Creditors of a business called Paniolo Cable Co. that is owned by the adult children of imprisoned telecommunications entrepreneur Albert Hee are trying to force the cable company into bankruptcy.
A federal bankruptcy court filing in Honolulu last week by HSBC Securities (USA) Inc. alleges Paniolo Cable owes more than $199 million on notes held by HSBC. The filing by HSBC, Deutsche Bank and a third company seeks to push Paniolo into involuntary Chapter 11 bankruptcy, which would provide the company a chance to reorganize.
Deutsche Bank financed construction of the Paniolo fiber-optic cable network, which consists of about 358 miles of undersea and overland cable linking Kauai, Oahu, Molokai, Maui and Hawaii island.
Sandwich Isles Communications Inc., which was founded by Hee, has a 20-year lease agreement to use the Paniolo cable system to provide telecommunications services to about 3,600 customers on Hawaiian homelands across the state.
Hee is serving a federal prison term for tax fraud, and his companies face an array of problems, including a foreclosure action filed by the U.S. Department of Justice this year to try to recover $130 million Sandwich Isles allegedly owes the federal government after defaulting on U.S. Department of Agriculture loans.
Sandwich Isles has claimed it is not affiliated with Paniolo, but according to Federal Communication Commission records, Paniolo is indirectly owned by Hee’s children, Adrianne, Breanne and Charlton Hee.
According to an FCC filing in 2013, Paniolo is owned by Blue Ivory LLC, which in turn is wholly owned by Blue Ivory Hawaii Corp. Blue Ivory Hawaii is held equally by the private trusts of Hee’s three children.
The lease payments from Sandwich Isles to Paniolo were heavily subsidized by the federal government for years as part of a federal program to deliver modern telecommunications services to rural communities.
Sandwich Isles agreed to initially pay $15 million a year to lease the cable from Paniolo, and those payments increased over time to $24 million. However, the FCC in 2010 reduced the federal subsidy to half of the lease rent paid by Sandwich Isles to Paniolo, according to federal court records.
The FCC further reduced the annual lease subsidy
in 2016 to no more than
$1.9 million per year, court records show. FCC records show Sandwich Isles reduced its payments to Paniolo, and by some accounts ended the lease payments to Paniolo altogether.
The Paniolo fiber network is a valuable asset with enough capacity to provide broadband service to the entire state, but only a small fraction of that capacity is being used, according to FCC documents.
It is unclear what the next steps will be for HSBC, which claimed in last week’s bankruptcy court filing that it holds notes from Paniolo worth $199.1 million in
principle and interest.
HSBC acquired most of
that debt in transactions in 2017 and 2018 after the FCC had slashed its subsidy of the SIC lease payments to Paniolo, according to court records.
Another creditor, Sunrise Partners LP, holds more than $10 million in Paniolo debt, while Deutsche Bank claims it is owed more than $24,500 in fees and expenses.
A spokesman for HSBC said that the bank “is carefully working to ensure
continuity of telecommunications services, including to the Hawaiian Home Lands, as we work to resolve the company’s debt.”
William Aila, deputy director of the state Department of Hawaiian Home Lands, said in a written statement Tuesday that DHHL was not aware of the Paniolo filing, and it would be “premature to comment at this time.”
The bankruptcy filing involving Paniolo is the latest threat to the cluster of businesses built by Hee, the brother of former state Sen. Clayton Hee.
Last spring the Justice Department filed in federal court to foreclose on the assets of Sandwich Isles Communications to recover what now amounts to about
$130 million in principal
and interest the company owes on delinquent USDA loans.
The politically connected Sandwich Isles had borrowed more than
$166.7 million from the USDA to help finance its fiber-optic telecommunications network across the Hawaiian Islands, but has not made the required
$1 million-per-month payments on the loans in more than five years, according to federal court records.
Hawaii political leaders including the late U.S. Sen. Daniel K. Inouye supported Sandwich Isles’ efforts to obtain USDA loans, and Inouye intervened on behalf of Sandwich Isles repeatedly to urge USDA to loan more money to the company. Inouye also pressed the Federal Communications Commission to provide telecommunications subsidies to support the company.
Over the years Sandwich Isles received more than $249 million in subsidies from the federal Universal Service Fund to support telecommunications services on Hawaiian homelands, but the FCC cut off most USF subsidies to the company in 2015. The USF is financed through fees collected from telecommunications customers across the country.
In late 2016 the FCC ordered Sandwich Isles to repay more than $27 million of the federal USF money it received, and also proposed another $49 million in fines for Sandwich Isles, its parent company Waimana Enterprises Inc. and Albert Hee for alleged violations of FCC rules.
The FCC last year also ruled that the exclusive Hawaiian Homes license that Department of Hawaiian Home Lands granted to Sandwich Isles in 1995 is invalid because it violates the Telecommunications Act of 1996.
Hee himself was convicted of federal tax fraud in 2015 and sentenced to 46 months in federal prison for concealing from the IRS that his company deducted
$2.75 million as business expenses to cover Hee’s personal expenses. Hee is serving his sentence at a federal facility in Terre Haute, Ind.
Among the supposed business expenses cited by prosecutors in the tax fraud case were $718,559 the company paid for college tuition and living expenses for Hee’s three children, $92,000 in payments for massages for Hee and $121,878 in credit card charges made by Hee for personal expenses, according to federal court records.