by Andrew Walden

Which came first, the crony or the capitalist?

In David Ige's campaign biography touting his so-called "private sector" experience, the answer is clearly crony.  

Akamai readers already know about Ige's GTE gig, a "Conflict of Interest Because Ige Was Both Legislator and Lobbyist While Serving on Committee Overseeing His Employer." 

In his next position, Ige turned the tables.  Instead of allowing his capitalist employer to make use of his crony political position, at Pihana, Ige joined with small-time jewel smuggler, Larry Mehau protectee, and ex-governor George Ariyoshi to use political position in an attempt to become the capitalist--and it almost worked, until Goldman Sachs taught them all the meaning of "preferred stock."

The cronies got together in 1999 to form Pihana Pacific, Inc, which established "neutral Internet exchange data centers" in Honolulu and maintained offices in several Pacific Rim cities.  Oddly enough, it was a real company with employees, and a business plan.  According to his campaign biography, Ige was Pihana's "Project Engineer/Senior Principal Engineer." 

These were the days before Act 221 tax credits.  Nonetheless, Pihana managed to score at least $1,338,000 in State tax credits for "research".  Pihana also managed to work out a trade -- University of Hawaii consulting services for 100,000 shares of Pihana stock--common stock, not preferred.  UH generally doesn't do that for jewel smugglers, but it made an exception for the ex-Governor and sitting Senator.

The ride to Internet glory didn't last long.  In 2002, Mainland investors led by Goldman Sachs poured $224M into Pihana as part of a deal to merge the company into a Goldman-controlled entity known as Equinix Pacific.  Goldman got preferred stock giving them control of the new entity--which held the $224M.  The local rubes owning common stock had just been taken to the cleaners and UH was left holding the bag.  It took the cronies six years to figure it out.

The ink was barely dry when Pacific Business News, October 7, 2002, reported:

Pihana Pacific, which last week announced a three-way merger with like-minded businesses in California and Singapore, has now notified the state that the merger will actually be an acquisition of Pihana Pacific data centers that leaves Hawaii with few of the company's approximately 60 local jobs....

The merger is a good fit for the three companies, but not for Hawaii, because the Pihana headquarters in downtown Honolulu becomes redundant. More than 50 people will be laid off or transferred away from Hawaii. The data center at Honolulu International Airport will be kept but requires only a handful of people to run. From a jobs perspective, Pihana is virtually going out of business here.

"As a result of merging these businesses into Equinix, we will become the largest global network neutral Internet exchange services company," Equinix CEO Peter Van Camp said in a letter to the mainland company's customers. "Equinix will leverage the established infrastructure of all three companies."

With the local cronies out of the picture, DoTax took an uncharacteristic interest in assessing the validity of Pihana's tax credits.  Equinix' 2005 Annual Report explains:

In July 2005, the Company received a Notice of Proposed Assessment of Income Tax from the state of Hawaii asserting a tax deficiency, plus interest, totaling $613,000. The deficiency stems from certain refundable tax credits that the state of Hawaii subsequently disallowed in the examination of the Hawaii income tax returns for the tax years of 2000 and 2001 filed by Pihana Pacific, Inc., which the Company acquired on December 31, 2002.

DoTax settled with Equinix in 2008 stating: "The Department found that one project qualified for the research activities tax credit and disallowed the other projects."

On August 22, 2008, Ariyoshi and Pihana co-founder Lambert Onuma sued Goldman in Hawaii's First Circuit Court for $700M.  They claimed Equinix had "concealed key financial information and failed to hold a shareholder vote" on the 2002 merger and Goldman and its co-investors had, "used the merger to 'freeze out' the common stock shareholders."  In May, 2010, Circuit Court Judge Rom Trader dismissed the case because the statute of limitations had expired.  Trader then awarded $3.4M in attorney's fees to Goldman and its co-defendants--the University of Hawaii was among those ordered to pay up. 

Ariyoshi and Onuma appealed the dismissal, and Supreme Court Chief Justice Ronald Moon naturally stepped up to transfer the case out of the Intermediate Court of Appeals into the grotesquely politicized State Supreme Court.  Like UH, Moon didn't generally provide that kind of personal service for jewel smugglers, but he too made an exception for an ex-Governor and a sitting Senator.   Even when  getting your butt kicked by a gang from New York, its good to be Crony.

With Equinix valued at about $3.3B, Goldman got Moon's hint and decided not to sweat the small stuff.  In August, 2012 Goldman agreed to pay Ariyoshi and Onuma $500K in nuisance money and dropped the demand for attorneys fees.  Morgan Stanley and USB kicked in another $250K each.  Everybody was responsible for paying their own attorneys.

Thus ended David Ige's foray into capitalism. 

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Conflict of Interest: Ige Was Both Legislator and Lobbyist While Serving on Committee Overseeing His Employer

DCCA: Ige Business 'Not in Good Standing'

Hon Adv: Pihana Fiasco 2008

Star Adv: Pihana Fiasco 2010

Star Adv: Pihana Fiasco 2012