Letter Ruling  Public Enforcement Letter 89-1: US Trust

Date:	08/15/1988
Organization:	State Ethics Commission
Referenced Sources:	G.L. c. 268A, Conflict of Interest Law

US Trust

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

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 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 factors, 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 little 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 # 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

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 of approximately $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 Department were 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 expenses 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 of substantial 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 provide payments in exchange for specific official acts to be taken by the treasurer. Had the Commission found substantial evidence of preferential treatment or of a 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). Finally, the Commission chose to focus on the relationship between those five treasurers and USTC because (a) most of the expense payments involving those five treasurers were attributable to USTC, and (b) according to the IG report, as discussed 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 because 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.