8

C. H. Dean, Jr.

CONTRACT BETWEEN TVA,

STONE & WEBSTER ENGINEERING

CORPORATION, AND STEMAR CORPORATION

corporation [or other entity] . . . is
employed or acts as an officer or agent of
the United States for the transaction of
business with such business entity [shall be
guilty of a felony) [62 Stat. 703 (1948)].

It has been pointed out that "[t]he new statute [18 U.S.C. § 208) is a direct lineal descendant of the older one [18 U.S.C. § 434], and the family resemblance is great." B. Manning, Federal Conflict of Interest Law 109 (1964). Also, the Court of Claims held in K & R Eng'g Co. v. United States, 616 F.2d 469, 473 (Ct. Cl. 1980), that old section 434 differs from present section 208(a) only in that the scope of the older statute was narrower, and that the Supreme Court's interpretation of the policies underlying the older statute therefore apply equally to the new one. Accordingly, the administration and interpretation of old section 434 are not merely of historical interest but of precedential importance with respect to the application of new section 208. This is especially the case in light of the rule that reenactment of statutory provisions which have been the subject of extensive judicial or administrative interpretation presumably known to Congress is to be taken as constituting legislative approval or adoption of such interpretation. See United States v. Dixon, 347 U.S. 381, 384-85 (1954); Rath Packing Co. v Becker, 530 F.2d 1295, 1312 (9th Cir. 1975).

Much of the law relating to the old section has been developed in opinions of the Attorney General. In such opinions, the Attorney General has made clear on several Occasions the basic purpose of the statute and the approach which should accordingly be followed in applying it:

[T]he law does not prohibit a public officer
from [engaging in a private business
activity for compensation, at least when the
private activity is unrelated to any busi-
ness of the Government. When the private
activity does touch upon some interest of
the Government, it may be continued only
when it falls outside the bar of the
statutes and principles of law . . . which

9

C. H. Dean, Jr.

CONTRACT BETWEEN TVA,

STONE & WEBSTER ENGINEERING

CORPORATION, AND STEMAR CORPORATION

are aimed primarily at improper conflicts of
interest [40 Op. Att'y Gen. 187, 190 (1942);
see 41 Op. Att'y Gen. 217, 220 (1955)].

With regard specifically to contracts by Government officers with the Government, the Attorney General has upheld contracts whose subject matter was entirely unrelated to and unconnected with the performance of the officers' Government duties. 14 Op. Att'y Gen. 482 (1874); see 24 Op. Att'y Gen. 557 (1903). However, he has held repeatedly that an officer cannot legally enter into or approve a contract on behalf of the Government with a corporation of which he is an officer or director. 11 Unp. Op. Att'y Gen. 557 (1941); 10 Unp. Op. Att'y Gen. 261 (1940) (improper for a Government department to make contracts with a corporation of which the head of the department is an officer).

In a 1942 opinion based primarily on section 434, the Acting Attorney General went further, holding that the proposed assignment of an Army officer simply to maintain liaison with a private corporation of which he was an officer and stockholder was of doubtful legality, and recommended that the assignment not be made. Even in the face of World War II exigencies in so doing, he discussed at length the problems which would result if Government officers were permitted to advise the Government on matters which might influence procurement by the Government from a corporation of which the officer was an officer and stockholder:

The Chief Signal Officer of the Army advises
that the Signal Corps is in dire need of
experienced and expert communications
personnel to act as liaison officers between
the War Department and large private

corporations in the communications industry.
The duties of such officers would be to
advise the department as to commercial
services, facilities, and technical
personnel available within the corporations
in question and to advise the corporations
of the needs and plans of the War Department
for communication service. Such officers

10

C. H. Dean, Jr.

CONTRACT BETWEEN TVA, STONE & WEBSTER ENGINEERING CORPORATION, AND STEMAR CORPORATION

would not be authorized to have any direct
connection with the purchase or procurement
of supplies or services for the military
establishment but the nature of their duties
would be such that the advice they would
furnish the War Department might influence
the procurement activities of the department
with relation to the corporations in
question. The War Department is advised,
that in several instances, the only avail-
able person competent to perform the
required duties is an officer and stock-
holder of the corporation with which he
would maintain liaison and it is proposed
that such person would retain his status as
such officer and stockholder and also
receive a portion of his compensation as an
officer of the corporation while on duty as
an officer of the Army.

This statute [section 434] is penal in
nature. Under established rules of con-
struction it should be strictly construed.
But the rule of strict construction must not
be applied to defeat the manifest purpose of
the statute. United States v. Corbett, 215
U.S. 233.

No man can serve two masters. The statute
in question is clearly grounded on this
assumption. Its manifest purpose is such
that any attempt to reconcile it with the
proposed employment runs into difficulties.
Some of these difficulties are pointed out
by the Judge Advocate General of the Army in
his opinion on the question. Others are
equally apparent. No matter how high are
the motives of the Army officer who advises,
he is likely as a realistic matter to be
consciously or unconsciously influenced by
the fact that his actions may benefit the
corporation of which he is an officer and a

11

C. H. Dean, Jr.

CONTRACT BETWEEN TVA, STONE & WEBSTER ENGINEERING CORPORATION, AND STEMAR CORPORATION

stockholder. To a degree his salary as an
officer of the corporation would be affected
by whether his advice leads the War Depart-
ment to enter into a procurement contract
with his company. To a larger degree his
share in the earnings of the corporation as
a stockholder would be affected by his
advice.

The advice of the officer would probably
also materially influence the nature and
extent of the contracts entered into with
his company. Conflict between the interests
of the United States, the interests of the
corporation and the interests of the Army
officer as an officer and stockholder of the
corporation are more than likely to arise.
Such conflicts and results were doubtless
intended to be avoided by the statute. In
this case, the officer would clearly be a
person "directly or indirectly interested in
the pecuniary profits" within the meaning of
the statute. So too, the degree of
relationship of the officer to the procure-
ment process would be such as to constitute
"the transaction of business with such
corporation" as used in the statute. It was
the obvious purpose of the statute to
prevent an officer of the United States from
transacting business with a corporation in
such a way that his action might result in
direct or indirect personal pecuniary
benefit to the officer.

For the above reasons, I agree . . that both the legality and propriety of the proposed terms of employment are so doubtful that the employment should not be consummated [40 Op. Att'y Gen. 168, 169-71 (1942)).

12

C. H. Dean, Jr.

CONTRACT BETWEEN TVA,

STONE & WEBSTER ENGINEERING CORPORATION, AND STEMAR CORPORATION

This opinion indicates that the conflict-of-interest rules are to be strictly applied even during the exigencies of wartime, and that there is thus no exception to its broad sweep based on agencies' emergency or critical needs.

In United States v. Mississippi Valley Generating Co., 364 U.S. 520 (1961), the Supreme Court applied section 434 in a civil suit directly related to TVA's power program. Growing power needs in the TVA area during the 1950s required the provision of additional generating capacity. TVA proposed to construct such additional capacity and, since it did not then have statutory authority to issue revenue bonds, sought appropriations to finance the construction. Out of this situation was born the plan known as DixonYates. Under the plan, which was developed by the Bureau of the Budget and two private power systems, Middle South Utilities and Southern Company (whose presidents were, respectively, Edgar H. Dixon and Eugene Yates), the companies would together form the Mississippi Valley Generating Company. This company would build a generating plant in Arkansas across the Mississippi River from Memphis. The Atomic Energy Commission (AEC) would contract to purchase the power to be produced, which would be delivered to the TVA system via a transmission line across the Mississippi River, half of which would be built by the Mississippi Valley Generating Company and half by TVA. AEC would continue to receive power from TVA under the existing contracts between them, but would "replace" such power with that bought from the generating company (at costs higher than would result if capacity were constructed by TVA instead, which increased costs would be borne by TVA and ultimately by its ratepayers). Thus, AEC was in effect to become a broker purchasing power for the TVA system to be delivered in the Memphis area.

The contract between the generating company and AEC was duly executed (with the AEC signing under Presidential directive), and construction of the generating plant in Arkansas began. Then, two developments occurred. First, it was discovered by opponents of Dixon-Yates that Adolphe Wenzell, a vice president and director of First Boston Corporation, had served as a part-time unpaid consultant by the Bureau of the Budget in developing the scheme and had participated in preliminary negotiations (although not in