to bring this program to you is a volunteer who believes in the importance of lively and informed public dialogue. We believe the brightness of any community's future is directly related to the level of activity in its marketplace of ideas. Our sponsor is the Hawaii Community Foundation, an organization that encourages grassroot efforts to improve the quality of life in Hawaii and that administers charitable funds with efficiency and compassion. Our topic today has to do with the Bishop Estate. Specifically, we're going to be talking about what some people are calling the Masters Report, other people are calling the Matsumoto Report.
[00:00:56] Randall Roth: Cobert Matsumoto is the court appointed master for the Bishop Estate. He issued a lengthy report in December of last year, but that was just the first installment. This last Friday, he came out with the second installment. It's about 145 pages long. It's been described by a variety of people as a real bombshell. It addresses a number of issues, some of which have been addressed previously by him or other masters or other commentators, but there are some issues that are raised for the first time in this particular report. It's something that I think anyone who's interested in what's going on at the Bishop Estate is going to want to be familiar with. And even though there's been a lot of media coverage over the last few days, it's just touched the tip of the iceberg.
[00:01:48] Randall Roth: And what we're hoping to do this morning is to highlight some of the major areas of the Matsumoto Report, and try at least to explain what it means. Try to put it into a context, try to translate it into non-technical terms so that people who don't have time to read the entire report are going to be able to somehow get their arms around what's going on, and form an opinion, and perhaps weigh in in some way. If you would like to ask a question about anything that I might say, or anything that has appeared in the newspapers, or you've seen on television, heard on the radio about any of this, be sure to call. I'll do my very, very best to answer your question. Even more importantly, if you have a comment, especially if you feel as though your views differ from mine, especially if you feel as though the trustees for whatever reason are getting a bum rap on all of this, especially if you feel that the Master's Report, the Matsumoto Report is somehow flawed.
[00:02:52] Randall Roth: I encourage you to call. Our number is 955-8821. Or if you're on a neighbor island, it's 1-800-955-8821. What I'm planning to do is to fairly quickly go through a list of what I think are major points of the Matsumoto Report. I'm going to make a few comments about them, not so much in an attempt to cover it comprehensively, but to begin this conversation, because again, the point of this show is to generate lively and informed public dialogue. We want to hear from you, and again our number is 955-8821. To me, as I read through the Matsumoto Report, I think first and foremost, what grabs my attention is that despite the claims of the trustees in recent months that they have been generating a 17.3% compound annual rate of return, suggesting that they have had wonderful investment reports.
[00:03:58] Randall Roth: According to the master, for the three years that he looked at closely, fiscal years 1994, 1995 and 1996, their average total return was a negative 1%. You might say, how can there be such a dramatic difference? Well, first of all, it's an apples to oranges comparison, the trustees have been very non-specific in terms of just how they calculated their 17.3%, what period of time is involved, how they've defined various terms, etcetera. So we know instinctively that it's apples to oranges. But also as the master as the master has pointed out, the accounting mechanisms that have been used by the trustees are, in the master's opinion, greatly flawed. The trustees have resisted applying generally accepted accounting principles, and they've used various other conventions that can only be described as as highly unusual.
[00:05:00] Randall Roth: What the master attempted to do was to take the basic numbers received from the trustees and apply generally accepted accounting principles and try to determine a yield based upon the same approach that Harvard and Yale and other educational institutions with very large endowments, what they do in calculating a return. And again, according to the master, for fiscal years 1994, 95, 96, the average total return, now that takes into account both changes in the value of the corpus and the income generated investing that corpus, the average total return a negative 1%. If you're interested in how that breaks down on an annual basis, in fiscal 94, the income was a little over 2%, but the total return was negative 2.7%.
[00:05:54] Randall Roth: In fiscal 95, the income yield was a little bit over 2% again, but the total return was .3%. In fiscal 96, the income yield was exactly 2%, but the total return was a negative .6%. So point number one, to me is that despite claims of extraordinarily good investment results that the trustees have been making, Cobert Matsumoto has determined that the investment performance for this three-year period was dismal. Point number two, for years now, Masters, certainly Cobert Matsumoto, but a number of Masters before him, have said that the trustees simply have to develop a strategic plan. That any organization of this size and complexity cannot fly by the seat of its pants, that there has to be a strategic plan both for the investing of the funds and also for the uh setting of policy and the implementation of that policy over on the educational side.
[00:07:02] Randall Roth: What this Master's Report does is to make very clear that despite all of these Master's Reports and several court orders, there still isn't a comprehensive strategic plan. There still isn't a cohesive strategic plan. The various pieces that seem to be out there are oftentimes ignored. And so, to me, one of the major recommendations that Cobert Matsumoto is making is that the court has to get tough, the court has to say, look, we need a comprehensive cohesive strategic plan. Again, if you would like to ask me a question or if you'd like to make a comment, and especially if you feel that your point of view on all of this differs from mine, please give us a call at 955-8821 or from a neighbor island 1-800-955-8821.
[00:07:58] Randall Roth: You're listening to Randy Roth, I'm a professor at the law school. I teach courses involving trust law, tax law, wills, estates, that sort of thing. I've been very involved in the unfolding of the Bishop Estate controversy. I was one of five co-authors of an article that came out, Son of a Gun, exactly one year ago called Broken Trust. And what I'm doing right now is very quickly running through what I would describe as highlights from Cobert Matsumoto's report that came out two days ago. Another area that I think is of terrific importance is that Cobert determined that the trustees have been deviating from the will, which has instructed trustees to spend income educating Hawaii's children.
[00:08:46] Randall Roth: Not only did they deviate from this, but they did so without disclosing that to the court or to anyone else. And uh under the circumstances, given the tremendous number of dollars involved, hundreds of millions of dollars. This strikes me as something that is of major significance. Uh presumably the court is going to insist that the trustees explain themselves, why it is that monies that were earmarked as income and under the terms of the will were supposed to be spent, not necessarily immediately. But if income was not to be spent in the year that it was earned, according to the court and this was all in writing years ago, the trustees had to develop a plan for spending that income.
[00:09:34] Randall Roth: Again, they had to spend it educating Hawaii's children, not just building up their empire. And instead we see hundreds of millions of dollars have been diverted and done so without authorization and done in a way that suggests they were trying to hide the fact that they were doing it. And that strikes me as another headline if you will in terms of what the Matsumoto Report has to say. The lead trustee system, whereby each of the five trustees has functioned as a separate CEO, Chief Executive Officer, has been criticized by other masters. Cobert Matsumoto, in this latest report takes it a step a step further. He says that the system is obviously flawed. He says that these trustees are unlikely to change it on their own.
[00:10:25] Randall Roth: That it seems to be tied in with how they go about justing the compensation that they pay to themselves. And so this master has taken the highly unusual step of telling the court that it has to step in, it has to do this. Again, that's virtually unprecedented. Another headline, if you will, is that Cobert Matsumoto has said that the trustees should show cause. Now that's a a technical term, it basically says that in his opinion, it appears as though they have improperly used trust funds to lobby against legislation that posed a threat to them, but was beneficial to the trust. This legislation is called intermediate sanctions law, and anyone and everyone, all of my colleagues, for example, who teach in the area of taxation and in the area of trust, agree at least all of them that I've talked to and that's probably a dozen or so.
[00:11:23] Randall Roth: Agree that this was legislation that could only benefit the trust. It only posed a threat to the trustees and yet the trustees used over a million dollars of trust funds fighting the enactment of this legislation and then attempting to adversely affect it once it had been enacted. And then finally in terms of my uh initial summary of what I consider the headlines, in the master's report, it says that the administration of Kamehameha Schools during this three-year period quote fell into disarray. It goes on to provide specifics, some of which came from the Yim Report, which was filed about 6 months ago, some of it though is new and it paints a very distressing picture in terms of the impact that these trustees have had out at the campus over the three years studied by the master.
[00:12:18] Randall Roth: Well again, you're listening to the Price of Paradise Radio Show. My name is Randy Roth, I'm a professor at the law school. We're talking about the Bishop Estate in general, but especially Cobert Matsumoto's Masters Report which he filed with the probate court two days ago. We've got uh two people who've called in, but we've got some open lines, and so if you would like to get behind them to ask a question or make a comment, our number is 955-8821 or from a neighbor island 1-800-955-8821. We go first to Bill in Makiki. Good morning Bill.
[00:12:54] Bill: Yeah, good morning Randy. I have a um a comment about the investment results achieved by the trustees. Um this is not a defense of the trustees conflicts of interest or any of the other aspects of the report, but um if uh if the newspaper articles are correct, um the trustees invested 500 million in Goldman Sachs um several years ago, possibly during the period of the Matsumoto Report, uh 500 million dollars. They've already recovered 400 million and they still own a 9 and a half percent partnership interest in Goldman Sachs, which is apparently going to go public, uh with a uh a stock issue and the result of that reportedly will be that Bishop Estate's share will be worth something uh between a bay and and perhaps as much as 4 billion dollars.
[00:14:10] Bill: And I would question, I mean, if that's true, if it turns out that way, then that's extraordinarily good investment returns. So Oh absolutely. it's uh not you know not necessarily fair to judge the trustees on investment results over four years achieved.
[00:14:12] Randall Roth: Well, let let me give you my reaction. But stay on the line because I I I want to give you the last word on this. My reaction to that is that the trustees have not been free with information and even as of today, they attempt at least to play their cards very very close to their chest. Uh Cobert Matsumoto in his report that came out last year December of 97 said that getting information from them was was like getting information from the CIA. And especially because this is a charitable organization, to me that in and of itself is a a terrific indictment, especially when you consider that Princess Pauahi's will specifically indicates that she wants extraordinary disclosure.
[00:15:00] Randall Roth: That in addition to their regular disclosure, their regular accounting to the court, she wanted all of this published in the newspaper each year. So in that context, a charitable trust with the kind of directions in the governing document, the princess's will that we have, to me it's an outrage that they are so secretive in terms of what's going on over there. So, it makes me wonder when they point to their home runs. And it sure looks like Goldman Sachs is a home run, and I'm really delighted. The uh the the last thing I want to see is any kind of damage to this particular charitable organization. I think it is the single most important charity in Hawaii, and maybe the single most important institution in Hawaii. I really believe that.
[00:15:46] Randall Roth: And so I'm delighted to hear that it looks as though Goldman Sachs is going to be a real winner. But it seems to me there's something wrong when the trustees are very secretive about what goes on, and then in a highly selective way, they try to put the spotlight on things like the Goldman Sachs investment. So that's that's one reaction that I have. Uh what do you think?
[00:16:11] Bill: Well, I I think that's uh that's well taken and I certainly don't uh you know, it should be more public, absolutely. Um it's just that they did have hit hit that one which seems to be a four bagger which might make up for all the other bad ones. But uh that's just based on newspaper reports.
[00:16:29] Randall Roth: Yeah, well, um I hope there's nothing that's uh that's uh there are a real bad one that would uh undo that good one.
[00:16:36] Bill: Okay, I I I agree.
[00:16:38] Randall Roth: You know, Bill, one thing that uh Cobert Matsumoto's Report hits real hard is the fact that that large charitable organizations like the Bishop Estate uh clearly have either gone to or are in the process of going to what's referred to as a a total return strategy. Rather than investing just for income or investing for growth, that they're trying to invest in such a way that is going to in the long run give them the highest return. And because a lot of times those are investments that aren't going to generate a a great deal of income on a current basis, part of this total return investment strategy is that you establish a guideline in terms of a percentage of trust corpus that you plan to spend each year.
[00:17:30] Randall Roth: And Harvard does this, Yale does this, again, long, long list, University of Hawaii Foundation does this, and all of them set that guideline and almost always follow that guideline at between 4.5 and 5%. So, if the Bishop Estate corpus is worth $10 billion, and if you believe what they say about Goldman Sachs, and and again it it sure looks as though it has the potential to to add billions of dollars to the corpus. If if we accept that and I do, then the corpus of that trust is worth somewhere between 10 and 12 billion dollars. If we take the lower number, $10 billion, we apply what other institutions almost always will spend on a current basis, and in fact, many charitable organizations are by law required to spend at least 5%.
[00:18:26] Randall Roth: That calculates in the case of Bishop Estate to $500 million a year. Bill, do you realize that the most that they have ever spent in any one year educating Hawaii's children is about $100 million? 1/5th of what total investment strategy would suggest 1/5th of what we would anticipate these other educational institutions would be spending. According to Cobert Matsumoto, that is a serious
[00:19:00] Speaker 1: problem and among other things, it's a clear reflection of their lack of strategic planning.
[00:19:07] Speaker 2: I wonder, does that work in the case of Bishop estate, which holds an awful lot of land, which is not productive?
[00:19:16] Speaker 1: Interesting that you would raise that. You know, oftentimes when it suits their purposes, the trustees like to to say, well, the will requires this, or the will prohibits that. This particular master quotes the will in his report, and the will says, and I'll read it, that the trustees can sell any land, quote, if it's in the best interests of the estate. And this report goes through to explain the generating sufficient funds to have the liquidity, if you will, in order to carry out Puah's legacy, in order to have diversity that gives you the kind of long-term investment return and and reduction of risk that all investment managers will put at the top of the list in terms of of what prudent investing is all about. What this master is saying is that they cannot simply blindly say, well, we've got all this land and we're stuck with all this land, uh, in order to follow the prudent investing standard, and, in accordance with the will, because, again, said if it's in the best interest of the estate, then you need to sell that. This master is saying it needs to be looked at very, very closely. Also, this master is saying, you know, it's a little disingenuous to say, gosh, our hands are tied. We've got all this land in Hawaii, when they're taking a big chunk of the billion dollars they've received from land sales in Hawaii, and they're buying more land elsewhere.
[00:20:57] Speaker 2: So I'm a little skeptical of any excuse as to why the returns have been so low, any excuse that suggests that the will requires them to hang on to low-income or no-income-producing property in the form of land.
[00:21:15] Speaker 1: Bill, I'm I'm going to have to move on. If you would like to quickly just add anything, that would be great, but I do have to move on.
[00:21:22] Speaker 2: Okay. Please, go ahead, and uh you're doing a good job. Keep up the good work.
[00:21:26] Speaker 1: Thank you, Bill.
[00:21:27] Speaker 2: All right, bye.
[00:21:27] Speaker 1: We go to Joe from Kapule. Good morning, Joe.
[00:21:30] Joe: Good morning, Wendy. How are you?
[00:21:31] Speaker 1: I'm fine. What do you have this morning?
[00:21:33] Joe: Well, I have a couple of comments, actually a comment in the question. Okay. First of all, if I could be devil's advocate, uh if I were a Bishop estate trustee and I look at this whole thing a year ago, there was you, there was Walter Heen, there was Gladys Brant, and there was Sam King and Monsignor Kmano. Unfortunately, Monsignor is past. Uh Walter is now really engaged with the Democratic Party for the election, and Gladys Brant is with OHA. Uh your numbers have gone down. Theirs are still the same. Why shouldn't they just continue to wait you out?
[00:22:06] Speaker 1: Well, let me let me give you a quick reaction to that.
[00:22:09] Joe: Okay.
[00:22:09] Speaker 1: Um, the wheels of justice turn very slowly, but they do turn. They turn especially slowly when you've got a tremendous amount of resources being used to slow down the process. Uh-huh. Bill McCorston's firm is receiving between $85 and $100,000 a month. And his firm is just the first of a long line, an army of lawyers, if you will, that the estate has hired, or the various trustees have hired, and it's crystal clear that their number one strategy is to slow down and ideally derail the attorney general's investigation completely. And that's one reason why it's going so slowly, yeah. Even if they were cooperating, the nature of the process is such that it's not going to go as quickly as as you and I and a lot of other people would want it to go. So, it's easy to get disheartened. It's easy to get frustrated, but, you know, I'm absolutely convinced it's just a matter of time. And in fact, I think all this money that they're spending fighting the investigation, I think they're going to end up being surcharged. They're going to have to pay that out of their own pockets. I think it's going to be the same thing that is happening now with respect to the money that they spent fighting the enactment of intermediate sanction law. So I'm as frustrated as as I think probably you are, Joe, and I know an awful lot of other people are, but if we pay attention, if the public doesn't lose interest, then big changes are coming, including at least three of these trustees are going to be removed. Quite frankly, I think it's all five. I'd love to see four removed. Austender, I think's in a special category, but I suspect all five are are going to be removed. It's just a matter of time. I think they're going to be surcharged. What I'm worried about and what the Matsumota report hints at, I mean, strongly hints at, is that the IRS audit has heated up again and they are well, that was my second uh comment because we we only see a little bit of what's going in on with that in the paper, and it's secondhand. So I so we really don't know what's there. But what's suggested is that a lot of their expenses are really questionable.
[00:24:35] Speaker 1: That's right, and I've been saying to myself, and I guess it's because I want to believe this, that the IRS would not punish the beneficiaries for abuse by the trustees. And so I've been saying, I just know they're going to just apply intermediate sanctions and fine the trustees for all this abuse. I just know that the IRS is not going to take away the tax-exempt status of the trust, which would dramatically adversely affect the interests of the beneficiaries. And I still think that's what's going to happen, but there are some hints in the Matsumota report that the IRS is looking hard at, among other things, looking hard at whether that tax-exempt status is justified, and that really concerns me.
[00:25:04] Joe: Oh, that would concern me to, uh well, all of us here that that care about these kids.
[00:25:06] Speaker 1: Right.
[00:25:06] Joe: Uh last comment, uh is the new Master's report available for the public to read or has it been put on the web or is it all complete?
[00:25:17] Speaker 1: I should know the answer. The Star bulletin has done a super job of putting just about everything related to the Bishop estate controversy on the web. And for those of you who don't have a computer, find somebody with a computer and ask them to help you go to starbulletin.com. It's real simple, starbulletin.com. And you'll have an opportunity to click on something that says Bishop estate controversy or Bishop estate archives, and you'll find all sorts of very interesting documents and articles, cartoons, editorials. And if they haven't already put this master's report there, it's just a matter of time before they do so. So check out starbulletin.com. And Joe, I apologize. I should have checked it out this morning to see if they had it up yet, but if they don't have it up now, I know from experience it's not going to be long before they get it up there. They've just done a marvelous job at keeping that website up to date.
[00:26:31] Joe: Yeah, I agree, Wendy, and so do you. And I'm going to get off and let somebody else get on.
[00:26:33] Speaker 1: Thank you, Joe. Okay, bye. Let's go to Harry on Maui. Good morning, Harry.
[00:26:37] Harry: Good morning.
[00:26:38] Speaker 1: I have a question about this alleged, very low return. Uh, does that include the rates of return from all of those leases that were signed some 25 and 30 years ago?
[00:26:49] Harry: Yes, it does. It includes That kind of drags it down, doesn't it?
[00:26:53] Speaker 1: Well, almost all of their, um rental income, I think it's 97, maybe 98%. Almost all of it is from commercial leases, and almost none of those are old, old leases. Commercial leases tend not to be um the same as as the residential leases. The residential leases, a lot of that, uh the land has been sold on on involuntary conversion, and uh and what's left is is just as you've indicated, just a trickle in terms of of the return they get. Uh but they've got a tremendous amount of rent coming in on the commercial leases, they tend to be uh, you know, new numbers and they tend to be adjusted regularly.
[00:27:14] Harry: Well, I have several thoughts about what you said. For example, you criticized them this morning for uh selling land here and investing in land on the mainland. I believe Alexander and Baldwin has done that. Do you think they're badly managed?
[00:27:44] Speaker 1: No, but I think that you have to look at everything in a context and what the master said and and it was the master that was criticizing that. What the master says is that there is a lack of diversification. Trustees of trusts have a fiduciary duty to invest prudently and when you say, what does that mean? And you look to Hawaii law on prudent investing, at the top of the list list is diversification. This master is saying it's problematic that the trustees haven't developed a plan for diversifying and it's problematic that their actions indicate that they are not taking the steps to diversify that one would expect. So when you combine the actions with the lack of planning, this master is sounding the alarm and telling the court that they really need to take a close look at this.
[00:28:49] Harry: Well, it seems to me that they've diversified quite a bit, sometimes successfully and sometimes not into uh mineral leases and mineral exploration and into uh investment bank in in in New York, I can't imagine much being much more diversified than that.
[00:29:04] Speaker 1: Well, I guess I would just say that you and this particular master are are are in in very different camps and this master's recommendation is based upon the report of of Arthur Anderson, the the international accounting firm. And I I don't mean to put it in those terms to suggest that you're just wrong, Harry. What I'm what I'm saying is Well I'm trying to figure out why they're worse than other other large trusts, for example, the they're original assets and they are somewhat historically uh constrained by what they happened, what they got was uh was land and uh the Harry and Janette Weinberg Trust, I believe is also required to distribute 5% of this assets and uh for my observation, I don't have any insight into their uh activities. They seem to be having rather difficult time of diversifying because it is not necessarily easy to take uh undeveloped land in Hawaii and turn it into a productive asset or convert it into some non-real estate asset that's productive. Well, again, what You mean you think they should Bishop estate should sell off thousands of acres of land in Hawaii and then what is that what happens then? Somebody develops it Well, Princess Puah said that if it's in the best interests of the estate, sell the land. This master, based upon Arthur Anderson's recommendations, is saying you're not nearly diversified enough. It isn't saying sell the land. What it's saying is that you've got to develop a plan for diversifying. They not only haven't developed that plan in many instances, as you've correctly pointed out, not always, but in many instances, they've taken proceeds from the sale of real estate, and they've bought a large golf course or forest or who knows what, apartment buildings, condominium, shopping centers, a lot of real estate on the mainland, and by itself, that's really not a problem. It's not a problem. In the context of no strategic plan and you look at it in the context of never having paid out more than about 1% of what they now are touting as the fair market value of the trust assets, when other charities, even when they don't have to, almost always pay out 5% a year. And as you pointed out, the Weinberg Foundation, because it's a private foundation, has to by law pay out 5% a year and the most that the trustees of the Bishop estate have ever paid out for educating Hawaii's children in any one year is about 1%. It's a little bit I think problematic that they say our hands are tied. Again, develop a plan and start changing this is what the master seems to be saying.
[00:34:23] Harry: Well, I wouldn't have any problem with that, and I don't want to be argumentative. I'm just look at what their assets are, and I I was very surprised when you said that only about 2% of their um rental income is coming from uh condos essentially, because of the tremendous outcry over in Honolulu about that, but the that 2% of their income, what percent of their assets is represented by the current value of the land under those condos? It's got to be much more than 2%. Yeah, it's not broken out by condo, but I know the real estate on Oahu as of about a year ago, had an assessed value of just under $5 billion. That's That's my point. That's my point. Exactly. And yet on a lot of those pieces of land where allegedly, according to people like uh uh Savio the Realtor, where the the land if it were on the free market, or if it had been gone on the free market five years ago when conditions were better, might have earned income of $10,000 a month in some cases, it's earning income of just a couple of hundred a month. And uh you don't have to have very many of those condos before your your investment return is dragged down tremendously, and and I'm concerned because you're stating that their investment return is very low and yet you don't seem to be able to explain to me what it would be with their recent investments. I I would argue that the the contracts that they signed for all the leasehold condominiums that were built back in the 60s and 70s were presumably about as good as they could have done at that time. They looked terrible because of the the tremendous appreciation of real estate. On the other hand, it was uh a glory to them that they didn't sell then and that they did lease because they still have the land. Yeah, you know, Harry, I I I I um you're going to have to You're absolute because trust because the previous trustees Harry, you're going to have to read the Master's report because you're making a bunch of assumptions that that just aren't true. Let me tell you, for example, where you're suggesting that this rental income is low, the um rental revenue for fiscal 94 was $159 million for fiscal 95, 158 million for fiscal 96, $160 million. That's the rental operations revenue. And so I feel like we can't really get this conversation any further than it is and until until you take a look to see what the numbers actually are because the reality is this negative 1% return for this three year period cannot be explained simply by saying they own a lot of real estate.
[00:38:01] Speaker 1: Okay. I'll take a look at it.
[00:38:03] Randall Roth: I appreciate your call, Harry.
[00:38:04] Speaker 1: All right. Let's go to Steve from Waikiki. Good morning, Steve.
[00:38:08] Steve: Hi, good morning. Uh I want to make a very brief comment, sort of a general overview and then ask a question. The very brief comment is that um I think the whole controversy that's growing up now can be um correctly uh labeled political, and the reason I say that is because in many societies, well, politics are about power, and in many societies, power derives from land and money. Uh in Hawaii, as most political science uh investigation of the Hawaiian politics, Hawaiian politics particularly uh power derives from land, and if we know that the Bishop Estate Trustees have been consistently uh political appointees or or or reward for for various political power, they already had such as Henry Peters and Dicky Wong, um and the Ba past the Nazi Takabuki and some others, it's very clear that that the Bishop Estate is a major player in the thinking of the political powers of Hawaii, and their disinclination to do certain things is reflective I think of the general morass of Hawaiian politics and the mediocrity of the appointees and the mediocrity of their operation and the mediocrity of of what they do with their money, is really reflective on the general mediocrity of the state's political institutions and and their and their their inability to cope with with the situation because they're basically focused on their own power, on the distribution of power and on the brokerage of power, and I think that will continue until uh the uh reflecting the whole situation until the situation itself is somehow reformed.
[00:39:51] Randall Roth: Steve, can I can I give you a reaction to that?
[00:39:53] Steve: Yeah.
[00:39:54] Randall Roth: I agree completely. I think you've said it very, very well.
[00:39:59] Steve: Uh I had a specific question which you as an attorney will probably be able to get some insight in that I think uh most of us laypeople can't, and you were talking about how the wheels of of justice turn slowly, but they do turn, and it seemed to me
[00:40:16] Randall Roth: Usually, usually they turn. Go ahead.
[00:40:17] Steve: Usually turn. Uh it sometimes agrees. Uh, uh it seemed to me that there was an inexorability about what your group started a a year ago today, that is um pointing out the Emperor has no clothes, and and everybody maybe knew it, but now it's been said in public so we got to take some stock of it. And I think the fact that you had such prestigious folks as Sam King and Monsignor Kekumano as part of your group, prestigious people with clear uh connections to the Hawaiian community, Well and people of character. People of character, of course, yes, but I mean, also people of of prestige uh uh in the in the older sense of the term. Well, okay. And and it was very helpful and it was excellent. I I'm sort of company to point things out. However, while the while the inexorable noose is sort of tightening around the Bishop Estate operation, uh one wonders whether they will simply uncover uh mediocrity uh and ineptness [unintelligible — audio glitch] bumbling and and sort of, or whether there will be are there hints in the Master's report of activity which might be considered criminal? And what I'm particularly thinking of is uh a practice in in the in these kinds of institutions called front running, where you're you have a vast amount of money to to invest. You're not you're not making the money, you're not taking the money and giving it to the kids for for their education. You're playing games with the money, power games and investment games. And let us say that you as an individual have a million dollars Okay to invest. You You got to get get to this quickly. Okay, I'll be very quick. If you had a million dollars to invest of your own, which is peanuts next to what these trust and you were front running, you would take your million, your personal million and you would invest it right after you you dropped a big ton of the of the uh or right before, I'm sorry, you dropped a big ton of the estate's money in. And so, instead of buying Goldman Sachs and and or or buying something and jacking up the price because you invested so much money in it, if you put your own million in first and then dropped it in, you're you would make a ton of money. So front running and it's a very easy way to make money with other people's money without without actually stealing it.
[00:42:36] Randall Roth: To to answer your to answer your question, uh the Master does raise major concerns about a number of apparent breaches of fiduciary duty. One involved co-investment, which some people describe as a form of of front running. Co-investment in the case of the McKenzie methane gas deal and and perhaps in others. Again, the information is only slowly becoming available. To answer your specific question, there isn't anything in this report that would um indicate that any of these trustees would ever be indicted for a crime. Um let's just say, in my opinion, that is a continuing possibility, and I don't want to say anything more than that.
[00:43:28] Steve: You don't want to call your shots. I don't I don't blame you, I don't blame you, I don't blame you.
[00:43:31] Randall Roth: But I think it certainly looks like it on the outside. I I've got to move on, but I think we're looking at more than bumbling.
[00:43:37] Steve: Thank you.
[00:43:38] Randall Roth: Thank you. Bye. Let's see, we have Lloyd from Makiki. Lloyd, you're on the air.
[00:43:46] Lloyd: Lloyd, are you still with us?
[00:43:48] Randall Roth: Aloha. I'm from Waikiki but that's all right.
[00:43:51] Lloyd: Okay. I just wanted to say that your my hat's off to you. In in the beginning when you had your investigations, this wasn't very clear, but as a layman, just somebody that doesn't know too much about it, all these things, just common sense told me years ago, where the hell is all that money going? It's not going into that school. It's not going into the education of those Hawaiian children, and there's plenty of them that need help with addictions and whatever, you know? And I now you're on the right track. Let's get that amount up for the for the education of these children and quit investing and trying to be big dealers here. Uh I personally feel that in stock investment is very poor, even though some of the Congress thinks we should invest it in our life uh for the social security coming up. Uh that's really gone mad over there. But I think that we must not invest in and we have to have the aloha spirit and invest things that will help the island. That the queen would die if you were if she saw what was going on. I I think Princess I mean not die. I mean, she would be very upset if I think so. It's just it's just it but I really love what you're doing and keep digging, but now I'm even more for you because I couldn't quite get what's going on, but in the back of my mind for many years, I said to myself, where in the hell is that money going? It's not going into the school, which it's supposed to. And I think now we need to get definitely get those people straightened out. I really appreciate your call.
[00:45:23] Randall Roth: Thank you so much. Aloha.
[00:45:24] Lloyd: Aloha.
[00:45:25] Randall Roth: You're listening to Price of Paradise radio show. My name's Randy Roth. I'm a professor at the law school. I teach courses in trust law, tax law, and uh related courses. We're talking generally about the Bishop Estate, specifically about what some people call the Matsumoto Report. He's a court-appointed master who two days ago came out with a 145-page report and about 350 pages of exhibits. Very important and interesting exhibits, by the way. We're talking about this and we're inviting your calls. If you'd like to ask a question of me or if you'd like to make a comment, especially if you feel your point of view is different than my point of view on this. We'd like to have you call us at 955-8821. From a neighbor island, it's 1-800-955-8821. This morning, we have something that is very unusual. We're doing two Price of Paradise shows. We have the normal slot from 8 to 9 on the station that you're listening to, but from 10 to 11 this morning, we're going to do a special program on the annexation of Hawaii to the United States. As I think just about everybody in Hawaii knows, in just three days we'll have the centennial of the uh annexation, and on KIFO, that's 1380 AM or KIPO, 89.3 FM. Now, these are different stations than whatever station you're listening to right now. So if you would like to hear the second installment of the Price of Paradise show this morning, you're going to have to tune to KIFO 1380 AM or KIPO 89.3 FM between 10 and 11 this morning. We've got just a great show. We have Tom Kaufman, who is the author of a brand-new book called Nation Within. A lot of people have seen the video that's been on television over the last few days. He's going to be out at the Bishop Museum later on this evening. Tom is a gifted journalist who's done a phenomenal amount of research, has written in in a very readable, interesting way all about the annexation of Hawaii. He's going to be here talking about his book. Thurston Twigg-Smith, who's about 180 degrees from Tom so far as his interpretation of the events of 100 years ago, and in some cases, they're their description of just what happened, he'll be with us as will be Jim Mee, an attorney here in town who has an article in this morning's Advertiser in the Focus section, page 1, very critical of Tom Kaufman's book. We'll also have Ed Krapohl, who is a historian from William and Mary. His specialty is that era, that period of time. Some people might call it the expansionist period of time, manifest destiny. And then finally, David Forman, who is the executive director of the Appleseed Public Interest Law Center here in Hawaii. So, we encourage you to tune back in to a different public uh Hawaii Public Radio station, either KIFO 1380 AM or KIPO 89.3 FM between 10 and 11 this morning for our special show on annexation. Well, we've got three people on the line. Let's get to them. First, Dave from the Big Island. Good morning, Dave.
[00:48:53] Dave: Good morning. Uh I have I've not a regular listener, unfortunately, and so I may not be up on what you already said on this, but I'm curious curious about two things. One are issues of privacy and trust in general. Um is this trust published somewhere or is the Master's report published? The um governing document for the trust and people call it the Bishop Estate, but it is a charitable trust. The governing document which is the will of Princess Bernice Pauahi Bishop is on our website, which can be found on the internet at popweb.org or you can go to starbulletin.com and you'll find all sorts of things about it, including the last master's report that came out in December of '97 and perhaps already, but certainly within a couple of days if not now, you'll be also able to find this current master's report that we're talking about. If you go to the courthouse, you can also there is a copy there that you would be able to to um to make your own copy of. Or if you want to try to get a hold of me, you can call this number after the show and we'll try to figure out some way to make it possible for you to use my copy to make your own copy. Uh but there isn't right now a real easy way to find it unless you've got access to the internet. And like I say, if it's not available at starbulletin.com today, it will be very, very soon. Well, uh for following on issues of privacy, um in this, I don't know maybe you can clarify to me when they talk about diversification, um presumably they mean that um diversifying away from just particularly land investments and into into stocks, actually, uh respect to the prior caller, I think that the the end return if if the trust had done such a thing would be much better than it is, but Well let let me give you a quick reaction to what you just said. There is no one template. There is no one formula in terms of how one diversifies, and that's why this master is saying you've got to develop your own strategy. And the big problem here is that these trustees have just been flying blind, making ad hoc seat of the pants decisions in many cases without adequate due diligence as spelled out time and time again in this report. And so from a fiduciary responsibility standpoint, this master isn't saying diversify in the following ways. This master is saying you've got to develop a plan for diversifying. Right, I think you'd start with what you've got and and and work that, work something out, but um presumably obviously from all this that the the the portfolio is not disclosed. I mean, it's a secret. I mean there there aren't any disclosures of what they actually have. Is that right or is that private information? No, as a matter of fact, um and there are pieces of information that are under seal. Uh the actual Arthur Andersen study is under seal, so you and I can't see it. The attorney general can see it, the Master can see it, the judge can see it, but you and I can't see it. And it's because it has a lot of sensitive information in it. But there is a a very, I think clear and complete summary of that report that is an exhibit to the master's report, and in the master's report he talks about all the major investments and so it's surprisingly um clear just what it is that they own. What the report doesn't get into is the various business decisions that they are making with respect to the management of that property. I see. Uh one other question I have and and I presume this trust is operating as a tax tax exempt organization and I I personally am wholeheartedly in favor of of the idea of of setting aside these these these funds to educake Hawaiian children. I think it's a great idea but I'm curious when I read the the code about how to set up one of these things, I notice that when a school restricts its um admissions to certain ethnic or right on a racial basis that they're denied the tax exempt status. I wonder how they're getting around that, if they are. Well, there is a lawsuit that has been filed, I believe, oh, and I shouldn't say this because I'm not sure the exact name, but Freddy Rice, an individual from the Big Island, has filed a lawsuit and he has questioned whether the uh Native Hawaiian only admissions policy out at Kamehameha, whether that is number one constitutional, whether it's permissible, but number two, whether a tax exempt organization can have that kind of admissions policies. So, and again the wheels of justice don't turn quickly, so it's going to be a while, but sooner or later presumably a court is going to address that exact issue. It's interesting to me that this particular master made very, very clear and I know that he studied a lot of historical documents. He's made very clear in this report his opinion that Princess Pauahi intended to educate Hawaiian children. The governing document doesn't say that, but he feels from his reading of the document and a lot of other documents that he has researched, he's concluded that her intention was that native Hawaiian children should be benefiting from this as opposed to just children in Hawaii. But that is a controversial issue and then regardless of what the will says, whether they can discriminate by race and keep their tax exempt status, that's a controversial issue as well and that is being litigated right now. Well, certainly, we we I I I for one would hope that they could grandfather something like that in uh since it was of course happened before all these codes were written. But I think that's all I have to say and I thank you very much for taking the time to Thank you, Dave. Appreciate your call. Right. Let's go to Dick in Honolulu. Good morning, Dick.
[00:55:15] Dick: Dick, are you there? Yes, I am, Randy.
[00:55:17] Randall Roth: It's your turn.
[00:55:18] Dick: Good morning.
[00:55:19] Randall Roth: Good morning.
[00:55:19] Dick: Collectively, the trustees may owe millions of dollars to the the trust and also as a group may need to be removed. What is the process for getting this done specifically and what do you see as the timetable?
[00:55:34] Randall Roth: The court could do it on its own. The court could look at this master's report and say these trustees have to be removed, these trustees have to be surcharged, etc. I don't think that's going to happen. For a lot of different reasons, the primary one being that the state attorney general is toward the back end of a what appears to be very thorough investigation. I think the court's going to sit back and wait for the attorney general as parens patriae, it's a Latin term that basically means that the attorney general in any state represents the beneficiaries of every charity in that state. As parens patriae, she's going to go into the probate court and she's going to ask them for something. I strongly suspect that she's going to ask the court to remove all five trustees. I strongly suspect that she's going to ask the court to surcharge most probably all of the trustees, but I think the amount will vary with the individual trustee. I think there are going to be major consequences and I think the Bishop Estate is going to be very, very different a few years from now than what it is right now. Unfortunately, that's not going to happen tomorrow and clearly the numbers are big. There's been a lot of politics in this in the past, it makes it impossible to predict with certainty just what's going to happen.
[00:56:58] Randall Roth: Randy, if the um If there is a change in in the leadership of of this state, which is uh highly probable, what effect would that have on this uh moving forward?
[00:57:11] Dick: Well, I think it's going to move forward, um, whether the governor uh, after the election is Cayetano, Fasi, Lingle, uh, Bulaia, or whomever. Uh, I think that there is a tremendous amount of momentum here. I cannot imagine the public letting any governor, uh, simply drop this. Now, it's a lot more complicated than that, but suffice it to say, um, Cayetano, we've seen his stripes in terms of what he's doing, if Lingle were to be elected, I'm 100% confident that she would pursue this at least as vigorously.
[00:57:52] Randall Roth: Good. Thanks for the good job.
[00:57:53] Dick: Thank you, Dick.
[00:57:54] Randall Roth: We go to Robert from Punchbowl, I think it says. Good morning, Robert.
[00:57:59] Robert: Hi Randy. Um, I just got one question. Um, has anyone ever asked the, uh, getting back to that last point with your last speaker, about the governor candidates. Has anyone ever posed the question to them, you know, would they continue the investigation. It's kind of troubling to me because, you know, when you take a look at this, you know, everybody says, well, the Bishop estate is stalling. What are they stalling for? The elections?
[00:58:32] Randall Roth: Well, um, I don't have a complete answer to your question. I happened to be on, uh, Rick Hamada's radio show a month or so ago, and Bitty Dawson was there with me, and Bitty had had asked a question, um, and and I think answered her own question, that she was concerned about what Linda Lingle would do. Linda Lingle then called in and stated in no uncertain terms that she would vigorously pursue it, and in fact, she was rather upset that this thing had gone on as long as it's gone on. And so, based on what I heard her say that day, um, I think it's safe to say that that her public statement is that she will continue it. Cayetano, I don't know if he's said anything, but it's it's obvious, I believe, from his actions and the situation generally, that he will continue to pursue it. At least I believe that. Uh, I've not heard Frank Fasi talk about the issue, uh, but it's it's just hard for me to believe that he wouldn't continue it.
[00:59:40] Robert: I see. Well, thank you very much.
[00:59:43] Randall Roth: Thank you, Robert. We have time for one more call and then I'm going to make a few concluding comments, a few issues that we haven't gotten to yet. Uh, let's go to Richard in Hawaii Kai. Good morning, Richard.
[00:59:54] Richard: Good morning. Randy, appreciate all the things you're doing for this uh in this situation. Uh I missed part of the response to the gentleman's um uh comments about the Goldman Sachs return, potential return. And uh, of course, in good accounting, it doesn't happen until it happens. And uh there's there's no saying how much Goldman Sachs may return, the investment there may return, but then again, in a good accounting practice, um, how many other investments may not return as as well as that. Uh and I'm saying that, wait a minute, you can't say, you can't go on a a basis of what may may occur when when the previous uh records of the investments was made on what actually happened. That was my only comment on that, Randy.
[01:00:48] Randall Roth: Well, and I agree completely with you. Uh and and I just am very skeptical of these trustees when, for example, they tout a 17.3% return and at least for the three years that the master has studied, he comes up with a negative 1% return and that's with the help of the accounting firm of Arthur Andersen. Um, I hope that this Goldman Sachs investment works out wonderfully. I I hope it is just worth all the money in the world and I I really mean that and I think the vast majority of people in this state really mean that. I don't think any of us want the Bishop Estate to to somehow suffer because of what these trustees have done and and in many cases haven't done. We want to see Kamehameha, um, spread if you will in terms of the wonderful work that's going on out there with the kids now. We want to see more kids served. We want to see the outreach programs return. We want to see what the princess's legacy and her vision was all about. Um, and so let's hope that that investment is is a real home run, but at this point in time, you got to look at the whole picture and at least for the three years that the master studied, negative 1% in the context of trustees spending a lot of charitable funds publicizing a so-called 17.3% return.
[01:02:09] Richard: Yeah, I I totally agree and uh yes, I I'm sure everyone wants the the estate to do well. uh and uh hopefully, continuing their great program of educating the children.
[01:02:20] Randall Roth: Richard, thank you for your call.
[01:02:22] Richard: Thank you.
[01:02:23] Randall Roth: A couple of things I want to add before we run out of time. Number one, I have been personally bothered that Bill McCourston and Henry Peters and others have gone in front of a TV camera recently and said, well, we're vindicated because the last master's report said that in fiscal '94, we lost $264 million and and and now he admits that he was way wrong, etc., etc. Well, read the report. Number one, he's concluded after finally getting information from the trustees, he's concluded that it was quote, only $135 million, pretty big loss. Number two, the difference between that number and what he had reported last time almost entirely is just a timing difference. That it was lost. It just wasn't lost during fiscal '94. It was either in fiscal '93 or fiscal '95, together with the losses in fiscal '93 and '95 that had already been reported. Finally, this master said, well, let's take a look at the two years preceding these three years just to see whether there's a pattern here. In fiscal '92, they had losses of $107 million. In fiscal '93, $144 million. So, for McCourston and Peters to act triumphant about the number being only losses of $135 million in fiscal '94, rather than 264, especially when almost all of that difference is just a difference in timing, well, it makes me wonder. Um, also earlier, I mentioned that the Broken Trust piece had a lot of impact because of the character of those other those four co-authors. And let me just say there are a lot of people in this community who've established the kind of of reputation that gives them a voice that other people are going to hear. Whether it's this issue, annexation or some other issue, if you've got an opinion, an informed opinion on these issues that are important to the future of Hawaii, please speak up. It makes a difference. Our producer is Susie Roth, but she's on the mainland. Jenny Tanji and Sherry Ganaway have been here helping out in her stead. Our production chief is Jeff Alardi. Stay tuned at 10 o'clock on KIF on KIPO for our special show on annexation. You've been listening to the Price of Paradise radio show. I'm Randy Roth. Aloha.
[01:02:03] Speaker 1: trustee spending a lot of charitable funds publicizing a so-called 17.3% return.
[01:02:09] Richard: Yeah, I I totally agree. And uh yes, I I'm sure everyone wants the the estate to do well, uh and uh hopefully continue in their great program of educating the children.
[01:02:20] Speaker 1: Richard, thank you for your call.
[01:02:22] Richard: Thank you.
[01:02:23] Speaker 1: A couple things I want to add before we run out of time. Number one, I have been personally bothered that Bill McCorriston and Henry Peters and others have gone in front of a TV camera recently and said, well, we're vindicated because the last master's report said that in fiscal 94 we lost $264 million and and and now he admits that he was way wrong etc etc. Well, read the report. Number one, he's concluded, after finally getting information from the trustees, he's concluded that it was quote only $135 million, pretty big loss. Number two, the difference between that number and what he had reported last time almost entirely is just a timing difference, that it was lost, it just wasn't lost during fiscal 94, it was either in fiscal 93 or fiscal 95 together with the losses in fiscal 93 and 95 that it had already been reported.
[01:03:22] Speaker 1: Finally, this master said, well, let's take a look at the two years preceding these three years just to see whether there's a pattern here. In fiscal 92, they had losses of $107 million, in fiscal 93, $144 million. So for McCorriston and Peters to act triumphant about the number being only losses of $135 million in fiscal 94, rather than 264, especially when almost all of that difference is just a difference in timing, well, it makes me wonder. Um, also earlier, I mentioned that the Broken Trust piece had a lot of impact because of the character of those other, those four co-authors. And let me just say, there are a lot of people in this community who have established the kind of of reputation that gives them a voice that other people are going to hear.
[01:04:18] Speaker 1: Whether it's this issue, annexation or some other issue, if you've got an opinion, an informed opinion on these issues that are important to the future of Hawaii, please speak up, it makes a difference. Our producer is Susie Roth, but she's on the mainland. Jenny Tonji and Sherry Gaway have been here helping out in her stead. Our production chief is Jeff Alardi. Stay tuned at 10:00 on KIFO and KIPI for our special show on annexation. You've been listening to the Price of Paradise Radio Show. I'm Randy Roth. Aloha.
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