A new election season is upon us, which brings to mind the little considered, but potentially perilous, phenomenon of the corporate executive turned elected official. In New Jersey, the former chairman and chief executive officer of Goldman Sachs, Jon Corzine, became a U.S. senator, and is now governor of New Jersey. In New York City, a former general partner of Salomon Brothers and the founder of Bloomberg, L.P., Michael Bloomberg, is the Big Apple's mayor. In Pennsylvania, a Hall-of-Fame wide receiver turned broadcaster and businessman, Lynn Swann, is running for governor. And that's not to mention "actors" or professional wrestlers turned governors (Arnold Schwarzenegger and Jesse Ventura) or famous businesspersons turned political flameouts (Ross Perot and Steve Forbes). Across the country, successful and wealthy private-sector leaders are vying to put their executive experience to work in the public arena.
In many instances, these newly minted politicians are funding their own campaigns. Independence from political donors, they claim, is a political virtue. But these individuals may not be entirely separated from the companies they used to lead, and their "self-funding" may itself be funded with forms of compensation from their former companies. Which raises a hidden pitfall: what happens when your company's former executive remains associated with the company, or even still on the payroll, while becoming the company's new political contact? In the labyrinthine world of governmental ethics, where statutes and regulations and ordinances and prosecutorial policies all overlap one another, the answer for those who don't learn the terrain is: nothing good.
The top tier of the regulatory framework is the federal criminal laws prohibiting bribery, criminal gratuities, and fraud. The primary federal bribery statute is set forth at 18 U.S.C. 201, although another federal statute, 18 U.S.C. 666, applies analogous bribery prohibitions to others who administer programs receiving federal funds. These federal laws generally prohibit improper payments to federal officials. The "bribery" portion of this statute is set forth at 201(b) and prohibits the giving of "anything of value" in order to influence an official act. There must be a showing of a specific quid pro quo , that is, that the official agreed - whether overtly or by the proverbial wink and a nod - to accept the offered gift in return for the exercise of his official power. The penalties for running awry of these laws is steep. Each violation is punishable by a fine of three times the monetary equivalent of the thing of value or imprisonment for up fifteen years (or both).
"Bribery" is a strong word. How could your regular, otherwise law-abiding corporation find itself under suspicion of federal bribery and criminal corruption of an elected official or candidate? Unwittingly. Say a corporation has one department delivering a deferred compensation payment at the same time that a current employee talks with the former colleague-turned-politician at a fundraising event, or chamber of commerce meeting, or even at a Little League game - and who perhaps discusses what goods or services the company may be able to provide the public. A prosecutor's eyebrows may be raised when a lucrative government contract follows. What may have been a seemingly innocuous deferred compensation payment now dangerously resembles that impermissible quid pro quo to get your foot in the door for that contract - especially if your company had not previously performed that work.
Fine, you say, we'll just not go to any Little League games after Election Day where our former colleague's child is pitching. But in addition to its conventional "bribery" prohibitions, 18 U.S.C. 201 also prohibits improper "gratuities" and is broader in scope than its bribery counterpart. For example, this gratuity offense applies to candidates for office as well as officials already serving in their public roles. More alarmingly, there can be a violation of the gratuities statute even if the offered "gratuity" - again, basically anything of value - is given without a contemporaneous agreement to deliver some official act in return. (But note, although the gift need only be made with the intent to influence an official act, an illegal gratuity will not be found unless the public official then follows through as a consequence of the gift with some kind of an official "specific act." It took one defendant's appeal all the way to the U.S. Supreme Court to make that important additional requirement clear, which should serve as a cautionary tale of what risks a company confronts when the scope of these laws is left to the interpretation of an over-prosecutorial prosecutor.) The whole idea behind the statute is to prevent parties from obtaining preferential treatment by providing things of personal value to public officials. It may be no defense that the candidate has not yet been elected or assumed office. That deferred payment may be blameless, but the prudent course is to avoid having to defend such an allegation in the first place.
The accidental violator of these provisions can see its problems multiplied by what will feel like the next spring-loaded trap. Federal criminal statutes governing mail and wire fraud can also be applied where an entity provides something of value to a public official. Generally, the mail and wire fraud statutes, 18 U.S.C. 1341, 1343, prohibit the use of the U.S. Postal Service or public airwaves for the purpose of executing "any scheme or artifice to defraud[.]" That term - "scheme or artifice to defraud" - is statutorily defined to include depriving another "of the intangible right of honest services." And the "right of honest services," in turn, includes a right to honest and impartial government. Also, a party making improper payments or obtaining improper benefits may be held criminally liable for the underlying fraud or for acting in concert or conspiracy with others for the purpose of executing a fraudulent scheme. So when your payroll department wires what it thinks is a routine payment, the prosecutor's ultimate response may well have several counts.
While perhaps academically interesting (or not), you might be wondering what this all has to do with you, and whether your executives really have the moxie to run for high elected office. You may not be able to imagine your current day officemate running for office in the U.S. Senate, but it is probably not too far a stretch to picture one of your company's executives running for or elected to the local city council, zoning commission or school board. The case law is not uniform as to whether and when federal laws apply to those holding state or municipal office, but several defendants may have been shocked to learn that any public official who administers programs or makes decisions that affect the distribution of federal funds may also be subject to these federal criminal laws. When that governmental body takes action affecting the disbursement of federal social services dollars, or housing assistance monies, or education funding, then a very local entity can take on a decidedly federal flavor. Moreover, the states pick up where the federal framework ends, typically with their own collection of bribery, gratuity and other "corrupt influence" statutes and regulations. Often, state and local requirements are duplicative of federal requirements, but each state or local law or regulation comes with its own nuances and, consequently, dangers.
Criminal statutes are only the first layer of the onion. The Federal Office of Government Ethics also promulgates ethical standards and regulations at 5 C.F.R. 2600 et seq. which generally apply to members of the federal executive branch of government (although not to municipal public officials). Each state does the same. To make matters even more complex, individual municipalities are getting into the act, adding their own variations of requirements and prohibitions. These regulations often include extensive disclosure requirements. If you work for a tight-lipped company that shares compensation information on a need-to-know basis only, then you should be aware that many of these regulatory bodies will, by law, need to know what your former executive is being paid, and perhaps what his or her family members are being paid too, if they also work for the company.
While all of these requirements may be driven by a laudable desire to ensure transparent, ethical government, the lesson to corporate counsel whose dynamic corporate leaders of today may become their elected leaders of tomorrow is straightforward: do not take it for granted that whatever innocent discussions or payments occur will not seem nefarious after the fact. For many companies, which do not provide products or perform services of value to a governmental entity, it would be simple to eschew future contact with the new public official. For those companies which could stand to benefit from public work, however, perhaps the best way to insulate the company from complaints about payments made to elected officials is to make crystal clear the contractual obligations of what the company will pay the former executive, and when. By locking these payments into obviously non-discretionary contracts, the company may be able to protect itself from later charges that those payments were delivered with the intent of affecting the official's conduct. If such an ironclad contract is a practical impossibility - perhaps it was negotiated long ago, and now that contract giving the company maximum flexibility and discretion does not seem so liberating - it may be time to revisit the subject with your former executive and either postpone any additional payments or renegotiate the schedule of future payments, clarifying their details. After all, the new politician has as much to lose from a mishandling of this subject as you.
Nevertheless, the onus falls on the corporation to make sure any work it does obtain through its former colleague is compensated in a scrupulously fair and above-board manner. Knowing the hazards involved is the first step to successful navigation.
Published October 1, 2006.