Shield for Officials : Blind Trust: Banking on Aides’ Ethics

When former Transportation Secretary Elizabeth Hanford Dole placed $2-million worth of assets in a so-called “blind trust” three years ago, she was following a time-honored formula for shielding herself from conflict-of-interest problems--much as dozens of other officials have done in recent years.

Similarly, after Atty. Gen. Edwin Meese III was criticized during his long Senate confirmation hearings for what some Democrats saw as possible financial irregularities, Meese announced he was placing his holdings with an independent investor.

Earned Fat Commission

But recent scrutiny of the Dole and Meese arrangements has raised questions about how these trusts operate and how well they serve their intended purpose. More than half of Elizabeth Dole’s assets, for example, were handled by David C. Owen, a close political associate of her husband, Senate Minority Leader Bob Dole (R-Kan.). And Owen, rather than merely giving arms-length financial advice, earned a fat commission by selling property from the trust and paid back $250,000 he had borrowed from Elizabeth Dole for a private business venture only a few days before the trust was dissolved.

Meese’s arrangement for his holdings, meanwhile, has been one of several matters under investigation by a court-appointed independent counsel, James C. McKay, since disclosures that Meese’s funds were invested by W. Franklyn Chinn, a key figure in the influence-buying scandal surrounding Wedtech Corp. To make matters worse, the federal Office of Government Ethics said it never approved Meese’s trust arrangement with Chinn.

As the history of such things makes clear, the problem of preventing public officials’ financial holdings from posing a conflict of interest--whether real or potential--has proved extremely hard to solve.

The difficulties are numerous and complex. Federal rules are far from comprehensive and enforcement is seldom vigorous, the present system is heavily dependent on self-policing by those involved, and would-be officials who have built up large private fortunes are often reluctant to turn everything over to someone else.

Hard to Design Safeguards

“It’s hard to design a system of absolute safeguards,” concedes Donald E. Campbell, chief counsel of the Office of Government Ethics.

“Ethical standards are still very dependent on the individual, despite tougher new rules,” agreed former Defense Secretary Caspar W. Weinberger, who left office last November with an unblemished reputation for high ethical standards. “But I think the required annual financial disclosure statements are a good deterrent to misconduct in office. If the public knows everything you have, that’s a pretty good protection.”

For his part, Weinberger sold all his corporate stocks--including a heavy investment in Bechtel Corp., of which he had been general counsel--upon taking office seven years ago. “I then put everything into money market funds so I could not be accused of having ties with specific corporations,” Weinberger said in a recent interview.

Weinberger, who formerly had served in the Richard M. Nixon Administration as chairman of the Federal Trade Commission and then as secretary of health, education and welfare, said officials at that time underwent “a lot less scrutiny because the rules were less rigid.”

Even with the best intentions, fair and effective arrangements can be extremely difficult to work out.

Take the case of David R. Packard, who accepted an appointment as deputy secretary of defense in the Nixon Administration and in 1969--long before firm guidelines existed--set up what may be the largest, most complex blind trust in history.

Would Damage Company

Packard owned $300-million worth of stock in Hewlett-Packard Co. of Palo Alto, a firm he had co-founded. Although previous defense officials had been required to sell off any stock in defense contractors like Hewlett-Packard, it was decided that unloading so much stock on the market would drive down the value of all Hewlett-Packard shares and severely damage the company.

So Packard entered into an agreement with members of the Senate Armed Services Committee prior to his Senate confirmation, placing his Hewlett-Packard shares in a trust administered by the Bank of America.

Terms of the trust agreement were stringent. During his three years at the Pentagon, Packard had to give up $700,000 in regular stock dividends annually to a list of charities and educational institutions designated by the bank. And when he left the Pentagon, the agreement called for the bank to sell off enough Hewlett-Packard shares to offset any appreciation in the value of his stock. Proceeds from the stock sales went to the same charities and institutions.

Packard also had to recuse himself from dealing with any Pentagon matter relating to his company.

Packard said in a recent interview that the trust had proven to be “a workable procedure” but it had cost him about $22 million. “I wouldn’t do it again,” he said. “It was too high a price to pay for service in Washington. I don’t have a better answer to the problem, however, unless it’s to get Congress to trust individual officials.”

‘It’s How Others See It’

Despite such problems, the late Commerce Secretary Malcolm Baldrige once told reporters he had placed his own investments in a blind trust because “it’s not how I see it--it’s how others see it.”

“In government, you’re held to a higher standard,” Baldrige said.

Sen. Carl Levin (D-Mich.), chairman of the governmental affairs subcommittee on oversight of government management, said he is planning hearings this year aimed at tightening supervision of blind trusts. Levin will examine this question in connection with re-certifying the Office of Government Ethics, whose charter expires Oct. 1.

The Dole and Meese cases, which are focusing new attention on blind trusts, illustrate how the protections such trusts supposedly provide can be illusory. In fact, the system for protecting the public interest has gaping loopholes, which federal watchdogs insist they are trying hard to correct.

There are, for example, no absolute requirements that public officials of exalted position or wealth place their holdings in a blind trust.

Independence Not Required

And while public officials who decide to establish blind trusts must name trustees who are totally independent of them, there is no such requirement of independence on the part of investment advisers who help the trustees. Neither is there a requirement that trustees must invest in conservative, “blue chip” stocks. In fact, some trustees have invested in risky new stock issues or other high-flying financial ventures.

Public officials, said the Government Ethics Office’s Campbell, are required only to comply with a federal law that bars them from taking any governmental action to benefit their personal holdings.

To satisfy this law, officials may adopt any safeguard of their choosing, Campbell explained. Most officeholders, especially those with moderate assets, simply assign a deputy to rule on matters that might bear upon the value of their corporate stock holdings, he said.

“But if your stock holdings are extensive,” he said, “sometimes it’s easier just to set up a blind trust.”

There are only 35 to 40 blind trusts among the 1,000 high-ranking officials, including Cabinet members, sub-Cabinet officers and White House aides, who fill appointive jobs in the Reagan Administration, Campbell said.

Few From Carter Presidency

Even this number is more than triple that during Jimmy Carter’s presidency, he recalled, “because very few officials in the Carter Administration had sufficiently large assets to warrant a blind trust.”

The Reagan Administration is peopled in considerable part by former business executives. The small number who have established blind trusts suggests that most government officials have chosen to retain control over their own investment decisions and avoid dealing with matters that could affect their holdings.

A blind trust is so named because the public official who establishes it is supposed to remain “blind” to any decisions by the trustee to buy or sell stocks, real estate or other assets. Uninformed about what investment decisions the trustee is making, and unable to give instructions, the public official is deemed to be protected from any possible conflict of interest.

For the blind-trust system to work, federal ethics rules require that the trustee be truly independent, Campbell explained. The trustee may not be related by blood or marriage to the public official, may not be a close friend and may not be employed by the official or in any way under the official’s control.

In Elizabeth Dole’s case, it was not the trustee, but a financial adviser hired by the trustee who had political and financial ties to the Doles and thus intruded on the blindness of the trust. Campbell said he believed that the trustee, Washington attorney Mark L. McConaghy, did not initially know that the adviser, David C. Owen of Kansas City, was a fund-raiser for Sen. Dole and had long been associated with Dole’s political campaigns.

Defends Actions as Proper

McConaghy, when contacted by The Times, declined to answer any questions on grounds that he cannot discuss the affairs of a client. Owen also declined to answer questions beyond saying his actions were proper and that he never discussed trust matters with either of the Doles.

The Doles insisted they never knew about Owen’s connection with the blind trust, but Sen. Dole forced Owen to resign as national finance director of his presidential campaign Jan. 14, several days after a Kansas newspaper revealed the link. Elizabeth Dole, who is no longer in office, abolished the trust on Jan. 16 and made public all of the trust’s past transactions in an effort to end the controversy.

The trust papers showed that Owen, who was lieutenant governor of Kansas for two years in the 1970s, owed $250,000 to the trust from the day it was set up in 1985, having borrowed that amount from Elizabeth Dole in February, 1984, to establish a small movie company he had organized.

Yet Owen, who had managed two previous campaigns for Sen. Dole--his successful 1974 Senate reelection campaign and his unsuccessful 1980 presidential nomination bid--apparently asked to be retained as financial adviser to the blind trust and was hired by McConaghy, the Washington-based trustee.

Owen’s relationship to the trust, although not illegal, was anything but arm’s-length. He subsequently sold 120 acres of his own Kansas farmland to the Dole trust for $270,000, although it is not clear if he profited from the sale. He also arranged for the trust to sell one-half interest in a $1.6-million office building in Overland Park, Kan., to a firm he was associated with, earning a $260,000 profit for the trust and a commission for himself of $139,000.

Severed Ties to Trust

McConaghy quietly severed the trust’s connection with Owen last October, reportedly after learning that Owen was raising political funds for Sen. Dole as his national finance director.

Campbell said the federal ethics office now is developing strict guidelines for financial advisers to blind trusts, similar to the rules governing trustees.

“Although all trusts have trustees, most of them do not have financial advisers as well,” Campbell said. “It’s a problem we never focused on before.”

Three Washington attorneys who have handled blind trusts for high government officials said controls now are more strict than 10 years ago. It was in 1978 that Congress passed the Ethics in Government Act, which sought to bring uniformity to the handling of these trusts.

“Before 1978, you’d get a call from your client (the public official) suggesting a certain type of investment,” one lawyer said. “Of course, you didn’t have to listen to him because you were the trustee and solely responsible for his assets. But you did.”

‘Trust Is Totally Blind’

“Now the rules are much tougher. You and the public official cannot communicate at all except in writing through the Office of Government Ethics. He can’t call you with any suggestions or instructions. The trust is totally blind to him.”

This attorney and the others agreed to comment only on condition of anonymity. And none would reveal the identity of any clients.

The lawyers said that in setting up a blind trust, a government official may “shop around” for a trustee whom he believes has an investment philosophy similar to his own. But after an initial meeting at which legal documents are signed, the official is supposed to have no further communication with his trustee except to receive “bare bones” quarterly reports listing the trust’s gain or loss. No specific transactions or assets are described.

All three lawyers interviewed insisted that they have followed the rules religiously. However, one said: “I think there are some trustees who might wink at a phone call from the client without turning him in.”

If the no-communication rule is breached, the federal ethics office has the power to terminate a trust, which it has done only twice in 10 years--without public disclosure of the officials involved. Campbell said that if the breach is egregious and willful, the Justice Department may also impose civil penalties ranging from $1,000 to $5,000. But this has never happened.

Not Popular With Some

“Blind trusts are not popular with officials who want to maintain day-to-day control over their investments,” Campbell said, noting the example of William J. Casey, the late CIA director.

Casey, a millionaire New Yorker and former chairman of the Securities and Exchange Commission when he joined the Reagan Administration in 1981, initially was dead-set against placing his holdings in a blind trust, associates said.

“Casey understood the stock market and felt he was smarter than a roomful of attorneys and investment bankers,” one recalled.

But congressional pressure mounted on Casey when, by 1983, it was disclosed he had bought securities worth as much as $4.5 million in 61 firms the previous year. Critics noted that the stocks were in the oil, computer, airline and drug industries, fields in which Casey had access to secret economic reports prepared by CIA analysts.

Later that year, the crusty master spy relented and set up a blind trust “in order to avoid future questions and misunderstandings.”

Placed Assets With Adviser

In the case of Meese, federal investigators found that when the attorney general tried to satisfy Senate critics of his personal financial affairs upon taking his Cabinet post in February, 1985, he placed $55,000 of his assets with an outside financial adviser, Chinn, who turned out to be involved in a scandal.

Chinn was a director of scandal-torn Wedtech Corp., a now-defunct New York defense contractor that came under scrutiny last year by independent counsel McKay. Meese and his wife withdrew their funds after learning of Chinn’s links to Wedtech.

McKay has been scrutinizing Meese’s finances since learning that Chinn earned a two-year profit of about $40,000 for the Meeses, largely by investing more money on behalf of Meese than the attorney general and his wife had placed with him. Meese’s attorneys have said Chinn refuses to say where the extra funds came from.

Chinn was indicted in New York last month on racketeering and conspiracy charges in connection with Wedtech’s efforts to lobby Meese and other officials for government contracts.