Goldman Sachs

After her death in 1884, Bishop — the final heir of King Kamehameha, who owned some 500,000 acres of waterfront land and fertile agricultural tracts that are now among the world’s most expensive real estate — bequeathed her property to a private trust known as the Bishop Estate; its sole purpose was to build the Kamehameha Schools, a private institution for children of Hawaiian ancestry. Approximately 3,000 students now attend the Kamehameha Schools from kindergarten through high school. Since being used to found the schools in the late 19th century, the princess’s largesse has helped educate thousands of Hawaiian children, many of whose families were too poor to afford private schools.

For decades, the Bishop Estate functioned as a proud legacy for the Hawaiian people, an agency of hope where members of a community often beset by rampant drug use, high crime and a sense of dispossession brought on by racial discrimination could find opportunities for a better future. Native Hawaiians often compare their status to that of Native Americans. In spite of their rightful claims to the islands, many Hawaiians are essentially locked out of profiting from the state’s real estate market and the financial rewards of its reputation as a shimmering playland for the rich. It’s no surprise then that the Bishop Estate, with its vast wealth and singular commitment, was long regarded as beyond reproach by the islands’ native population.

Today, the name Bishop Estate is as quintessentially Hawaiian as the Fiat-founding Agnelli is Italian. The Estate’s pockets have grown so deep that its endowment — now more than $6 billion — makes it one of the world’s richest educational institutions. And not only is the Bishop Estate Hawaii’s most powerful private trust, it is one of America’s wealthiest philanthropies.

The princess and her will

But all has not been perfect in this island paradise.

In what may have been a historic blunder that set the course for future Bishop Estate dealings, Princess Bernice posthumously granted Hawaii’s Supreme Court the authority to choose five trustees to monitor the Estate’s activities. This allowed Hawaii’s most powerful politicians to select their former colleagues as trustees.

Take Bishop Estate board member Henry Peters, for instance, who simultaneously served for a two-year period as a Bishop Estate trustee and speaker of the house — two king-of-the-hill positions that crowned him with colossal power and influence. The looming, 6-foot-plus Peters, a much-feared local political player, was indicted last year for first-degree theft in a Bishop Estate land deal. Though the charges were later dropped, Peters became the first trustee ever to be booked, fingerprinted and charged as a criminal.

Hawaiian insularity has also played a major role in the tainted machinery of the Bishop Estate. With eight primary islands spread over more than 250 miles, Hawaii has long operated its government with impunity. But it isn’t just geographic insularity that comes with great distance from the mainland. Hawaii’s government has long been driven by cronyism, favor banks, mafia-like associations and a curious enthusiasm for shadowy, conflict-of-interest-loving characters who happen to sit in powerful positions.

“There had long been questions about how the trustees were managing Estate assets,” says University of Hawaii law professor Randall Roth, an expert in trusts and estates and a self-described “thorn in the side” of the Bishop Estate. “You have to understand the raw political power of the Bishop Estate in Hawaii. It’s been considered political suicide for any politician to question what it was doing.”

The avatar

Attitudes toward the Bishop Estate began to change after 1993, though, when Lokelani Lindsey, a native Hawaiian and the former school superintendent of the Maui Schools, was appointed as trustee to oversee the Bishop Estate’s Kamehameha Schools. A grandmotherly figure with an iron will and three decades of experience as an educator, Lindsey had been asked by Henry Peters to join the board. When some of her fellow trustees told her they felt “out of the loop,” Lindsey hired an outside educational consulting firm to evaluate the schools’ programs. The firm revealed the schools’ elementary-aged children were reading below par. In 1997, Lindsey released what had been the confidential report, and promptly canceled what she felt were faltering programs and fired several veteran teachers.

Lindsey also came under attack for criticizing the schools’ popular president, Michael Chun. “The audit also found that financial aid accounts were being used as a slush fund for Chun to throw lavish parties,” says Lindsey.

But it was Lindsey’s clash with student body president Kamani Kualaau that caused the biggest stir. The showdown pitted two ambitious Hawaiians against each other — a young, striving student and a member of the older generation who saw herself as guardian of the island’s richest trust.

Kualaau, who would be leaving Hawaii that fall to attend Princeton, had worked in Washington as a page for the U.S. Senate. “I and a few of my classmates were drafting a letter to the Hawaii Supreme Court in support of president Chun,” Kualaau says. “Mrs. Lindsey found out about the letter and summoned me to her office. We had a cordial conversation at first. Then she told me I wouldn’t like it if she called Princeton and told them that I was a rabble-rouser.”

Lindsey remembers it slightly differently; nevertheless, she regrets the conversation. “I asked Kamani how he would like it if I called Princeton and tried to damage his reputation the way people were trying to damage mine. In retrospect, I should not have said that.”

This now-legendary exchange became a flash point for the ensuing scandal. In May 1997, students, teachers and alumni, angry with Lindsey for what they charged was micromanagement and interference with President Chun, marched from the Princess Bernice Pauahi Bishop monument to the Bishop Estate’s Honolulu headquarters. “They marched because the trustees refused to meet with them,” Kualaau says.

Henry Peters says Lindsey was excoriated for trying to raise the schools’ deteriorating standards. “Mrs. Lindsey was trying to improve the schools, and no one wanted to give her the chance,” says Peters. “She knew more about what the schools needed than Chun did, who had no experience as an educator. That is why the other trustees and I brought her to the Estate in the first place.”

Lindsey’s most vociferous critics have said she was swept into the power maelstrom created by Peters and Richard “Dickie” Wong, a fellow trustee and former president of the state Senate who was also indicted last year for taking kickbacks in Bishop Estate land deals. The charges were later dropped. Mr. Wong was not available to comment. “Lindsey was in over her head,” says Randall Roth. “Peters and Wong saw they could use her, and she was brought along, unwittingly at first.”

Whatever her fellow trustees thought of her did not help Lindsey’s popularity with students and faculty. They believed she was strong-arming her way through the school administration, that she was using her clout as a trustee to dictate school policy. Trustee solidarity did not last, though. Several months after the student march, two of Lindsey’s fellow trustees — Gerard Jervis of public bathroom fame, and Oswald Stender — turned on Lindsey and petitioned the courts for her removal on the grounds that she had breached her duties to the Estate.

Roth says the march and the opposition to Lindsey were symbolic for the same reasons Kualaau’s letter was significant. “Hawaiians were challenging the once-sacred power of the Bishop Estate trustees, who were also Hawaiian,” he says. “The trustees hired photographers to take pictures of the marchers so they could later be identified. People who marched risked reprisals from the trustees, risked having their children rejected for admission to the Kamehameha Schools.”

The attorney general

A few months after the march, Stender, a former CEO of Hawaii’s Campbell Trust, the state’s second-largest private landowner, insisted on meeting with then-Attorney General Margery Bronster.

“At that time, Mr. Stender urged me to investigate his fellow trustees for possible breach of their fiduciary duties,” Bronster says. “There had been suspicions about Bishop Estate trustees for years, and I’m not sure why none of the previous attorneys general [didn't] investigate them. Part of it, I suppose, is the fact that the Estate had always been notoriously secretive. Before 1997, it was almost impossible to get them to release documents. It was like trying to get information from the CIA. And everyone knew they ruled with fear and intimidation.”

Peters scoffs at Bronster’s assessment. “The Bishop Estate is a private institution. We have confidentiality agreements with our investment partners. Why should we not be secretive? The point is we make money for the princess’s children.”

Within several weeks of Bronster’s meeting with Stender, The Honolulu Star Bulletin published a lacerating article, co-authored by five high-profile citizens, including Roth, and demanding that Bronster investigate the Bishop Estate. The article indicated that since 1884, Hawaii’s Supreme Court had supposedly been monitoring the Bishop Estate but had never questioned the trustees about their performance or ethics, even as public accusations of their misdeeds became ever more frequent. The five authors demanded, among other things, sweeping changes in how trustees were chosen, as well as how the Estate’s activities should be monitored.

Bronster eventually accused four of the five trustees, including Lindsey and Peters, of helping themselves to the spoils and riches of the Bishop Estate’s accounts. In 1995, trustees paid Hawaii’s former governor John Waihee, who worked as a Washington lobbyist, to petition against a proposed federal law that would require officers at charitable organizations to receive only “reasonable” compensation. The bill also prohibited trustees of philanthropies from being paid percentages of trust income and assets.

“When their efforts failed and the bill was finally passed in 1996, the trustees were very upset,” Bronster says. “Mind you, basically every mainland charity supported this bill. The Bishop Estate was the only major U.S. charity that opposed it.”

Peters says the Bishop trustees initially supported the bill, but then realized “there were several onerous provisions that we felt would have been detrimental to the Estate.”

In 1998, a state law was passed in Hawaii setting the rules for charitable organizations to pay their officials. The state law adopted the same guidelines as the federal law. Paradoxically, after both the federal and the state laws were passed, the Bishop Estate’s trustees, still in office and embroiled in the controversies and charges against them, granted themselves raises from yearly salaries of approximately $800,000 per year to nearly $1 million.

“Our commissions were based on the income stream of the Estate,” Peters says.

Randall Roth disagrees. “A million dollars a year for a trustee of any charity anywhere is excessive. Period.”

Peters believes attacks against the Bishop Estate come down to race discrimination and cronyism.

“The only reason Bronster, Roth and the governor came up against us was because they were jealous of the money we were making as trustees,” Peters says. “It is also because they are anti-Hawaiian. All five of us trustees are either all or part Hawaiian. Bronster is not. Roth is not. The governor is Filipino. The money from the richest organization in the state was only going to Hawaiians.”

Peters added that Colbert Matsumoto, the court-appointed master who eventually found the trustees guilty of breach of duty, was the campaign chairman of Gov. Ben Cayetano when he ran for lieutenant governor. “They’re old buddies,” he says. “Don’t you think he’s going to tell the governor what he wants to hear?”

Lindsey, now a consultant to several private schools in Los Angeles, says, “The real story here is the terrible Hawaiian economy that has not improved in the five years the governor has been in office. The governor and his administration wanted to break the trust open, overrule the princess’s will, use the assets to help fund state programs and then turn the economy around.”

Island cowboys, Indians and the IRS

In 1995, Bronster says, the trustees tried to change the Estate’s legal domicile — so intrinsic to Hawaii — to a Cheyenne Indian reservation in South Dakota (which has a sovereignty agreement with the U.S. that allows it to self-govern). “If the Estate had been moved there, it would have escaped a lot of government oversight, especially from the state of Hawaii,” Bronster says.

Peters counters that the issue of the Indian reservation was a personal one for native Hawaiians. “We were not trying to escape anyone,” he adds, claiming that the trustees looked into the Indian reservation because of increasing interest among native Hawaiians in reclaiming their sovereignty.

In April 1999, nearly two years after Bronster’s investigation began, Hawaii’s Senate voted against her reappointment as attorney general. Considering the charges she had made against several former state senators who later become trustees, few in Hawaii were surprised her tenure ended prematurely.

But just as Bronster’s role was being written out of the script, a new act was being outlined. The IRS, which had been conducting an extensive audit of the Estate since 1996 as part of its investigation into allegations that trustees were receiving improper perks, threatened to revoke the Estate’s tax-exempt status if all the trustees didn’t resign.

Stender abdicated willingly, but the remaining four — including Lindsey and Peters — were forcibly removed by court order. Determined to keep their jobs as trustees, they did not officially resign until several months later. By then, the IRS had demanded their permanent removal. Lindsey is less than remorseful: “Our constitutional rights were violated,” she says. “We are not allowed to speak with anyone at the Bishop Estate, and several people who worked with us there, who were friends with us, were let go.”

The princess curtsies on Wall Street

Although Gerard Jervis’ salacious bathroom adventure was, surprisingly, among the only Bishop Estate events to be reported outside Hawaii, the once-stately trust got even more global attention — and another eye-opening chapter — when Goldman Sachs announced plans to go public last year. In its filings with the Securities and Exchange Commission, the tightly held, famously secretive white-glove firm revealed to the world that the Bishop Estate was one of its primary outside shareholders.

It now owns some 22 million shares of Goldman, worth more than $2 billion. Last week, the investment firm unveiled plans for a stock offering of 40 million shares to accelerate the timetable shareholders must follow to cash out. It also disclosed that none other than the Kamehameha Activities Association, the money-making investment subsidiary of the Bishop Estate, now plans to sell 11 million shares to boost the percentage of its shares that trade publicly. Approached for this article, Goldman Sachs refused to discuss its ties to the troubled Estate.

The Bishop Estate and Goldman Sachs may have not been such strange bedfellows. Until 1984, the Estate was land-rich and cash-poor. Of the trust’s estimated 500,000 original acres, a large percentage was leased to homeowners who eventually sought to buy the land under their homes. After an arduous 17-year legal battle to keep the leaseholds — a battle that wound its way to the U.S. Supreme Court — Bishop Estate lost, forcing the liquidation of thousands of acres, yielding more than $1 billion for its coffers. It was this bitter legal pill that ended up convincing the Estate’s once-conservative trustees to delve into aggressive, high-profile investments, particularly the 1992 Goldman Sachs deal.

Goldman Sachs certainly needed the Estate’s money. At the time, a dismal bond market was hampering the investment firm’s ability to procure capital. Like a poi-fattened piggy bank, the Estate forked over $500 million, which would be delivered by two cash infusions, one in 1992 and the next in 1994. With Sumitomo Bank of Japan, Bishop Estate became one of Goldman’s only two outside investors: a first in the firm’s 100-plus-year history. By the time Goldman held its IPO in May of 1999, Bishop Estate’s investment had mushroomed to $1.5 billion, yielding more than a 300 percent return. Not bad for an institution that had recently been strapped for dough.

Henry Peters takes credit for negotiating the Goldman Sachs deal. Peters also boasts that he was one of the primary forces behind the firm’s decision to go public.

“I pushed Jon Corzine [who became Goldman Sachs' co-chairman in 1993 and who is now running for a U.S. Senate seat in New Jersey] to change Goldman Sachs so that we could make a profit,” says Peters. “We couldn’t just park a half-billion dollars there if we weren’t going to get a return. People in the financial industry thought Corzine was a real renegade for doing what he did. But I’m sure that our investment played a big role in Goldman’s decision to go ahead with the IPO.”

Goldman Sachs declined to address Peters’ claim. Jon Corzine, who is no longer with Goldman Sachs, was not available to comment; a campaign press office staff member said Corzine played a “limited” role in the Bishop Estate’s investment in Goldman Sachs. One imagines he would prefer to keep this connection in the past.

Sex, suicide, golf, shopping malls and crystal meth

Meanwhile, the Bishop Estate limps forward. Bishop currently owns approximately 400,000 acres of primo land, including the Royal Hawaiian shopping plaza in Honolulu. It also commands major interests in a mainland China bank, the People’s Bank of California, Columbia Health Care Systems and, as Peters notes, “numerous lucrative re-insurance investments.”

“We are hard-nosed investors and tough negotiators,” he says, speaking in the present tense despite his removal as a trustee last year. It is clear he still thinks of himself as a part of the Estate, a keeper of its flame.

While serving as the trustee who managed — and made — the Estate’s major investment decisions, Peters’ influence extended beyond Goldman Sachs and inside the Beltway: He also brokered a Bishop Estate investment deal with late golf course designer Robert Trent Jones to develop an exclusive Virginia golf club with $75,000 initiation fees and an A-list membership that includes Supreme Court Justice Sandra Day O’Connor and Vernon Jordan, President Clinton’s golfing-and-girl-talk buddy.

Adding to the Estate’s colorful portfolio, Milton Holt, Bishop’s special projects director and a former state senator, admitted last year to charging more than $20,000 to Estate credit cards for numerous visits to strip clubs. He later tested positive for crystal methamphetamine and was sent to jail last July.

Last February, the IRS finalized an agreement that allows the Kamehameha Schools to retain its tax-exempt status. The deal requires the trust to pay $13.4 million in back taxes on its supposed “tax-exempt” activities. The Estate also agreed to pay out $46 million on its for-profit operations.

Meanwhile, the investigation continues under Earl Anzai, the new attorney general whose deputy confirms that the five ousted trustees will go on trial in September in what is being called “the surcharge trial.” The new attorney general’s office now alleges the Bishop Estate “lost a great deal of money under these five trustees, who were in breach of their duties. The state wants them to pay Hawaiian schoolchildren restitution,” says Deputy Attorney General Hugh Jones.

And if the timbre of odd events accompanying the Bishop Estate saga isn’t strange enough, Hawaii’s governor appointed Anzai as attorney general, despite the fact that he was terminated as the state’s budget director in the same Senate vote that ousted Bronster. Anzai continues to investigate the Bishop Estate, even though his wife once worked there and his children clerked last summer for a law firm representing the controversial trust.

A few months ago, the interim board of trustees voted to change the Bishop Estate’s name to Kamehameha Schools. This change, Jones says, is designed to “keep the focus on Princess Bernice’s beneficiaries, the schoolchildren, and to remind the public how their needs were neglected.”

Said Roth: “When you look back over all the charges, at who knows who, at the denials, at the legal maneuvers and the money wasted, oh, the money wasted, and you try to make sense of what has happened to this vital institution, it just makes your head hurt.”

“Baywatch” may never be the same.