Honolulu’s former police chief and his city deputy prosecutor wife were arrested Friday in the most significant case of alleged public abuse of power in state history, and prosecutors said the investigation could lead to even further charges.

“This is just the beginning,” Alana Robinson, acting U.S. attorney for California’s Southern District, said after retired Honolulu police Chief Louis Kealoha and Katherine Kealoha made their initial appearance in District Court.

The Kealohas, who were arrested at their home early Friday morning, appeared in federal court to face charges of conspiracy, obstruction of justice, making false statements and bank fraud. Katherine Kealoha was further charged with aggravated identity theft. They pleaded not guilty.

Federal prosecutors involved in the unprecedented investigation said the Kealohas used their power and influence as government officials to commit fraud and then led a conspiracy to hide their actions from federal investigators, prosecutors and a grand jury that has been meeting the past two years.

The case has also resulted in the arrests this week of four other current or former police officers, named in Friday’s indictment as co-conspirators tied to the cover-up. A fifth former HPD officer pleaded guilty in December to conspiracy.

The lengthy investigation and the subsequent retirement of Louis Kealoha cast a significant cloud over both the Honolulu Police Department and the office of city Prosecutor Keith Kaneshiro.

“The FBI investigation has reached the highest levels in the Honolulu Police Department and Prosecutor’s Office, and this shows no one is above the law,” Mayor Kirk Caldwell said in a statement Friday.

Triggering the federal investigation was the allegation that the Kealohas and other Honolulu police officers, specifically in the Criminal Intelligence Unit, framed Gerard Puana, Katherine Kealoha’s uncle, for the alleged theft of the mailbox in front of the Kealohas’ Kahala home in June 2013, and that they conspired to cover it up when the matter was investigated by federal agencies.

But an extraordinary 42-page indictment filed Thursday by U.S. attorneys focuses not just on the mailbox theft investigation, but a series of other alleged offenses on the part of the Kealohas, including the alleged theft of nearly $150,000 in trust funds set aside for two minors for whom Katherine Kealoha was appointed guardian. She was in private practice at the time.

Robinson, during her press conference, was flanked by a team of deputy U.S. attorneys, Hawaii FBI Special Agent in Charge Paul Delacourt and HPD acting Chief Cary Okimoto.

“The 20-count indictment describes a complex web of fraud, deception and obstruction by a husband-and-wife team so desperate to fund their lifestyle and maintain their self-professed status as Honolulu’s power couple that they swindled hundreds of thousands of dollars from banks, credit unions and some of the most vulnerable members of the community,” Robinson said.

“But the most troubling aspect of this case is the way these powerful defendants allegedly manipulated the justice system for their own purposes,” Robinson said. “The Kealohas used their considerable power and influence as public officials to launch a secret campaign to cover up their financial crimes and to discredit their victims with the help of a few friends from (HPD’s) elite Criminal Intelligence Unit.”

Delacourt said, “What (the indictment) makes clear is this is far more than a case about a stolen mailbox.” After federal authorities began looking into the alleged mailbox theft, “the investigation thereafter uncovered much more,” he said.

COURT APPEARANCE

The Kealohas appeared before U.S. Magistrate Judge Richard Puglisi in street clothes — he sporting a ponytail, a long-sleeved aloha shirt and jeans; she in a blue pantsuit.

When Deputy U.S. Attorney Eric Beste attempted to convince Puglisi to hold Katherine Kealoha without bail, she shook her head. At various times, Louis Kealoha also shook his head and at one point chuckled audibly.

Beste argued that Katherine Kealoha shouldn’t be released because she has “a proven record” of obstructing evidence and testimony, as well as intimidating witnesses.

Myles Breiner, the Kealohas’ attorney, said federal attorneys did not provide evidence why she should be held.

Puglisi agreed with a presentencing recommendation that allowed Katherine Kealoha to be released on a $100,000 signature bond. Louis Kealoha was also released on a $100,000 signature bond.

Draped with flower lei, the Kealohas walked out of the main courthouse exit hand-in-hand just as acting Chief Okimoto was taking reporters’ questions on the courthouse steps nearby.

“Basically, we appreciate the community support, and we look forward to our day in court,” Louis Kealoha said as he continued walking down the steps, ignoring the crowd of cameras aimed at the prosecutors’ news conference several feet away.

The indictment says Katherine Kealoha even created a fictitious assistant, “Alison Lee Wong,” to make it appear Katherine Kealoha was working to help resolve the trust fund issue. Among the charges against Katherine Kealoha was aggravated identify theft for using another person’s name in 2013, 2014 and 2016 as part of a federal bank fraud violation.

The stolen money, Robinson said, was used to pay for various personal expenses including mortgages, car payments for a Maserati and a Mercedes-Benz, Elton John concert tickets, travel expenses and even a $26,394 brunch tab at the Sheraton Waikiki when Louis Kealoha became chief in 2009.

OFFICER INDICTED

Appearing with the Kealohas in court Friday was HPD Sgt. Daniel Sellers, among the Criminal Intelligence Unit officers at the time of the alleged mailbox theft investigation.

Sellers, who also was arrested Friday, pleaded not guilty to charges that he lied to a grand jury about taking part in searches of Puana’s home and also lied to the FBI when asked about the video from the Kealohas’ house. He was released on a $50,000 unsecured bond.

Three other current and retired Honolulu police officers, all of whom were at the time of the incident members of the Criminal Intelligence Unit, were arrested earlier this week either for conspiracy to commit the frame-up or obstruction.

Federal investigators became interested in the alleged mailbox theft case when the case against Puana concluded with a mistrial. Hawaii First Assistant Federal Public Defender Alexander Silvert, who represented Puana in the criminal case, gave federal authorities what he said was evidence of HPD misconduct.

The indictment states that the Kealohas, with the help of the CIU officers at various points, orchestrated the theft, destroyed and manipulated evidence and then lied about the investigation to federal authorities and the grand jury.

Among the allegations is that the mailbox itself was switched out to make it easier to steal, that a hard drive retrieved was held from evidence with only an edited surveillance video submitted and that the video on the hard drive “was permanently altered by attaching a camera to the hard drive and filming an image of CIU’s office ceiling for almost one week.”

Kealoha attorney Breiner this week noted to reporters that much of the information U.S. attorneys cited about the mailbox investigation came from Niall Silva, another CIU officer at the time who pleaded guilty last year to contributing to the conspiracy in a deal with federal prosecutors in exchange for his cooperation.

Silva said under oath that he and others participated in the conspiracy in an effort to discredit Puana.

Breiner said it was Silva’s credibility that should be questioned because court documents showed he lied to investigators and to the grand jury before pleading guilty.

Both Silvert and Eric Seitz, who is representing Puana in a civil suit against the city, the Kealohas and several other officers, said in separate news conferences that the evidence shows the continued existence of CIU, which is handpicked by the chief, is concerning. Seitz said an inquiry needs to be made of CIU, “where they do intelligence work and … conduct activity that are marginally constitutional, if not unconstitutional.”

“I think it should be disbanded or suspended pending review,” Silvert said. “This is a very secretive unit. They’re responsible to no one, except apparently the chief of police.”

Without naming them, Seitz also criticized Caldwell, Kaneshiro and the City Council. “Why weren’t they conducting some supervision, and why didn’t they do something when all of these allegations first came out? They’ve been sitting on their hands.”

Seitz said Puana will continue to cooperate with federal authorities. “He feels some degree of vindication, that people now believe him when he said he was framed,” Seitz said. “He was harmed by what took place.”

He said the civil case will proceed when the criminal case is concluded.

EARLY RETIREMENT

Louis Kealoha retired at the end of February amid the controversy after placing himself on paid leave in mid-December when federal authorities issued him a letter informing him that he is the target of a criminal investigation. The Honolulu Police Commission gave him a $250,000 settlement with the stipulation that he return the money if he is convicted of a felony within six years.

He was a captain when he was selected chief from among six finalists in 2009.

A spokesman for the city Department of the Prosecuting Attorney said Katherine Kealoha was placed on leave without pay Friday pending the outcome of the federal case.

She began her third and latest stint with the prosecutor’s office in 2010, ultimately becoming supervisor of the career criminal unit, according to the indictment. In 2008 she was appointed by then-Gov. Linda Lingle as director of the state Office of Environmental and Quality Control.

Louis and Katherine Kealoha Indictment by Honolulu Star-Advertiser on Scribd

Star-Advertiser reporters Rosemarie Bernardo, Nelson Daranciang, Marcel Honoré and Rob Perez contributed to this report.