Docket No.: 236


IN THE MATTER OF THOMAS W. WHARTON


Appearing: Stephen P. Fauteux, Esq: Counsel for Petitioner, State Ethics Commission; Thomas W. Wharton: pro se


Commissioners: Diver, Ch.; Brickman, Burns, McLaughlin, Mulligan


Date: May 8, 1984


DECISION AND ORDER



I. Procedural History


The Petitioner initiated these proceedings on September 30, 1983
by filing an Order to Show Cause pursuant to the Commission's Rules
of Practice and Procedure, 930 CMR 1.01(5)(a). The Order alleged
that the Respondent, Thomas W. Wharton, a former president of the
Community Development Finance Corporation (CDFC), a state agency,
violated the conflict of

Page 183

interest law (specifically, s.5 of G.L. c. 268A) by receiving
compensation from a private company in connection with matters in
which he had participated while at CDFC.

The Respondent filed an answer in which he denied "each and
every allegation, conclusion and finding in the Order to Show
Cause." He also filed three "Motions for Dismissal" which will be
discussed below.

The adjudicatory hearing on this matter was held on four
separate days (January 26, 1984, January 27, 1984, February 10,
1984, and February 22, 1984), before Commissioner Joseph I.
Mulligan, Jr., the Presiding Officer designated pursuant to G.L.
c. 268B, s.4(c). The parties thereafter filed briefs with the
Commission and presented oral arguments before the full Commission
on April 17, 1984. In rendering this Decision and Order, each of
the participating Commissioners has heard and/or reviewed the
evidence and arguments presented by the parties.


II. Findings of Fact[1]


1. The Community Development Finance Corporation was established
by the Legislature pursuant to G.L. c. 40F, s.s.1 et seq. to invest
state funds in small businesses within economically depressed areas
of the Commonwealth.

2. Wharton was president of CDFC from August, 1980 to June 30,
1982.

3. In May of 1981, Wharton identified Computer Components
Systems, Inc. (CCS), a corporation located in Lawrence as a good
prospect for involvement by CDFC. CCS was engaged in the
fabrication of precision sheet metal components.

4. In October of 1981, CCS submitted a proposal to CDFC seeking
to have CDFC invest in it.

5. In his capacity as president of CDFC, Wharton toured CCS and
met with its president, Larry Johnston, assigned a CDFC financial
analyst to perform a management audit of CCS, submitted to the
Board of Directors of CDFC "historical and projected financial
information" on CCS, and presented CCS's investment proposal to the
Board at its December 17, 1981 meeting.

6. The Board authorized Wharton to make the investment which
involved an initial equity investment of $10,000 and subsequent
promissory notes aggregating $240,000. The Board further noted that
the Investment Agreement to be entered into must "provide for
adequate reporting of financial data from [CCS] to [the local
community development corporation] and the CDFC, including an
annual audit of [CCS's] books."

7. The Investment Agreement was executed on February 4, 1982
with Wharton signing on behalf of CDFC. As part of that Agreement,
CCS agreed to furnish CDFC annual financial reports and monthly
financial statements which would include a balance sheet and
statements of profit and loss. CCS further agreed to furnish CDFC
full information pertinent "to any matter in connection with the
company's business," and to permit CDFC representatives to visit
and inspect any of its properties, including its books and "to
discuss its affairs, finances and accounts with its officers."

8. At the end of March, 1982, Wharton tendered his resignation
to the CDFC Board, to be effective June 30, 1982.

9. In the early part of 1982, CCS lacked adequate financial
management. Neither its president nor vice president possessed the
requisite financial skills. This need for strong financial
management was of concern to the CDFC Board at the time the
investment was approved and continued to be of concern to the CDFC
staff after closing.

10. CCS attempted to "solve [its] need for financial planning
and control" in various ways, first with the presence of a
financial consultant on its Board of Directors, then by hiring
outside consultants, and finally by hiring a controller. Thomas
Wharton took over as controller, informally on July 23, 1982 and
formally on August 5,1982.

11. As of July 15, 1982, the balance of funds available to CCS
from CDFC was $85,000. Johnston had requested $50,000 of that. On
July 15th, CDFC responded to that request by sending a check for
$23,488.85. In a letter accompanying that check, CDFC's investment
officer noted that: "To advance monies to you without accurate
financial information on a long-term financial program for survival
of CCS is to say the least making me feel uncomfortable." Among
the items requested by CDFC before the next "drawdown request" were
"weekly flash reports," a "revised payout schedule," a "revised
break even analysis," and a "demonstrated plan for achieving
profitability."

12. A week later, on July 23, Wharton met with CCS's president
(Johnston), vice president (Ham) and another employee (Payne). A
"survival strategy" was mapped out, the gist of which was to
"[t]ake the money, invest it back into raw materials, salaries,
production and collection. Sell, produce and collect for a period
of 60 to 70 day." Responsibilities were assigned: Johnston and Ham
were to be in charge of sales and Payne of production; Wharton was
to collect funds, and coor-

Page 184

dinate the sales and production areas. The four participants at the
July 23rd meeting "set goals in sales, shipping, production and
backlogs... [T]hey set up weekly sales and production report [sic]
that would.. .give [them] the information" as to whether these
goals were being met.

13. Six days later, on July 29, 1982, Johnston responded to the
conditions set by CDFC "before any drawdown request [could] be
acted upon" and made a new drawdown request. Johnston noted that
an "internal weekly report has been designed," and a "revised
payout schedule was prepared along with a cash flow schedule," that
the "strategy for the next 60 to 90 days [was] basically to
conserve all cash and first apply it to raw materials and salary,"
and that there would be closer coordination between production,
sales and finance. Johnston further noted that in order to solve
its cash flow problem, CCS needed the cooperation of CDFC,
Arlington Trust Company (its major secured creditor) and its other
secured and unsecured creditors. CDFC's cooperation was termed
"crucial."

14. On August 2,1982, Arlington Trust initiated foreclosure
proceedings but agreed to a temporary stay while CCS tried to come
up with a plan to avert foreclosure. As consideration for this
forbearance, CDFC agreed to advance CCS $5,000 which would be paid
to Arlington Trust. (At this time, CDFC advanced CCS a total of
$12,000). Arlington Trust also indicated that it would "entertain
an offer of approximately $160,000 [from CDFC] to assume [the
bank's] present collateral position.

15. Wharton was among those representatives of CCS who met with
CDFC's investment officer on August 3 and August 4,1982 to discuss
the pending foreclosure by Arlington Trust. Wharton also indicated
to CCS's Board of Directors that among other measures that had to
be taken, the company needed "the balance of the drawdown from
CDFC."

16. On August 5,1982, Wharton was informed by CDFC's counsel
that the conflict of interest law would "prevent [him] from working
for [CCS] on any matter relating to its Investment Agreement with
CDFC." On the same day, Wharton sought an advisory opinion from the
Ethics Commission in which he indicated that his role in CCS would
not involve "any appearance or direct contact by [him] with CDFC."

17. On August 9, 1982, Johnston reported to CDFC that CCS "ha[d]
developed the financial strategy to overcome the serious crisis
that it [was then] facing," submitted "supporting documents that
detail[ed] that strategy," and requested that CDFC release to CCS
$8,000 a week for six week and defer interest payments. Wharton
prepared those supporting documents, knowing they would be used to
support the drawdown request to CDFC: Wharton had been present at
the management meeting on August 4, 1982 at which CDFC's investment
officer discussed a "to-do list" for gathering documentation on
CCS's financial position for presentation to CDFC's investment
committee; Wharton had stressed the need for more money from CDFC;
the documents Wharton prepared correlated to that "to-do list;" and
their Content was more consistent for submission to CDFC than to
Arlington Trust.

18. On August 16,1982, Wharton stated to the chief of the Legal
Division of the Ethics Commission that his role at CCS was limited
to dealing with banks, that he was not dealing with CDFC, and that
he was not performing the functions of controller as set out in his
contract.

19. On August 19, 1982, Johnston asked CDFC to obtain from the
Ethics Commission a "waiver" to allow Wharton to be CCS's
controller.

20. On August 23, 1982, the CCS Board of Directors voted to fire
Wharton.

21. On or before August 24, 1982, Wharton prepared for Johnston
a status report to be given to CCS's Board of Directors. In that
report, it is stated: "Although Computer Component Systems
continues to operate according to plan, there still remains a need
for the release of [CDFC] funds."

22. On August 25,1982, Wharton resigned from CCS.

23. On August 27, 1982, the chief of the Legal Division of the
Ethics Commission orally advised Wharton that the conflict law
would prohibit him from becoming involved with CCS in any matters
related to the CDFC loan or conditions established under the loan.
That oral advice was coded in writing on August 30, 1982.

24. Wharton returned to work at CCS on August 31, 1982, and
performed services for the company through September 17, 1982.

25. The Commission rendered its formal advisory opinion to
Wharton on September 13, 1982.

26. Wharton again resigned from CCS on September 18, 1982.

27. For the nine-week period from July 16,1982 through September
17, 1982, Wharton performed services for CCS on 44 days and
received a total of $14,690 from the company.

28. The preliminary inquiry into Wharton's activities was
initiated by the Commission on December 20, 1982. On March 22,
1983, it was extended to June 1,1983 but ended on April 12,1983
when the Commission found reasonable cause to believe that the law
had been violated.

Page 185
29. The Order to Show Cause in this case issued on September
30,1983 and a hearing was scheduled for December 14, 1983. Less
than two weeks before the hearing, Wharton's attorney withdrew from
the case and asked for a two-month continuance. A six-week
continuance was granted to January 26, 1984. On January 20, 1984,
Wharton sought a further continuance to March 15, 1984; his request
was denied. The hearing took place over four days: January 26,
1984, January 27, 1984, February 10, 1984 and February 22, 1984.


III. Decision


A. Motions to Dismiss

Wharton first argues that the proceedings against him should be
dismissed because he was denied a continuance and thereby denied
an adequate opportunity to prepare his defense. Four months elapsed
in this case between the issuance of the Order to Show Cause and
the hearing. For approximately the first half of that period,
Wharton was represented by counsel. When counsel withdrew from the
case, Wharton was given an additional six weeks to prepare his
defense. In addition, the two weeks between the second and third
hearing days and the twelve days between the third and fourth
hearing days were available to him. Thus, there was an adequate
opportunity for Wharton to prepare his defense. Accordingly, this
Motion to Dismiss is denied.

Wharton next argues that the proceedings should be dismissed
because the informal advice he received from the chief of the
Commission's Legal Division was "radically different" than that
contained in his advisory opinion and that the chief of the Legal
Division had no authority to give informal advice. The informal
advice Wharton received was consistent with the advisory opinion
ultimately rendered by the Commission. While such informal advice
is not binding on the Commission and does not have the legal effect
of an advisory opinion (see, G.L. c. 268B, s.3(g)), it is
permitted, and, indeed, often contributes to the efficient
administration of the Commission's statutory responsibilities.
Accordingly, this Motion to Dismiss is denied.

Finally, Wharton argues that these proceedings should be
diimissed because of the length of the preliminary inquiry and the
delay in issuing an Order to Show Cause after reasonable cause was
found. The Commission's procedures provide a 90-day limit on the
length of an inquiry unless the Commission votes to extend the
inquiry. While the inquiry in this case took more than 90 days, it
was extended by the Commission. It is of no consequence, absent a
showing of prejudice, that the extension was granted after the 90-
day period (here, by one day since the 90th day fell on a
Sunday).[2]

The 90-day rule is not based on any statute, but reflects the
Commission's desire that inquiries be conducted as expeditiously
as possible. Its principal purpose is to make the Commission aware
of the length of inquiries and to require its acquiescence for them
to go beyond 90 days. That purpose is satisfied whether the
extension is granted before or after the initial 90-day period
ends. With respect to the time period after the finding of
reasonable cause, it should be noted that neither the provisions
of c. 268B dealing with investigations (see s.4) nor the
Commission's procedures impose any requirement as to when the Order
to Show Cause must issue. Here again, there is no showing that Mr.
Wharton was prejudiced or that the Petitioner gained any undue
advantage by the delay. Indeed, during the argument, Wharton
indicated that during this period his lawyer was negotiating with
the Petitioner over resolution of the case by way of a Disposition
Agreement. Accordingly, this Motion to Dismiss is denied.


B. G.L. c. 268A, s.5

Section 5 of G.L. c. 268A prohibits, in part, a former state
employee from receiving compensation from a private party in
connection with any particular matter in which the state is a party
or has a direct and substantial interest and in which the former
employee had participated while with the state. An "application,"
"submission, contract," "decision," and "determination" are all
among the items included in the definition of "particular matter."
See G.L. c. 268A, s.1(k).

Section 5 is grounded on several policy considerations. The
undivided loyalty due from a state employee while serving is deemed
to continue with respect to some matters after he leaves state
service. Moreover, s.5 precludes a state employee from making
official judgements with an eye, wittingly or unwittingly,
consciously or subconsciously, toward his own personal future
interest. Finally, the law ensures that former employees do not use
their past friendships and associations within government or use
confidential information obtained while serving the government to
derive unfair advantage for themselves or others.

Applying the law to this case, CDFC is a state agency. It was
created by the legislature as a "public instrumentality" and placed
in the state's Department of Community Affairs. See G.L. c. 40F,
s.2. Its available funds are derived from the state Treasury. See
G.L. c. 40F, s.4. Wharton, thus, is a former state employee by
virtue of his prior employment as CDFC's president. See

Page 186

G.L. c. 40F, s.3(j). After he left state service, Wharton was
compensated by CCS, i.e., someone other than the Commonwealth of
Massachusetts. The Investment Agreement entered into between CDFC
and CCS was a contract and thus a particular matter as that term
is defined in G.L. c. 268A, s.1(k) and used in s.5. The state was
a party to and had a direct and substantial interest in that
matter. See, EC-COI-79-122; 82-79; 82-130. The questions left to
be resolved are:

1. whether Wharton had participated in the Investment
Agreement while a state employee, and

2. whether his subsequent work for CCS for which he was
compensated was in connection with that Agreement.
Clearly, Wharton participated in the Investment Agreement as a
state employee. Among other things he identified CCS as a good
prospect for investment by CDFC; he submitted background
information on CCS to the CDFC Board; he presented CCS's proposal
to the Board; he was the one authorized to make the investment; and
he signed the Investment Agreement on behalf of CDFC. Such actions
constituted personal and substantial participation in that
agreement as required by the conflict law. See G.L. c. 268A,
s.1(j); see also EC-COI-82-156; 82-143; 81-58.

In view of the concern expressed by CDFC over the financial
management of CCS and the importance of CDFC funds to CCS,
arguably, everything Wharton did to help solve the company's
troubled financial situation was in connection with the Agreement
with CDFC. The Commission need not decide that issue, however,
since Wharton's activities at CCS directly related to the
Investment Agreement in the following three instances:

(1) The Agreement clearly contemplated a close monitoring by CDFC
of CCS's financial affairs. As part of that monitoring, CDFC's
investment officer expressed concern over the need for accurate
information as to how CCS planned to survive financially and
required various items from CCS before any further money could be
advanced Wharton was directly involved in planning such a survival
strategy and helping the company respond to CDFC's request.
(Findings of Fact Nos. 11-13). (2) When Arlington Trust threatened
to foreclose, CDFC's cooperation became critical to CCS. The
company requested that CDFC release to it under the Investment
Agreement $8,000 a week for six weeks and agree to defer interest
payments. Wharton prepared the documents to support that request.
(Findings of Fact Nos. 14-17). (3) Finally, Wharton prepared a
status report to the CCS Board of Directors which directly related
to the further release of CDFC funds under the Investment
Agreement. (Findings of Fact No. 21).

By the activities listed above, Wharton violated s.5(a) of G.L.
c. 268A. It is immaterial whether Wharton did a good job or a bad
job for CCS, or whether the company would or would not be able to
survive without his services. Section 5 establishes one standard
for all former state employees. It could not be fairly applied if
in each instance the quality of the necessity of the work performed
had to be analyzed. Moreover, such an analysis would be irrelevant
to the purposes underlying the rule.


IV. Order


On the basis of the foregoing, we conclude that Thomas W.
Wharton violated G.L. c. 268A, s.5(a). Pursuant to authority under
G.L. c. 268B, s.4(d), we hereby order Mr. Wharton to pay a civil
penalty of $1,000 (one thousand dollars).[3] We order Mr. Wharton
to pay this penalty to the Commission within 30 (thirty) days of
receipt of this Decision and Order.

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[1] Included are those findings relevant to the Motions for
Dismissal,

[2] The inquiry ends with the Commission's finding of reasonable
cause.

[3] While in some circumstances, the fact that a person sought an
advisory opinion might be considered a factor in mitigation of a
violation, we decline to do so here. Wharton appears to have sought
an opinion only after being forced to do so by CDFC counsel.
Moreover, in his opinion request and discussions with Commission
staff, he inaccurately described his role at CCS.

End Of Decision