Settlement  In the Matter of Goldman Sachs & Co.

Date:	06/19/1997
Organization:	State Ethics Commission
Docket Number:	564

Disposition Agreement

This Disposition Agreement ("Agreement") is entered into  between the State Ethics Commission ("Commission") and Goldman,  Sachs & Co. ("Goldman Sachs") pursuant to Section 5 of the  Commission's Enforcement Procedures. This Agreement constitutes a  consented to final Commission order enforceable in the Superior  Court, pursuant to G.L. c. 268B, s.40).   

On April 11, 1995, the Commission initiated, pursuant to G.L.  c. 268B, s.4(a), a preliminary inquiry into allegations that  Goldman Sachs had violated the conflict of interest law, G.L. c.  268A. The Commission has concluded the inquiry and, on January 15,  1997, voted to find reasonable cause to believe that Goldman Sachs  violated G.L. c. 268A, s.3(a).   

The Commission and Goldman Sachs now agree to the following  facts and conclusions of law:   

1 . Goldman Sachs, a New York limited partnership, is an  investment banking and securities firm with headquarters in New  York City. According to the firm's 1995 Annual Review, Goldman  Sachs' activities and sources of revenue include securities  underwriting, sales and trading and asset management. Goldman Sachs  conducts its business through five operating divisions: Investment  Banking, Fixed Income, Equities, Currency and Commodities, and  Asset Management. At the end of 1995, Goldman Sachs' assets totaled  slightly over $1 billion.

I. Steven Kaseta

2. During the relevant time, Steven Kaseta ("Kaseta") was a  Massachusetts deputy treasurer. As deputy treasurer, Kaseta was  responsible for overseeing the day-to-day administrative activities  of the Massachusetts Teachers and Employees Retirement Systems  Trust ("MASTERS Trust").[1]   

3. During the relevant time, Daniel J. McCarthy ("McCarthy")  was employed as a vice president at Goldman Sachs' Boston  Institutional Department, which functions within the Equities  Division.   

4. During the relevant time, Larry Kohn ("Kohn") was employed  as a vice president with Goldman Sachs Asset Management ("GSAM"),  a division of Goldman Sachs.   

5. In May 1991, the Massachusetts Treasurer's Office issued a  Request for Proposals ("RFP") for investment managers for $595  million in the MASTERS Trust domestic equity pension funds. On May  23, 1991, GSAM submitted a proposal in response to the RFP. In  August 1991, the Treasurer's office awarded GSAM a contract to  manage $100 million of these funds. This contract had an effective  annual fee of $400,000 to GSAM.  

 6. As deputy treasurer, Kaseta was a member of the selection  committee which recommended to the Treasurer the award of the  foregoing contract to GSAM. Furthermore, as a deputy treasurer,  Kaseta was one of the officials responsible for evaluating Goldman  Sachs' performance under the contract from the time the contract  was awarded in August 1991 to September 1993.1' Finally, as a  deputy treasurer, Kaseta was in a position along with the  Treasurer's other staff to recommend that the Treasurer award  similar contracts in the future.   

7. On two occasions between April 1991 and May 1993, McCarthy  entertained Kaseta with meals and theater tickets where Kaseta's  pro rata share was worth $50 or more. On March 12, 1992, McCarthy  provided Kaseta with two tickets to "Man of La Mancha" at the  Colonial Theater in Boston, MA. On this same date, McCarthy also  provided Kaseta and his guest with dinner at Locke-Ober Restaurant.  The total cost of this March 12, 1992 entertainment for Kaseta and  his guest was approximately $130. On December 10, 1992, McCarthy  provided Kaseta with drinks and dinner at the Post House Restaurant  in New York City. Kaseta's pro rata

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share of the cost of this December 10, 1992 entertainment was approximately $95.   

8. Additionally, on December 5, 1991, and June 26, 1992, Kohn  provided Kaseta with theater tickets for shows in New York City.  The cost of these tickets was approximately $290.   
 

9. Goldman Sachs reimbursed McCarthy and Kohn or paid for all  of the expenses they incurred in entertaining Kaseta. Goldman Sachs  viewed the expenses as business expenses warranting reimbursement.  In total, Goldman Sachs, through McCarthy and Kohn, provided Kaseta  with items with a cost of approximately $500.   

10. Section 3(a) of G.L. c. 268A, prohibits anyone from,  directly or indirectly, giving a state employee anything of  substantial value for or because of any official act performed or  to be performed by the state employee.   

11. As a deputy state treasurer, Kaseta was a state employee.   

12. Anything with a value of $50 or more is of substantial  value for s.3 purposes.[3]   

13. The decisions and actions by Kaseta regarding the awarding  and monitoring of contracts to manage MASTERS Trust assets were  official acts performed or to be performed by him as a deputy  treasurer.[4]   

14. As a business, Goldman Sachs acts through and is  responsible for the conduct of its employees acting within the  scope of their employment.[5] Therefore, in that Goldman Sachs  through McCarthy and Kohn provided Kaseta with free meals and  tickets of substantial value for or because of official acts  performed or to be performed by Kaseta, Goldman Sachs violated G.L.  c. 268A, s.3(a).   

15. The Commission is aware of no evidence that any of the  foregoing gifts were given to Kaseta with the intent to influence  any specific official act by him as a deputy treasurer. The  Commission is also aware of no evidence that Kaseta, in return for  gifts, took any official action which would have affected Goldman  Sachs. In other words, the Commission is aware of no evidence that  there was any quid pro quo.[6] The Commission is aware of no  evidence that Goldman Sachs at any time acted in a manner  inconsistent with the best interests of the MASTERS Trust when  providing investment services. However, even if the conduct of  Goldman Sachs' employees was only intended to create goodwill, it  was still impermissible.

II. Edward M. Murphy

16. From May 1989 to June 1995, Edward M. Murphy ("Murphy")  was the executive director of the Massachusetts Health and  Educational Finance Authority ("HEFA").[7]   

17. During the relevant time, Benjamin Wolfe ("Wolfe") was a  Goldman Sachs vice president within the firm's Municipal Bond  Department.[8]   

18. For a number of years, including the years in which Murphy  served as HEFA executive director, Goldman Sachs has been a leading  underwriter of bonds for non-profit institutions in Massachusetts.  As an underwriter, Goldman Sachs would test the market for a bond,  establish a price for the bond, and then agree to sell all or part  of the bond issuance at that price.   

19. During Murphy's tenure at HEFA, Wolfe was one of Goldman  Sachs' senior investment bankers for non-profit institutions in  Massachusetts.   

20. Between 1989 and 1995, HEFA issued approximately $6 to $8  billion in new tax-exempt bonds. HEFA would normally receive the  proceeds of the sale of the bonds, oversee the payment of the  costs of the issuance, such as attorneys' and underwriters' fees, and  remit the balance to the borrowing institution. HEFA would also  monitor the borrowing institution's repayment to the bondholders.   

21. Goldman Sachs was the lead underwriter for approximately  25 percent of all of the bonds issued by HEFA between 1989 and  1995.   

22. As executive director, Murphy assigned the HEFA staff who  would work with a borrowing institution in developing a bond  proposal. Once the proposal was developed, it had to be presented  to and approved by the HEFA Board of Directors, Murphy assigned who  from the HEFA staff would make the presentation to the board  pertaining to the bond. More generally, all agenda items for board  meetings had to be approved by Murphy, otherwise, the items would  not be placed on the agenda.

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23. The HEFA board reserves the right not to enter into a bond  transaction with a particular underwriter if it does not wish to do  so.[9]   

24. Goldman Sachs' profits from HEFA bonds, referred to as its  "take down," was $8 per thousand during Murphy's early tenure, but  later changed to $5 per thousand. (The take down is based on the  bond prices. For example, in a $100 million dollar transaction, if  Goldman Sachs' take down was $6 per thousand, its fees would amount  to approximately $600,000.)   

25. In addition to tax-exempt bond financing, HEFA also agrees  to support "pools." A "pool" is typically a transaction where one  or more borrowers finance more than one project or need by one  umbrella bond issuance. During Murphy's tenure at HEFA, one such  pool was entered into by HEFA with a hospital in 1991. That  hospital was a Goldman Sachs client and was in the process of  building a medical research facility. A pool was organized to make  the management of funding easier. HEFA chose Goldman Sachs to  manage the pool.   

26. In 1991 or 1992, HEFA issued an RFP for a short-term  investment manager for its bond proceeds. Goldman Sachs submitted  a bid on the RFP. Goldman Sachs was not chosen. In 1994, HEFA was  remarketing a pool for a firm which went out of business. HEFA  issued an RFP, on which Goldman Sachs put in a bid. Again, Goldman  Sachs was not chosen.  

 27. As executive director, Murphy participated in each of the  foregoing decisions regarding which firm would be HEFA's short-term  investment manager and which firm would manage a given pool.   

28. On the following three occasions Wolfe provided Murphy and  his wife with entertainment where Murphy's pro rata share cost $50  or more:   

(a) a July 19, 1990 dinner at Cafe Budapest in Boston,  attended by Murphy, Mrs. Murphy, Wolfe and Mrs. Wolfe. The  total cost for the dinner was $284.30; Murphy's pro rata share  was $142.16;   

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

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

29. Goldman Sachs reimbursed Wolfe for the above expenses  incurred in entertaining Murphy. Goldman Sachs viewed the expenses  as business expenses warranting reimbursement. In total, Goldman  Sachs, through Wolfe, provided Murphy with items with a cost of  approximately $630.   

30. As the HEFA executive director, Murphy was a state employee.   

31. The decisions and actions by Murphy regarding what items would go on the board's agenda, which staff would be assigned to a  bond proposal, the choice of a manager for a pool or a short-term  investment manager for bond proceeds were official acts performed  or to be performed.   

32. As stated above, Goldman Sachs acts through and is  responsible for the conduct of its employees acting within the  scope of their employment. Therefore, Goldman Sachs violated s.3(a)  by through Wolfe providing Murphy with free meals and tickets, for  or because of official acts performed or to be performed by Murphy  as HEFA executive director.   

33. The Commission is aware of no evidence that any of the foregoing gifts were given to Murphy with the intent to influence  any specific official act by him as HEFA executive director. The Commission is also aware of no evidence that Murphy in return for  gifts took any official action which would have affected Goldman  Sachs. In other words, the Commission is aware of no evidence that  there was any quid pro quo.19 The Commission is aware of no  evidence that Goldman Sachs at any time acted in a manner  inconsistent with the best interests of HEFA when providing  underwriter services. However, even if the conduct of Goldman Sachs' employees was only intended to create goodwill, it was still impermissible.   

34. Goldman Sachs fully cooperated with the Commission's investigation.

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Remedy

In view of the foregoing violations of G.L. c. 268A, s.3(a),  the Commission has determined that the public interest would be  served by the disposition of this inquiry without further  proceedings, on the basis of the following terms and conditions  agreed to by Goldman Sachs:   

(1) that Goldman Sachs pay to the Commission the sum of $3,500  as a civil fine for violating G.L. c. 268A, s.3(a);   

(2) that Goldman Sachs waive all rights to contest the  findings of fact, conclusions of law in terms and conditions  contained in this agreement in any related administrative or  judicial proceeding to which the Commission is or may be a  party.   

[1] The MASTERS Trust is the combined investment fund for  state employees and state teachers retirement annuities. G.L. c.  32, s.23 establishes a non-paid Pension Investment Committee  ("PIC") to oversee the MASTERS Trust. The day-to-day administrative  activities of the trust are carried out by the Massachusetts  Treasurer's Office. The MASTERS trust is a broadly diversified  portfolio which stood at $5.532 billion at the end of February  1991.   

[2] Kaseta resigned from the Treasurer's office in September  1993.  

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

[4] "Official act" is defined as any decision or action in a  particular matter or in the enactment of legislation.   

[5] See John Hancock, 1994 SEC 646; Mass Medical Society, 1995  SEC 751.   

[6] Indeed, any such quid pro quo understanding would raise  extremely serious concerns under the bribery section of the  conflict of interest law, G.L. c. 268A, s.2. Section 2 is not  applicable in this case, however, as there was no evidence of such  a quid pro quo between the donors and Kaseta.   

[7] HEFA, an independent authority, was created by special  legislation in 1968. Mass. St. 1968, c. 614. HEFA provides capital  financing to public and non-profit institutions for higher  education, non-profit hospitals, nursing homes, and their  affiliates as well as non-profit research and cultural institutions  and schools for the handicapped. This financing is accomplished  primarily through HEFA issuing the tax exempt bonds. The monies  raised are used for project acquisitions, construction, renovation,  refinancing, arid equipment financing.    

[8] Wolfe left Goldman Sachs in May 1995.    

[9] According to Murphy, this policy has never been applied.   

[10] As discussed in fn. 6 above, any such quid pro quo would  raise c. 268A, s.2 issues.

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