March 30, 1993

 

FACTS:

You are counsel for Mr. A, Mr. B, Mr. C and Ms. D, and
requested a formal advisory opinion from the Commission on their
behalf pursuant to G.L. c. 268A, s. 10, and c. 268B, s. 3(g). Mr.
A was the Executive Director of a state agency (Agency One) until
December 31, 1992, when his resignation became effective. Mr. A
has entered into a consultant contract with Agency One, for the
period of January 1, 1993 through March 1, 1993. This contract
allows for private employment during normal business hours, and
specifies that he will perform services on no more than sixty
days during the contract period. His consultation consists of
responding to specific questions posed by his successor. He does
not have the authority to approve any agency matters, and does
not know whether his advice is or will be implemented. Agency One
is a "state agency" [1] within the meaning of the conflict of
interest law, G.L. c. 268A. Mr. A continues to be a "state
employee" by virtue of his regular consultation to Agency One.

Upon Mr. A's departure as Executive Director of Agency One,
he filed the appropriate paperwork creating Mr. A & Company, Inc.
(the Corporation),

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an incorporated company of which he is sole shareholder,
president, treasurer and clerk.

Mr. B, Mr. C and Ms. D are private citizens who are
interested in forming a business organization with Mr. A after he
leaves state service. They want to amend the articles of
incorporation of the Corporation, so that Ms. D will be listed as
Treasurer, Mr. C will be registered as Secretary, and Ms. D, Mr.
B and Mr. C will each have the option to purchase 16 2/3% of the
Corporation, leaving Mr. A with 50% ownership. Ms. D, Mr. B and
Mr. C will pay start-up costs for consideration of the purchase
option.

Ms. D, Mr. B and Mr. C are the principals of a separate
business organization, (Company X). Mr. A does not have any
ownership interest in Company X, although he may enter into a
short-term personal services contract with Company X after he
leaves state service, while this opinion is pending.

Company X has had contact with Agency One on two matters
during Mr. A's tenure at Agency One. In early 1992, Company X
represented a development group that was interested in responding
to a request for proposals (RFP) to build a computer facility in
a city (the City) for a second state agency (Agency Two). Mr. B
and Mr. C, as representatives of Company X, approached Agency One
for information concerning Agency One's interest in providing
financing for the Agency Two project. Mr. A met with Mr. B and
Mr. C in or about January 1992 to discuss these matters. He also
had a telephone conversation with one of Company X's competitors
regarding the Agency Two project. Other employees of Agency One
met with or had telephone conversations regarding the Agency Two
project with another Company X competitor. In August 1992,
another state agency (Agency Three) issued an Addendum to the
original RFP (Amended RFP). Neither Mr. A, nor anyone else at
Agency One (to Mr. A's knowledge) has had any other involvement
in the original or Amended RFP since the various requests for
information in early 1992. The Amended RFP involves a super-
computer facility in the City to be used by Agency Two and other
state agencies. Mr. A does not intend to have any connection to
either the original or amended computer facility projects while
he is in a private capacity.

The second matter involves a proposal to develop and
construct a new construction project (the Project) for a fourth
state agency (Agency Four). Company X represents a potential
bidder on this project. Representatives of Company X met with Mr.
A in early 1992 and the summer of 1992, to solicit information
regarding Agency One's interest in and capacity to provide
financing for the Project. On December 17, 1992, Mr. B and Mr. C
met with staff members and the General Manager of Agency Four
regarding their Project proposal. Agency One personnel were
also present to provide information about Agency One financing. Mr. A
abstained from participation in this December 17, 1992 meeting,
and any further Company X matters, as he had commenced "nascent
discussions" regarding prospective business associations with Mr.
B, Mr. C and Ms. D [2]. At present, Agency Four has not issued an
RFP. If the Project does go forward, Company X would presumably
be compensated for its efforts. The Corporation would receive no
monies from the Project.



QUESTIONS:

1. Are there any restrictions on Mr. A's private activities
after the termination of his appointment as Executive
Director of Agency One on December 31, 1992?

2. Are there any restrictions on the private activities of Mr.


B, Ms. D and Mr. C if they become officers and/or part
owners in the Corporation?

 


ANSWERS:

1. Yes, as set forth below.


2. No, as they are not "partners" under s. 5.

 


DISCUSSION:

Restrictions on Mr. A's Private Activities Under s. 4


As Mr. A will be employed by Agency One as a consultant
immediately upon his resignation as Executive Director of Agency
One, Mr. A will not become a "former state employee" until the
termination of his consultation with Agency One [3]. The
prohibitions of s. 4 will apply to Mr. A as a current special
state employee [4] because of his consultation for Agency One.

Section 4 generally prohibits a state employee from
receiving compensation from, or acting as attorney or agent for,
anyone other than the Commonwealth in connection with a
particular matter in which the Commonwealth is a party or has a
direct and substantial interest. This reflects the basic
principle that a person cannot serve two masters. Whenever an

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employee works for private interests in matters in which the
state also has an interest, there is a potential for divided
loyalties. Commonwealth v. Canon, 373 Mass. 494, 504 (1977); In
re Bagni,
1980 SEC 30, 32. This prohibition applies in a less
restrictive manner to special state employees. Accordingly, as a
special state employee, Mr. A would be prohibited from receiving
compensation from, or acting as an agent or attorney for, anyone
other than the Commonwealth only in relation to a particular
matter in which (a) he had participated in as a state employee,
(b) is or within one year had been a subject of his official
responsibility [5], or (c) is pending within a state agency in
which he is serving. Note that clause (c) is not applicable to a
special state employee who serves (in his special state employee
position) on no more than 60 days during any period of 365 days.

As Executive Director of Agency One, Mr. A had comprehensive
official responsibility for agency matters, whether he
participated in them or not. Thus, while he is consulting for
Agency One, he may not receive compensation from or act as agent
or attorney for anyone other than the state in connection with a
particular matter in which the Commonwealth is a party or has a
direct and substantial interest, if it was within his official
responsibility during the previous year. Thus, he may not receive
compensation or act as agent for a private party in relation to
particular matters in which he had official responsibility, such
as the original Agency Two RFP or the Agency Four project. While
he is consulting for Agency One, if he chooses to enter
simultaneously into a contract with Company X, he may not receive
compensation or act as agent in relation to any matters, for any
private party, which were under his official responsibility at
Agency One for the previous year, or in which he had at any time
participated as a state employee.

In EC-COI-92-25, the Commission held that in general, a
public employee acts as agent for the purpose of G.L. c. 268A
when he speaks or acts on behalf of another in a representational
capacity. See Commonwealth v. Newman, 32 Mass. App. Ct. 14 8, 150
(1992); Commonwealth v. Cola, 18 Mass. App. Ct. 598, 610-11
(1984); In re Reynolds, 1989 SEC 423, 427. See also Commission
Advisory No. 13 (Agency)
. We have repeatedly given as examples of
acting as agent appearing before a government agency on behalf of
another, submitting an application or other document to the
government for another, or serving as another's spokesperson.
See, e.g., EC-COI-92-18. Of course, Mr. A may act as an agent for
Company X or any other private entity if his private activity is
not in relation to a matter in which the state has an interest,
or is otherwise not within the scope of s. 4 as discussed above.
Restrictions on Mr. A's Private Activities Under s. 5(a)

Section 5(a) prohibits a former state employee from acting
as an agent or attorney for or receiving compensation [6]
directly or indirectly from anyone other than the Commonwealth in
connection with any particular matter [7] in which the state or a
state agency is a party or has a direct and substantial interest
and the matter was one in which the employee officially
participated [8]. Therefore, in regard to matters in which Mr. A
officially participated as a Agency One employee, this section
will permanently restrict his ability to act as agent or attorney
for or receive compensation from anyone other than the
Commonwealth, after he terminates state employment. Again, Mr. A
will only become a "former state employee" after termination of
his consultation for Agency One.

We note that participation may be found with regard to
matters which were pending during Mr. A's Agency One employment,
where he did not personally handle the matter, but rather, he
supervised the work of subordinates. See EC-COI-89-7 (a state
employee's participation in discussion or approval of
subordinate's recommendation is more than ministerial in nature);
EC-COI-79-57.

Mr. A participated in both the original Agency Two RFP and
the Agency Four project, as he personally advised Company X about
Agency One's interest in and capacity to finance these projects.
Thus, he is forever precluded from receiving compensation from
anyone other than the Commonwealth or a state agency for any
private activity that is "in connection with" these matters. We
need not discuss whether or not there are limitations on Mr. A's
ability to participate in the Amended Agency Two RFP, as he has
indicated that he does not intend to participate in the Amended
RFP in his private capacity [9]. Additionally, nothing in s. 5
will prohibit Mr. A from participating in either the Agency Three
or Agency Four projects as a consultant to Agency One, as he will
be acting as a state employee.

Finally, Mr. A cannot receive income that is based upon
services provided by the Corporation's employees or officers,
that Mr. A could not provide himself. The Commission has held
that if one is merely an investor, and receives nothing more than
a return on an investment, the return on investment is

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not "compensation," as it is not "in return for services rendered
by another." See G.L. c. 268A, s. 1(a). See also, EC-COI-89-13;
86-03; 85-17
. However, if an individual is active in the
business, he cannot receive a share of profits related to a
particular matter from a prohibited source, even if he did not
work on that particular matter himself, as it is deemed the
receipt of money in return for services rendered by another, and
is therefore "compensation." See EC-COI-85-38; 85-21; 85-20.

In the present case, Mr. A is an active member of the
Corporation, and not merely an investor. While Mr. A may not
receive compensation in connection with particular matters in
which he participated as a state employee, that ban does not
extend to other members of the Corporation. Mr. A may not receive
any income from these prohibited sources. Therefore, the proceeds
from the prohibited sources must be segregated from any pool of
money which is used to pay the individual his salary or to
determine his share of profits. See EC-COI-89-5; 85-38; 85-21;
85-20
. You have indicated that the Corporation (through employees
or officers other than Mr. A) has no intention at this time to
engage in private work in connection with these matters. However,
these principles would apply to any other particular matter that
Mr. A participated in as a state employee. Restrictions on Mr. A's Private Activities Under s. 5(b)

Section 5(b) prohibits a former state employee from
personally appearing [10] before any court or agency of the
Commonwealth within one year after leaving state service in
connection with any particular matter in which the state or a
state agency is a party or has a direct and substantial interest
and if the matter was under the official responsibility of the
employee within the two years prior to the termination of such
state employment.

If, for example, Mr. A had official responsibility for the
work of several employees, and did not personally supervise their
work, he would still be restricted from personally appearing
before any court or state agency for a period of one year in
connection with those matters handled completely by his
subordinates during his final two years at Agency One. Such
matters were under Mr. A's official responsibility,
notwithstanding the fact that he did not participate in them.

Based upon your facts, under s. 5(b), Mr. A may not appear
before a court or agency of the Commonwealth until one year from
the termination of his consultation for Agency One, in connection
with a particular matter which was under his official
responsibility during the two years before the termination of his
consultation. The one year waiting period does not begin on
December 31, 1992 (the day Mr. A's resignation as Executive
Director of Agency One becomes effective) because s. 5 specifies
that the waiting period begins one year after his last employment
has ceased. Mr. A's consultation is with the same state agency,
to take effect upon (or shortly after) his resignation as
Executive Director; therefore, he is continuing his employment
with Agency One (although in a different capacity). Cf. EC-COI-
92-16.
Thus, Mr. A's consulting post with Agency One in effect
tolls the one-year bar of s. 5(b).


Partners of a Former State Employee: Restrictions on the Private Activities of Mr. B, Ms. D and Mr. C Under s. 5(c)


The same restrictions that apply to Mr. A under s. 5(a) will
apply to his partners during the one-year period following Mr.
A's completion of state services. G.L. c. 268A, s. 5(c). Thus,
the issue is whether Mr. B, Ms. D and Mr. C can be considered Mr.
A's "partners" under s. 5.

The term "partner" is not specifically defined in G.L. c.
268A. However, the Commission has construed the term in previous
opinions. See EC-COI-87-34; 87-29; 86-03; 85-62; 84-78. In order
to advance the purposes of the conflict of interest law, which
"was enacted as part of `comprehensive legislation . . . [to]
strike at corruption in public office . . . for private gain,'"
McMann at 427, the term "partner" is not restricted to those who
enter formal partnership agreements. Thus, where business ties
are indeterminate, the Commission has held that a partner is any
person who joins with another, formally or informally, in a
common business venture, and that the substance of the
relationship is what matters, not merely the terms the parties
use to describe the relationship [11]. EC-COI-84-78.

While our broad interpretation of the word "partner" under
G.L. c. 268A has proved helpful in clarifying situations in which
business ties are either unclear or misleading, it is not our
function to revise the terms of statutorily defined business
arrangements. See G.L. c. 108A (partnerships), G.L. c. 156B
(business corporations) [12]. "[A] statute must be interpreted
according to the intent of the Legislature ascertained from all
its words construed by the ordinary and approved usage of the
language,

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considered in connection with the cause of its enactment, the
mischief or imperfection to be remedied and the main object to be
accomplished, to the end that the purpose of its framers may be
effectuated." Commonwealth v. Galvin, 388 Mass. 326, 328 (1983);
McMann v. State Ethics Commission, 32 Mass. App. Ct. 421, 425
(1992) (emphasis added). The language and history of the conflict
of interest law indicates that the drafters discerned a
difference between partnerships and other forms of business
arrangements. While s. 5 of G.L. c. 268A discusses only
"partners" of a state employee, s. 6 addresses both "partners"
and "business organization[s] in which [the state employee] is
serving as officer." See also Report of the Special Commission on
Code of Ethics
, 1962 House Doc. No. 3650, at 13-4; Buss, The
Massachusetts Conflict-of-Interest Statute: An Analysis
, 45
B.U.L. Rev. 299, 350-351 (1965).

In the present case, a corporation is contemplated. While we
reserve the right to review the substance of a corporate entity
according to the principles enunciated in Evan v. Multicon Const.
Corp.,
30 Mass.App.Ct. 728, further appellate review denied, 410
Mass. 1104 (1991) (disregarding a corporate entity), [13] it is
too speculative for us to comment on the substance of an
organization that has not yet been formed. Therefore, we will
presume that the proposed Company will be properly incorporated,
with an eye towards the Evan factors.

All four individuals will thus be officers of a corporation.
Mr. A will be the sole owner while the others will have the
option to purchase a set percentage of ownership interests in the
corporation. Therefore, Ms. D, Mr. B and Mr. C are not "partners"
under s. 5, even in light of the broad purposes of this section
[14]. On the present facts, then, the conflict of interest law
does not prohibit these activities.


-----------------------------------


[1] "State agency," any department of a state government
including the executive, legislative or judicial, and all
councils thereof and thereunder, and any division, board, bureau,
commission, institution, tribunal or other instrumentality within
such department and any independent state authority, district,
commission, instrumentality or agency, but not an agency of a
county, city or town. G.L. c. 268A, s. 1(p).

[2] Mr. A filed a s. 6 disclosure with this Commission with
respect to this matter. This opinion addresses only his future
conduct. See G.L. c. 268B, s. 3(g).

[3] This is true whether or not he is compensated for his
consulting work by Company X. Cf. EC-COI-92-16 (State employee
who resigned from one state agency and a year later, was hired by
a second state agency, was both a former and current state
employee, implicating s. 4 and s. 5 simultaneously).

[4] "Special state employee," a state employee:

(1) who is performing services or holding an office, position,
employment or membership for which no compensation is provided,
or

(2) who is not an elected official and

(a) occupies a position which, by its classification in the
state agency involved or by the terms of the contract or
conditions of employment, permits personal or private
employment during normal working hours, provided that
disclosure of such classification or permission is filed in
writing with the state ethics commission prior to the
commencement of any personal or private employment, or
(b) in fact does not earn compensation as a state employee
for an aggregate of more than eight hundred hours during the
preceding three hundred and sixty-five days. For this
purpose compensation by the day shall be considered as
equivalent to compensation for seven hours per day. A
special state employee shall be in such a status on days for
which he is not compensated as well as on days on which he
earns compensation. G.L. c. 268A, s. 1(o).

[5] "Official responsibility," the direct administrative or
operating authority, whether intermediate or final, and either
exercisable alone or with others, and whether personal or through
subordinates, to approve, disapprove or otherwise direct agency
action. G.L. c. 268A, s. 1(i).

[6] "Compensation," any money, thing of value or economic
benefit conferred on or received by any person in return for
services rendered or to be rendered by himself or another. G.L.
c. 268A, s. 1(a).

[7] "Particular matter," any judicial or other proceeding,
application, submission, request for a ruling or other
determination, contract, claim, controversy, charge, accusation,
arrest, decision, determination, finding, but excluding enactment
of general legislation by the general court and petitions of
cities, towns, counties and districts for special laws related to
their governmental organizations, powers, duties, finances and
property. G.L. c. 268A, s. 1(k).

[8] "Participate," participate in agency action or in a
particular matter personally and substantially as a state, county
or municipal employee, through approval,

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disapproval, decision, recommendation, the rendering of
advice, investigation or otherwise. G.L. c. 268A, s. 1(j).

[9] If Mr. A were interested in private work regarding the
Amended RFP, we would need to determine whether that work was "in
connection with" the particular matter in which he participated
as a state employee. We would make this determination by
analyzing whether the private work is "integrally related" to the
government matter because they involve "the same parties, the
same litigation, the same issues or the same controversy," and
the effect the proposed private work would have on the government
matter. EC-COI-92-17.

[10] The Commission has previously interpreted "personally
appearing" to include, in addition to physically appearing before
a court or agency of the Commonwealth, contacting an agency or
court in person or in writing." See EC-COI-87-27.

[11] This opinion does not overrule precedent which involves
this principle, in cases where a particular business
association's classification is vague or misleading.

[12] In fact, G.L. c. 108A, s. 4, which defines
"partnerships" as an association of two or more persons who carry
on as co-owners of a business for profit, specifically states
that any association formed under any other statute of this state
is not a partnership under this chapter. Thus, a corporation
formed under G.L. c. 156B cannot be a partnership under c. 108A.

[13] The twelve factors which should be considered in
deciding whether to penetrate the corporate form are: (1) common
ownership; (2) pervasive control; (3) confused intermingling of
business activity assets, or management; (4) thin capitalization;
(5) nonobservance of corporate formalities; (6) absence of
corporate records; (7) no payment of dividends; (8) insolvency at
time of litigated transaction; (9) siphoning away of corporate
assets by dominant shareholders; (10) nonfunctioning of officers
and directors; (11) use of corporation for transactions of the
dominant shareholders; (12) use of corporation in promoting
fraud.

[14] Professional corporation and limited partnership issues
are not before the Commission at this time. Thus, this opinion
does not address those matters.


End Of Decision