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Spitzer Ignores Ethics Opinion - Violates State Law

By: Thomas Suozzi

Date: Sept. 9, 2006

Issues: Unemployed and Low-Income Entitlements and the Safety Net Taxes Health Insurance

Spitzer Ignores Ethics Opinion - Violates State Law

The Daily News is the third New York newspaper to raise questions about Spitzer's role in his family's charitable trust.

Nassau County Executive and Democratic Candidate for Governor Tom Suozzi charged that Attorney General Eliot Spitzer ignored ethics opinion and violated New York State law by serving as a board member on his family's charitable trust. The Attorney General's office is charged with the oversight of the state's 60,000 charitable institutions.

"This is as clear cut a conflict of interest as the fox guarding the henhouse," said Suozzi. "More importantly, it is part of a larger pattern of behavior. Once you get past the hype and headlines, and connect the dots of Eliot Spitzer's career, New Yorkers will see that my opponent has trouble playing by the same rules as every one else."

The New York Daily News yesterday reported, following previous reports by the New York Post and Newsday about Eliot Spitzer's ethical conflicts. According to the paper's report, Spitzer "has never asked the state Ethics Commission to approve his work for the charity because, aides say, his post is unpaid and no laws or regulations bar him from serving as a trustee."

But the Ethics Commission's Advisory Opinion No. 90-25 in fact does just that, stating that when "a policy-making employee desires to serve or is serving on the board of an organization which is regulated or licensed by the State agency with which that individual is employed . . . a conflict of interest will always be raised in such circumstances."

"This is part of a pattern in which my opponent is unwilling to hold himself to the high ethical standards his office demands, and of which he often brags," said Suozzi. "Eliot Spitzer should do what he demands others do - follow the law. He should immediately resign from the management of the trust, and his office should quantify, define and disclose any and all contacts between the attorney general's office and Eliot Spitzer's charity.

"Eliot Spitzer needs to answer the following questions:

1. Has the OAG investigated or audited the Spitzer Family Trust at any point?
2. What official business' has the OAG had with the Spitzer Family Trust? What was the resolution? Did they operate without fear of favor'?
3. Is the OAG aware of the financial management problems of the Spitzer Family Trust that resulted in a $51,768 federal fine, and did the Office open an investigation when they became aware of them? If not, why not?
4. Eliot Spitzer's spokesperson says he has recused himself, but has he? His government press secretary is commenting on political payola allegations, and on legal matters effecting Eliot Spitzer as an individual. Will the OAG now disclose the content and scope of the official business' it has had with the Spitzer Family Trust? Are they even capable under New York State law of conducting further business' with the Trust?

"Eliot Spitzer needs to answer these questions immediately," Suozzi concluded.

Fact Sheet:
What's wrong with Eliot Spitzer serving on the Spitzer family trust?

Questions have been raised about the Spitzer family trust activities. Who will investigate those questions? The Office of the Attorney General?

"It raises ethical questions - and suggests a level of self-dealing - when financial investments are placed with investors who happen to be his biggest contributors."

Marcy Murninghan is a Boston-based consultant to foundations and a former ethics professor at Harvard Divinity School.

"Wearing both hats is a potential conflict because his private life, family life and charitable life could all bleed into his public life."

Rachel Leon is the executive director of New York Common Cause.

"Our advice to the attorney general is that he should do one of two things: Either request an advisory opinion from the state Ethics Commission - or withdraw from the board."

Blair Horner is legislative director for the New York Public Interest Research Group.

(New York Daily News, Family charity is regulated by Spitzer's office, July 9, 2006)

How does Advisory Opinion 90-25 relate to Eliot Spitzer's oversight of the Spitzer family trust?

Application of §74 of the Public Officers Law to a State employee, who has been designated as a policy-maker by his State agency, serving as a member of the board of directors of a not-for-profit agency licensed by the employee's State agency.

Section 74 of the Public Officers Law sets forth a code of ethics for State employees, prohibiting conflicts of interest and their appearance.3 The Rule with respect to conflicts of interest, as contained in §74(2), provides the following:

No officer or employee of a state agency . . . should have any interest, financial or otherwise, direct or indirect, or engage in any business or transaction or professional activity or incur any obligation of any nature, which is in substantial conflict with the proper discharge of his duties in the public interest. Subdivision 3 of §74 contains standards which further define the Rule. In particular, §§74(3)(f) and (h) include the following language: An officer or employee of a state agency . . . should not by his conduct give reasonable basis for the impression that any person can improperly influence him or unduly enjoy his favor in the performance of his official duties, or that he is affected by the kinship, rank, position or influence of any party or person.

An officer or employee of a state agency . . . should endeavor to pursue a course of conduct which will not raise suspicion among the public that he is likely to be engaged in acts that are in violation of his trust.

It is not necessary that an actual conflict be present before a violation of §74 can occur. Rather, §74 of the Public Officers Law prohibits acts that, by their nature, may lead to a conclusion that an appearance of such a conflict of interest could occur.

The Commission concludes that a State officer or employee, who has been designated by his appointing authority as serving in a policy-making position or any employee who is under the direct control and supervision of a policy-maker, may not also serve as a director or member of the board of an organization that is regulated or licensed by his employing State agency. (New York State Ethics Commission, Advisory Opinion No: 90-25)
Isn't the Spitzer family trust a charitable organization?

Finally, the Commission recognizes the importance of State officers and employees engaging in community service. However, such service must be consistent with the public policy of this State to avoid even the appearance of a conflict of interest in the performance of official duties. (New York State Ethics Commission, Advisory Opinion No: 90-25)

STATE OF NEW YORK
STATE ETHICS COMMISSION

Advisory Opinion No. 90-25:

The following advisory opinion is issued in response to an inquiry from the Office of Mental Retardation and Developmental Disabilities ("OMRDD") as to whether there would be a violation of the Public Officers Law if an employee of OMRDD, who has been designated as a policy-maker by the agency, serves as a member of the board of directors of a not-for-profit agency licensed by OMRDD.

Pursuant to the authority vested in the New York State Ethics Commission ("Commission") by §94(15) of the Executive Law, the Commission hereby renders its opinion that an OMRDD employee, who has been designated as a policy-maker by the agency, may not serve on the board of directors of the not-for-profit agency licensed by OMRDD because of the appearance of a conflict of interest, in violation of §74 of the Public Officers Law, which would occur.
BACKGROUND

The individual who is the subject of this opinion serves as [position] at the [facility in County A], an OMRDD facility. In this position, the individual noted that he has operational responsibilities for the Business Office, Personnel Office, Maintenance, Support Services and Clinical Professional Services. He oversees each of these major functional areas within the [facility in County A] to ensure that the facility's actions are in concert with the goals of OMRDD and that all State rules and regulations are followed in regard to day-to-day business actions. The individual has also been designated by OMRDD as serving in a policy-making position.1

The individual has been invited to become a member of the Board of Directors of [organization]. [Organization] is a not-for-profit, tax exempt, charitable organization serving the mentally handicapped by providing residential, day training, day treatment, and recreational programs. [Organization] is located in and receives some limited financial support from [County B] and does not operate any programs in [County A]. [Organization] runs community residences, supportive and supervised apartments, sheltered workshops, day treatment centers, adult recreation and family support, and a summer day camp in twelve communities all of which are located in [County A]. [Organization] is an alternative to State institutionalization, which would be provided by [a facility in County B], servicing [Counties B, C, and D].2

According to the requesting individual, the Board of Directors of [organization] consists of twenty-one members and meets a minimum of four times a year to establish policy, discuss plans for expansion and innovation, review events in the residential programs and respond to financial realities. About 60 percent of the members of the Board are parents of [organization] clients, while the other 40 percent are drawn from the community.

[Organization] is licensed by OMRDD. Specifically, pursuant to §31.22 of the Mental Hygiene Law and §404(q) of the Not-for-Profit Corporation Law, [organization] is required to receive an operating certificate from OMRDD before beginning any residential or day program. The Mental Hygiene Law also provides for specific procedures to be followed in the certification process.

Pursuant to §13.01 of the Mental Hygiene Law, OMRDD is mandated to work with local governments, voluntary agencies, and all providers of services (such as [organization]) to develop an effective, integrated, comprehensive delivery system for services to the mentally retarded. OMRDD, by regulations, sets the rates which facilities, such as [organization], may bill for services provided. OMRDD provides either total State funding for particular [organization] programs or Medicaid reimbursement funding in which the State and the federal government share the costs. The central administration of OMRDD makes funding decisions, not the [facility in County A], which is a separate OMRDD facility.

The individual who is the subject of the opinion has stated that he will receive no compensation for his service as a member on the Board of Directors of [organization]. He also notes that [organization] is located in [County B] and does not operate any programs in [County A] where the individual's DDSO is located. The [facility in County A] has no contractual arrangement with [organization]. However, the individual, on behalf of [facility in County A] and in his capacity as [position], was able to arrange temporary placements for five [County A] based clients with [organization] during a period where there was a shortage of available day treatment spaces in [County A].
DISCUSSION

In 1987, the Ethics in Government Act was enacted to restore the public's trust and confidence in State officers and employees through the prevention of corruption, favoritism, undue influence and other abuses of one's official position in State service. The Ethics in Government Act restricts certain business and professional activities of State officers and employees. As an employee of OMRDD, the individual in question is subject to the provisions of §§73 and 74 of the Public Officers Law.

Section 73(7) of the Public Officers Law sets specific restrictions on the business activities of State employees, including prohibiting a State employee from appearing or rendering services for compensation in connection with the sale, rental or lease of real property, goods or services or licensing in relation to any matter before any State agency. In the present matter, the requesting individual will not be compensated for his services to [organization] and, therefore, §73(7) would not apply.

Subdivision 3 of §74 contains standards which further define the Rule. In particular, §§74(3)(f) and (h) include the following language:

An officer or employee of a state agency . . . should not by his conduct give reasonable basis for the impression that any person can improperly influence him or unduly enjoy his favor in the performance of his official duties, or that he is affected by the kinship, rank, position or influence of any party or person.

The Commission must determine whether the OMRDD employee's service as a member of the board of directors of a not-for-profit agency licensed by OMRDD will raise the suspicion of the public that the employee, in his service to [organization], is likely to be engaged in acts that are in violation of the trust of his position with OMRDD. It is not necessary that an actual conflict be present before a violation of §74 can occur. Rather, §74 of the Public Officers Law prohibits acts that, by their nature, may lead to a conclusion that an appearance of such a conflict of interest could occur.

The requesting individual has been designated by his appointing authority as serving in a policy-making position. Such a designation demonstrates that the individual has substantial responsibilities and obligations in his position at OMRDD. He has operational responsibilities for the [facility in County A] and the facility's day-to-day business actions. He must assure that the facility's actions are in concert with the goals of OMRDD and that all State rules and regulations are followed. He is in a position where he has contact with the central administration of OMRDD and could have contact with those OMRDD employees, who also have direct oversight over the [organization] operation and its licensure. In addition, as a policy-maker, the individual is in a position where he could influence the actions of other OMRDD employees, whether on behalf of [organization] or not.

Finally, because it is public information that the individual is employed by OMRDD in the position of [position] for the [facility in County A], his presence on the [organization] board could raise the suspicion among the public that [organization] receives preferential treatment or some other competitive advantage over similar not-for-profit organizations because of this individual's relationship with OMRDD central administration. Every time [organization] receives a "benefit" or favorable decision from OMRDD, other providers, as well as the public in general, may conclude such benefit or decision was provided as a result of this individual's influence with and relationship to the OMRDD central administration. And, even if no other provider can assist with placements for the [facility in County A], his placement of such clients with [organization], as opposed to any other facility outside [County A], may be questioned under §74 of the Public Officers Law.

This question goes beyond simply the appearance of a conflict of interest faced by this policy-maker, because of the relationship of his agency with the private entity with which he is affiliated. It strikes at all similar situations, where a policy-making employee desires to serve or is serving on the board of an organization which is regulated or licensed by the State agency with which that individual is employed. We conclude that a question of an appearance of a conflict of interest will always be raised in such circumstances. A policy-maker, by definition, has influence in the execution of policy or assists one who does. Even if that policy-maker is not in the line of authority to regulate or oversee the private organization on whose board he or she serves, the appearance that he or she can influence other policy-makers, with whom he or she works or who have appointed him or her, clearly exists whenever favorable action is taken by the agency towards such organization.

For all of the foregoing reasons, the Commission concludes that State officers and employees, who have been designated as serving in policy-making positions by their appointing authorities, may not serve as directors or members of the boards of organizations regulated, overseen or licensed by their employing State agency.4

The Commission is also mindful of the conflict of interest standard contained in §74(3)(i) of the Public Officers Law which states as follows:

No officer or employee of a state agency employed on a full-time basis nor any firm or association of which such an officer or employee is a member nor corporation a substantial portion of the stock of which is owned or controlled directly or indirectly by such officer or employee, should sell goods or services to any person, firm, corporation or association which is licensed or whose rates are fixed by the state agency in which such officer or employee serves or is employed.

While §74(3)(i) does not specifically address whether an employee may serve as an uncompensated board member of an organization licensed by or whose rates are set by the employing State agency, this prohibition does reflect that the Legislature was concerned with the relationship between the State agencies and the entities they regulate and the appearance of a conflict of interest that these relationships would generate in the specific situation where compensation is received.5

The Commission has also reviewed an Opinion of the Attorney General, addressing the application of §74 of the Public Officers Law to similar circumstances.6 The Deputy Commissioner of the Division of Adult Residential Care in the Department of Social Services wished to serve on the advisory board of the Foundation for Long Term Care, Inc., a not-for-profit affiliate of an association of operators of adult homes regulated by the Department of Social Services. Of significance for the Attorney General was the fact that the Division of Adult Residential Care had comprehensive responsibility for the approval and supervision of the establishment of all adult homes in New York State, whether or not the adult homes were not-for-profit or privately owned. The Deputy Commissioner directed the activities of the Division which, in turn, regulated the adult homes including ones that were affiliated with the not-for-profit foundation. As the Attorney General stated:

No matter how well intentioned he may be, if any official act of his should be a subject of fair disagreement in the industry, some suspicion might be raised as to whether he was influenced by his relationship to the Foundation for Long Term Care, Inc. Under these set of circumstances, the Attorney General concluded that the Deputy Commissioner could not accept the position without creating a conflict of interest and engaging in a violation of the Code of Ethics of §74.

In the present matter, the individual who is the subject of this Opinion has, in the past, referred clients of the [facility in County A] to [organization]. This conduct, even if well intentioned, is the type of official act referred to in the above-mentioned Opinion of the Attorney General that might raise the suspicions of the public that the individual was influenced to refer the clients to [organization] because of his position on the [organization] board.

The Commission concludes that a State officer or employee, who has been designated by his appointing authority as serving in a policy-making position or any employee who is under the direct control and supervision of a policy-maker, may not also serve as a director or member of the board of an organization that is regulated or licensed by his employing State agency. Therefore, the individual who is the subject of this opinion, by virtue of the fact that he has been designated by OMRDD as a policy-maker, may not serve on the board of directors of [organization], an organization licensed by and whose rates are set by OMRDD, without a prohibited conflict of interest.

This Opinion, until and unless amended or revoked, is binding on the Commission in any subsequent proceeding concerning the requesting individual who acted in good faith, unless material facts were omitted or misstated by the person in the request for opinion.
All concur:
Elizabeth D. Moore, Chair
Angelo A. Costanza
Norman Lamm
Donald A. Odell, Members
Dated: November 15, 1990

ENDNOTES
1. Individuals designated as policy-makers must file an annual statement of financial disclosure, pursuant to §73-a of the Public Officers Law. The Commission has also adopted regulations (19 NYCRR Part 932), concerning the outside activities of State officers and employees who have been designated as serving in policy-making positions by their appointing authorities. The regulations on outside activities require that a policy-maker receive the approval of both his appointing authority and the Commission, where the outside activity entails the receipt of gross income over $4000 or where the individual serves on the board of directors or as an officer of a for-profit business or institution. No approval is required for policy-makers who serve as uncompensated board members of not-for-profit corporations.
2.There are twenty-one OMRDD maintained developmental centers located throughout New York State.
3. For example, under §74 of the Public Officers Law, there would be an appearance of a conflict of interest for any employee of OMRDD, whether a policy-maker or not, who is involved, as part of their State duties, with either the licensure, regulation, or rate setting of a voluntary organization, and who serves as a director or member of the board of the organization.
4. The Commission also concludes that those employees, who are under the direct control and supervision of an individual serving in a policy-making position, may not serve as a director or member of the board of an organization regulated or licensed by their employing State agency. This prohibition would preclude a policy-maker from designating his or her subordinate to provide services to an organization from which the policy-maker is barred by this Opinion.
5. Under §74(3)(i), no employee of OMRDD, whether a policy-maker or not, could sell goods or services to the [organization].
6. 1979 Op. Atty. Gen. 66.

Family charity is regulated by Spitzer's office
New York Daily News, Sunday, July 9, 2006

By Douglas Feiden

Attorney General Eliot Spitzer, the top cop for New York's 60,000 charities and nonprofits, also helps his family run a charity regulated by his office.

The Spitzer Trust invests nearly all of its assets - $25.9 million - in hedge funds and equity funds. Executives at those firms, meanwhile, have pumped hundreds of thousands of dollars into Spitzer's front-running Democratic gubernatorial campaign.

IRS records and state Board of Elections filings reviewed by the Daily News show that the trust:

Placed $9.5 million with Cramer-Berkowitz, a hedge fund. Jeffrey Berkowitz, its principal, gave $50,100 to Spitzer through his limited liability company, Berkowitz Capital.

Invested $7 million with hedge funds Seneca Capital and Seneca International. Douglas Hirsch, the managing partner, also plunked down $50,100, the maximum allowable by law.

Put $3.8 million into Bedford Fall Investors, another hedge fund. Karen Finerman, president of its parent firm, also handed Spitzer $50,100. Another manager gave $10,000.

Placed $1 million with Golub Capital Partners, a private equity firm. Lawrence Golub, its president, also maxed out, and another executive tossed in $25,000.

Berkowitz and Hirsch didn't return calls. Finerman and Golub were out of town.

The hedge funds are run by people with long personal friendships with the Spitzers. Given those ties, "It makes sense that the CEOs, as individuals, would choose to support Eliot," said Spitzer communications director Darren Dopp.

But Marcy Murninghan, a Boston-based consultant to foundations and a former ethics professor at Harvard Divinity School, said, "It raises ethical questions - and suggests a level of self-dealing - when financial investments are placed with investors who happen to be his biggest contributors."

Since 2001, Spitzer has served with his parents and brother as one of the four unpaid trustees of the Bernard and Anne Spitzer Charitable Trust.

Bankrolled by his 82-year-old father, Bernard, who struck it rich in midtown real estate, the Spitzer Trust is one of the little-known jewels of Manhattan philanthropy. With neither staff nor consultants, it keeps overhead low and writes fat checks - discreetly - to dozens of cultural, religious, scientific and educational institutions.

"The family has never advertised the fact that it's donated tens of millions of dollars to charity," Dopp said.

Spitzer declined to address the finances of his charity or any perceived role it might play in his political career.

Dopp said the family members give because they're thankful for their business success and want to give back to the community.

But good-government groups, law professors and attorneys for nonprofits questioned why a public official - the No. 1 charities regulator in the state - would sit on a private charitable board monitored by his subordinates.

"Wearing both hats is a potential conflict because his private life, family life and charitable life could all bleed into his public life," said Rachel Leon, executive director of Common Cause/NY.

Aides say Spitzer has recused himself from any official business his office has with the trust. He has never asked the state Ethics Commission to approve his work for the charity because, aides say, his post is unpaid and no laws or regulations bar him from serving as a trustee.

That's not good enough, says Blair Horner, legislative director for the New York Public Interest Research Group: "Our advice to the attorney general is that he should do one of two things: Either request an advisory opinion from the state Ethics Commission - or withdraw from the board."

The good works of the charity are abundant. It helps the Anti-Defamation League stamp out hate, funds research into juvenile diabetes, supports programming for Channel 13 and mounts butterfly exhibits at the Museum of Natural History.

But the Spitzer Trust, which is tax-exempt, does not have an unblemished record with the Internal Revenue Service. It had to pay a $51,768 IRS penalty in 2004 for failing to make charitable gifts at the level mandated by U.S. tax law.

Dopp said the elder Spitzer decided not to meet the trust's obligations because, after giving out several hundred thousand dollars, he had difficulty finding recipients that met his standards for the remaining amount. So he chose to pay the penalty instead.

"It's not a fraud on the United States - but it is technically a violation of U.S. law," said Marcus Owens, an attorney who was chief of the IRS exempt organizations division from 1990 to 2000.

The great institutions of the city - the Jewish Museum, New York Public Library, Metropolitan Museum of Art - have been the typical recipients of the family's largess.

But politically connected groups that can advance Spitzer's campaign for higher office have also been funded, though there's no evidence they were picked for that reason. Among them:

The Progressive America Fund, a left-leaning civic group in Brooklyn that runs get-out-the-vote drives, got $30,000 in 2004. PAF is closely tied to the union-backed Working Families Party, which endorsed Spitzer seven months later.

"Who do you think we'd support?" said Dan Cantor, the party's executive director. "We'd have paid for the right to endorse him."

The NARAL Pro-Choice New York Foundation, affiliated with the state's most influential abortion-rights group, has received $101,000 since Spitzer became a trustee five years ago. NARAL endorsed him in February - and slammed his opponent, Nassau County Executive Tom Suozzi, as "not trustworthy."

"If they hadn't given us a penny, we'd still be trying to elect Eliot Spitzer," said Robert Jaffe, NARAL executive vice president.

The Drum Major Institute, a think tank linked to defeated Democratic mayoral candidate Fernando Ferrer, a political ally of Spitzer, got $10,000.

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