Reed had denied the allegations, and said the suit was settled more than a year ago for less than 15 percent of the damages sought by the plaintiffs, without any admission of wrongdoing.

"While it would have been a tremendous honor to serve you and the people of the City and County of Honolulu as managing director, my family expressed concerns about being subjected to the kind of public exposure we've seen this week," Reed wrote in a letter to Hannemann.

Hannemann said that the suit should not disqualify Reed from being the city's second-in-command and that he was surprised when Reed informed him yesterday morning he would step down. Hannemann said he asked Reed to reconsider, but did not pressure him one way or the other.

"While John's decision is indeed regrettable, from my standpoint, I certainly understand and appreciate his decision to put his family first," Hannemann said. "I've always said, and I said this to my Cabinet, that your family comes first. No other success can compensate for failure in the home, and it is with regret that I accept John's decision."

No deadline set

Mayor Mufi Hannemann said he accepted John Reed's decision to withdraw his nomination "with regret." Richard Ambo • The Honolulu Advertiser

"I just want to make it real clear that the city does not come to a standstill because we don't have someone I had tapped to be managing director," the mayor said. "I have an excellent team that is right now assuming their positions, with myself, and I don't think we're going to miss a beat. Yes, it'd be nice to have had his expertise here, but life goes on and we're going to move on."

Reed had not informed Hannemann of the lawsuit before media reports surfaced Wednesday, during Hannemann's inauguration ceremonies.

Hannemann, who has known Reed for more than a decade and recruited him for the job, said on Thursday he did not believe that Reed was in any way racist. But Hannemann said Reed should have disclosed the potential for controversy.

Reed had said he considered the lawsuit an "immaterial issue" because the allegations weren't true and the case had been settled. He said that the suit was filed after the lead plaintiff's job was eliminated and that other demands regarding back pay had been dropped from the suit when payroll records proved claims false.

The plaintiffs' attorney could not be reached over several days, and court records were not immediately available.

Hannemann said that Reed had offered Thursday to withdraw his nomination if Hannemann believed it would hurt his emerging administration and that Hannemann rejected the offer.

"I was really touched by the fact that he said, 'Mufi, if you feel in any way that I'm going to be an impediment to your administration, I will leave in a New York minute.' I said, 'No, John. I'm fine with you. As long as you're up-front, you tell me exactly what happened. Did you in any way make those statements?' And he assured me that he didn't."

Hannemann said Reed also assured him there were no additional lawsuits, settled or pending, that could prove embarrassing. Reed could not be reached yesterday.

Several people who have worked with Reed in Hawai'i said they never heard Reed make any racially derogatory statements.

"He would have been let go the next day if I had even a whiff of any kind of prejudice being exhibited," said Larry Vogel, Reed's former boss at DFS. "I never heard a sound in that regard. Never. He would have never survived."

Vogel, who was president of the company's North America division, characterized Reed as a "very high-energy, intense" manager who had dramatically revived a division branch that had been performing poorly.

"He took a mess and he turned it around," Vogel said yesterday, before Reed's decision was announced. "The city in some areas is a mess. Streets, the sewer system, truly a mess. I would bet my last dollar that John would be able, with the mayor's support, to turn those around."

Reed could return

Hannemann said he was disappointed that the city would not have a chance to know what Reed could have done as managing director, but he did not rule out hiring Reed for another position.

"I was very sorry to hear that he was going to withdraw, because I really believed he had some unique talents and skills that we've never seen in a managing director before," he said. "We had a proven CEO. But I totally understand when anyone talks to me about family."

Reed had held high-level positions at several companies and was founding chairman of the Hawai'i Tourism Authority. He left Hawai'i for California in 1999 to co-found a teeth-whitening treatment company called BriteSmile Inc.

The lawsuit controversy erupted a day after Hannemann announced Reed's nomination. "He went home, and of course last night as you know, he was on the news," Hannemann said. "As I said, this was very different for he and his family. They had never been in the public arena before."