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The Honolulu Advertiser
Posted on: Wednesday, January 12, 2005

Unity House case detailed

By Jim Dooley
Advertiser Staff Writer

A wealth of new information about how Tony Rutledge Sr. operated Unity House Inc. was unsealed in federal court yesterday, including grand jury testimony that the tax-exempt Unity House "sold" Hawai'i tax credits to wealthy local investors and allegations that Rutledge used the organization's money to gain "political influence."

A. Rutledge

T. Rutledge
The information, contained in a sworn statement from an Internal Revenue Service agent and a preliminary report on Unity House finances from the court-appointed receiver now running the $42 million nonprofit labor organization, was discussed during a hearing on a motion by Rutledge's attorneys to declare the government's December seizure of Unity House illegal.

Chief U.S. District Judge David Ezra denied the motion and issued an injunction allowing the government's takeover of Unity House to continue until criminal fraud and conspiracy charges against Rutledge and his son, Aaron, are resolved. Trial in the case is set to begin May 10.

Ezra also eliminated electronic monitoring of the Rutledges but raised their bail to $750,000 each and ordered that they be at home from 9 p.m. to 6 a.m. every day until the conclusion of the trial.

New details about Unity House's activities were contained in a sworn "declaration" from IRS agent Gregory Miki that formed the basis for the government's Dec. 14 seizure. The declaration had been sealed from public view but was released yesterday, with sections blacked out because of an ongoing criminal investigation of Unity House, according to U.S. Department of Justice attorney Edward "Ted" Groves.

According to Miki and the appointed receiver, Anthony Pounders, Unity House invested $1 million and Rutledge invested $200,000 of his family's money in Hoana Medical, a local company developing state-of-the-art medical sensory equipment. Hoana Medical investors qualified for state tax credits available to "high-tech" business ventures under Act 221, a controversial state law passed in 2001.

The generous tax credits —each dollar invested in a qualifying high-tech venture allows an investor to reduce personal or corporate Hawai'i taxes by one dollar over a five-year period — are a valuable tool for creating business growth and new jobs in Hawai'i, proponents argue.

Critics have questioned the true economic value of the tax credits, in part because the identities of individuals receiving them are shrouded in secrecy, making the benefits of the program to the state difficult to measure.

And provisions of Act 221 that allow well-to-do investors to sell, barter or otherwise exchange tax credits have created an underground market in the tax credits, according to a 2002 Circuit Court lawsuit.

Miki's statement said Rudy Tam, a Unity House investment consultant, testified before the federal grand jury that Unity House "sold the tax credits" it received from the Hoana Medical investment to other, unspecified Hawai'i taxpayers.

Kurt Kawafuchi, state tax department director, also testified before the federal grand jury, saying that "Unity House is a tax-exempt charitable organization not entitled to the Act 221 tax credit and thus could not sell it to wealthy investors," Miki's declaration said.

Kawafuchi declined comment yesterday, saying that "information about a specific taxpayer is confidential."

Tam could not be reached for comment. His attorney, Eric Seitz, said Tam has served as a Unity House investment adviser and testified before the federal grand jury about his work for the organization and Tony Rutledge.

Federal prosecutors "told me that he (Tam) is not a target of the grand jury," Seitz said.

Tam, who is on the board of directors of Hoana Medical, has been "tied to several failed business investments made by Unity House," Miki said in his declaration.

Tam does not have a personal bank account because of unpaid federal tax liens and child-support obligations, Miki said in his sworn statement.

Patrick Sullivan, head of Hoana Medical, could not be reached for comment yesterday. Hoana official Ian Kitajima said he was not privy to the details of the Unity House and Rutledge investments or Tam's involvements in them.

"Hoana Medical is a qualified high-technology business that follows state laws," Kitajima said.

Miki's sworn statement also said the grand jury investigation has included testimony about political activities of Unity House when it was controlled by Rutledge. "The unchecked use of Unity House contracts and monies have resulted in political influence that has opened doors from which Rutledge has benefited personally," the statement said.

Those activities included "contributions to individuals such as Robert Awana (Gov. Linda Lingle's chief of staff), Romeo Mindo (a former state representative who was a Unity House employee) and (state Sen.) Colleen Hanabusa."

Awana received a "generous consulting contract from Unity House to survey the members" from 1999 to 2000, according to Miki.

"The survey included questions to the members on whom they would vote for in the upcoming mayoral election," Miki said.

After Lingle was elected governor in 2002, Tony Rutledge "had eleven meetings with the Chief of Staff for the Governor of Hawai'i," Miki said in his sworn statement.

Awana could not be reached for comment yesterday.

Hanabusa, D-21st (Nanakuli, Makaha), said yesterday that she is Awana's attorney and that he "testified freely before the grand jury and was told from the beginning of the investigation that he was not a target of the grand jury." She declined further comment on Miki's statements about Awana.

Hanabusa said she did not know why she was named by Miki as a recipient of "contributions" from Unity House, pointing out that her political campaign is one among many that have received donations from the organization.

According to the criminal indictment of the Rutledges, Mindo introduced legislation in 2003 that allowed Unity House to transform itself from a "membership-based" organization to a "nonmembership-based" one that was directly controlled by Tony Rutledge. Mindo received an unsecured, $40,000 Unity House House loan January 2004.

Seitz, who is also Mindo's lawyer, said the loan was for home repairs and was unrelated to Mindo's sponsorship of the Unity House legislation.

Lingle signed the bill into law in May 2003. Awana told The Advertiser last month that Unity House employee Michael Tanaka called him about the Mindo bill after it had been approved by the Legislature.

"He just said it had passed downstairs and asked me to take a look at it," Awana said.

Awana said he did not speak to Lingle about the bill or tell her about Unity House's interest in it.

Lingle herself worked for Unity House founder Arthur Rutledge in the mid-1970s and was named by the senior Rutledge to the board of directors of the Hawaii Pacific Cinema Development Foundation in 1981, resigning after she was elected to the Maui County Council.

The new criminal charges against Tony Rutledge allege that he improperly diverted $50,000 from the Cinema Foundation for a movie project in which he had a personal financial interest.

Awana said last month neither his past work for Unity nor Lingle's more remote connections to the nonprofit affected their consideration of the worthiness of the Mindo bill.

Reach Jim Dooley at jdooley@honoluluadvertiser.com or 535-2447.