When Katherine Kealoha was appointed as trustee and guardian of Ransen and Ariana Taito in 2004, it might have seemed like a routine matter.

Ransen, who was 12 at the time, and Ariana, who was 10, had come into more than $167,000 from the settlement of a medical malpractice case brought by their father, Pakini Taito, against Kaiser Foundation Hospitals.

Kealoha was appointed to oversee trust accounts set up at American Savings Bank for the kids’ benefit.

Appointing a guardian to oversee the funds was a standard probate court requirement, said Scott Saiki, an attorney and now the Hawaii State House speaker, who represented Kealoha in the guardianship appointment. In fact, the matter was so routine that Saiki, at the time an associate with the firm then called Bickerton Saunders & Dang said Monday he did not remember much about it.

But more than a decade later, the seemingly innocuous matter is at the center of a federal indictment against Kealoha and her husband, former Honolulu Police Chief Louis Kealoha.

Instead of overseeing the kids’ trust accounts, the indictment alleges, the Kealohas for years used the funds as their own: pledging the money as collateral for bank loans and stealing money from the trust accounts to fund a lavish lifestyle that included a Maserati, a Mercedes and a house in Kahala.

According to the indictment, Ariana’s account, which had once contained some $83,884, was wiped out by the time Katherine Kealoha finished serving as Ariana’s guardian.

Ransen and Ariana, who are now adults, could not be reached for comment. But their maternal grandmother, Marlene Drew, said Kealoha had always seemed kind to the kids, even as she appears to have stolen their money.

“People can look you straight in the face and seem nice but be the devil in disguise,” Drew said.

Although the kids lived with Drew, she said she was not involved in their finances. Drew recalled Kealoha giving the children money periodically, but she said she did not think the children received the full amount they had been awarded.

“What was owed to them should be given to them,” Drew said. “They went without for so long.”

The allegation concerning the purported misappropriation of funds raises questions not simply about Kealoha’s honesty, but also about the system for policing lawyers.

Ken Lawson, who teaches legal ethics at the University of Hawaii’s William S. Richardson School of Law, said the rules of professional conduct for lawyers are specifically designed to prevent such breaches of trust, whether it deals with client confidentiality or money.

“When you’re in this position of public trust, there’s more expected of you,” Lawson said.

Device Left In Body Sparked Suit

The matter of the Taitos’ trust accounts began with a medical malpractice claim.

According to Drew, the Taitos’ grandmother, the children’s father, Pakini, brought a claim Kaiser after surgeons left a medical device inside of him after an operation.

A Kaiser spokeswoman declined to comment.

The malpractice claim, court records show, ultimately led to a settlement before the Medical Claims Conciliation Panel, a state entity set up to resolve malpractice claims. A portion of the settlement money went to the kids.

At the time, Drew said, Pakini was sick with cancer and estranged from the kids’ mother, Lauren Taito. Pakini did not want the kids’ mother or maternal grandmother involved with the money, Drew said.

So he moved to put Katherine Kealoha in charge of the money.

“He dropped it in her lap, and then he died,” Drew said.

According to the court order establishing Kealoha as guardian, there were safeguards designed to prevent theft of the kids’ money. For example, the money was supposed to be deposited into separate accounts at a federally insured bank. In addition, the court ordered that the accounts require signatures from two lawyers for money to be taken out — Kealoha, and an attorney from the Bickerton firm, who the indictment refers to as “Attorney 1.”

Saiki and Jim Bickerton were the only attorneys named in the guardianship case, and Saiki said he did not think he was Attorney 1, as he was only a young associate at the time.

“It must have been Bickerton,” he said.

Asked to confirm whether he was Attorney 1, Bickerton said, “I’m not commenting on that.”

In any case, according to the indictment, Kealoha cut the Bickerton firm out of the loop, setting up two trust accounts, each containing $83,884, with only herself as the signatory of the trust accounts.

Then, the indictment alleges that between May 2004 and February 2012, without notice or approvel from Ransen, Ariana or Attorney 1, Kealoha used almost all of the funds in the accounts to pay her and Louis Kealoha’s personal expenses, including a $6,247 mortgage payment and private school tuition for their child.

Around 2011 and 2012, Attorney 1 was questioning Kealoha about the status and disposition of the trust accounts, the indictment says.

But Kealoha was taking pains to hide her activities, according to the indictment. She even created a fictional assistant, who she called Alison Lee Wong, who would then send emails to Attorney 1 that Kealoha would forward to Attorney 1 to make it look like she was working toward closing out Ransen and Ariana’s guardianships.

“People can look you straight in the face and seem nice but be the devil in disguise.” Marlene Drew, grandmother of the Taito kids

A final accounting submitted by Kealoha in 2010 when Ransen turned 18 says the account was transferred to him, and Ransen signed a statement saying he had received the account. Court documents show that Ransen added Drew, whom he lived with in Kaneohe at the time, as a beneficiary of the account.

Drew says she doesn’t know how much money the kids ended up with but that she does not think it was the $167,000 originally desposited into the accounts.

Although simple theft would not necessarily be a federal crime, the indictment alleges that Kealoha’s misappropriation of trust money – using it as loan collateral, for instance, and claiming loan proceeds were going to support the Taito children – amount to bank fraud.

The broader question of how an attorney could pull off such a scheme with another attorney helping oversee the trust accounts remains unclear.

Rules of professional conduct require lawyers to report to the state’s Office of Disciplinary Counsel if they know another lawyer has committed a violation of the ethics rules “that raises a substantial question as to that lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects.”

According to the indictment, Attorney 1 was questioning Kealoha about the trust accounts.

But it’s not clear whether a report was made to the lawyers’ disciplinary office or what the office did with any information it received.

Bruce Kim, chief disciplinary counsel for the office, declined to say whether anyone brought Kealoha’s activities to the office’s attention.

“We can’t comment on that,” he said. “We can’t even comment on whether we have an investigation.”