oversight

COI (NSF) SBIR

Published by the National Science Foundation, Office of Inspector General on 1998-02-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                    NATIONAL SCIENCE FOUNDATION
                                     OFFICE OF INSPECTOR GENERAL
                                       OFFICE OF INVESTIGATIONS

                               CLOSEOUT MEMORANDUM

TO: AIGI      File Number: I96110057                                             Date: 28 March 2002

Subject: Closeout Memo
                                                                             ~           Page 1 of 1


     There was no closeout written at the time this case was closed. The following information was
     extracted from the file in conformance with standard closeout documents.

     Our office was informed that the subject' was alleged to have committed other improper actions.
     The subject allegedly owned stock in a c~rporation,~     an NSF SBIR grantee, and made award
     decisions on their proposals. Subsequent investigation, including an interview in which the subject
     admitted to owning the stock and not recusing himself from reviewing corporation proposals, in
     apparent violation of 18 U.S.C. fj 208. He participated personally and substantially in the review
     process for three proposals from the Corporation. This participation also violated government-wide
     and NSF conflict-of-interest regulations. Our investigation also determined that the subject
     recommended his son as a panel reviewer, who reviewed a proposal from the corporation in which
     the subject later obtained a financial interest. The subject also failed to file a Form SF-450,
     Executive Branch Confidential Financial Disclosure Report, for 1995 with the Office of General
     Counsel.

     Based on these determinations, an investigation report was forwarded to NSF's Deputy Director on
     July 30, 1997. On February 11, 1998, the Acting Deputy Assistant Director (ADAD) for the
     Directorate of Engineering reported to us that the subject was suspended from duty and pay for 14
     days. It was also reported that the subject had resigned from the agency.

     Accordingly this case is closed.
 \
-+
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        Office of Inspector General
           Investigation Report



          Case Number I96 110057



                30 July 1997
. II       This report concerns
                                                       --         -
                                                                                    in NSFs
                                                                                    -           ---_.


           - -------- - -                         ..    Y   . We investigated to determine whether
  I
                          used his position to favor a company in which he owned stock. We
           concluded that                 violated federal law, 18 U.S.C. 9 208, by participating
           personally and substantially in decisions on three SBIR proposals submitted to NSF by
  I                             , a company in which ,               . nad a financial interest. In
           addition, '-             violated sections of government-wide 'Standards of Ethical
           Conduct for Employees of the Executive Branchn, 5 C.F.R. part 2635, and NSF
           conflict regulations, 45 C.F.R. $5 680-684 (collected in NSF Manual No. IS, "NSF
           Conflict-of-Interests Rules and Standards of Conductn),by failing to take appropriate
           measures to recuse himself from working on these proposals.

           Investigative Findings
                                                          x   I
                      became an NSF, ""'"       "                            in ~ u L e1987 and has
           been in this position until the present.' Between June 1987 and December 1994,
                       acted on 8            proposals (recommending 2 for award and 6 for
           declination) [see Attachment A]. In connection with his official duties,
           also conducted a site visit of -        facilities in the summer of 1993.
           purchased 4,000 shares of ,  -- -.stock on December 27, 1994 [see Attachments B, C].
                                                        -
       8   After acquiring this financial interest in                   - - acted on 3 more
           proposals.

           We interviewed             Dn April 23 and 24, 1997.                r admitted that after
           purchasing stock in December 1994, he acted on4- -               poposals              ..

                               In both instances, - - - - - - - _. recommended
                                                                  _.
                                                                          - - in writing that NSF
           decline funding for the proposal [see Attachment Dl.                       stated in his
           affidavit:

                  I received Phase I reviews and recommended actions consistent with the
                  reviews
                  -
                           on several - -         jroposals. I did this, for example, with
                                t, recommending on August 10, 1995 that the proposal be

                  declined. I now realize that I should have recused myself fiom this
                  proposal instead of acting on it. However, I did not confer any special
                  treatment to:        - Jr any reason. I participated in the same manner in




                          3   currently working under an NSF funded position at "       -   -
                               Intergovernmental Personnel Act (IPA) agreement.
    f
                -- -- -       .   .-
                                       in which I recommended on January 24, 1995 that        NSF
    I)          decline 2
                              C

                                                       ....
                                       - hase I proposal
                                                           2


I
I        In January 1995             also participated in the review process for a third -
         proposal,            - , by  signing the Form 7 summarizing the review panel's
         findings.  However, another NSF               _ iogram manager made the formal
         recommendation not to fund the proposed project.

         Although -       -      vas unable to explain why he acted on the      ~roposalsafter
         purchasing:      a   tock, he believed he had taken sufficient action to address the
         conflict of interests. He said:

                After obtaining the -     stock, I advised thc -   ~rogrammanagers at
                NSF of my stock purchase and resulting conflict o i interests as to -
                proposals. I also notified [the head of the                office] of this
                situation. I did not submit a written recusal form, but I believed the
                matter had been addressed through my oral notification of these
                individuals.

         However, -               ~cknowledgedthat he did not consult the cognizant conflict-of-
         interests officer for his directorate about his stock purchase as required by 45 C.F.R.
         5 681.21(a) and he did not formally (i.e. in writing) recuse himself from working on
    3)           jroposals. Furthermore, although NSF has required annual attendance at
         conflicts briefings since 1992: .           lcknowledged that:

                During my tenure at NSF, I have only attended one NSF Conflict of
                Interests and Ethics Briefing. This briefing was in June 1987. .I have   ..
                been sent several ' e-mail announcements regarding                ...
                                                                               briefings.
                Though I did not attend these briefings, I am familiar with the rules
                listed in the publication, "Standards of Ethical Conduct for Employees
                of the Executive Branch, August 1992," but I do not have a copy of this
                publication. I am aware that if I have a financial interest in an
                organization, I am prohibited from participating substantially and
                personally in an official capacity in any particular matter in which, to
                my knowledge, I have a financial interest . . . .


                                       -   -
            All quotations from                  are contained in his affidavit (see Attachment B).

             See NSF O D 92-12 (March 10, 1992): "All program officersand all officials at or above a
          comparable level should participate in at least one conflicts briefing session in each calendar
          year.. ..These briefings are a requirement for all program staff."
    a
                     said that prior to, or shortly after, his purchase c r ^ stock he visited
         NSFs Office of General Counsel (OGC) and requested advice on whether he needed
         to recuse himself once he made the purchase:
I

E               In approximately late 1994 or early 1995, I spoke to [NSF's Designated
                Agency Ethics Officer (DAEO)] regarding my anticipated purchase of
                                            . .
                               . - - - stock. . I was told by [the DAEO] that I would
                           have to recuse myself if I did purchase -     stock, but was
                given no documents describing [the DAEO's] opinion. The only
                document [the DAEO] gave me was a sample recusal form. I have
                never filled out or submitted one of these forms arid have not had any
                more contact with [the DAEO] since that meeting.

         In addition to- the
                         .
                             above participation ir?         proposals,           recommended
         that his son,                      . be used as a reviewer for proposals sent to NSF
         regarding bioengineering. [See Attachment F] Subsequently.                   was placed
         on the review panel for      :proposal _       .       , which was declined. However,
         prior to the proposal's declination but approximately one month afta he had
                              -
         purchased the -                  stock,     .-:r signed the NSF Form 7 listing his son's

         review. - -.        said:

                I suggested my son     . . . as a potential panel reviewer, but did not make
    9           the final election decision or contact him to ask him to come. My son is
                a physical chemist, and I believed that he was qualified to review
                proposals in the biomedical area. In addition, I believed that by gaining
                experience as a reviewer, my son would learn to write better proposals for
                himself in the future. My son served on the panel, and reviewed
                proposa~                  and on January 25, 1995, I signed the Form 7
                summarizing the panel's ratings of the -     .~roposal. I realize now that I
                should have recused myself from the process for this proposal, instead of
                participating as I did.

          We also determined that - -        lid not, as required, file a SF450 form, "Executive
                                                                                      - -
          Branch Confidential Financial Disclosure Reportn for 1995 with OGC.
          submitted a SF450 form on October 30, 1996, which listed the 4,000 shares a
                                   .
        - r o c k f m a c h m e n t Ej
                                                                n         mw.* .        -
                                                                                        -
           1995 because he was on an IPA assignment to
          and, when he filed the SF450 form covering 1996, he was not informed by OGC that
          he had not filed the SF450 form covering 1995. [See Attachment F]
1
    Analysis of Violations

    Federal law, 18 U.S.C. 5 208, prohibits individuals from:
t
              ...  participat[ingl personally and substantially as a Government officer               L

              or employee, through decision, approval, disapproval, recommendation,                   ,
I                                                                  .             .
              the rendering of advice, or otherwise, in [any] . . matter . . in which,                11


              to his knowledge, he   .. .
                                        has a financial interest . . . . [Emphasis Added.]'           I
                                                                                                      I
                  , acting as an NSF Program Manager       ("Government officer or employee"),        I
    recommended that the two -             ,roposals,       . .- ..-                   . not be       i
    funded by submitting the appropriate written documentation to NSF ("through . .              .    I
                                                                                                      I

                              ..
    disapproval . . . in a . mattern)and participated in the panel review of -, poposal
                                                                                                      I
                                                                                                      i
                    'through the rendering of advice or otherwise*), all while knowing that           I
    he owned 4,000 shares of          -   stock ('[to his] . . . knowledge . . . he . . . has a       I
    financial interest . . . ."). His participation in each proposal violated 18 U.S.C.5 208.         I
                                                                                                      I
                                                                                                      I
                                                                                                      I
                 also violated NSF and government-wide conflicts regulations. The first of
    these violations concer,ns the Federal government-wide 'Standards of Ethical conduct
    for Employees of the Executive Branch*, specifically 5 C.F.R. 5 2635.402(a) which
    reiterates the definition of 18 U.S.C. 8 208. What is noteworthy about this is that
         --      -rated in his affidavit that he read this document and understood the rules
    set forth in it [See Attachment B]. .._.       .    also violated NSF's conflict-of-interests
    regulation, 45 C.F.R.8 683.20(a), which states:

              You must not be personally involved as a Federal employee in handling
              any proposal, award, or other matter in which you . . . a business
              partner, or an organization of which you are or may become a part has a
              financial interest. BE CARENL: Violation of this rule may also result
              in a violation of a criminal statute.

    Wher             failed to notify any NSF conflicts officials about his         ~ock
    ownership
    -         and yet  made  the  two recommendations   to decline  funding for the  two
         ~roposals,he violated 45 C.F.R.5 681.21. This regulation states:

              If you would normally handle a proposal or other application, but possess
              with respect to it a potentially biasing affiliation or relationship . . . , you
              must bring the matter to the attention of a conflicts official in vour
              directorate or staff office.  ..
                                             . Ownership of the institution's securities or
              other evidences of debt [is] automatically disqualifying.

       Violators are subject to imprisonment for up to five years and a civil fine of up to $50,000
    per violation.
I
!
        45 C.F.R.5 681.22(a) furthe; explains the above regulation by stating:

I
!
              If you have an interest, affiliation, or relationship that 8 681.21 designates
              "automatically disqualifying", you should disqualify yourself from
I             handling the affected proposal or application. You must not participate
              in handling it under any cirmmstances [emphasis in original].


1       In addition, by recommending his son as a reviewer for NSF proposalst            *aY
        have violated 5 C.F.R. $2635.702, which states that "An employee shall not use his
        public office for.. .                     . .
                              the private gain of . relatives . . . .
                                                                     n
                                                                               acknowledged
        that he recommended his son as a reviewer in part to give his son experience with the
I
        review process, so that his son would learn to write better proposals on his own.
                      son traveled from Albany NY to the Washington DC area to attend the
        panel review at NSF,which, at the very least, gives the appearance that          ,ave
        his son the opportunity to visit his father at government expense.

        By failing to file a SF450 form for the time period covering 1995                 violated
        45 C.F.R. § 683.10(b). This regulation states:

               If you   ...serve as either a program officer, directorate administrative

    e         officer, a grants and contracts officer, an auditor, or a lawyer, you must
              file confidential Statements of Employment and Financial Interests.

        This is further explained in 45 C.F.R. $ 683.12(a), which states that if

              you are one of those who must file Statements of Employment and
              Financial Interests, you must file an initial Statement within 30 days after
              you are first appointed to a covered position either by promotion or as a
              new NSF employee. You must thereafter file a Statement each year by
              July 31.

        Generally, if an employee fails to file a SF-450, OGC notifies the employee by e-mail to
        do so.. However, althougk                   failed to file his 1995 SF-450, there are no
        records to indicate that OGC attempted to contact him after the 1995 SF450
        submission deadline in order to obtain his SF-450.

                     actions also created appearance issues. Specifically, it could appear to a
        reasonable person that by purchasing stock in a company that had submitted
        proposals to the NSF ----   .
                                        -                was using the proprietary information
        contained in the proposals to make personal investment decisions, in violation of
45 C.F.R. 9 683.34(a) (as summarized in NSF Manual 15, p. 60). This regulation
states:

          If your Government job gives you access to information not generally
          available to the public, you must not use that information for your
                         . .
          private benefit . .

However, during our interview,.                denied that he used any proprietary
information he may have had access to through his NSF position to assist in making
his personal investment decisions. As he stated:

           [Prior to the purchase o  a
                                         . _ ~ c k I]was advised . . . by . . . a friend
           in the business community, of a rumor that . . . the President of          --,
                                                     -..
                                                                                A



           .. . might be planning to sell ,,---       -        I did not obtain this
           information through my position at NSF, and my discussion with [my
           friend in the business community] did not take place during the course
           of my NSF duties. I did not base my decision to purchast -           itock on
                               .
          'the 1993 site visit . . . My decision to purchase the stock was based on
           my previous associations with . .           ~ n its
                                                           d founder], and my belief
           that -        .s a sound company.

Even i.I ,. -.      did not use proprietary information
                                               - -
                                                        gained from the use of his NSF
position, it may have been inappropriate for              to purchase the stock in the
first place. - -- -  .   purchase may create an appearance of impropriety in violation
of 5 C.F.R. $ 2635.101(b)(14). This regulation states:

          Employees shall endeavor to avoid any actions creating the appearance
          that they are violating the law or the ethical standards set forth in this
          part. Whether particular circumstances create an appearance that the
          law or these standards have been violated shall be determined from the
          perspective of a reasonable person with knowledge of the relevant facts.

We are concerned that this is a significant potential problem for;              ~fficersin
general because--uniquely among NSF program officers-they deal exdusively with large
numbers of proposals from and awards to for-profit entrepreneurial businesses. Because
NSF          - -       managers have access to pertinent, and often proprietary,
information (from such sources as proposals, indirect cost rate analysis, site visits, etc.)
r egardind        cipients' operations that is not available to those who are not NSF
program managers, we believe that NSF should have a policy which sets forth a
whether and in what circumstances it is appropriate for            . - 1 managers to
invest in      applicants and awardees.
Recommendations
            -   -
Because             engaged in conduct prohibited by federal statute, we referred this
matter to the Department of Justice as required by law.' The Department determined
that NSF should resolve the matter on an administrative basis, and declined
prosecution. Accordingly, we are referring this matter to NSF management so that
appropriate corrective action can be taken by the F~undation.~

Based on the evidence gathered during this investigation, we recommend that NSF
take appropriate administrative action againsi               for the actions described in
this report. In addition, in order to avoid similar instances, we recommend that NSF's
Division of Design, Manufacture, & Industrial Innovation (DMII) and OGC assess
whether and in what circumstances it is appropriate, consistent with conflicts of
interests rules, for      .        aanagers to invest in ---.applicants and awardees.
Following this assessment, we recommend that DM11 and OGC disseminate a formal
written policy addressing this issue.

At the time we began this investigation, we ascertained that under the controlling
precedent in the United States Court of Appeals for the Fourth C i r ~ u i twhere
                                                                              ,~    NSF is
locate-, - - . - _         ons did not constitute "insider tradingn in violation of federal
securities laws and regulations.8 We noted that, with its recent decision in United
States u. O'Hagan,P the Supreme Court expanded the scope of the prohibitions on
insider trading such that they now apply to NSF employees.'0 However, because
             - --_:ens predate O'Hagan, we did not refer this matter to the Department
of Justice for violations of securities laws and regulations.




5
     5 U.S.C.app. 8 4(d).
    Under federal ethics regulations, "It is the responsibility of the employing agency to initiate appropriate
disciplinary or corrective action in individual cases." 5 C.F.R.§ 2635.106(b). In addition, "Aviolation of [federal
                                                                                      .
or] agency regulations may be cause for appropriate corrective disciplinary action . . . Such action may be in
addition to any action or penalty prescribed by law." 5 C.F.R.5 2635.106(a).
     United States u. Brymr, 58 F.3d 933 (4'h Cir. 1995).
B
     15 U.S.C. $8 78j(b), 78ff and 17 C.F.R. 8 240.10b-5.
     No. 86-842 (June 25, 1997).
lo
   "Is a person who trades in securities for personal profit, using confidential information misappropriated in
breach of a fiduciary duty to the source of the information, guilty of violating § lo&) and Rule lob-51 . . .Our
answer   ...        .
           is yes . . ." Id.
        Attachments
    D   A.   Timeline of Relevant Events
\       B.   Affidavit of -.--.----.-.-.
I
        C.   Documents Showing Purchase of Stock
        D.   NSF Proposal Documentation Showing                nvolvement in Decisions
1            After His Purchase of Stock         - -
        E.   SF450 Forms Signed and Submitted by             LO NSF
        F.   July 2, 1997 Response by       NSF
                                            1    OIG's draft of Investigation Report
I
                             Attachment A: Timeline of Relevant Events

-
Date                     -
                         Event

1985-1986                                 is a paid consultant of -                  hired to be
                         the                          representative in washington D.C.

June 1987
                         --       --      . . NSF as a Program Manager,              ,--          -
                         -   - --                                      -
December 1992                             .ecommends declination for                 proposal4

October 1993                              recommends declination for -               _ roposal'
November 1993                             .ecommends Phase I award for                     - roposal
                                                                                                        -   --
December 1993    '   .                    recommends Phase I award for           -         - oposa!

January 1994             -        -        .-ecommends declination for       I             :oposals


March 1994                                 recommends that NSF decline funding for
                         proposal

September 1994           -                  :ommends final payment for -

September 1994$                            submits SF 450 to NSF OGC, listing no financial
                         interests ii       -
                              -
November 1994                             recommends final payment for           a



                         - -
December 1994                      speaks with NSF OGC regarding recusal from projects
                         he may have a financial interest in, is given a recusal form
                                      -
December 1994                              ~urchases4,000 shares of      "

                                                                                             -
January 1995                                        mmends   declination             for               roposal


January 1995                                   signs Form 7 containing his son's review results
                             for :,-
                                   -      .-    -
I
I   August   1995   -   -
                             recommends declination foi
                                                               -
                                                                          proposal

                                                                   ----
I
I
I   August 1995              begins P A assignment to
                                                         m
                                                                                -

    December 1996           submits SF450 to NSF OGC listing   -    ocks    '