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Opinion

Opinion EC-COI-91-2

Date: 02/14/1991
Organization: State Ethics Commission

Section 7(a) will not prohibit the Secretary of Transportation and Construction from divesting of a financial interest in a state contract after a thirty day period of assuming office because (1) the interest arose prior to his appointment; (2) he had attempted to divest in good faith prior to assuming office; (3) a legal requirement outside of his control prohibited divestment of the interest unless and until that requirement was fulfilled; (4) the value of his interest was capped pursuant to an agreement which was entered into prior to his taking office; (5) he would not financial benefit from any delay in divesting; and (6) he agreed to keep the Commission informed of the divestment process.

Facts

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

1. Transit Retail Partnership, Inc. (TRPI)

A. Description of Business Activity

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

B. Description of Ownership Interest

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

C. Proposed Plan of Divestiture

You have proposed to divest this interest in TRPI within 30  days by (i) immediately resigning from the Board of Directors and  the office of President of TRPI, (ii) selling all of your stock in  TRPI to a present stockholder of that company for the current fair  market value of such stock as determined by a mutually-selected,  independent business appraiser and (iii) seeking the consent of the  MBTA to the cancellation and withdrawal of your personal guarantee  under the Master Lease Agreement.    In considering the foregoing plan of divestiture, you inform  us that the proposed transferee is not a member of your immediate  family and that any dealings between you and such transferee have  been (and will be at all times throughout the transaction) at arms'  length. In addition, it is possible that an independent financial  appraisal of TRPI could result in a negative present value for  ascertaining the value of your stock. In such event, the parties  may consider the issuance of a promissory note by you to account  for such determination. If issued, the principal amount of such  promissory note would be set at a sum certain fixed at the time of  your transfer of stock.

D. Removal from MBTA Deliberations Concerning Assignment of  Interest

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

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

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

2. Alewife Commercial Associates, Inc. (ACAI)

A. Description of Business Activity

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

B. Description of Ownership Interest

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

C. Proposed Plan of Divestiture

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

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

D. Removal from MBTA Deliberations Concerning Assignment of  Interest

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

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

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

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

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

Question

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

Answer

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

Discussion

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

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

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

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

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

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

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

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

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

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

In effect, the "cap" mechanism set out above is similar to the  "segregation" mechanism of EC-COI-89-5 and the deferred income  mechanism of 87-29 because your interests would not benefit as a  result of any state contract during the time you have been in  office. So long as the divestment process continues in good faith,  the mere holding of the interests in question will not violate s.7  if the value of those interests will not increase beyond the  "capped" rate if determined as of an earlier date.[6] See also,  EC-COI-89-14 (the liquidation of a prohibited interest must be  based upon a currently appraised value, not on a post-transfer  valuation - in effect, setting a "cap" on the value).    You have already informed us that you agree to the imposition  of the cap and that you will move as quickly as possible to  complete the divestment process in accordance with the requirements  of s.7 and this formal opinion. In addition to the above, you must  keep this Commission informed on a monthly basis as to the status  of the divestment process until such time as the divestment has  been completed. This status report will enable the Commission to  monitor whether the process is proceeding in accordance with the  requirements of s.7 and this formal opinion.

We also advise you that an additional disclosure pursuant to  s.23(b)(3) of c. 268A to Governor Weld, as your appointing  authority, is appropriate in order to keep the Governor fully  apprised of the potential rent dispute between the MBTA and TRPI,  and of the continuing personal guarantees. Section 23(b)(3)  prohibits a state employee from acting in a manner which would cause a reasonable person, having  knowledge of the relevant circumstances, to conclude that any  person can improperly influence or unduly enjoy his favor in  the performance of his official duties, or that he is likely  to act or fail to act as a result of kinship, rank, position  or undue influence of any party or person.   

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

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

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

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

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

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

[4] The date on which you took office.

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

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

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