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IN THE SUPREME COURT OF THE STATE OF HAWAI#I ---o0o---

No. 22671 STATE OF HAWAI#I, Plaintiff-Appellant, vs. RICHARD SUNG HONG WONG, MARI STONE WONG, and JEFFREY R. STONE, Defendants-Appellees. (CR. NO. 99-0678) ---------------------------------------------------------------No. 23151 STATE OF HAWAI#I, Plaintiff-Appellant, vs. HENRY HAALILIO PETERS and JEFFREY R. STONE, Defendants-Appellees. (CR. No. 99-1502)

NOS. 22671 AND 23151 APPEALS FROM THE FIRST CIRCUIT COURT (CR. NOS. 99-0678 and 99-1502) .FEBRUARY 22, 2002 CIRCUIT JUDGE MASUOKA, ACTING C.J., IN PLACE OF MOON, C.J., RECUSED; CIRCUIT JUDGE IBARRA, IN PLACE OF LEVINSON, J., RECUSED; CIRCUIT JUDGE KOCHI, IN PLACE OF NAKAYAMA, J., RECUSED; CIRCUIT JUDGE RAFFETTO, IN PLACE OF RAMIL, J., RECUSED; AND CIRCUIT JUDGE CHANG, IN PLACE OF ACOBA, J., RECUSED; ACTING JJ. Per Curiam. Plaintiff-Appellant State of Hawai#i appeals from orders dismissing indictments against Defendants-

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Appellees Richard Sung Hong Wong, Mari Stone Wong, Henry Haalilio Peters, and Jeffrey R. Stone. The circuit court orders, entered

by the Honorable Michael R. Town, were entered without prejudice. We affirm the dismissals, but remand with instructions to enter the dismissal orders with prejudice. I. Background A. Appeal No. 22671, First Circuit Criminal No. 99-0678 The Office of the Attorney General secured an indictment against Richard Sung Hong Wong (Wong), Jeffrey R. Stone (Stone), and Mari Stone Wong (M. Wong). The indictment's

charges of theft in the first degree (Wong), commercial bribery (Stone), perjury (Wong), hindering prosecution in the first degree (M. Wong), and criminal conspiracy (Wong, Stone, and M. Wong), arose out of a series of business and personal transactions. In sum, the indictment alleged that Wong, a

trustee of the Bishop Estate/Kamehameha Schools (Estate), manipulated the Estate into giving his brother-in-law, Stone, a "sweetheart deal" on what was called the Kalele Kai project and, in return, Stone secured for Richard and Mari Wong a sale price for their apartment that was $115,800 more than the apartment was worth. According to the State, the $115,800 was money that

should have gone to the Estate and Wong's keeping of the money was a theft from the Estate. All of the other charges relate to

the alleged theft or the investigation of it.

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According to the testimony before the grand jury, the Kalele Kai project was a leasehold condominium construction project on Estate land. The developer, Bedford Properties,

borrowed seventy-six million dollars from Mitsui Bank and Trust Company and formed a partnership, Kapalele Associates, with Mitsui to develop the project. Kapalele Associates had cash flow problems when the leasehold units did not sell. To generate sales, Kapalele

Associates purchased the fee interest from Estate for $21.9 million. The fee interest was purchased by agreement of sale.

However, Kapalele Associates eventually defaulted on the Mitsui Bank loan and could not perform the agreement of sale for the fee interest. In the summer of 1995, Stone offered to buy the Kalele

Kai project and to assume the fee purchase agreement with Estate. To finance the purchase, a Stone company, Pacific Northwest Ltd., and an Ohio corporation, the National Housing Corporation, formed One Keahole Partners (OKP), a partnership. Stone sent OKP's proposal to Trustee Wong. Wong forwarded the proposal to the Principal Executive of the Estate's Asset Management Group. Wong recused from trustee deliberations OKP acquired the Kalele

concerning OKP's Kalele Kai proposal.

Kai project after a majority of the remaining trustees approved OKP's assumption of the fee purchase agreement.1

The record contains information that both OKP and the Estate reaped considerable benefit from the transaction. OKP was estimated to have reaped a nine million dollar profit. Rather than having to deal with a

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In 1996 Stone's company, Pacific Northwest, Ltd., purchased a Kahala home that was in foreclosure, renovated the home, and sold the home to Richard and Mari Wong. The Wongs

financed the home, in part, with a $613,200 credit for their Wilder Avenue apartment. The State alleged the Wilder Avenue

apartment was worth no more than $498,000 and that the $115,800 difference between the $498,000 value of the Wilder Avenue apartment and the $613,800 credit was a payoff by Stone for the Kalele Kai deal and a theft by Wong of monies due the Estate. To secure the indictments, the State called, among others, Stone's former tax lawyer, disbarred attorney Richard Frunzi2 to testify before the grand jury. The State called

Frunzi before the grand jury without seeking a court ruling about the extent to which Frunzi could testify.3 Frunzi did not notify Stone that Frunzi was going to testify before the grand jury and Frunzi did not get Stone's permission to testify about their professional relationship.

bankrupt developer, the Estate apparently received the expectations from its original agreement with Kapalele Associates, plus significantly increased annual payments at a higher rate of interest, immediate rights to some of the money generated from the sale of condominium units, and, among other things, additional security in the form of mortgages and partner guarantees that provided recourse in the event of OKP's default. Frunzi was allowed to resign from the practice of law in lieu of discipline on April 10, 1997. See Supreme Court Case Number 20583, Office of Disciplinary Counsel v. Richard L. Frunzi . A resignation in lieu of discipline is a disbarment. RSCH 2.14(d). Frunzi testified before the grand jury on January 14, 1999. The State also subpoenaed Stone attorneys James Stubenberg and Jonathan Durrett. Stubenberg and Durrett raised privilege issues on Stone's behalf and the parties sought and obtained a court ruling concerning the extent to which Stubenberg and Durrett could testify.
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Frunzi testified without raising any privilege issue on behalf of his former client, Stone. At the State's urging, Frunzi

explained his testimony to the grand jury: [State]: Now, prior to asking you questions about Mr. Stone, do you recognize that there ordinarily would be a prohibition from you testifying about those kinds of matters?

[Frunzi]: Yes. The rules of the Bar Association and the Code of Professional Conduct prohibit an attorney from divulging any confidential communications or proprietary information to a client -- about a client to anybody else, but there are certain exceptions. And one of the exceptions is that if a crime is committed or to be committed, there's what's called a crime fraud exception. [State]: Okay. And that's what you are basing your ability to testify on today.

[Frunzi]: Yes Richard Wong, joined by Mari Wong and Jeffrey Stone, moved to dismiss the indictment for lack of probable cause and prosecutorial misconduct. The circuit court granted the motion The circuit

and dismissed the indictment without prejudice. court explained:

. . . this Court will respectfully grant the motions to -- Defendants' Motion to Dismiss the indictment for the following reasons: One, the government used the privileged testimony of an attorney, Richard Frunzi, albeit at that time he was suspended in lieu of discipline, he was also incarcerated in federal custody pending sentencing, although -5-

that's not terribly relevant. And this privileged testimony did not meet the crimefraud exception to the Hawaii Rules of Evidence. I think that's very clear. Neither Mr. Frunzi, nor the government, notified Mr. Stone or the Court that his attorney, Mr. Stone's attorney, Mr. Frunzi, would be testifying. Further, the government on its own did not seek Court review ahead of time as this Court believes is required by law. Secondly, the Court finds that the government, by attesting to the quality of the testimony, by referring to or allowing Mr. Frunzi to refer to it as under the crimefraud exception before the grand jury who are lay persons from the general community, illegally bolstered Mr. Frunzi's testimony, thereby prejudicing the Defendants. Assuming arguendo . . . that there is no requirement to approach this Court as a supervising judge ahead of time, the Court finds, nevertheless, that Mr. Frunzi's testimony was, in fact, privileged and the crime-fraud exception did not apply. . . . The State appealed. where necessary. B. Appeal Number 23151, First Circuit Criminal Number 99-1502 The Office of the Attorney General secured an indictment against former Bishop Estate Trustee Henry Haalilio Peters (Peters) and Jeffrey R. Stone (Stone). The indictment's Additional facts are set out below

charges of theft in the first degree (Peters), commercial bribery (Stone), criminal conspiracy (Peters and Stone), accomplice to theft in the first degree (Stone), and perjury (Stone), arose out of the Kalele Kai transactions, set out above, and an allegation -6-

that Stone secured the sale of Peters' residential apartment for $192,500 more than its alleged value. The indictment alleges, in sum, that Stone induced Peters to approve OKP's acquisition of the Kalele Kai project by convincing another person to pay more for Peters' apartment than it was worth, that Stone financed the purchase of the apartment through OKP, OKP accepted the deed to the apartment in lieu of repayment of the money borrowed to finance its purchase, and that Peters used the value of his apartment, including the alleged $192,500 excess, to purchase an apartment on a higher floor in the same building. The State alleges the $192,500 should belong

to the Estate and that Peters' retention of that value is a theft from the Estate. These allegations formed the basis of the

theft, commercial bribery, conspiracy, and accomplice to theft charges against Peters and Stone. In addition, the State

alleged, in sum, that Stone lied to a prior grand jury when Stone testified that he was contacted by Glenn Okada about the availability of an upper floor unit in Peters' building and Okada told him to contact Peters about the possibility of buying the higher floor apartment. In the course of presenting the case to the grand jury, the State called several witnesses, including Nathan Aipa, acting chief operating officer and formerly General Counsel for the Estate, and Glenn Okada, President and Chairman of the Board of

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GKO Corporations and GO Realty.

The State did not seek the

circuit court's approval before it called Aipa to testify, did not notify Peters that Aipa would testify, and did not secure a waiver of attorney-client privilege from Peters. Aipa was

called, according to the State, "[t]o provide the grand jury with more specific information from which to determine whether Peters knew that any benefit he received from a transaction in which the trust was also involved needed to be returned to the trust[.]" To that end, the State questioned Aipa about an unrelated matter, referred to as the McKenzie Methane gas investment, for which legal advice was sought and conveyed to the trustees. The State

questioned Okada about Peters' purchase of the higher floor apartment, but it did not allow Okada to explain that Okada, not Stone, initiated discussion of the transaction with Peters. The State moved to nolle prosequi the criminal conspiracy charge and the motion was granted. moved to dismiss the other counts. Peters and Stone

The circuit court granted the In granting the motions

motions to dismiss, without prejudice.

and dismissing the theft, accomplice to theft, and perjury charges, the circuit court said, in part: . . . the defendants' right to a fair and impartial grand jury proceeding was prejudiced by the Attorney General's misconduct in failing to seek permission of the court and to obtain a proper waiver of the attorney-client privilege from Henry Haalilio Peters prior to eliciting testimony before the grand jury from Nathan Aipa, Esq. on the subject of Trustee Peters' knowledge and involvement in the McKenzie methane gas -8-

investment, discussions and related legal opinion; . . . the defendants' right to a fair and impartial grand jury proceeding was prejudiced by the Attorney General's preventing witness Glenn Okada from answering questions several times in order to suppress clearly exculpatory evidence; . . . the attorney-client privilege is a sacred and important privilege and . . . the violation of that privilege is unacceptable; . . . the Attorney General's office was on crystal clear notice of the process to seek prior court permission to call attorneys before the grand jury and knew in fact that the court was supervising the grand jury; and that neither Trustee Peters or his counsel . . . was given prior notice by either the Attorney General or Mr. Aipa of the subpoena to the grand jury[.] The circuit court dismissed the commercial bribery charge. doing so, the circuit court explained: . . . the reason [for the dismissal] is that the government chose not to allow what could have been clearly exculpatory evidence by Glenn Okada for reasons of their own about Mr. Stone's committing perjury. That had to affect how the grand jury saw the other counts in the Court's view. Secondly, the criminal conspiracy matter never should have been brought, including the overt acts. And the fact it was, in the Court's view, could easily have influenced the grand jury. And all the other reasons set forth in the moving papers. The circuit court denied reconsideration and the State appeals. Additional facts are set out below where necessary. II. Standard of Review In

The State contends the circuit court erred when it granted the Defendants' motions to dismiss the indictments. -9-

An appellate court reviews a trial court's decision to dismiss an indictment for abuse of discretion. State v. Chong, The trial

86 Hawai#i 282, 288 n.2, 949 P.2d 122, 128 n.2 (1997).

court abuses its discretion when it clearly exceeds the bounds of reason or disregards rules or principles of law or practice to the substantial detriment of a party litigant. E.g., State v.

Klinge, 92 Hawai#i 577, 584, 994 P.2d 509, 516 (2000)(citations omitted). The burden of establishing abuse of discretion is on

appellant, and a strong showing is required to establish it. E.g., State v. Kupihea, 80 Hawai#i 307, 312, 909 P.2d 1122, 1127 (1996) (citation omitted). III. Discussion

A grand jury is a constituent part of the court or branch of a court having general criminal jurisdiction. In re Moe, 62 Haw. 613, 616, 617 P.2d 1222, 1224 (1980). The circuit

court has supervisory power over grand jury proceedings to insure the integrity of the grand jury process and the proper administration of justice. Id.; Cf. United States v. Williams,

112 S.Ct. 1735, 1742, 504 U.S. 36, 47 (1992) (United States Supreme Court concluded the federal grand jury "belongs to no branch of the institutional Government" and that "its institutional relationship with the [federal] Judicial Branch has traditionally been, so to speak, at arm's length"). This court recently "reaffirm[ed] the principle that prosecutorial conduct that undermines the fundamental fairness -10-

and integrity of the grand jury process by `invad[ing] the province of the grand jury or tend[ing] to induce action other than that which the jurors in their uninfluenced judgment deem warranted on the evidence fairly presented before them,' [State v.] Joao, 53 Haw. [226] at 229, 491 P.2d P.2d [1089] at 1091[4] . . . is presumptively prejudicial." 282, 284, 949 P.2d 122, 124 (1997). State v. Chong, 86 Hawai#i This court explicitly stated

that Justice Kidwell's concurrence in State v. Bell, 60 Haw. 241, 589 P.2d 517 (1978), . . . accurately distilled Joao's relative place within "the criteria which should govern" the grant or denial of a motion to dismiss an indictment: ... [A] grand jury proceeding is not adversary in nature. An application of this principle is found in the rule that an indictment may not be attacked on the ground of the incompetency of the evidence considered by the grand jury, where prosecutorial misconduct is not involved. State v. Layton, 53 Haw. 513, 497 P.2d 559 (1972); United States v. Calendar, 414 U.S. 338, 94 S.C. 613, 38 LED.2d 561 (1974). The function of a grand jury to protect against unwarranted prosecution does not entail a duty to weigh the prosecution's case against that of the defense, or even to determine that the prosecution's case is supported by competent evidence.

In State v. Joao, the State introduced a grand jury witness as "the original defendant charged with murder" who "decided to make a clean breast." 53 Haw. at 227, 491 P.2d at 1090. This court held that the prosecutor's conduct was contrary to the fundamental principles of liberty and justice that lie at the base of all our civil and political institutions and affirmed the circuit court's dismissal of the indictment. 53 Haw. at 230, 491 P.2d at 1091-2.

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On the other hand, an indictment that is the result of prosecutorial misconduct or other circumstances which prevent the exercise of fairness and impartiality by the grand jury may be successfully attacked. State v. Joao, 53 Haw. 226, 491 P.2d 1089 (1971); State v. Pacific Concrete and Rock Co., 57 Haw. 574, 560 P.2d 1309 (1977). Bell, 60 Haw. at 256-57, 589 P.2d at 526 (Kidwell, J., concurring) (emphasis added). State v. Chong, 86 Hawai#i 282,288-9, 949 P.2d 122, 128-9(1997)

(footnote omitted). Most of the issues posed by the State concern application of the attorney-client privilege and application of the "crime-fraud" exception that allows otherwise privileged testimony to be presented. The United States Supreme Court has

described the common law attorney-client privilege and the crime fraud exception as follows: We have recognized the attorney-client privilege under federal law, as the oldest of the privileges for confidential communications known to the common law. . . . Although the underlying rationale for the privilege has changed over time, . . .courts long have viewed its central concern as one to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice. . . . That purpose, of course, requires that clients be free to make full disclosure to their attorneys of past wrongdoings, . . . in order that the client may obtain the aid of persons having knowledge of the law and skilled in its practice[.]

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The attorney-client privilege is not without its costs. . . . [S]ince the privilege has the effect of withholding relevant information from the factfinder, it applies only where necessary to achieve its purpose. . . . The attorney-client privilege must necessarily protect the confidences of wrongdoers, but the reason for that protection--the centrality of open client and attorney communication to the proper functioning of our adversary system of justice--ceas[es] to operate at a certain point, namely, where the desired advice refers not to prior wrongdoing, but to future wrongdoing. . . . It is the purpose of the crime-fraud exception to the attorney-client privilege to assure that the seal of secrecy, . . . between lawyer and client does not extend to communications made for the purpose of getting advice for the commission of a fraud or crime. . . . United States v. Zolin, 491 U.S. 554, 562, 109 S.Ct. 2619, 2625-6 (1989) (quotation marks and citations omitted). The United

States Court of Appeals for the Ninth Circuit explained: The attorney-client privilege is essential to preservation of liberty against a powerful government. People need lawyers to guide them through thickets of complex government requirements, and, to get useful advice, they have to be able to talk to their lawyers candidly without fear that what they say to their own lawyers will be transmitted to the government. United States v. Chen, 99 F.3d 1495, 1499 (9th Cir. 1996) (citation omitted). In Hawai#i the common law attorney-client privilege and the exceptions to it are codified as Rule 503 of the Hawai#i

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Rules of Evidence (HRE).
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See HRS

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