ABC, LLC v. State Ethics Commission

• Decision Date: 29 July 2003
• Docket Number: (SC 16686)
• Citation: 826 A.2d 1077,264 Conn. 812
• Court: Connecticut Supreme Court
• Parties: ABC, LLC, ET AL. v. STATE ETHICS COMMISSION.

264 Conn. 812

826 A.2d 1077

ABC, LLC, ET AL. v. STATE ETHICS COMMISSION.

(SC 16686)

Supreme Court of Connecticut.

Argued March 21, 2003.

Officially released July 29, 2003.

Sullivan, C. J., and Katz, Vertefeuille, Zarella and Moran, Js. Eliot D. Prescott, assistant attorney general, with whom were Jane R. Rosenberg, assistant attorney general, and, on the brief, Richard Blumenthal, attorney general, for the appellant (defendant).

Jeffrey J. Mirman, with whom was R. Bartley Halloran, for the appellees (plaintiffs).

Opinion

SULLIVAN, C. J.

The defendant, the state ethics commission (commission), appeals¹ from the judgment of the trial court sustaining the plaintiffs'² appeal pursuant to General Statutes § 4-183³ from a declaratory ruling of the commission regarding the scope and application of the Code of Ethics for Lobbyists, General Statutes § 1-91 et seq. We conclude that, because the declaratory ruling was based on hypothetical facts, the plaintiffs were not aggrieved by the commission's ruling within the meaning of § 4-183 and, therefore, the trial court lacked subject matter jurisdiction over the plaintiffs' appeal. Accordingly, we reverse the judgment of the trial court.

The record contains the following relevant facts and procedural history. On November 24, 1999, the plaintiffs, pursuant to General Statutes § 4-176,⁴ petitioned the commission for a declaratory ruling on six questions⁵ pertaining to the scope and application of General Statutes §§ 1-91 (k),⁶ 1-97 (b)⁷ and 1-99 (a).⁸ At the time, the commission was investigating whether the plaintiffs' conduct in connection with certain contractual transactions involving the plaintiffs, two venture capital investment firms and the state treasurer's office violated the prohibition on contingent fee lobbying set forth in § 1-97 (b). The commission granted the request for a ruling and ordered that a hearing on the petition "be conducted in the course of the first Docket Number regarding the [pending investigations of the plaintiffs] to reach the preliminary hearing stage ...." By agreement of the parties, however, the facts alleged in the petition and presented at the hearing on the petition were "submitted for the sole purpose of obtaining a Declaratory Ruling, and the resultant Ruling should not be construed as addressing the specific conduct of the [plaintiffs in the transactions then under investigation by the commission]."

The parties stipulated to the following relevant facts for purposes of the declaratory ruling.⁹ The plaintiff Truro Associates, LLC (Truro), is a limited liability company formed under the laws of this state. The plaintiff George Finley is Truro's president, and the plaintiffs Peter Kelly and John F. Droney are partners in the company. On August 14, 1997, Truro entered into an agreement with IAI Ventures, Inc. (IAI Ventures), a venture capital firm and the managing member of IAI World Fund, LLC (IAI World Fund). Under the agreement, Truro was obligated to assist IAI Ventures in identifying large financial institutions as potential members of IAI World Fund in exchange for a fee contingent upon the amount of the institution's investment. The agreement prohibited Truro from engaging in any attempt to explain, sell or recommend investment in IAI World Fund.

In September, 1994, Finley sought a legal opinion from Paul McCormick, an attorney, regarding the application of Public Acts 1994, No. 94-69 (P.A. 94-69), to the marketing of services by Crossroads Management Partners, another entity in which Finley had an interest, to the state treasurer's office and its servicing of existing contracts. Public Act 94-69 had amended the statutory definition of "administrative action" set forth in General Statutes (Rev. to 1993) § 1-91 (a) to include "any action or nonaction of any executive agency or quasi-public agency, as defined in section 1-79 ... regarding a contract, grant, award, purchasing agreement, loan, bond certificate, license, permit or any other matter which is within the official jurisdiction or cognizance of such an agency."¹⁰ By letter dated December 27, 1994, McCormick advised Finley that, in his opinion, contacts with the state treasurer's office for the purpose of servicing investment management contracts, renewing existing contracts or selling new services did not constitute lobbying under P.A. 94-69 because those activities were exempted under §§ 1-92-42a through 1-92-42c of the Regulations of Connecticut State Agencies.¹¹

Before engaging in any conduct in furtherance of its obligations under the agreement with IAI Ventures, Truro also obtained a legal opinion from Richard Kraut, an attorney and the former assistant director of enforcement for the Securities and Exchange Commission, concerning Truro's compliance with state and federal securities law. Kraut advised Truro that it could not engage in: (1) the sale, solicitation of offers, or recommendations of a security to an investor; (2) the provision of advice to investors; or (3) negotiations with prospective buyers. He also advised Truro that it could have no involvement in the investments and that any fees received by Truro as a result of its activities must be disclosed to the state treasurer in writing.

In 1997, Finley, on behalf of Truro, inquired of the then state treasurer, Christopher Burnham, whether the treasurer's office would be interested in investing in a venture capital fund. When Burnham indicated his interest in making such an investment, Finley informed him about IAI Ventures and arranged a meeting between Burnham and representatives of IAI Ventures, which Finley also attended. Finley did not engage in any sales conduct with respect to the IAI World Fund and did not explain the investment or negotiate any terms of the state treasurer's investment in the fund. Ultimately, the state treasurer entered into an agreement with IAI Ventures to invest in IAI World Fund. On August 15, 1997, Truro filed with the state treasurer an unsolicited and voluntary disclosure of the type and amount of the fee that it would receive from IAI Ventures if the state invested in IAI World Fund.

The plaintiff St. James Associates, LLC (St. James), is a limited liability company formed under the laws of this state. Finley is St. James' president and Droney is a partner in the company. On October 15, 1998, St. James entered into an agreement with Crescendo Ventures III, LLC, and Crescendo Venture Management, LLC (jointly, Crescendo), concerning the Crescendo III, LP Fund (Crescendo Fund). The terms of the agreement were virtually identical to the terms of the agreement between Truro and IAI Ventures. After entering into the agreement, Finley and Droney inquired of the then state treasurer, Paul Silvester, whether the treasurer's office would be interested in investing in the Crescendo Fund. When Silvester indicated his interest in making such an investment, Finley and Droney arranged a meeting between Silvester and representatives of Crescendo. Ultimately, the state treasurer entered into an agreement with Crescendo to invest in the Crescendo Fund. Finley and Droney did not engage in any sales conduct with respect to the Crescendo Fund and did not explain the investment or negotiate any terms of the state treasurer's investment in the fund. On October 13, 1998, St. James filed with the state treasurer an unsolicited and voluntary disclosure of the type and amount of the fee that it would receive from Crescendo if the state invested in the Crescendo Fund.

On the basis of these facts, the commission issued a declaratory ruling that the conduct described in the petition constituted "lobbying" within the meaning of § 1-91 (k). It also concluded that, for the commission to impose a civil penalty "equal to the amount of compensation which the registrant was required to be paid"; General Statutes § 1-99 (a); two findings would be required: (1) that the person knowingly entered into a contingent fee agreement; and (2) that the agreement was in violation of § 1-97 (b). It rejected the plaintiffs' argument that, in order to impose the penalty, the commission must find that the person knowingly violated § 1-97 (b).¹² Finally, addressing the plaintiffs' fourth question; see footnote 5 of this opinion; the commission concluded that the forfeiture penalty could be imposed against the individual lobbyists as well as the limited liability corporations.

The plaintiffs appealed from the commission's declaratory ruling to the trial court pursuant to § 4-183. In its decision, the trial court noted that, "[b]y agreement of the parties, the facts which formed the basis of the declaratory ruling were to be hypothetical and were not investigated or corroborated by the commission." It also determined, as a preliminary matter, that the plaintiffs were aggrieved by the commission's ruling. The court specifically noted that the commission had not contested that the plaintiffs had "a specific personal and legal interest that has been specially and injuriously affected by the decision of the commission."¹³

In a thoughtful and comprehensive analysis of the merits of the plaintiffs' appeal, the trial court first found that the hypothetical conduct described in the plaintiffs' petition did not constitute lobbying because it did not constitute "communicating directly ... with any official or his staff in the ... executive branch of government... for the purpose of influencing any ... administrative action ...." General Statutes § 1-91 (k). The court reasoned that "communicating for the purpose of influencing" required an "evaluative or qualitative statement in favor of the administrative action." It also concluded that the conduct came under the exception to § 1-91 (k) set forth in § 1-92-42a (e) (3) of the Regulations of Connecticut State Agencies, which provides that "contacts with an executive branch or quasi-public agency, whether formal or informal, for informational purposes ......