Randall Roth Rotary Talk
Rotary Club talk · 1997-10-28
Guests: Randall Roth (Speaker)
Duration: 00:34:13

[00:00:00] Randall Roth: Thank you. As Ralph indicated, I am the second of five co-authors of what's known as the Broken Trust essay to appear before you. The first was Monsignor Keke Mano, and as many of you know, Monsignor has been ill since he appeared before you over a month or so ago, but I am happy to report that according to Gladys, the latest report is that Monsignor is doing much, much better, and it's wonderful to hear that he is recovering. The introduction to Monsignor's talk six weeks or so ago was the reading of of a little poem of sorts called The Priest, Professor, The Judge is two and a lady named Gladys Grant.
[00:00:49] Randall Roth: And I'm happy that the lady named Gladys Grant is with me today. Her job is to tug at my shirttail here if I go too long or say the wrong thing to impress all of you with my investigative ability, I want to share with you that I I found out a little tidbit of information about Gladys, and I hope I hope she won't mind with me revealing it to you, but in 1924, at the dedication of this hotel, the Royal Hawaiian, she was the princess of Oahu.
[00:01:41] Randall Roth: Over 10 weeks ago, on the 9th of August, the Star Bulletin published an essay called Broken Trust. Since then, it's been credited with having prompted an investigation of the Bishop Estate by the Attorney General and has played a role in unleashing media coverage of unprecedented proportions. If you haven't yet seen the Broken Trust essay, but would like to, you can go to the Star Bulletin's address on the internet, or if you don't know how to do that, ask a friend or or any child, and they will, and, and I have.
[00:02:20] Randall Roth: One of the issues that I think is important is this question of who are the beneficiaries of a charitable trust in general, beneficiaries of the Bishop Estate, which is a charitable trust in particular. Having said that, there is I think a misconception that the students or the parents or the alumni of Kamehameha are the only beneficiaries of this charitable trust and they are beneficiaries, make no mistake about that. And quite frankly, in a non-legal sense, they're in a special class, but from a technical standpoint, under the law, while they are beneficiaries, so are you. The public is the beneficiary of any charitable trust.
[00:03:37] Randall Roth: Now, that's terribly not important from a legal standpoint, because if it were a non-charitable trust, as soon as we say X is the beneficiary, then that tells us that fiduciary duties are owed by the trustee to X, and X has what's called standing to sue. So once you've been labeled a beneficiary in a private trust or non-charitable trust context, then that that has great, great meaning under the law. But when we're talking about a charitable trust to say that the public are beneficiaries of that trust doesn't really get us anywhere because it would invite chaos to say any member of the public that wanted to sue a trustee for breach of trust could do so.
[00:04:27] Randall Roth: And so the way the legal system deals with this is to assign to one person, the Attorney General of the state, not only the power, not only the authority, but the responsibility to represent the interests of the beneficiaries. It's called parents patrii, and it's real specific not just in our common law, but in our statutes, that it's the Attorney General's job to hold the trustees feet to the fire in the case of a charitable trust such as the Bishop Estate.
[00:05:01] Randall Roth: Now, for some reason, the Attorney General falls short and I don't expect that to happen here. I think Marjorie Bronster and her staff are as able as they are determined to get to the bottom of this and then to do whatever those facts warrant. But if for some reason an Attorney General, in his or her role as parents patrii, falls short, then a court should grant standing to some group within the public, not the public at large, but some smaller group, some smaller group that because of their unique situation, are best positioned to effectively hold the trustee's feet to the fire.
[00:05:40] Randall Roth: Well, Napua, the group of Kamehameha students, parents and alumni would be the perfect example of such a group. So while they are beneficiaries, we are too. While it's the Attorney General who has the responsibility and the authority to hold the trustee's feet to the fire, if that doesn't happen for some reason, it makes great sense to look to the Napua group to do that job. The second issue that I thought I would mention is how does the Attorney General's investigation interrelate with what the master is doing and what the court-appointed factfinder is doing.
[00:06:26] Randall Roth: Well, first of all, it used to be, 25 or so years ago, that the master, who looks into the affairs of the Bishop Estate and writes up a report, it used to be that that person was appointed by the Attorney General, and that made a great deal of sense given parents patrii that the Attorney General's responsibility to monitor charitable trust like the Bishop Estate. So it's been somebody who's starting out without special skills and experience, and generally, they would only serve for a limited period of time. The ones that I've talked to have indicated that they have have not been given much of any cooperation from the trustees.
[00:07:36] Randall Roth: So with limited power, limited scope, limited cooperation, it's not terribly surprising that those masters reports have not done a very good job of holding the trustee's feet to the fire. In the meantime, because the master was out there, in theory doing something by way of monitoring the Bishop Estate, I think that's one reason why the Attorney General has sat back over the years and not been as effective a watchdog as what, in theory, should have been the case. So personally, I think there's a structural problem with having a master out there and the Attorney General as parents patrii.
[00:08:24] Randall Roth: I think from a structural standpoint, we ought to put that master's function back under the Attorney General, so it's real clear who has both the authority and the responsibility to serve as a watchdog with respect to both charitable trusts in general and the Bishop Estate in particular. The current master is almost ready to issue his report. My impression is that he's done an extremely good job under the circumstances. I think it would make no sense whatsoever to pull the plug on that process right now, so I personally think we should sit back and wait to see what the master has to say.
[00:09:05] Randall Roth: On the other hand, when we talk about the court-appointed factfinder, the history of that to me is even more troubling. The trustees didn't have to get approval from the court, much less be ordered by the court, to hire the person of their choice to interview their employees to find out just what has gone on. It troubles me that they would ask the court to order that and label this person a factfinder.
[00:09:35] Randall Roth: I've been told by a high source at the Bishop Estate that Pat Gm was led to believe that he was being hired as a mediator, and at least initially was surprised to find out that the scope of his responsibilities potentially were much broader than that. To me, especially given the fact that this creates confusion among witnesses, who should they go to, the Attorney General, the master, Pat Gm, the factfinder? I think it's unfortunate to have all three going on out there and while I would suggest the master be allowed to finish his report and issue it, it would make great sense to me if Pat Gm's factfinding mission was folded into the Attorney General's investigation.
[00:10:35] Randall Roth: Put her in charge of what he has done, so that she can coordinate exactly what the two of them are doing, make sure nothing falls between a crack, and that's something that I believe would be a structural improvement so far as this question of having too many hands on the steering wheel is concerned. The next thing I was going to mention is that sometimes people say, you know, these broken trust allegations aren't that serious. In many cases, you're talking about the perception of a problem, a conflict of interest as opposed to hard proof that somebody has actually done something terribly wrong.
[00:11:18] Randall Roth: Well, first of all, when you're talking about somebody who's serving in a fiduciary capacity, this is a very special term for legal purposes. A fiduciary is supposed to be concerned about both the perception and the reality of dealing with the beneficiaries of the estate, dealing with everything having to do with the estate, in such a ways to leave no doubt but what they are doing this for the beneficiaries as opposed to doing it for themselves. Let me give you a couple examples of where I think they've at least created the perception of something other than that. The trustees are given honorary memberships at Wyllie Country Club.
[00:12:02] Randall Roth: Now, I can't stand here and tell you how many times each of them has used that honorary membership. I know that there's been an admission that at least some use it quite a bit. I'm told that Azbender has turned down the honorary membership for some years. At any rate, to me, it looks bad that they would be getting something very valuable that I think probably they're getting because they're Bishop estate trustee, and it seems to me that if there's something of value that should be going in that direction, it should go to the beneficiaries.
[00:12:45] Randall Roth: It just looks bad that they personally are getting this valuable honorary membership simply because they're trustees of this trust, especially since Wyli Country Club is a major leaseholder in doing business with the state. Now, it just looks bad, and because it looks bad, maybe that affected me when I read the newspaper less than two years ago that the Wyllie Country Club had renegotiated its lease.
[00:13:18] Randall Roth: And in a context where other leaseholders have been claiming the trustees play hardball and are terribly unreasonable and they come out with outrageous demands, etc., we're told, according to what the leadership of the country club was quoted as saying, we're told that their lease was renegotiated for a term of 75 years, that there are no openings for renegotiation changes in the negotiated rent between now and 75 years from now. That the rent under this renegotiated lease is quite fair and reasonable and the leaders of the club are happy with it and they don't foresee the need for any dues increases for at least a five-year period of time.
[00:14:10] Randall Roth: Now you see, maybe that's the exact set of terms that would have been negotiated even if the trustees hadn't been given honorary memberships there, but because there's this perception that maybe they they got some sort of individual special interest with respect to this lessee, it makes people like me very suspicious. Something else that troubles me a great deal, and we mentioned in Broken Trust that there's a federal law called Intermediate Sanctions. You really have to appreciate the seriousness of our charges in that article, you have to appreciate that Intermediate Sanctions is a law, it's only about a year old. It's a law that benefits the charity.
[00:14:55] Randall Roth: It's a very good law from the Bishop Estate standpoint, from the trustee's standpoint, it's something that has them terrified. It has them terrified because it basically says that if the IRS detects an excess benefits transaction, it might be free membership at a country club, it might be unreasonably high compensation. It might be a sweetheart deal with a crony, if you will, so far as some contract is concerned. If they find what fits within the term excess benefit transaction, they're able to immediately assess a penalty that only that trustee who is involved has to pay.
[00:15:43] Randall Roth: And if there's only one involved but the other trustee sat on their hands and allowed it to happen then they get penalized too, only in a different way. But the penalty is on the trustees. Let me give you a real quick example so you can see what the numbers might look like. Let's say the IRS comes in and looks at one particular trustee and says, based on that person's credentials, that person's training, that person's experiences, that that person, in the marketplace, has services worth about $100,000 a year. Let's assume that the IRS says that.
[00:16:16] Randall Roth: And that's the process by the way at looking at the value of the services of anyone individual as opposed to saying what would you what would you expect somebody who's been hired to manage 10 billion dollars of assets, what would you expect them to be paid? Instead we start with each individual, what is that individual's services worth in the marketplace. If the IRS determines it's a hundred thousand and that year that person was paid 900,000, then that 800,000 is an excess benefit. Immediately the IRS can impose a 25% tax or $200,000 that that trustee has to pay right away.
[00:16:51] Randall Roth: If that trustee is saying, whoa, that's a lot of money, the IRS says, well, that's not the half of it. You also have to immediately repay to the charity, in this case the Bishop Estate, the excess amount 800,000. So 200,000 to the IRS, 800,000 to the Bishop Estate. Obviously, the beneficiaries are better off as a result of that reimbursement.
[00:17:16] Randall Roth: And if that trustee says, wow, it's going to take me some time to raise that kind of money, under this law, and we might quibble about whether this is fair or not, but the law gives them a very short period of time to pay the money, and if they don't get it paid during that period of time, they're immediately hit with a 200% penalty on that $800,000 excess benefit. And that's for one year and this is some in one year and one specific opportunity for assessing it. And immediately you can see why trustees might be personally terrified.
[00:17:53] Randall Roth: And you might you might understand if I told you they spent millions of dollars of their own money fighting the enactment of this law and then working for its repeal. That would be outrageous because that would be working in their own best interest to the detriment of the charity that they have these fiduciary duties to toward the beneficiaries of that charity. But it's worse, they didn't just spend money, they spent the charity's money fighting this law that poses a threat only to them. A law that is only good from the charity's standpoint. That strikes me as pretty serious.
[00:18:32] Randall Roth: We're talking these days about the absence of a strategic plan, and I'm not even going to talk about a plan so far as the educational side of the Bishop Estate is concerned. Personally, and I'm not the expert in this area, but what's written up in the paper today strikes me as something that's doomed to failure, a strategic plan isn't something that people like Yukio Takamoto and Mokelani Lindsey sit down and develop and then cram down the throats of the people.
[00:19:00] Randall Roth: who are actually going to be um implementing it. It seems to me that that you have to have involvement of all the players. You have to give them an opportunity to voice their thoughts. Even if their thoughts don't end up in the plan, you've got to go through that process. But what I want to focus on very quickly is the absence of a strategic plan on the investment side. To me, it's almost inconceivable that a eight I'm sorry, a 10 billion dollar operation would not have goals and benchmarks. There wouldn't be an attempt to spell out just what we're trying to do and how we're going to know when we've done it.
[00:19:39] Randall Roth: I think its absence is directly related to a desire not to be held accountable. Now, I mention this because sometimes I have people come up to me and point to things like the Mackenzie Methane gas deal, that according to the trustees' own lawyer in a Texas bankruptcy court, less than two years ago, was quoted as saying that the estate had over $85 million invested in this thing. He didn't mention, but I've since determined there was over $2 million, in addition to that, in attorney fees that they had incurred. And at that time, their attorney called it a disaster. Said that they at best could expect to get $20 million back.
[00:20:21] Randall Roth: And I've had people say, well that was a breach of trust to have made a speculative investment like that. Well, you know, it's not necessarily wrong for trustees, even trustees of charitable trusts to make speculative investments. But it's got to be part of a strategic plan. It's got to be part of of something that's been carefully worked out so that you've got proper diversification on all sorts of levels. And they don't have that. In fact, this particular deal was presented to them one day, February 22, 1989, and the next day they committed to it.
[00:20:57] Randall Roth: The due diligence amounted to reviewing the materials that the promoter had presented, and they only found out later that the promoter was getting a commission on this. They had thought that the promoter was somehow on their side. In order to structure this to protect their tax-exempt status, the promoter had to come up with some money of his own to put into a of sorts. He didn't have it. Legal counsel told the trustees that they couldn't legally lend him the money or guarantee a loan.
[00:21:28] Randall Roth: So they sent him to the Bank of Hawaii, where he borrowed a very large amount of money. And even though they had been told that they couldn't guarantee that loan, what the trustees did was to give to the bank a continuing option to sell the note to the trustees at the face amount. It's it's a guarantee except in name. And of course, that's eventually what did happen. So it seems to me in the context of no strategic plan, to operate like that is obviously problematic. To have it end up a terrible, a disaster in the words of their attorney, is terrible. Not terribly unpredictable, one could have anticipated it I think.
[00:22:16] Randall Roth: They've got this structure of five CEOs, I think in part to justify their high compensation. But think about it a minute. Who's holding those seats CEOs feet to the fire? If they set policy and hired a CEO to implement all of that, if that person didn't perform, the trustees could fire that person. Is Henry Peters going to fire himself? Is Lokelan Lindsey going to fire herself?
[00:22:44] Randall Roth: And when you have individual trustees with responsibility in individual areas, there's a concern that maybe you would have a a political process of sorts where where one might agree to vote for what the other wants in her area in exchange for her agreement to vote for what he wants in his area. And I don't know whether that's happened or not, but what you have is a structure that causes people to wonder whether that's what's happening. And again, fiduciaries are supposed to be setting things up so that it's beyond those sorts of of doubts.
[00:23:22] Randall Roth: Uh, the fact that they're spending so much money of the estate, of charity to uh, to defend themselves in this investigation, uh strikes me as uh, absolutely, um, outrageous. Comments have been made uh, that we the authors are attacking the will. Well, it's interesting to see that the trustees ignore the will when it says pay out the income each year. They don't do that, they've never done that. The most that's ever been paid out in any one year for educational purposes is about 1% of the minimum value of the corpus of the charity.
[00:24:07] Randall Roth: They try hard not to put a figure on the value of that corpus because it makes it easier for people to do comparisons, see what kind of yield that they have. And yet, again, somebody within the Bishop Estate has told us that, at a minimum, it's worth $10 billion. 1% strikes us as a terribly small figure, especially when the will, and you might argue that the will should have been drafted differently. But the will says, income shall all be paid out.
[00:24:37] Randall Roth: Also, the will, in letter and in spirit, talks in terms of operating openly, and instead we have this shroud of secrecy and we have this failure to report publicly all sorts of information that, according to the letter and the spirit of the will, should be reported. Even the justices of the Supreme Court, who say they need to continue picking trustees because the will asked them to, find it quite convenient to say, well we're going to ignore a provision in the will when when they want to.
[00:25:12] Randall Roth: And specifically, I'm referring to a provision that says the trustees have to be members of the Protestant religion, and that's not something that a court of law has ruled on. And yet, for reasons of their own, because an ethics opinion said that it would be unethical for the justices to take religion into account in selecting trustees, the justices in their individual capacity, not a court ruling in their individual capacity, have said they're going to ignore that particular provision of the will.
[00:25:41] Randall Roth: Again, it's hard to take seriously somebody who defends their position by saying the will says it. Or attacks somebody else by saying, you're against the terms of the will, when they themselves have a history of ignoring the will when convenient to do so. Couple real quick last points. If not the justices, who should pick these trustees? Well, quite frankly, that's not the primary question to me.
[00:26:11] Randall Roth: There should be written criteria as to what we're looking for, there should be a a written process, whether the final choice is made by justices of the Supreme Court or probate judge or somebody else, there ought to be a process that the public can understand and believe in so that it doesn't happen behind closed doors to where there's at least a suspicion that the whole thing has been politicized.
[00:26:37] Randall Roth: And of course, in terms of this suspicion that it's been politicized, it doesn't help that so many people who have either been justices of the Supreme Court or members of the judicial selection committee or close to one or more of those have ended up trustees of the Bishop Estate. So personally, the only court that has jurisdiction to do something like this is the probate court. So to me it makes great sense to have the probate court make that final approval if you will of a new trustee, but getting that name should be something that is based upon criteria, process, community involvement, and it all ought to be on top of the table.
[00:27:20] Randall Roth: About two months ago, the co-authors of Broken Trust, the five of us, came together and issued a statement suggesting that we were fearful that the trustees, rather than cooperate with the attorney general, would instead use estate funds to do everything that they could to stall the investigation and that they would continue to intimidate witnesses. As we look back over the last two months, we think our concerns were not only warranted then, they have been absolutely confirmed now. So while we see them trying to derail the investigation, intimidate witnesses, trying to to have lifted an order that prohibits them from destroying evidence, notwithstanding one of the trustees saying I don't want that removed.
[00:28:15] Randall Roth: I think there should be an order that prevents us from intimidating witnesses, that prevents us from retaliating on witnesses, prevents us from uh destroying any evidence. Nonetheless, we see more and more and more state funds being spent in that effort. Well, I've run out of time and there's so many issues that we could address. I'll just finish this by saying uh what we started the Broken Trust essay with, and that is it's time to say no more. As a community, as beneficiaries of every charitable trust in the in this state, we have a responsibility to look to the attorney general as parents patriae to hold these trustees accountable.
[00:28:59] Randall Roth: And I think if each of us in our own way raises our voice on our own way and say, look, that's all we want is accountability, then I think we're going to see something along those lines. I had the the honor of spending some time with with Herb Cornell um during the last few years before he died and and during the last few weeks before he died and Herb as many of of you know, felt strongly that each of us has a responsibility to do what we can to improve our community. To do something to make Hawaii a better place for our children and for our children's children.
[00:29:40] Randall Roth: Uh, another thing that Herb shared with me was that something very important to him was that he live his life in such a way that his children would be proud of him. Well, I think that this Bishop Estate situation is an occasion for all of us to do what we can to insist upon accountability and not stop there. Look at other positions of power in this state where there needs to be more accountability. And do what we can to insist upon that accountability, and I think in doing so, we not only will make Hawaii a better place for our children and for their children, but will make them proud of us as well.
[00:30:19] Randall Roth: Thank you very much.
[00:30:22] Audience member: Wait, what what about the what are you doing with the on the allegation of the bishop state that you as the have written the entire article. I take that personally as a slap against the people like, like Grant, and uh Walter Heman and Sam King as a racist remark. They are not capable of writing some like that.
[00:31:07] Randall Roth: Yeah, if if you didn't hear the the question that had to do with the suggestion by by Dicky Wong and and some others, that the broken trust was really written by me and that the other four had somehow just
[00:31:07] NOTE: music outro ~197s