Advisory Opinion No. 2003-62

Re: Michael McMahon


The petitioner, the Executive Director of the Rhode Island Economic Development Corporation ("EDC"), a state appointed position, requests an advisory opinion regarding whether he may take an active role for the State in negotiating and offering financial incentives to a Massachusetts-based company that may wish to locate a manufacturing facility in Rhode Island


It is the opinion of the Rhode Island Ethics Commission that the Code of Ethics prohibits the petitioner, the Executive Director of the Rhode Island Economic Development Corporation, a state appointed position, from taking an active role for the State in negotiating and offering financial incentives to a Massachusetts-based company that may wish to locate a manufacturing facility in Rhode Island. This opinion is premised upon the Commission's determination that there is a reasonably foreseeable impact upon the finances of the petitioner's business associate, and upon the petitioner's personal finances, as a result of such official action taken by the petitioner.

The petitioner represents that, prior to accepting his appointment as the Executive Director of the EDC, he was a founder, limited and general partner of RockPort Capital Partners, LP ("RockPort"), a Small Business Investment Corporation ("SBIC") that manages approximately $100 million in venture capital which is primarily invested in early to mid-stage companies. The petitioner had an active management role in RockPort, including sourcing and monitoring deals, and serving on the investment committee. He received a salary and a share of the so-called "carried interest," which is an interest in the profits of RockPort that is distributed to the managing partners as compensation based upon the success of the investments. The petitioner represents that, upon accepting his position as the Executive Director of the EDC, he maintained his investment in RockPort's general partner, but reduced his investment as a limited partner, ceased receiving a salary and ceased having any active management role or participation in investment decisions.

Among the small businesses in which RockPort has invested is Aspen Aerogels, Inc. (Aspen), a company based in Massachusetts that develops flexible, blanket type aerogels for uses in thermal and sound insulation, blast mitigation, IR suppression and fire protection among other thing. In return for its investment, Rockport received an ownership interest in Aspen in the form of convertible preferred stock, a seat on Aspen's Board of Directors and the ability to select Aspen's Chief Executive Officer. The petitioner represents that Aspen has been one of RockPort's most productive investments and that RockPort and the petitioner continue to benefit financially from Aspen's success.

Aspen has experienced significant growth and is in need of expanding its operations to open another manufacturing facility. Northern Rhode Island is among the locations being considered. Indeed, the petitioner represents that Aspen representatives were recently given a tour of the area by United States Congressman Patrick Kennedy in hopes of luring the company to Rhode Island.

In order to attract businesses to Rhode Island and to increase economic development, the EDC regularly offers several financial incentives to businesses willing to locate operations in Rhode Island. These incentives may include corporate income tax reductions, investment tax credits, sales tax exemptions, low interest loans and other incentives. As with any other company, Aspen's decision to open a facility in Rhode Island, as opposed to other areas, will be influenced by the competing financial incentives being offered.

The petitioner asserts that, in the normal course of his duties as Executive Director of the EDC, he would meet with Aspen representatives to encourage a Rhode Island facility. He also would take official action at the EDC to determine and advocate for a fair range of incentives to encourage Rhode Island development. Given his relationship with RockPort, a part owner and Director of Aspen, and given the fact that he and RockPort will financially benefit from Aspen's continued success, the petitioner asks whether may participate in EDC matters relating to Aspen.

Under the Code of Ethics, a public official may not participate in any matter in which he has an interest, financial or otherwise, that is in substantial conflict with the proper discharge of his duties or employment in the public interest. R.I. Gen. Laws § 36-14-5(a). An official will have an interest in substantial conflict with his official duties if it is reasonably foreseeable that a "direct monetary gain" or a "direct monetary loss" will accrue, by reason of his official activity, to the official, a family member, a business associate, an employer or any business which the public official represents. R.I. Gen. Laws § 36-14-7(a); Commission Regulation 36-14-6001. Furthermore, a public official may not use his or her public office or confidential information received through his office to obtain financial gain, other than that provided by law, for himself or for any business associate. R.I. Gen. Laws § 36-14-5(d). A business associate is defined as "a person joined together with another person to achieve a common financial objective." R.I. Gen. Laws § 36-14-2(3). The term “person” is defined in the Code as “an individual or business entity[.]” R.I. Gen. Laws § 36-14-2(7).

Under the facts as represented by the petitioner, it is the opinion of the Commission that the Code of Ethics prohibits the petitioner from participating in the offering of financial incentives to Aspen. Any financial incentives granted to Aspen by the EDC are likely to financially impact Aspen's owners, including RockPort, the petitioner's business associate. Furthermore, the petitioner stands to benefit personally through his partnership interest in RockPort and his corresponding share of the carried interest attributable to RockPort's investment in Aspen. For these reasons, the petitioner is required to recuse from any EDC matters relating to the offering of financial incentives to Aspen. Upon such recusal, the petitioner's responsibilities may not be delegated to any person in a position that is subordinate to the petitioner. Because the petitioner is the Executive Director of the EDC, the Commission presumes that there are no EDC employees eligible for such delegation.

It may be that responsibility for issues relating to Aspen can be transferred to another department, or to the Economic Development Commission itself as opposed to its staff. The Ethics Commission declines to opine on the feasibility or legality of such a plan without it first being proposed with specificity. The petitioner is invited to explore such issues with the Commission staff and to seek further guidance from the Commission as needed.

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