Prison isn’t the only thing Hawaii defense contractor Martin Kao needs to worry about as he faces a series of federal charges for defrauding the federal government out of millions of dollars in Covid-19 relief aid and creating a shell company to funnel illegal campaign donations to a super PAC backing U.S. Sen. Susan Collins.

He and his alleged co-conspirators have also been named as defendants in a series of lawsuits meant to save his former company, Martin Defense Group, from financial ruin.

Already an arbitrator has issued a decision in one of the cases that effectively stripped Kao of his ownership interest in Martin Defense Group and ruled that he must pay more than $6 million in damages to the company.

The driving force behind the litigation is Steven Loui, president and CEO of Pacific Supply & Marine Co., which is the parent company of Martin Defense Group.

Loui founded Martin Defense Group in 1979 when it operated under the name Navatek.

He sold the company to Kao in 2019, but according to court records maintained a 1% stake in the business even after Kao renamed it after himself in 2020. Loui has since retaken control of the company.

Martin Kao is a prominent Honolulu businessman who is now in trouble with the feds over his use of federal CARES Act money. Courtesy: Hawaii News Now

Over the years, Pacific Marine and Martin Defense Group have received tens of millions of dollars in lucrative government contracts while at the same time pumping tens of thousands of dollars into the campaign coffers of federal politicians.

Martin Defense Group in particular conducts research for the U.S. Navy on state of the art hull designs and prototype vessels, such as underwater drones and unmanned amphibious vehicles that can deliver fuel to soldiers while fighting on beaches.

The company is based in Honolulu, but has several offices located across the country, including in Michigan, Maine and South Carolina. It has nearly 140 employees.

Loui’s lawsuits aim to salvage the business he once owned while at the same time punish Kao and his cohorts for tarnishing its reputation.

Loui was unavailable for an interview. In a written statement to Civil Beat, he said he would “take all necessary legal actions against ousted former CEO Martin Kao and all co-conspirators to hold them accountable for their multiple fraudulent, intentional, malicious, and illegal violations of federal and state laws.”

Loui added that Kao and his co-defendants, “including those who aided and abetted, must also be held accountable for their repeated harm to the company and theft of company assets.”

“Our reputation was built on charging through storm force winds and rough seas with our industry leading technologies,” Loui said. “MDG will have an exciting and successful future if it remains true to the enterprise traditions of bold innovation, dedicated mentoring/team building, diligence/perseverance and having the courage to always do the right thing.”

Now that Pacific Marine again has control of the company, he said, he plans to rename it to further distance the company from scandal.

Loui filed his first lawsuit against Kao in November 2020, just two months after Kao was arrested and charged by the U.S. Justice Department for allegedly bilking the Paycheck Protection Program out of more than $12 million in forgivable loans meant to help small businesses struggling to stay afloat during the height of the pandemic.

According to the Loui lawsuit, Kao had a fiduciary duty to act within the best interests of his company, which Loui still had a financial stake in at the time.

Instead, the lawsuit contends, Kao used Martin Defense Group as “his personal vehicle to commit federal bank fraud and money laundering” and that he was using “ill-gotten loan proceeds from the PPP Program for his personal use.”

Steven Loui, of Pacific Marine & Supply, has retaken control of Martin Defense Group after a series of scandals involving his former business partner Martin Kao. Courtesy: Hawaii News Now

The case went to binding arbitration, where Loui and his lawyers accused Kao of using $2 million in PPP money to help purchase a $4.5 million house in Kahala.

They also presented evidence that Kao used Martin Defense Group funds to pay for his civil and criminal defense lawyers and to make more than $190,000 in campaign donations to Collins and a super PAC supporting her 2020 bid for re-election — contributions that would later result in criminal charges for Kao and two of his top executives, Clifford Chen and Lawrence “Kahele” Lum Kee.

Many of those donations were made after Collins boasted of securing an $8 million federal contract for Martin Defense Group to do work in her home state of Maine.

Court records show that Loui spent more than $1 million in legal fees to make his case, including hiring former Hawaii attorney general David Louie.

The gamble appears to have paid off.

In a 100-page decision, arbitrator Jerry Hiatt excoriated Kao for his “truly shocking misuse of this country’s tax dollars” and his “history of pervasive fraud,” which included attempts to conceal his wrongdoing by fabricating documents and “threatening bankers with pressure from highly placed politicians.”

“The overall pattern of Mr. Kao’s conduct here was clearly egregious, intentional, and motivated by greed, as well as a misplaced and unearned sense of entitlement — all of which were harnessed to a selfish, corrupt and ego-driven personality,” Hiatt wrote.

“In a very short time after Mr. Kao obtained his 99% interest in the future profits of the Company, this toxic mixture of his qualities enveloped and virtually destroyed a productive local company, one which previously had a good reputation, one which had been carefully built by many years of hard and productive work.

“Mr. Kao’s misconduct thus deserves a suitable response, both to punish him and as an example to others who may consider engaging in similar misconduct.”

Navatek tested this experimental vessel several years ago near Honolulu. Courtesy: Hawaii News Now

Hiatt ordered Kao to pay more than $6.1 million in damages to Martin Defense Group, noting that Kao had filed official statements with the court saying he was worth more than $77 million. A spokesperson for the company said Kao has yet to pay for any of the damages.

Hiatt’s decision was approved by Hawaii Circuit Court Judge Gary Chang in April.

Loui has since filed more lawsuits — both in state and federal court — to further go after Kao and others in his orbit who were described in at least one filing as a “gang of conspirators” who were trying to “loot the resources of a venerable engineering firm.”

Among those named as defendants are Kao, his wife, Tiffany Lam, and a handful of former Martin Defense Group executives, including Chen and Lum Kee.

Loui has also targeted the Honolulu law firm Goodsill, Anderson, Quinn & Stifel and one of its partners, Michael O’Malley, who at one time worked closely with Kao.

Civil Beat reached out to Kao through his Hawaii criminal defense lawyer, Victor Bakke, and civil attorney, Keith Kiuchi. Both said Kao would not be made available for an interview.

Kiuchi said he plans to appeal the arbitrator’s decision that forced Kao to pay millions of dollars in damages.

“It’s worth appealing because I think the arbitrator made several errors and we’ll lay that all out in our opening brief,” he said.

One of the challenges during the arbitration proceedings, Kiuchi said, was that Kao couldn’t defend himself because he needed to preserve his Fifth Amendment right against self incrimination.

“We were handicapped because we needed to plead the Fifth,” Kiuchi said. “That’s the same reason he can’t talk to you.”

Kiuchi noted that the appeal could take several years to resolve.

Kao meanwhile is scheduled for trial in his criminal cases in early 2023. While he is represented by private attorneys in the PPP fraud case, he has been appointed a federal public defender in the illegal campaign contribution case, which is being prosecuted out of Washington, D.C.

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