Public Enforcement Letter 89-1

Board of Directors
United States Trust Company
30 Court Street
Boston,MA 02108

August 15, 1988

Dear Directors:

Page 356

As you know, the State Ethics Commission has conducted a
preliminary inquiry into allegations that United States Trust
Company (USTC) entertained a number of Massachusetts municipal
treasurers in the hope of of obtaining or maintaining banking
business, such entertainment involving paying expenses related to
Florida golf trips, in-state golf excursions and numerous dinners,
lunches and beverages.

The results of our investigation, discussed below, indicate that
from 1983 through November, 1985 USTC appears to have violated the
conflict of interest law in this case. Nevertheless, in view of
certain substantial mitigating fictors, also discussed below, the
Commission has determined that adjudicatory proceedings are not
warranted. Rather, the Commission has concluded that the public
interest would be better served by disclosing the facts revealed
by our investigation and explaining the applicable provisions of
law, trusting that this advice will ensure USTC's continuing
compliance with and understanding of the conflict law. By agreeing
to this public letter as a final resolution of this matter, USTC
does not necessarily admit to the facts and law as discussed
herein. The Commission and USTC are agreeing that there will be no
formal action against USTC and that USTC has chosen not to exercise
its rights to a hearing before the Commission.

I. Facts

1. On November 23,1985, the Office of the Inspector General, in
a document entitled "Report on Municipal Banking Relations" (IG
Report), disclosed its findings regarding a number of issues
involving the manner in which municipal treasurers did business
with banks. Included in the IG Report was the following:


The records revealed that banks' municipal calling officers
entertain public officials and their guests in a variety of
ways, including meals, drinks, theatre performances, sporting
events, and golf.


Seven Boston-based banks - Bank of Boston, Bank of New
England, Boston Safe Deposit Trust, Patriot Bank, Shawmut
Bank, State Street Bank, and U. S. Trust Company - gave to
municipal treasurers and other public officials during the
period August 1,1982 through 1984 hundreds of gratuities worth
in total approximately $138,000. Of this amount, the banks
spent over $85,500 on gratuities given to identified municipal
treasurers and other public officials, and an additional
$52,500 on gratuities given to municipal treasurers and other
public officials not identified in banks' entertainment
records.


(IG Report, at xi)[1] The IG Report also found that of the seven
banks identified, USTC, based on the records it had submitted,
provided more gratuities to certain public officials than any other
bank (a litlle over $40,000 for the period. August, 1982 through
December, 1984) (IG Report, at xi, chart). (The Commission's
investigation, however, found that USTC maintained more complete
records than did some other banks; as the IG Report stated, the
incomplete and in some instances illegible records maintained by
some other banks could "grossly understate the scope and value of
banks' gratuities." (IG Report, at 70)) The IG Report also noted:


During 1984 alone, 104 municipal treasurers, almost one-third
of all treasurers, apparently accepted gratuities of
substantial value from the seven reporting banks... 24
municipal treasurers each were given gratuities totaling over
$1,000. Half were given gratuities exceeding $2,000, seven
were given gratuities exceeding $3,000, and one was given
gratuities exceeding $7,000.


(IG Report, at xii).


2. As you know, on June 8,1987, the Commission began a formal
inquiry into allegations that USTC had violated the conflict of
interest law in its dealings with certain municipal treasurers.[2]


3. In addition to reviewing the IG Report (along with
substantial supporting documentation), we conducted an independent
examination of USTC's records, and certain municipal records, and
conducted numerous interviews under oath. Our investigation
determined the following:


a. As indicated in the chart appearing immediately below, from
1983 through 1985 USTC paid the expenses of one or more of the five
identified treasurers on 316 occasions involving a total amount of
$11,267. These expenses included lunches, dinners, greens
fees, and theatre tickets. The figures in the chart are minimums because,
when a treasurer has disputed a USTC record showing an expense
payment to him, we generally gave him the benefit of the doubt and
deleted that item.

CHART

Total Total# Fla.Trips Total $Value
$ Grat.'s 83/84/85 Fla. Trip Exp

Collas $4,253 138 83,84,85 $1,107

Page 357


Scafidi $2,599 78 83,84,85 $1,107
Brunelli $1,772 37 83,84,85 $1,107
Lewis $1,534 41 83,84 $ 743
Croatti $1,109 32 84 $ 375
------ ---
$11,267 316


b. Regarding the Florida trips, USTC paid for golf greens and
carts fees, balls, in-state transportation, meals and liquor. The
individual treasurers paid for their own transportation to and from
Florida and for their hotel rooms. Meal expenses involved the
payment of groceries, inasmuch as food was cooked by the treasurers
in their hotel rooms.


c. For three of the five identified treasurers, USTC paid for
expenses in connection with Massachusetts golf excursions where
those expenses (greens and cart fees, and food and beverage
expenses) exceeded $100 for a given event.[3]


d. USTC paid the foregoing expenses through expense accounts
provided to its employees in its Municipal Services Department Most
of those expenses were authorized and paid through Richard Brown,
Sr., a former vice president in charge of the department. All of
these expenses were duly noted on monthly expense account reports
submitted by Brown and each of his staff members, and reviewed by
officials at the bank.


e. When asked why the bank provided these gratuities to
municipal treasurers, Brown stated it was because all the banks
were selling basically the same services and that each of his
competitors was engaged in the same practice. It was USTC's goal
to develop a personal rapport with the municipal treasurers to
ensure obtaining and retaining their business. According to Brown,
USTC was willing to spend a substantial amount a year having Brown
out on the road developing these personal relationships in order
to bring municipal money into the bank. Brown stated it was USTC's
view that a municipal treasurer did not identify with a bank as
much as it identified with the person representing a bank. Brown's
way of handling this was to get to know the treasurers personally
by taking them out for meals or golf or some other type of
entertainment, according to Brown. Brown also noted that those
municipal treasurers on whom he spent expense account money at
dinners, golf, plays, and other entertainment more often than not
did more business with USTC than treasurers who were not receiving
such gratuities.

Brown stated that it was he who suggested the initial golf trip
to Florida. He stated that the understanding he had with the
treasurers was that USTC would pay for the golf and accompanying
fees and the cost of dinner each night. He stated that USTC also
covered the ground transportation costs in Florida. He admitted
that the trips were strictly social, but asserted that there was
no quid pro quo involved in the sense of any understanding that the
treasurers would give any preferential treatment to USTC in
exchange for the entertainment they received.

f. Each of the treasurers acknowledged that he was aware that
the purpose of USTC paying for certain golf or meals expenses was
that the bank was trying to obtain more of the town's or city's
business. At the same time, each treasurer insisted that he
always made his banking decisions on objective grounds and was
not in fact influenced by his expenses being paid by USTC.

g. The amount of business that any one of these treasurers
could and did give to USTC was substantial. For example, one
treasurer estimated that he deals with receipts of approximately
$100 million dollars a year, all of which have to be deposited in
banks at his discretion, subject to fiduciary guidelines. From
June, 1983 through January, 1987, his city purchased 54
certificates of deposit from USTC ranging in duration from 14
days to 205 days, with total average balances at USTC of
approximately $2,000,000. In addition, the city (like other
municipalities dealing with other banks) maintained a non-
interest bearing account with USTC during that time period which
had an average monthly balance ofapproximately $225,000.00 before
December, 1985 (prior to the IG's Report) and approximately a
$20,000.00 monthly balance from December, 1985 through June,
1987.

h. Prior to 1984 USTC had confirmed with its outside public
accounting firm that the expenditures for entertainment by its
Municipal Services Departmentwere consistent with the
entertainment expenses of other banks in this field. In 1984,
after becoming aware of the ongoing Inspector General
investigation, senior officials at USTC discussed the issue of
the foregoing expense accounts. The bank reached no decision to
change its course of conduct at that time. According to USTC
officials, in the spring of 1985 USTC began to formulate a
written Code of Conduct regarding the entertainment of public
officials. Alter the IG Report was made public on November
23,1985, the new Code of Conduct was reviewed for consistency
with the recommendations in the Report. On December 5,1985 the
Code of Conduct was adopted by USTC and distributed to its
employees. The USTC Code of Conduct directs its employees to be
sensitive to conflict of interest concerns, and to keep their
expenses in dealing with municipal officials to below $50 on any
given occasion. It also states that such expenses should not be
repetitive.

i. Based on the evidence the Commission has reviewed, it
appears that USTC employees have complied with the December
5,1985 Code of Conduct.

j. The Commission is not aware of any evidence indicating any
of the foregoing treasurers has been offered or accepted any
entertainment of substantial value

Page 358

from USTC after the IG Report was issued on November 29,1985.

k. Brown stated that one or more of the treasurers raised the
issue of whether it was legal for USTC to pay for a portion of
their expenses on the Florida trips. Brown stated that in 1985 he
consulted with USTC officials, and then informed one or more of the
treasurers that in USTC's view it was legal for USTC to pay these
expenses.

II. Discussion

Section 9(a) of the conflict of interest law, G.L. c. 268A, in
relevant part, prohibits anyone, otherwise than as provided by law
for the proper discharge of official duties, from giving an item
of substantial value to a municipal employee for or because of any
official act performed or to be performed by such employee.

As the Commission stated In the Matter of George Michael, 1981
SEC 59,68:


A public employee may not be impelled to wrong-doing as a
result of receiving a gift or gratuity of substantial value
in order for a violation of s.3 to occur. Rather, the gift may
simply be a token of gratitude for a well-one job or an
attempt to foster goodwill. All that is required to bring s.3
into play is a nexus between the motivation for the gift and
the employee's public duties. If this connection exists, the
gift is prohibited. To allow otherwise would subject public
employees to a host of temptations which would undermine the
impartial performance of their duties, and permit multiple
remuneration for doing what employees are already obliged to
do a good job.


For s.3 purposes, it is unnecessary to prove that the gratuities
given were generated by some specific identifiable act performed
or to be performed. It is sufficient that the gratuities are given
to the official "in the course of his everyday duties for or
because of official acts performed or to be performed by him and
where he was in a position to use his authority in a manner which
could affect the gift giver." United States v. Standefer, 452 F.
Supp. 1178, 1183 (W.D. Pa. 1978) (aff"d on other grounds, 447 U.S.
10(1980)), citing United States v. Niederberger, 580 F.2d 63
(3rdCir. 1978). See also, United States v. Evans, 572 F. 2d 455(5th
Cir. 1978). As the Commission explained if Advisory No.8:[4]


In fact, even in the absence of any specifically identifiable
matter that was, is or soon will be pending before the
official, s.3 may apply. Thus, where there is no prior social
or business relationship between the giver and the recipient,
and the recipient is a public official who could affect the
giver, an inference can be drawn that the giver was seeking
the goodwill of the official because of a perception by the
giver that that public official's influence could benefit the
giver. In such a case, the gratuity is given for as yet
unidentified "acts to be performed."


In {Commission Advisory No. 8} the Commission declared that
gratuities to public officials such as tickets to theatre or
sporting events which exceed $50 would be considered "substantial
value." The Commission further stated that a gift of several
tickets, each valued at less than $50, is a gratuity of substantial
value if the total value of the tickets exceeds $50. Finally, the
Commission noted,


A s.3 issue may arise if there is a standing offer to be
accepted at any time for tickets. It is likely that any such
offer would be deemed to involve substantial value. Similarly,
if there is a matter of periodically giving a public official
tickets, the course of conduct will be evaluated as to its
value. This would be the case, for example, if someone gave
a public official a ticket to an entertainment event each and
every weekend.


The facts set forth in this letter, if proven, would appear to
establish a violation of s.9(a) by USTC. Thus, as no one disputes,
USTC on numerous occasions paid for golfing expenses in Florida
and Massachusetts for municipal treasurers where those expenses
substantially exceeded $50. Indeed, for three treasurers those
expenses exceeded $1,000. Consequently, USTC did provide municipal
officials with items of substantial value.


In addition, the evidence would indicate that at least as to
Treasurers Collas and Scafidi, USTC paid for their expenses on a
sufficient number of instances within a short time period that even
though each payment was less than $50 in value, the payments should
be aggregated. Therefore, USTC gave these two treasurers items of
substantial value in this respect as well. Thus, the Commission
views USTC's having provided two treasurers with 138 and 78
gratuities in a two-year period as indicating either that those
treasurers had a standing offer to have USTC pay for their
expenses, or, alternatively, that the pattern of payments was such
that it should be considered as a course of conduct within the
meaning of Advisory No. 8.


That there was a standing offer is supported by Brown's
statement that whenever he saw a treasurer, it was his standard
procedure to invite the treasurer for lunch or dinner. One
treasurer stated that he knew that he could have a lunch or dinner
whenever bank officials visited him. It is also reasonably clear
from the evidence that each of the treasurers knew that he could
have Brown pay for a round of golf at USTC's expense at any time,
including food and beverages afterwards.


The numbers are also probative. For example, 138 gratuities over
a two-year period indicates that USTC was paying Treasurer Collas's
expenes more than once a week. In addition, the total value of
those 138 occasions was $4,253, a total which is again suggestive
of a standing offer.

Page 359

Alternatively, in light of the frequency of the expense payments
for these two treasurers, the Commission would conclude that USTC
was involved in a course of conduct with each treasurer which
involved substantial value. Therefore, whether considered a
standing offer or a course of conduct, USTC was giving these
treasurers items ofsubstantial value by virtue of the numerous
occasions on which it paid for their entertainment expenses, even
where those individual occasions did not exceed $50.[5]

The facts would also indicate that there was a clear connection
between USTC paying for these expenses and USTC's objective that
these municipal treasurers would either continue or expand their
town's or city's business with USTC. Thus, former vice president
Brown stated that by entertaining these treasurers, he could
establish personal relations with them, which in turn would likely
result in their doing more business with USTC. In other words,
USTC's motive in expending these monies was to foster goodwill with
these treasurers. That is precisely the motive or intent which lies
at the heart of a s.3 violation. Thus, the prohibited connection
or nexus between these entertainment expenditures and the
treasurers' duties would be established by these facts.

On the other hand, the Commission has not found any evidence
that any of these treasurers provided USTC with preferential
treatment as a result of these expenditures. In addition, there is
no evidence that USTC made any personal loans to these five
treasurers. Nor is there any evidence that any of these treasurers
entered into any kind of corrupt agreement by which USTC would
prcvide payments in exchange for specific official acts to be taken
by the treasurer. Had the Commission found suhstantial evidence
ofpreferential treatment or ofa corrupt agreement, this matter
would not have been resolved with a public enforcement letter.[6]

It could be argued that to the extent these expenses were
necessary and appropriate to legitimate business transactions, such
as a business lunch to discuss a banking proposal, then the
expenditures should not be considered unlawful gratuities. There
is some support for this view. See, e.g., State v. Prylbil, 211,
N.W. 2d 308 (Iowa 1973). The Commission, however, has taken the
position that a public employee cannot accept private reimbursement
for his business expenses. See, e.g., EC-COI-88-5.[7]

The Commission precedents, such as EC-COI-88-5, deal with
vendors paying for business trip expenses, including
transportation, lodging, meals and so forth. The Commission has
not, however, addressed the specific issue of a meal per se, and,
more specifically, the so-called "business lunch." For purposes of
s.3, there is no logical distinction between transportation and
lodgings on the one hand and meals and beverages on the other, so
long as "substantial value" is involved. Therefore, the Commission
takes the position that vendors should not directly pay for any of
the expenses of public officials whether or not in connection with
conducting official business, if those payments involve substantial
value. The potential for abuse is too great in those situations.
Instead, either the public agency in question should pay for the
official's expenses, or consideration should be given to whether
the statutes and ordinances which apply allow for the vendor to pay
for the public official's expenses by making a payment to the
public treasury specifically earmarked for those expenses. In turn
the public official can have his expenses paid for in the ordinary
way. (See, e.g., G.L. c. 41, s.53A.)

In any event, there are several important mitigating factors
which point to a public enforcement letter, rather than some more
serious sanction, as being the proper resolution of this matter.
One, prior to the IG Report, the practice of banks paying for
public officials' entertainment expenses including meals,
beverages, sporting events, theatre tickets, and golf was clearly
a widespread practice, and one which remains acceptable in the
private sector. That the practice was widespread is well-
illustrated by the IG Report noting that 104 treasurers received
such gratuities, and all seven banks which were contacted appear
to have been involved in the practice.[8] Two, after the IG Report
was issued in November of 1985, USTC promptly adopted a policy
requiring its staff to comply strictly with the conflict of
interest concerns articulated in that report. As far as the
Commission is aware, USTC employees have complied with that stated
policy. Three, until today, the Commission has not had the occasion
to articulate a position regarding private parties paying for meals
and beverages incidental to the transaction of business, nor had
the Commission, prior to its May, 1985 Advisory No. 6, indicated
it would aggregate items of value to meet the substantial value
threshold.

The Commission's decision to allow USTC to resolve this matter
with a public enforcement letter should not be construed as
indicating it does not consider the issues raised by USTC's conduct
to be serious. But for the mitigating factors just described, the
Commission would have pursued this matter through adjudicatory
proceedings. It is of critical importance that the public have
complete confidence that municipal treasurers make investment
decisions, often involving millions of dollars of public funds, in
a manner which best serves the public interest. The public has a
right not only to insist on actual impartiality and objectivity in
the performance of such fiduciary duties, but also the right to
expect that municipal treasurers will avoid even the appearance of
impropriety in dealing with banking institutions.[9] When a bank
pays for any of the personal expenses of a municipal treasurer, but
particularly when those expenses climb into the thousands of
dollars and involve payments occurring as frequently as once a week
then there is at least the appearance of impropriety, and enormous
potential for real abuse. Based on the evidence, it appears that

Page 360

USTC has stopped this practice. The Commission trusts that all
other banks have done so as well.[10]

III. Disposition

Based on its review of this matter, the Commission has
determined that the sending of this letter should be sufficient to
ensure USTC's continued compliance with and understanding of the
conflict law. This matter is now closed.

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

[1] The "gratuities", referred to in the IG Report are for the most
Part entertainment expenses.

[2] The Commission's investigation of this matter was delayed while
the Department of the Attorney General reviewed the issues raised
by the IG Report. It was subsequently agreed that the matter should
be resolved by the Commission. After careful consideration the
Commission chose to focus its inquiry on those treasurers who
allegedly received each of the following. (1) out of state golf
expenses; (2) in-state expenses greater than $100; and (3) expenses
paid on 50 or more instances occurring from 1983 through 1984.
Application of these criteria resulted in the Commission
investigating five municipal treasurers (Plymouth Treasurer Andrew
Collas, Newton Treasurer Theodore L. Scafidi, Franklin Treasurer
Albert R Brunelli, Everett Treasurer Frank E. Lewis, and Framingham
Treasurer Donald Croatti). Finnaly, the Commission chose to focus
on the relationship between those five treasurers and USTC because
(a) most of the exspense payments involving those five treasurers
were attributable to USTC, and (b) according to the IG report, as
discused above, USTC by far paid more expenses for municipal
treasurers than any other bank (Again, as stated above, apparently
not all of the banks submitted adequate records.).

[3] Treasurer Collas had such expenses paid by USTC on two
occasions involving a total payment of $217 by USTC. Treasurers
Scafidi and Brunelli each attended one Massachusetts golfing event
where their expenses paid for by USTC exceeded $100 ($108 each).

[4] Issued May 14,1985.

[5] Some treasurers have raised an issue as to whether the expenses
of a treasurer's guest should properly be attributed to the
treasurer for purposes of determining whether he received
substantial value. Section 3 does require that the item of
substantial value be for the municipal official as opposed to
someone else. Compare 2 (bribes) which is not so limited. in the
Commission's view, however, where presumably the treasurer would
have had to pay for his guest's expenses if USTC did not pay for
them, the value of USTC paying for the treasurer's guest can be
attributed to the treasurer.

[6] Certain treasurers have also an issue as to the unfairness of
dividing a total meal cost by the number of people present to
determine the value the treasurer received. Treasurers have stated
that on some occasions they may not have eaten as much as the
others present, or they may not have eaten anything but only had
a drink, or where there was a large liquor bill, they may have had
only had soft drinks. In the Commission's view, it is appropriate
to infer that when a group participates in a entertainment event,
whether it be golf, a meal, or drinks, the expenses are generally
shared equally. That inference, of course, could be overcome by the
testimony of those present.

[7] The Commission can impose up to a $2,000 fine for each
violation of G.L. c.268A. The Commission can also bring an action
in Superior Court under G.L c. 268A,s.21 (b) to seek to obtain up
to three times the amount of any unjust enrichment derived by any
party from having violated the conflict of interest law.
See also the Office of Governmental Ethics Memorandum dated October
23,1987, stating in part, "In general, an Executive branch
employee's acceptance of 'one-on-one' meals from someone who hosts
that individual beesuse of his or her government position is
prohibited, regardless of the cost of the meal."

[8] If in singling out the five treasurers and USTC for public
scrutiny, we are mindful that many others appear to have violated
the gratuities section of the conflict law, and thus fairness
considerations should play a role in the disposition of this
matter.

[9] As the Supreme Judicial Court said in Board of Selectmen of
Avon v. Linden, 352 Mass. 581,583(1967): "The legislature found it
advisable to enact a conflict of interest law. This was as much to
prevent giving the appearance of conflict as to suppress all
tendency to wrong doing. [T]he Legislature did not see fit to rely
upon the restraints of decency, propriety and fair play, upon the
law of libel, or upon the power of the electorate to eliminate
unworthy office holders."

[10] The Commission does not mean to imply that it would not
investigate and take sterner action against a bank which was found
to violate s.3 after the IG Report was issued but before the date
of this letter.