February 14, 1991

FACTS:


Page 335

You were recently appointed as the Secretary of Transportation
and Construction. You have undertaken to divest yourself of two
business activities which are "doing business with state agencies
coming within the purview" of your new office. You describe the
business relationships as follows:


1. Transit Retail Partnership, Inc. (TRPI)


A. Description of Business Activity

TRPI entered into a Master Lease Agreement with the
Massachusetts Bay Transportation Authority (MBTA) on May 23, 1989.
The Master Lease Agreement is in effect for an initial term of 15
years and 6 months and generally grants to TRPI the right to use
and sublease for retail and commercial purposes space located at
various stations on the MBTA's Orange Line. The Master Lease
Agreement was awarded to TRPI after public notice and a competitive
bidding process long prior to your consideration for, or
appointment to, the position of Secretary of Transportation and
Construction.


B. Description of Ownership Interest


Prior to your appointment to the position of Secretary of
Transportation and Construction, you were President and a member
of the Board of Directors of TRPI. You were also a holder of 40%
of the issued and outstanding capital stock of TRPI and a personal
guarantor (along with the two other stockholders of TRPI) of rent
arrearages due from time to time to the MBTA under the Master Lease
Agreement. Under Section 16(a) of the Master Lease Agreement, TRPI
may not, without the prior written consent of the MBTA, permit a
voluntary transfer of any beneficial interest in TRPI.


C. Proposed Plan of Divestiture


You have proposed to divest this interest in TRPI within 30
days by (i) immediately resigning from the Board of Directors and
the office of President of TRPI, (ii) selling all of your stock in
TRPI to a present stockholder of that company for the current fair
market value of such stock as determined by a mutually-selected,
independent business appraiser and (iii) seeking the consent of the
MBTA to the cancellation and withdrawal of your personal guarantee
under the Master Lease Agreement.

In considering the foregoing plan of divestiture, you inform
us that the proposed transferee is not a member of your immediate
family and that any dealings between you and such transferee have
been (and will be at all times throughout the transaction) at arms'
length. In addition, it is possible that an independent financial
appraisal of TRPI could result in a negative present value for
ascertaining the value of your stock. In such event, the parties
may consider the issuance of a promissory note by you to account
for such determination. If issued, the principal amount of such
promissory note would be set at a sum certain fixed at the time of
your transfer of stock.


D. Removal from MBTA Deliberations Concerning Assignment of
Interest


In order to complete the foregoing plan of divestiture, the
MBTA will be asked to provide its

Page 336

consent to (i) the withdrawal and cancellation of your personal
guarantee under the Master Lease Agreement and (ii) the transfer
of your stock in TRPI. As a related matter, we understand that the
MBTA has asserted that TRPI is in arrears under the Master Lease
Agreement. You and TRPI have disputed such assertion based upon the
advancement of funds by TRPI to improve the premises under the
lease, which, according to TRPI should be offset against payments
due under the Master Lease Agreement. Although there is not an
"arbitration clause" in the Master Lease Agreement contemplating
the resolution of such disputes by a mutually-selected, independent
arbitrator, we understand that the MBTA is considering the proposal
of such a procedure for the resolution of the present problem. This
can be accomplished by the written consent of the MBTA and TRPI.
The length of time possibly needed to arbitrate this matter is not
clear at this time.

You have stated that you will not participate in, or be
permitted to review any correspondence or internal memoranda
concerning, deliberations of the MBTA relating to the grant of a
consent to the transfer of TRPI stock, the resolution of the rent
dispute under the Master Lease Agreement, or the cancellation and
withdrawal of your personal guarantee, pursuant to s.6 of M.G.L.
c. 268A.


2. Alewife Commercial Associates, Inc. (ACAI)


A. Description of Business Activity


ACAI entered into a Lease Agreement with the MBTA on June 3,
1988. The Lease Agreement is in effect for an initial term of 10
years and 6 months and generally grants to ACAI the right to use
and sublease for commercial and retail purposes space located at
the MBTA Alewife Station/Garage Complex in Cambridge,
Massachusetts. The Lease Agreement was awarded to ACAI after public
notice and a competitive bidding process long prior to your
consideration for, or appointment to, the position of Secretary of
Transportation and Construction.


B. Description of Ownership Interest


Prior to your appointment to the position of Secretary of
Transportation and Construction, you were President and a member
of the Board of Directors of ACAI, and a holder of 50% of the
issued and outstanding capital stock of ACAI. Under Section 16(a)
of the Lease Agreement, ACAI may not, without the prior written
consent of the MBTA, permit a voluntary transfer of any beneficial
interest in ACAI.


C. Proposed Plan of Divestiture


You have proposed to divest your interest in ACAI within 30
days by (i) immediately resigning from the Board of Directors and
the office of President of ACAI, (ii) selling all of your stock in
ACAI to a third party for the current fair market value of such
stock as determined by a mutually-selected, independent business
appraiser. There are no personal guarantees outstanding under the
Lease Agreement and, to your knowledge, there are no material
disputes concerning past due rents under the Lease Agreement.

In considering the foregoing plan of divestiture, you inform
us that the proposed transferee of your stock is not a member of
your immediate family and that any dealings between you and such
transferee have been (and will be at all times throughout the
transaction) at arms' length. In addition, it is possible that an
independent financial appraisal of ACAI could result in a negative
present value for ascertaining the value of your stock. In such
event, the parties may consider the issuance of a promissory note
by you to account for such determination. If issued, the principal
amount of such promissory note would be set at a sum certain fixed
at the time of your transfer of stock.


D. Removal from MBTA Deliberations Concerning Assignment of
Interest


In order to complete the foregoing plan of divestiture, the
MBTA will be asked to provide its consent to the transfer of your
stock in ACAI as set forth above. As with any deliberations
concerning TRPI, you have stated that you will not participate in,
or be permitted to review correspondence or internal memoranda
concerning, deliberations of the MBTA relating to your request for
a consent as herein described, pursuant to M.G.L. c. 268A, s.6.

Prior to taking office in January, 1991, you entered into an
agreement with an independent third party to purchase your
interests in TRPI and ACAI. A process was set to determine the
value of those interests at that time.

You have already resigned from the Board of Directors and
Office of President of each of TRPI and ACAI. Consequently, you are
no longer involved in the management of the affairs of these
corporations.[1] It is your current understanding and belief that
the remaining officers and directors of TRPI and ACAI will not
permit you to transfer your shares in these entities to the
independent third party without first offering such shares back to
TRPI and ACAI in accordance with Article V of the respective
Articles of Organization of these two corporations (the "Charter
Restrictions").

By their respective terms, the Charter Restrictions require
at least a 30-day consideration period by each of TRPI and ACAI
before their directors must decide whether to purchase your shares
in accordance with your third party offer, reject the offer
outright, or reject the offer and exercise a right of arbitration
to determine the value to be paid for the shares. In the event
either or both of TRPI and ACAI elect to exercise the right of
arbitration under the Charter Restrictions, you will be unable to
transfer your shares within the 30-day divestment period as set
forth in s.7 of c. 268A.

Page 337

Although the exact time frame for completing the arbitration
process is unknown, it is unlikely to be resolvable within the next
month.
 


QUESTION:


Given the above facts, must the divestment requirements of
G.L. c. 268A, s.7(a) be completed within 30 days?
 


ANSWER:



Based upon the above, including the apparent goodfaith attempt
to divest of the prohibited interest within 30 days pursuant to
s.7(a) and the fact that legal constraints will prevent complete
divestment within that time period, a period longer than 30 days
to complete divestment is warranted, subject to certain conditions.
 


DISCUSSION:


Section 7 of c. 268A prohibits a state employee from having
a direct or indirect financial interest in a contract made by a
state agency in which the Commonwealth or a state agency is an
interested party. The restrictions of s.7 will not apply, however,
to a state employee who, in good faith and within thirty days after
he learns of an actual or prospective violation of the section,
makes a full disclosure of his financial interests to the
contracting agency and terminates or disposes of the interest. G.L.
c. 268A, s.7(a).

The theory on which a violation of s.7 is premised is clear:

Section 7 announces a rule the basis of which is that,
if no exemption is applicable, any state employee is in a
position to influence the awarding of contracts by any state
agency in a way which may be financially beneficial to
himself. In a sense, the rule is a prophylactic one. Because
it is impossible to articulate a standard by which one can
distinguish between employees in a position to influence
and those who are not, all will be treated as if they have
influence ... But it may be possible, in at least some
instances, to implement such a theory of the section with
selective rapier thrusts where needed, rather than
indiscriminate sledgehammer blows on any employee who is
caught in the area.

Buss, The Massachusetts Conflict of Interest Statute: An Analysis,
45 B.U. L. Rev. 299, 374 (1965); see also, EC-COI-84-105.

This Commission has always proceeded on the theory that the
conflict of interest statute must be given a workable and flexible
meaning. See, Graham v. McGrail, 370 Mass. 133, 140 (1976)
(flexibility on certain of the restrictions of s.19 was warranted);
EC-COI-87-19 (s.14 - the county counterpart to s.7 - must be given
a workable and common sense meaning); 87-29 (permitting the receipt
of deferred income which would otherwise be a violation of s.7).
The Commission has also determined on several separate occasions
that even the broad preventative purposes of s.7 are flexible
enough to permit some time period of divestment which is greater
than the 30-day period set out in s.7(a) when circumstances have
warranted. See, EC-COI-84-109; 84-105; 82-12; 81-189. However, each
of these prior opinions involved housing and rental subsidies paid
to the state employee. In each case, the Commission held that, in
an effort to avoid undue hardship to innocent third parties, the
restrictions of s.7 could be delayed until such time as the
contractual or other legal arrangements fully ran their course,
notwithstanding the fact that the state employee continued to
benefit from a prohibited s.7 interest.

In the present case, you have informed us that you have
undertaken a number of steps to divest of the interests since
taking office. For example, you have resigned all of your positions
in the private entities in question and have complied with the s.6
disclosure/abstention requirements. In addition, by entering into
an agreement to sell your interests in TRPI and ACAI, you have
attempted to start the divestment process as soon as possible.

That the respective boards of TRPI and ACAI may now invoke the
time-consuming Charter Restriction process, to which they are
legally entitled, should not hinder your good faith efforts to
comply with s.7.

Accordingly, given (i) your apparent good faith efforts,
before and after taking office, to fully understand and comply with
the requirements of s.7; (ii) the necessity of complying with the
Charter Restrictions (a legal process outside of your control) in
order to complete the divestment process;[2] and (iii) that these
interests arose prior to your taking office, the Commission finds
that additional time is warranted in this case to avoid undue
hardship, even though no innocent third parties are involved.

Although you may have such additional time as is necessary for
the Charter Restriction process to run its course,[3] s.7 will not
permit you to benefit financially from having held an interest in
prohibited s.7 contracts. In other words, the value you ultimately
receive for your shares in TRPI and ACAI, respectively, cannot be
greater than (i) the value derived from the third party agreement
entered into before you took office, but set as of a date not later
than January 3, 1991,[4] or (ii) in the actual event the
arbitration process is triggered, the value of such shares as
determined as of January 3, 1991 through the arbitration
process.[5] By capping the value of the shares, in advance and at
these pre-determinable amounts, you would not be receiving any
financial gain as a result of the prohibited s.7 interests. This
is consistent with prior Commission precedent. For example, this
Commission has permitted a state employee to continue to be
affiliated with a private entity which was a party to state
contracts,

Page 338

provided that the state employee received no financial interest
from those contracts. EC-COI-89-5 (any income derived from the
prohibited contracts must be "segregated" so that the state
employee would receive no financial benefit from them). In
addition, EC-COI-87-29 held that the deferred receipt of otherwise
prohibited s.7 income, earned and "capped" prior to taking office,
even if paid after the employee begins his state job, is
permissible. This result was based upon the theory that newly
appointed state employees may not practically be able to receive
the complete payment of fees owed as of their final date of work.
It would be unreasonable to place such newly appointed state
employees in immediate violation of s.s.4 or 7 merely because of
a compensation timing which they do not control. Id.

In effect, the "cap" mechanism set out above is similar to the
"segregation" mechanism of EC-COI-89-5 and the deferred income
mechanism of 87-29 because your interests would not benefit as a
result of any state contract during the time you have been in
office. So long as the divestment process continues in good faith,
the mere holding of the interests in question will not violate s.7
if the value of those interests will not increase beyond the
"capped" rate if determined as of an earlier date.[6] See also,
EC-COI-89-14 (the liquidation of a prohibited interest must be
based upon a currently appraised value, not on a post-transfer
valuation - in effect, setting a "cap" on the value).

You have already informed us that you agree to the imposition
of the cap and that you will move as quickly as possible to
complete the divestment process in accordance with the requirements
of s.7 and this formal opinion. In addition to the above, you must
keep this Commission informed on a monthly basis as to the status
of the divestment process until such time as the divestment has
been completed. This status report will enable the Commission to
monitor whether the process is proceeding in accordance with the
requirements of s.7 and this formal opinion.

We also advise you that an additional disclosure pursuant to
s.23(b)(3) of c. 268A to Governor Weld, as your appointing
authority, is appropriate in order to keep the Governor fully
apprised of the potential rent dispute between the MBTA and TRPI,
and of the continuing personal guarantees. Section 23(b)(3)
prohibits a state employee from acting

in a manner which would cause a reasonable person, having
knowledge of the relevant circumstances, to conclude that any
person can improperly influence or unduly enjoy his favor in
the performance of his official duties, or that he is likely
to act or fail to act as a result of kinship, rank, position
or undue influence of any party or person.

Section 23(b)(3) provides, however, that a full written
disclosure of all of the relevant facts to the employee's
appointing authority will dispel the "appearance" of any conflict
of interest. See, e.g., In the Matter of George Keverian, 1990 SEC
460.

This disclosure is necessary in your case because you would
normally continue to have official dealings with the MBTA, its
directors, and staff, while the dispute and the personal guarantees
are on-going. This disclosure will provide Governor Weld with the
opportunity to decide whether additional safeguards are warranted.
For example, the Governor might want to consider whether your
official duties under M.G.L. c. 161A, s.6 as Chairman of the Board
of the MBTA, should or could be delegated to others while the
potential dispute and/or the personal guarantees remain in effect.

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

[*] Pursuant to G.L. c. 268B, s.3(g), the requesting person
has consented to the publication of this opinion with identifying
information.

[1] In addition, on February 4, 1991, you filed appropriate
s.6 disclosure forms with the Commission and the Governor's Office
concerning these matters.

[2] We note, for example, that Article V of the respective
Charter Restrictions state that "No shares of stock shall be
assigned, encumbered or transferred ... until these provisions have
been complied with; and any purported ... transfer without such
compliance shall be void." Accordingly, if you do not comply with
Article V's right of first refusal, you cannot complete the
divestment process because the divestment would, in effect, become
void anyway.

[3] We would anticipate, absent extraordinary circumstances,
that the Charter Restriction process and complete divestment of
your interests (including the personal guarantees) could be
completed before the beginning of FY92 (that is, prior to July 1,
1991).

[4] The date on which you took office.

[5] In either event, the value related to your share of
the potential rent dispute between TRPI and the MBTA must also be taken
into account as of January 3, 1991 and must also be included in the
final sales price for the TRPI shares.

[6] Of course, in addition to the "cap," you may not receive
any other benefits from holding the interests which have accrued
after January 3, 1991, including, but not limited to, income,
distributions, and dividends.

 

End Of Decision