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HomeMy WebLinkAbout2011-03-09 Board of Ethics MinutesHAWAII COUNTY BOARD OF ETHICS MINUTES — REGULAR SESSION' Wednesday, March 9, 2011 10:05 a.m. to 11:22 a.m. 101 Aupuni Street, Suite 230 Hilo, Hawaii 96720 Members and staff present: John E. K. Dill, Chair David Heaukulani, Vice Chair Arne Henricks, Member Bernard Balsis, Jr., Member Renee N. C. Schoen, Deputy Corporation Counsel Mary E. Crosson, Secretary 1. CALL TO ORDER Mr. Dill called the meeting to order at 10:05 a.m. 2. STATEMENTS FROM THE PUBLIC ON AGENDA ITEMS There were no statements from the public. 3. APPROVAL OF THE MINUTES OF THE FEBRUARY 9, 2011, MEETING (REGULAR SESSION) Motion and vote: Mr. Balsis moved to accept the minutes, Mr. Heaukulani seconded the motion, and they and Mr. Dill voted aye. 4. NEW BUSINESS a. Petition No. 2011 -07: Initial review of petition alleging that an officer, "by offering solely to the Bank of Hawaii the purchase of Hawaii County General Obligation Bond Anticipation Notes ... provided unwarranted privileges, advantages, and treatment to Bank of Hawai`i." DILL: Could we quickly identify who's here regarding this petition? Mr. Cole, you're the petitioner, correct? COLE: Yes. ' Minutes in italics are verbatim. Blanks indicate inaudible or indecipherable speech. DILL: Okay, and gentlemen do we have Mike here? OKUMOTO: Yeah. I'm Mike Okumoto. I'm the treasurer, and I'm here to answer any questions that you may have regarding this matter. DILL: And you're here on behalf ofMs. Crawford, correct? OKUMOTO: That's correct. DILL: And you, sir? SCOTT KNOWLES: I'm the risk management officer from the Finance Department, and I'm here not in a representative capacity but just as an observer. DILL: Okay. Okay, again this petition is referencing Section 2 -83 of the Hawai `i County Code of Ethics regarding fair treatment, specifically item (b), no officer shall use or attempt to use the officer's official position to secure or grant unwarranted privileges, exemptions, advantages, contracts, or treatment for oneself or others. Mr. Cole, if you could step up and quickly give us your side of the background on this petition, and then we will have questions for either you or Mr. Okumoto. Again, just to remind everyone, this is an initial review by the Board of Ethics to determine future actions on this petition. Mr. Cole, you have the floor. COLE: Yes, well thank you. I would like to note that my statements on this matter were included in my testimony of the previous session of the Board of Ethics for February. Also in that note, I would like to note that there are items missing. However, I've already made the statements. Apparently, the information I have is the Hawai `i County is offering general obligation bonds and municipal securities in violation of the 1933 Securities and Exchange Act, Section 17(a(2), by not disclosing fully the risk of the bonds. In reviewing the violations and racketeering activity in the County of Hawai `i, I had the opportunity to have a conversation with Ms. Crawford on approximately the 201h of October last year in Mayor Kenoi 's outer office, where she informed me in reference to Bill 311, the $56 million obligation bond, that the County of Hawai `i was not going to float any bonds. That was the old way of doing things, and the new way is they had a very special short -term arrangement with Bank of Hawai `i. Querying further, insofar as I do have a background in securities and exchange, I tried to find out why bonds were not being floated and to demonstrate and to profess the risks to the bonds to the rating agencies of Standard & Poor's, Moody's & Fitch. Upon reviewing farther, I found out that a master issuance of certificate was made by the Department of Finance and Ms. Crawford, and she began issuing bond anticipation notes solely to Bank of Hawai `i. The certificate of issuance identified a maximum of 90 basis points about the mean municipal data rate. The County of Hawai `i offered only to one agency, that was the Bank of Hawai `i and Mr. Stephen Rodgers, the sole bidding on these bonds. These bonds could have been bid on other financial institutions and a lesser basis point arrangement, i. e., a better advantage to the County of Hawai `i, could have been obtained. That would be similar to going out to contracting in your business, and you go to a sole source contract, and the contract would give you the maximum amount of interest drawn. The Bank of Hawai `i charged 90 basis points, which was the maximum allowable under the master 2 certificate, and since no other bids were accepted or even offered, therefore it was a violation and gave the Bank of Hawai `i an advantage over all other financial institutions, and therefore is a violation of the County Code of Ethics and also a violation of the Securities and Exchange Commission and is also a violation of Title 18, United States Code, 1433, bank fraud. DILL: Okay, so you're saying this plus -90 BPS rating applied only to Bank of Hawai `i and if the County had gone out and considered sub -90 scores, or institutions with sub -90 scores, the results might have been different in terms of what they're offered? COLE: No. DILL: Okay. COLE: The 90 basis points was part of the master issuance certificate, a maximum that the County of Hawai `i would entertain. DILL: Okay. COLE: By not going to any other institutions, no other financial institutions were able to bid for a better or lesser basis points, therefore disadvantaging the County of Hawai `i at the advantage of sole advantage of the Bank of Hawai `i. It is also noted that the treasurer for the County of Hawai `i, Mr. Okumoto there, was a senior executive with the Bank of Hawai `i for the 20 years prior to coming to Bank of Hawai `i [sic]. It is also noted that the Bank of Hawai `i, through its Hawai `i Tax Free Trust, Capital Pacific Investment Trust, and a number of others, holds the majority of municipal securities for the state of Hawai `i. It is also known that on the 281h of June last year, the governor of Hawai `i signed into law Act 182, which is trust protection legislation which would also impact with these bond anticipation notes for the payment of securities and monies, and it actually would provide for money laundering by paying into—buying tax free trusts and taking out tax free federal and state dividends from these bonds. DILL: Okay. Welcome, Arne (Board member Arne Henricks arrived). Okay, any Board members have questions, any further questions, for Mr. Cole? BALSIS: Not at this time. DILL: Thanks, Mr. Cole. We might have some more follow -up questions. Mr. Okumoto, do you mind coming up? Thanks for joining us. Mr. Okumoto, if you could quickly give the Board a rundown on protocol and the due diligence in place for these types of issuances by the County. OKUMOTO: Let me give you some background information on how we got to that stage where we're looking for such a facility. Back in late 2004, we got an audit by the IRS. Because we issue tax- exempt paper, the IRS is interested in making sure that we comply with all their regulations, because when you issue tax - exempt paper, the treasury is losing money versus something taxable. Under advice of our counsel, he recommended that we retain a firm that specializes in dealing with the IRS, so we did so and in 3 conversations with this attorney, on the east coast, he said that the IRS frowns upon us holding bond proceeds longer than three years. We were having trouble getting the projects out within three years. So I asked him to put this in writing, and he did, and it went through Bill Takaba, who was our finance director at the time. But anyway, this was a major reason why I looked for such a facility. The other reason was that the method that we were using was that as soon as we had a bond ordinance, we'd go out and issue long -term bonds for the amount of that authorization. So if the bond ordinance authorized SO million, we hire an underwriter and sell $SO million in bonds. And that way, the departments know that we actually have the cash on hand and they can go ahead and sign their contracts. The problem with this is that we get the $SO million, or whatever the amount is, and we put this in a bank, invest it, and usually the rate, the investment rate, is a lot lower than the bond rate. This is called negative arbitrage. So when we do this, and the longer we take to spend the money, the more negative arbitrage we have. So between the IRS not looking favorably on us spending the money taking too long to spend the money, and also the negative arbitrage, the solution for this was to find a short -term credit facility. So I began looking for such a facility, and there's all kinds of facilities out there. The facility at Bank of Hawai `i that we have with them is a private placement facility, so there is no prospectives or rating that is required. So this is one of the advantages of such a facility. So we're not in violation of any kind of securities regulation in that regard. The other types the most common facility is called a tax- exempt commercial paper program, but this involves getting a bank to issue a letter of credit, and what this does is that it ensures that when these commercial paper is rolled over, and the investor wants to sell them and he can't find a buyer, then that LOC bank will guarantee that they'll purchase it. So there's other types of facilities, there's like lines of credit, there's what they call a SIFMA index notes. So when I started to explore this, there were all these different types of facilities. So we went out and we hired an independent financial advisor, and as Ms. Crawford's letter notes, that she said there were six alternatives. Actually, there were more than that. But anyway, he compared everything and he determined that the Bank of Hawai `i facility was in the best interest of the County. So I feel that we did offer we did explore or research other alternatives. And as Mr. Cole mentioned, Bank of Hawai `i does have these other funds that they manage, and I have a chart here that illustrates that Bank of Hawai `i by far is the largest holder of County bonds, which means that they're the only financial institution in the state that is able to offer this particular program. So even if we went out to the other banks in the state or credit unions or whatever, other financial institutions, they have no way of accommodating us. So there's no—actually there's no basis of going out and trying to solicit these other banks. So this is a very customized facility. It took us 18 months to put this thing together. And you have to realize that this time, during when we were trying to do this, we were right in the middle of a credit crisis. And we had this liquidity crisis where nobody was buying anything, even at whatever rate. And this whole deal almost fell apart, but we persisted at it, because the parties involved have this trust and respect for each other, and we had to try to accommodate SEC regulations, IRS regulations, banking regulations, our own needs and to try to craft a document to address all these needs was I mean the bond counsel went through half a dozen drafts trying to do this. So it was a long process. It wasn't like we're going to lunch and we're saying okay, let's do this. We did a long due diligence, and then just trying to put this thing together took a very longtime. So I think we I think we did something very beneficial for the County. It's a product that the Finance Department is very proud of. M It's very unique in the state. Nobody else in the state has this, and I think Bank of Hawai `i sees the value in this and they've offered it to other municipalities. DILL: Okay, thank you, sir. To back up a little bit, you mentioned that during your selection process, you needed to constantly be under advisement in terms of compliance with SEC regulations, bank regulations, IRS regulations. You had Corp Counsel on staff, or on the team here? OKUMOTO: We have Corp Counsel, but this is a very specialized area of law. We hire a bond counsel, and the bond counsel is a person that's recognized, that has experience in these matters. Also, this had to get by the bank attorneys, too. So on the bank's side, I think they had a more difficult time trying to convince their senior management about this product. Our director we could see the benefit right off the bat, so I didn't have this problem with our side, but there was much more due diligence on the bank's side. And they went through a rigorous process on their side. DILL: One more question again, one more question, sorry. You said there are more than six you investigated more than six different financial institutions? OKUMOTO: Right. DILL: Okay. I'll save my question for later. Questions, board members? BALSIS: I was going to ask you with the same first of all, if I'm correct, you had a consultant which advised you on a variety of solutions to issue short -term notes while waiting -- to do your expenditures prior to actually getting the money for the long -term stuff OKUMOTO: That's correct. BALSIS: Okay, and when you're looking at these short -term facilities, the consultant then said this would be the best way to go. OKUMOTO: That's correct. BALSIS: When you decided on that as being a way to go, did you discuss that way with other institutions besides Bank of Hawai `i? OKUMOTO: When we talked to First Hawaiian, First Hawaiian we told them we were doing this, and they wanted to see what they could do. And after taking a look at it, they said no, we can't deal with the tax- exempt maybe taxable, but not tax - exempt. The other smaller institutions they just don't have the capability. Right now in fact, as far as investments, the only they're the only two financial institutions in the state that will take our deposits, because these other ones have capital restrictions, so a lot of the investments go outside the state. But as far as tax- exempt, you're talking about a double tax exemption, so if you're going to do something, it's going to make sense to do it in the state of Hawai `i. BALSIS: Did you approach anybody outside the state? OKUMOTO: Well, the financial advisor did. BALSIS: Okay. OKUMOTO: But they didn't offer a private placement program. They were offering all these various types of interim financing, and that's why with his expertise, he can compare more or less the apples and oranges kind of comparison. And just based on price alone, Bank of Hawai `i was the best alternative. One of the things for me was just the cost of administration, because Bank of Hawai `i just - -they didn't require us to buy- - they weren't required to buy rated paper. They would just take our paper as it is, because they were so familiar with us and they bought bonds in the past. They're the largest, our largest bondholder. So that alone already, because if you go through a rated process, you've got to go make presentations to all the rating agencies. You've got to fly up to San Francisco, you've got to prepare this rating presentation, you have to prepare a prospectus. But with Bank of Hawai `i, they said no, you don't have to do that. You guys are good. So just based on the cost, and also the lesser requirements that it was good enough for them, that - -these were two big points for me. And we've talked to other underwriters, and we say we have this facility with Bank of Hawai `i, and they said well, you got a good deal there. So we have not only our independent financial advisors, but other underwriters who —they deal with this, this is their business. They said we have a good facility. BALSIS: The issue here is did you give Bank of Hawai `i favoritism. And I guess if you're just looking at setting up the facility and your ability to go out and shop it around, the answer in my mind would be to say no. However, the question was brought up about and you addressed it rating the facility, getting it rated by Moody's, and it was not because it is private placement, correct? OKUMOTO: That's correct. BALSIS: Is there a legal opinion that you had received, saying that oh, you do not have to have this facility rated? Or how did you come across the idea that you did not have to have it rated? Just out of curiosity. I mean, one person's saying it has to be rated, and you're saying not. Is there a legal opinion OKUMOTO: - -Well, that's up to the purchaser. All the other facilities, the purchaser requires a rating. But back in 2004, we were doing an improvement district, and that required tax - exempt financing, but we got it from USDA, so it's like sole source, no underwriter involved. The only problem was that when we put the contract out for bid, it went over the amount, so USDA said okay, we'll cover it, but then they only could do a loan for only so much. So we were kind of like, oh, is this deal going to fall apart or what? So we were talking to Bank of Hawai `i, just talking about our problems and stuff. He says well, you know, if you really get into a pinch, we '11 just buy it and we '11 just put it into our portfolio. So that was like a private placement , they're buying it and using it either for their mutual funds or for their wealthy clients, or just buying it for the bank's portfolio. But regardless, they were able to absorb the paper. So when we got I into this other facility, the thing was in the back of my mind, maybe they can do a private placement. DILL: Because it set the precedence, or OKUMOTO: - -Yeah, because they had offered this in the past. DILL: So in terms of a legal opinion like he was asking about, there was no set legal opinion other than the precedence of him offering in the past, private placement? OKUMOTO: Yeah, it's up to the purchaser whether they want to get a rating or not, and Bank of Hawai `i is comfortable enough with our how we run the County, the County management team, our finances that they didn't require us getting a formal rating. DILL: I have some questions for counsel, more procedural questions than anything else. Is there a way to get a motion to go into executive session? BALSIS: So moved. SCHOEN: Your motion has to be specific, so if you want the motion to be for the specific purpose of consulting with the Board's attorney on its procedures, privileges, and BALSIS: - -Yes, that is exactly why we would be going into executive session. That's why I moved. SCHOEN: Thank you. DILL: So, second? HEA UKULANI: Second. DILL: All right, all in favor? DILL, BALSIS, HEAUKULANI (simultaneously): Aye. DILL: Okay, if you guys don't mind just giving us a couple of minutes. 10:32 a.m.: The Board left Regular Session 10:48 a.m.: The Board returned to Regular Session. DILL: We are currently under New Business, Petition 2011 -07, concerning Section 2 -83, fair treatment, subsection (b), and from Mr. Dan Cole. Do we have a motion regarding this petition? 7 HEA UKULANI: I want to make a motion to continue the initial hearing, and I would like Nancy Crawford to appear to answer questions. The petition is for her, is it not? BALSIS: I second that motion. DILL: Any discussion? If I might add, I think the Board would since Ms. Crawford is named directly in this and not you, Mr. Okumoto, I really appreciate you coming in and speaking. We just feel it might be better to give her a chance to speak and for us to ask a couple of questions from her before we decide how to proceed with this petition. So thank you again. We have a motion on the floor to continue the initial review of Petition No. 2011 -07 to a later date. All in favor say aye. HEA UKULANI and BALSIS (simultaneously): Aye. DILL: Aye. Motion carried, thank you. HENRICKS: I abstained. DILL: Thank you. Moving on to Petition 2011 -08. b. Petition No. 2011 -08: Officer's request for an informal advisory opinion on whether the officer may sit on the National Interstate for Juvenile Board with the State of Hawaii. Mr. Dill noted that the petitioner requested a closed hearing. Ms. Schoen reported that the petitioner had informed them that the petitioner was off - island and unavailable to appear at today's meeting and requested a continuance. Motion and vote: Mr. Heaukulani moved to continue the petition to the next meeting, Mr. Balsis seconded the motion, and all members voted aye. 5. UNFINISHED BUSINESS a. Petition No. 2010 -11: Further initial review of petition questioning whether an officer had a conflict of interest when voting on Bill 283, and whether statements made by the officer caused the officer to violate financial disclosure requirements. DILL: Good morning, sir. Thank you for coming back. I really appreciate you coming in and petitioning us and taking the time. I know it's citizens like you that have concerns and that go through the proper channels that really make this island great. We had a non - definitive vote the last time we discussed this petition from you regarding Mr. Yagong and his employment. There are essentially a couple of items at issue. Number one, whether or not there was a conflict of interest in him voting on Bill 283, correct? CADAOAS: Right. DILL: Due to his past employment. I was provided with further information on that Bill 283 and took a closer look at what it entailed, and then also took a closer look at his financial disclosure forms in terms of his employment and whatnot. And although there were some subsidiaries, I couldn't find that he was currently working for CADAOAS: - Malama Market DILL: --yeah, at that time, and furthermore, we're dealing with a subsidiary. And I couldn't find anything definitive that was in violation of the specific sections that are listed in the petition. What I'd like to do is do we have any other further questions from the Board on this, or can we make a motion to resolve this? SCHOEN: Mr. Chair, as you recall, Mr. Balsis had recused himself, so the three members are Henricks, Heaukulani, and yourself. DILL: Yes. HEA UKULANI: What about what did you say about his relationship to subsidiaries? Did he have, or did he have not? DILL: No, there's no direct relationship HEA UKULANI: - -Okay DILL: --Actually at the time he was not employed, but a former employer [sic]. Therefore, the decision - making process is of the subsidiary and direct relation to his former employment. Furthermore, after further review of the Bill 283, I didn't see any unwarranted advantages that would be gained through voting on that particular bill. SCHOEN: Mr. Heaukulani, if I might try to answer what I think your question is. The allegations in the petition was that Petitioner was asking whether or not Councilmember Yagong had violated any financial disclosure requirements by - -when he said that he was not affiliated with Kalama Beach. And I think what Mr. Chair is saying, that pursuant to 2 -91.1, whether or not there's a duty on Mr. Yagong's part to disclose a parent company, holding company, or subsidiary companies. And so 2- 91.1(c)(1) is actually the operative provision that I think Mr. Dill is looking at, which requires that a person list the source of income. There's no other requirement to list. HEA UKULANI: Okay. DILL: Which is included on the financial disclosure forms. HEA UKULANI: I got it, thank you. SCHOEN: Is that accurate? DILL: Yeah, so therefore he's meeting the requirement as specified, I think. AndMr. Cadaoas, we did take extra time to look at this and really consider what you brought up, 9 and we value you bringing it up. If there was anything that we thought or I thought, personally, might be a conflict or even seemingly conflict, I would pursue it even further. CADAOAS: I appreciate that, because I think it was during that first meeting, one of the members said he thought it was a traffic issue, which it wasn't. DILL: Right. It was a development issue. CADAOAS: Yes. DILL: And then you have to look at the players involved, and also for us, we kind of are hindered by the fact that we have to look at how it applies specifically to the County Code of Ethics. We're not judge and jury, we don't enforce laws or judge on laws. It's just simply the County Code of Ethics. And like I said, the requirements as stated in 2 -91 or 2, regarding disclosure, he needs to specify his source of income, which I think he did. And anyway, any motions? Again, we had a motion last meet HEAUKULANI: Arne, you going to make a motion? HENRICKS: I'm not making a motion, no. HEA UKULANI: Well, once again, motion to dismiss. DILL: Petition 2010 -11, finding that there is no violation? Okay, we have a motion. SCHOEN: Do you have a second? HEA UKULANI: Me? SCHOEN: Oh, you did. Sorry. HEA UKULANI: No, a second? DILL: Second. Any discussion? All in favor, say aye. HEAUKULANI, HENRICKS, DILL (simultaneously): Aye. DILL: Mr. Balsis recused. So again, Mr. Cadaoas, I appreciate your time and efforts. CADAOAS: All right. DILL: Thank you. Motion and vote: Mr. Heaukulani moved to go into Executive Session for review of the confidential matters in agenda item 6. Mr. Balsis seconded the motion, and all members voted aye. 10:58 a.m.: The Board left Regular Session. 10 11:17 a.m.: The Board returned to Regular Session. 6. VOTING ON EXECUTIVE SESSION MATTERS a. Approval of the minutes of the February 9, 2011, meeting (Executive Session). Motion and vote: Mr. Balsis moved to accept the minutes as presented, Mr. Heaukulani seconded the motion, and all members voted aye. b. Review draft informal advisory opinion regarding Petition 2011 -06, requested by a former employee on whether the former employee may work at a law firm which has clients having business with the County and in particular the County Council. Motion and vote: Mr. Heaukulani moved to accept the draft, Mr. Balsis seconded the motion, and all members voted aye. The Chair signed the original. C. Review of Confidential Financial Disclosure Forms filed pursuant to Section 2- 91.1(d), Hawaii County Code, by County board and commission members and designated County employees, where personal matters will be reviewed. Motion and vote: Mr. Balsis moved to accept all disclosures except 9 and 10, which were being rejected for being incomplete. Mr. Heaukulani seconded the motion, and all members voted aye. 7. ANNOUNCEMENTS Mr. Balsis and Mr. Henricks both said they were not available to meet as scheduled on April 13, 2011. The Board discussed when they could next meet, and three of the four were available on both April 20 and May 11, 2011. Ms. Schoen was to contact several parties involved in pending petitions to see when they were available and set a firm date. The Chair thanked everyone for serving. 11:22 a.m.: The Chair adjourned the meeting. Respectfully submitted: Mary E. Crosson, Secretary 11