Public Enforcement Letter 97-3

In the Matter of Edward M. Murphy

Date: June 19, 1997

Edward M. Murphy
c/o Thomas R. Kiley, Esquire
Cosgrove, Eisenberg & Kiley, P.C.
One International Place, Suite 1820
Boston, MA 02110

June 19, 1997

Dear Mr. Murphy:

As you know, the State Ethics Commission has conducted a
preliminary inquiry into allegations that as executive director of
the Massachusetts Health and Education Facilities Authority
("HEFA"), you violated G.L. c. 268A by accepting items of
substantial value from Goldman, Sachs & Co. ("Goldman Sachs").
Based on the staff's investigation (discussed below), the
Commission voted on January 15, 1997, to find that there is
reasonable cause to believe that you violated G.L. c. 268A,
s.s.3(b) and 23(b)(3). In view of certain mitigating circumstances
(also discussed below), the Commission, however, has determined
that further proceedings are not warranted. Rather, the Commission
has concluded that the public interest would be better served by
disclosing the facts revealed during our inquiry and explaining applicable
provisions of the law, with the expectation that this will insure both
your and other state employees' future understanding of and compliance
with the conflict law. By agreeing to this public letter as a final
resolution of this matter, you do not admit to the facts and law
discussed below. The Commission and you have agreed that there will
be no formal action against you, and that you have chosen not to
exercise your right to a hearing before the Commission.


A. Facts


1. HEFA, an independent state authority, was created by
special legislation in 1968. St. 1968, c. 614. HEFA provides an
alternative market mechanism through which hospitals, schools, and
other institutions serving the public's health, educational and
cultural needs can borrow money. Thus, HEFA provides capital
financing to public and non-profit institutions for higher
education, non-profit hospitals, nursing homes and their

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affiliates, non-profit research and cultural institutions, and
schools for the handicapped. This financing is accomplished
primarily through HEFA issuing tax exempt bonds. The monies raised
are used for project acquisitions, construction, renovation,
refinancing and equipment financing.

HEFA is not state funded. Instead, HEFA derives its operating
funds from fees generated from the financial services it provides
to participating institutions. In this regard, it competes in the
marketplace with other tax exempt bond-issuing sources such as the
Massachusetts Industrial Finance Authority ("MIFA") and local
industrial finance authorities; with federal agencies, most notably
the Federal Housing Administration of the United States Department
of Housing and Urban Development;[1] with non-exempt sources and
other traditional means of financing for clients. HEFA is different
from bonding issuers like the Massachusetts Treasurer in that it is
a "conduit" issuer; the revenues behind its bonds are the revenues
of the borrowing institution, not HEFA's or the Commonwealth's
revenues.[2]

2. From May 1989 to June 1995, you were HEFA's executive
director. As executive director, you had official responsibility
for all of HEFA's actions. For example, you assigned the HEFA staff
who would work with a borrowing institution in developing a bond
proposal. Once the proposal was developed, it was presented to the
HEFA board of directors for approval. You assigned HEFA staff to
make the bond presentation to the HEFA board of directors. You also
approved all agenda items for board meetings. After the HEFA board
acted, you typically participated in pricing the bond.[3]

3. Goldman Sachs, a New York limited partnership, is an
investment banking and securities firm with headquarters in New
York City. At the end of 1995, Goldman Sachs' assets totaled
slightly over $1 billion.

4. For a number of years, including the years in which you
served as HEFA's executive director, Goldman Sachs has been a
leading underwriter of bonds for non-profit institutions in
Massachusetts. As an underwriter, Goldman Sachs tests the market
for a bond, establishes a price for the bond, and then agrees to
sell all or part of the bond issue at that price.

5. During your tenure at HEFA, Benjamin Wolfe ("Wolfe") was a
Goldman Sachs vice-president within the firm's Municipal Bond
Department and was one of Goldman Sachs' senior investment bankers
for nonprofit institutions in Massachusetts. [4]

6. Between 1989 and 1995, HEFA issued approximately $6.4
billion in tax-exempt bonds. Some bonds are issued for new
construction, in which case HEFA would receive the proceeds of the
sale of the bonds, provide for the payment of the costs of the
issue, such as attorneys' fees pursuant to a pre-approved schedule,
and remit funds to the institution upon the receipt of a
requisition and pursuant to a pre-approved project description. On
refinancing issuances, HEFA might receive funds constructively,
through a bank trustee, for instance, which would hold funds in
escrow, and make the payment contemplated by the preapproved
schedule.

7. Goldman Sachs was the lead underwriter for approximately 25
percent of the $6.4 billion in bonds issued by HEFA between 1989
and 1995. Goldman Sachs earned commissions of several million
dollars on these bonds.

8. HEFA reserves the right not to enter into a bond
transaction with a particular underwriter if it does not wish to do
so. This power was not exercised during your tenure, however.

9. In addition to tax-exempt bond financing, HEFA also agrees
to support "pools," transactions where one or more borrowers
finance two or more projects or needs through a single umbrella
bond issue. In 1991, HEFA entered into a pool with a Massachusetts
hospital which was a Goldman Sachs client. Goldman Sachs was chosen
to manage the pool, a bonding of approximately $30 million.

10. In 1991 or 1992, HEFA issued a Request For Proposals
("RFP") for a short-term investment manager for its bond proceeds.
Goldman Sachs submitted a bid, but was not chosen. In 1994, HEFA
was choosing a remarketing agent to replace a pool for a firm that
was no longer involved in that type of business. HEFA issued an RFP
for a manager for the pool. Goldman Sachs submitted a bid, but
again was not selected.

11. As HEFA executive director, you participated in each of
the foregoing decisions regarding which firm would be selected as
HEFA's short-term investment and pool managers.

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12. On the following three occasions Wolfe provided you with
entertainment where your pro rata share cost $50 or more:

(a) a July 19, 1990 dinner at Cafe Budapest in Boston,
attended by you, Mrs. Murphy, Wolfe and Mrs. Wolfe. The total
cost for the dinner was $284.30; your pro rata share for you
and your wife was $142.15;

(b) a November 20, 1992 dinner at Le Bernadin Restaurant in
New York City, NY, and theater tickets to "Phantom of the
Opera," for you, Mrs. Murphy, Wolfe and Mrs. Wolfe. The total
cost was $735; your pro rata share for you and your wife was
$367.50; and

(c) an October 23, 1993 dinner at Christopher's Restaurant in
Phoenix, AZ, attended by you, Mrs. Murphy, Wolfe and Mrs.
Wolfe and two other couples. The total cost for the
entertainment was $482.86; Your pro rata share for you and
your wife was $120.72.

13. Goldman Sachs reimbursed Wolfe for the above expenses
incurred in entertaining you. Goldman Sachs viewed the expenses as
business expenses warranting reimbursement. As described above,
Goldman Sachs, through Wolfe, provided you with a total of
approximately $630 in gratuities based on you and your wife's pro
rata share.

14. According to your testimony, you met Wolfe in 1989 shortly
after you became HEFA's executive director. Your first conversation
with Wolfe took place by telephone regarding a controversy
involving a number of HEFA clients leaving HEFA to obtain their
funding through MIFA, which at that time was competing with HEFA in
financing bonds for schools and hospitals. You wanted to understand
Wolfe's perspective, as his company was lead underwriter on a
number of deals and had been blamed by many at HEFA for the loss of
business to MIFA. You also wanted to repair relations with Wolfe,
if possible, because HEFA wanted to regain many of the Goldman
Sachs clients it had lost to MIFA.

Your first opportunity to work with Wolfe on a bond issue took
place in the summer of 1989 on a hospital transaction. Goldman
Sachs was the lead underwriter on the bond issue. Because it was
your first opportunity to rectify HEFA's problems (created by its
competition with MIFA), you took a more active role in this bond
issue. You and Wolfe came to know each other as you worked together
on this transaction. You began to develop a great deal of respect
for Wolfe's professionalism. Wolfe was helpful in offering advice
to you because Wolfe had held a similar executive director position
in Illinois and had a number of insightful tips for you. Goldman
Sachs, through Wolfe, could have been involved in as many as a
dozen HEFA transactions during a peak year in your tenure. HEFA
typically was involved in 25 to 35 transactions per year during
that period.

You saw Wolfe approximately twice a week between 1989 and
1995. Wolfe frequently ate lunch at HEFA's office, paid for by
HEFA. At least once a month, you and Wolfe would leave the office
and go out to lunch together and you would often charge the expense
to HEFA. These occasions were related to work being done on bond
issuances.

In about 1990, you and Wolfe began to socialize in a
non-business atmosphere and develop a personal relationship. You
and Wolfe had a number of things in common, such as past job
experiences and children of common ages. In 1990, Wolfe's
wife, whom you had previously met, had an opportunity to be in Boston
to visit their daughter, a Boston University student, and the Wolfes
got together with you and your wife for dinner at Cafe Budapest as
described above. This sort of gathering did not take place often
because Wolfe's wife was rarely in Boston, and you and your wife
were not in New York very often. Whenever the occasion presented
itself, the two couples would try to get together.

You and Wolfe took turns creating social opportunities, and
would try to include your spouses or members of your families.[5]
A typical gathering of the two families took place during a Goldman
Sachs health care conference in Orlando, Florida in 1992. You
rented a boat using personal funds and invited Wolfe, his wife and
daughter. Two of your four children were also present. (You could
not recall any such outing in a non-conference related setting.)
You thought of these occasions as separate from routine business
contacts with Wolfe. In your view, they were social and personal
gatherings at which either Wolfe or you would pay. In the instances
where you paid, you used your personal credit card, not HEFA funds.
In the instances where Wolfe paid, you had no knowledge as to how
Wolfe paid. To the extent you thought about it, your assumption
would have been that Wolfe paid personally, not through Goldman
Sachs. As to those occasions

Page 869

where Wolfe paid, you never reflected on whether the cost was
greater than $50 for you and your spouse, but you assumed that
it was. Regardless of who paid, there was no business discussed;
on these occasions topics included family life and personal interests.
While your main motivation for the gatherings was personal, you also
saw these dinners with Wolfe as a way to help HEFA form a relationship
with Goldman Sachs.

You pointed out that in addition to the boat outing, there
were other occasions where you paid with your own personal credit
card to entertain Wolfe. For example, on October 18, 1990, you and
your spouse treated the Wolfes to dinner in New York City at Orso
Restaurant. You personally paid $177.80 for the meal. On July 27,
1994, you treated Wolfe to dinner at Toscano Restaurant in Boston.
You paid $121.05 for the meal, during which you sought Wolfe's
advice pertaining to your leaving HEFA. These were all occasions
which you felt were personal in nature, and therefore you paid
personally.

In contrast, on those occasions where you entertained Wolfe
for business purposes, you paid using HEFA funds. For example, in
1991, during a conference in Mystic, Connecticut, you through HEFA
hosted a dinner for a number of HEFA individuals and others,
including Wolfe. This was a business-related social gathering
because HEFA board members and other staff were present and the
function provided a networking atmosphere for HEFA. You
differentiate this type of event from the dinners which included
only Wolfe, you and your spouses, which were of a social/personal
nature.

You would not call Wolfe a "best friend. " You encounter a
number of people in your line of work. You tend to keep boundaries
for business contacts. You considered Wolfe somewhat of a close
friend because you felt that you could call on Wolfe for personal
matters, if the opportunity arose.

B. Discussion


Section 3(b):


As the HEFA executive director, you were a state employee.[6]
As such, you were subject to the conflict of interest law, G.L. c.
268A.

Your receiving approximately $630 in entertainment from Wolfe
raises issues under G.L. c. 268A, s.3(b). Section 3(b) prohibits a
state employee, otherwise than as provided by law for the proper
discharge of official duty, from directly or indirectly, receiving
anything of substantial value for himself for or because of any
official act or act within his official responsibility[7] performed
or to be performed by him. Anything with a value of $50 or more is
of substantial value for s.3 purposes.[8] You made decisions and
took actions regarding what items would go on the HEFA board's
agenda, which staff would be assigned to a bond proposal, the
negotiation of bond pricing, and the choice of a manager for a pool
or a short-term investment manager for bond proceeds. Each of those
decisions and actions were official acts or acts within your
official responsibility performed or to be performed by you.
Moreover, you had the authority to intervene at any time in the
acts of your staff which involved the evaluation, presentation
and/or consideration of various bonding, underwriting and
contractual issues either at the staff or board level. This
authority, when exercised, involved official acts or acts within
your official responsibility performed or to be performed by you.
Goldman Sachs had a significant financial interest in how you
performed or would perform these official acts because the acts did
or could impact on its business interests. There is no compelling
evidence of friendship or a private business relationship to
justify the gratuities that you received from Wolfe:[9] Therefore,
while there is no evidence of a quid pro quo,[10] there is
reasonable cause to believe that your acceptance of the above free
meals and tickets of substantial value was for or because of
official acts or acts within your official responsibility performed
or to be performed by you, and that you thereby violated s.3(b).


Section 23(b)(3)


The above conduct also raises an appearance issue under G.L.
c. 268A, s.23(b)(3). Section 23(b)(3) prohibits a state employee
from knowingly or with reason to know acting in a manner which
would cause a reasonable person knowing all of the facts to
conclude that anyone can ... unduly enjoy his favor in the
performance of his official duties.[11]

When you accepted the $630 in entertainment from Wolfe, you
knew (1) that he was an employee of Goldman Sachs, and (2) that
Goldman Sachs, as a leading underwriter of HEFA bonds, had an
interest in business dealings with HEFA. Thus, in the Commission's
view, your acceptance of such gratuities while you were acting as
HEFA's executive director on matters of interest to Goldman Sachs
constitutes acting

Page 870


in a manner which would cause a reasonable person to conclude that
Goldman Sachs could unduly enjoy your favor in the performance of your
official duties.[12] This is so even though you and Wolfe appear not to have
discussed business during the events in question, and even though there
is no evidence to indicate that you were ever unduly influenced in the
performance of your official duties to favor Goldman Sachs' interest.
Ultimately, accepting such entertainment under these circumstances
creates an appearance of undue influence. Therefore, there is reasonable
cause to believe that you violated s.23(b)(3).[13]


Mitigating Circumstances


The Commission recognizes that its long line of s.3 precedent
has primarily dealt with employees of regulatory, policy-making or
adjudicative agencies, such as legislators, municipal treasurers
and inspectors. In those contexts, the Commission's precedent is
clear that the receipt of gratuities by a regulator from a
regulatee with whom he has official dealings violates chapter 268A.

Certain state agencies, however, such as HEFA, are different
from state regulatory bodies in that they operate more like private
businesses than government agencies. In effect, they have to
compete for clients in order to exist. For example, HEFA must
compete with MIFA for many clients, as well as possible private
funding sources. Additionally, HEFA bonds must compete for buyers
in the financial marketplace with a host of other offerings. Also,
as discussed above, all of HEFA's funding is derived from the fees
it charges its clients like a private business. And it is run by a
board of directors, much like a private corporation. Because it is
financed and run more like a private business than a state agency,
we describe it here as "quasi-private".

The Commission has not clearly addressed the application of
chapter 268A, s.3 to employees of "quasi-private" independent
authorities such as HEFA. Consequently, employees of these agencies
may have misperceived how the Commission's s.3 precedent applies to
them. The Commission takes this opportunity to make clear that even
though the employees of these agencies operate almost continually
in a business environment, they are nevertheless state employees
and, therefore, must abide by chapter 268A. As with all public
employees, employees of "quasi-private" agencies are prohibited
from accepting gratuities of substantial value from persons or
entities with whom they have official dealings, even if these are
not traditional regulatory dealings, absent a legitimate motive
unrelated to their official duties such as a private business or
friendship relationship.

Although there is evidence of a friendly relationship between
you and Wolfe, your receipt of these gratuities appears to have
been motivated at least in part by your business relationship and,
more particularly, acts which you were authorized to take as HEFA's
executive director. Thus, this is a case of mixed motive which,
although not a defense, provides some mitigation when compared to
a situation where the sole reason the gratuity is accepted is for
or because of official acts or acts within one's official
responsibility.

Your reciprocating by personally paying for certain
dinners and events is further justification for this mixed motive
conclusion. In other words, your reciprocating is additional
evidence of friendship. It further distinguishes your situation
from one in which no reciprocation occurs. Here, however, even when
the degree of reciprocation is considered with the other evidence,
friendship does not appear to be the motive for these gratuities.
More importantly, even if you did reciprocate dollar for dollar, c.
268A, s.3(b) does not permit public officials to accept items of
substantial value so long as they later reciprocate, although again
it is arguably somewhat of a mitigating factor when compared to a
situation without reciprocation.


C. Disposition


Based on its review of this matter, the Commission has
determined that the sending of this letter should be sufficient to
ensure your understanding of, and your future compliance with, the
conflict of interest law.

The Commission is authorized to impose a civil penalty of up
to $2,000 for each violation of c. 268A. Arguably, your substantive
violations may be viewed in the context of the quasi-private
business nature of HEFA's activities and the fact that a friendship
developed between you and Wolfe in which you reciprocated for some
of the gratuities received. For these reasons the Commission has decided
to resolve your situation with a public enforcement letterand not by authorizing
an adjudicatory proceeding in which it could impose a civil penalty. Another
reason for the Commission to address your situation with a public
enforcement letter is that it gives the Commission an

Page 871

opportunity to make clear that reciprocation, under these circumstances,
is not a defense to a s.3 violation.

In resolving your situation with a public enforcement letter
the Commission does not mean to suggest that public employees of a
so-called quasi-private agency such as HEFA who have accepted
illegal gratuities prior to the date of this letter would also
receive such a resolution if they came before the Commission. The
resolution of this case was a function of all the factors
enumerated above. Obviously, as to conduct occurring after the date
of this letter, the fact that the subject is an employee of such an
agency would have no bearing on the resolution.

This matter is now closed.

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


[1] Boston City and Winthrop Hospitals received federal HUD
financing during or shortly before your tenure.

[2] See Opinion of the Justices, 354 Mass. 779 , 784-785 (1968)
(Senate No. 689, a bill leading to St. 1968, c. 614, constitutional
because it involves no public money and no loan of public credit).

[3] Negotiating the bond pricing would typically involve a
series of conference calls with the underwriter(s) and others to
try to arrive at the lowest interest rate at which the bond issue
could be reliably sold in the marketplace.

[4] Wolfe left Goldman Sachs in May 1995.

[5] According to you, by July 1990 you had developed a
sufficiently close relationship with Wolfe that you and he would
regularly go out for a social drink after a business meeting; his
daughter would frequently appear at your office to see her father
socially; and you and Wolfe would often arrange to meet at bond
conferences or other bond industry meetings.

[6] G.L. c. 268A, s.1(q) defines "state employee" as "a person
performing services for or holding an office, position, employment,
or membership in a state agency ......

G.L. c. 268A, s.1(p) defines "state agency" as "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 [emphasis added], district, commission, instrumentality
or agency, but not an agency of a county, city or town."

[7] G.L. c. 268A, s.1(p) defines "official responsibility" as
"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. "

[8] See Commonwealth v. Famigletti, 4 Mass. App. 584 (1976);
ECCOI-93-14.

[9] Friendship is not a defense to a s.3 violation unless it
is the motivating factor. Scaccia, 1996 SEC 838, 850, n. 27. Here
that was not the case.

[10] In determining whether the items of substantial value
have been given for or because of official acts within one's
official responsibility, it is unnecessary to prove that the
gratuities given were generated by some specific identifiable act
performed or to be performed. United States v. Sawyer, 85 F. 3d
713, 730 (1st Cir. 1996); Scaccia, 1996 SEC 838, 844.
[11] Section 23(b)(3) goes on to provide, "It shall be unreasonable
to so conclude if such officer or employee has disclosed in writing
to his appointing authority or, if no appointing authority exists,
discloses in a manner which is public in nature, the facts which
would otherwise lead to such conclusion. "

[12] This conclusion would apply even if, in fact, the motive
for the entertainment was friendship because a concern would always
remain that you might have been influenced by the gratuities to
favor Goldman Sachs. Indeed, the Commission has stated that
friendship only serves to enhance the appearance of favoritism that
arises when a public official accepts items of substantial value
from a member of the private sector over which the public official
can have official impact. Keverian, 1990 SEC 460.

[13] You could have dispelled any such appearance of conflict
by making a written disclosure pursuant to s.23(b)(3).

Page 872


End of Decision