12

excessive contribution would be determined subsequent to our review of the above
canceled checks.

In response the Committee’s Counsel cited Section 110.10(b)(1)(i)
of the Code of Federal Regulations which, “provides that personal funds means any
assets which, under applicable state law, the candidate had legal right to access or
control and to which the candidate had legal and rightful title. Under State law, Mr.
Bauer had a legal right to all the funds in the account.” Counsel further argued that;
“Mr. Bauer also had a right to the full amount of assets under the agreement with the
bank governing the account, the ‘instrument of ownership’.” Finally, Counsel asserted,
“Mr. Bauer’s act — drawing a check on a joint account — cannot cause Mrs. Bauer to
violate the contribution limitation.”

The Audit staff does not disagree with Counsel’s interpretation of
11 CFR 110.10(b)(1)(i). However, Counsel’s response ignores section (b)(3) that
addresses jointly owned assets and that portion that is the candidate’s share under the
instrument of conveyance or ownership. The Explanation and Justification for
110.10(b)(3), (Federal Register, Vol. 48, No 82 Wednesday April 27, 1983) states in
order to address the concept of “personal funds” in joint ownership situations, these new
provisions permit a candidate to use the full value of his or her share of assets jointly
owned with a spouse without the spouse being considered a contributor. As mirrored in
the body of Regulations for section 110.10(b)(3), the Explanation and Justification
states, “if there is no written instrument indicating the candidate’s ownership share of the
property, the candidate will be considered to own one-half of the value of the property
under these rules.” The Explanation and Justification further states this 50% rule would
apply in community property states, as well as in non-community property states.

The Committee has not provided evidence that demonstrated the
Candidate’s ownership share of the funds in the account exceeded 50%. Nor has the
Committee provide copies the requested canceled checks and respective bank
statements. As a result, the Audit staff's position remains unchanged; Mrs. Bauer made
an excessive contribution of at least $12,436.

The Commission considered two motions with respect to this
finding: The first motion was to reject the analysis presented above; the second was to
receive this finding without any determination on the merits of the analysis of the facts
or the interpretation of the law contained therein. Each motion failed by a vote of 3 to 3.

16


FEDERAL ELECTION COMMISSION

WASHINGTON. DC 20463

June 6, 2002

Mr. Francis P. Cannon, Treasurer
Bauer for President 2000, Inc.
P.O. Box 6166

Arlington, VA 22206

Dear Mr. Cannon:

Attached, please find the Audit Report on Bauer for President 2000, Inc.. The
Commission approved this report on May 31, 2002. As noted on page 7 of the Audit
Report, the Commission may pursue any of the matters discussed in an enforcement
action.

The Commission approved Audit Report will be placed on the public record on
June 17, 2002. Should you have any questions regarding the public release of this report,
please contact Ron Harris of the Commission’s Press Office at (202) 694-1220.

Any questions you may have related to matters covered during the audit or in the
report should be addressed to Brenda E. Wheeler or Thomas J. Nurthen of the Audit
Division at (202) 694-1200 or toll free at (800) 424-9530.

Sincerely,

4
U if aa
oseph F. Stoltz

Assistant Staff Director
Audit Division

cc: Timothy Beall, Assistant Treasurer

Attachment as stated

33


any documentation during the response period subsequent to the exit conference.? Asa
result, on March 8, 2001, the Audit staff requested subpoenas and interrogatories be
issued to the Committee, CWF, Lukens and the Pinnacle List Company (Pinnacle). The
Commission approved the subpoenas and interrogatories on April 5, 2001.

The entities were asked to produce documentation and/or answer
questions relative to the CWF mailing list made available to the Committee. In response,
the Committee and CWF provided an exchange agreement. Under the agreement
Pinnacle coordinated use of CWF’s file (by the Committee) and kept the exchange
history. The Committee received a complete copy of CWF’s donor (87,013) and non-
donor (51,507) files. The first use occurred on February 5, 1999. In exchange, the
Committee would provide CWF with a complete copy of its donor and non-donor files at
the end of the campaign. When the Committee wanted to use the CWF files, it submitted
a “request to mail form” accompanied by a copy of the mailing. Upon approval by CWF,
the Committee pulled “selects” from its copy of the CWF files and provided the output
counts to Pinnacle. Finally, all CWF names remained the sole property of CWF, any and
all Committee names remained the property of the Committee.

The provision of a mailing list at less than the usual and normal
charge is an in-kind contribution within the meaning of 11 CFR §100.7(a)(1)(iii)(A).
Furthermore, in Advisory Opinion 1981-46 the Commission addressed list exchanges and
determined, “if the exchange of names is of equal ‘value’ according to accepted industry
practice, the exchange would be considered full consideration for services rendered.
Thus, no contribution or expenditure would result and the transaction would not be
reportable under the Act.” The Commission also took the position that, “when the
Committee provides names to another political committee in exchange for its own future
use of a corresponding number of names which are of equal value, that this constitutes an
arms (sic) length business transaction between the committees and is not a reportable
contribution under the Act.”

According to Pinnacle, the list manager for both the Committee

and CWF, the Committee used the CWF files 22 times during the period February 5,
1999 through February 28, 2000, for an aggregate mailing of 957,338 names. Therefore,
in order for the exchange to be considered equal and not result in a contribution by CWF,
the Committee would have to make available (to CWF) use of “pure” Committee donor
file names (i.e., names not included in CWF’s donor and non-donor files at the time
CWF’s list was obtained by the Committee) that, based on the number of CWF uses, in
the aggregate, had value equal to the value of the 957,338 names used by the Committee.

CWF provided documentation that demonstrated “in exchange” it
used the Committee’s donor file, consisting of 25,547 names, a total of 8 times during the

Committees are provided ten business days subsequent to an exit conference to provide
documentation relative to potential audit findings. The Committee did not avail itself this
opportunity to respond to any matter discussed at the exit conference.

Selects are characteristics that identify segments or subgroups within a list.

10


16

E. APPARENT PROHIBITED CONTRIBUTIONS RESULTING FROM
EXTENSIONS OF CREDIT BY COMMERCIAL VENDORS

Section 441a(a)(1)(A) of Title 2 of the United States Code states that no
person shall make contributions to any candidate and his authorized political committee
with respect to any election for Federal office which, in the aggregate, exceed $1,000.

Section 441b(a) of Title 2 of the United States Code states, in part, that it
is unlawful for any corporation to make a contribution in connection with any election at
which presidential and vice presidential electors are to be voted for, or for any candidate,
political committee, or other person knowingly to accept or receive any contribution
prohibited by this section.

Sections 116.3(a) and (b) of Title 11 of the Code of Federal Regulations
state, in relevant part, that a commercial vendor that is not a corporation, and a
corporation in its capacity as a commercial vendor may extend credit to a candidate or
political committee. An extension of credit will not be considered a contribution to the
candidate or political committee provided that the credit is extended in the ordinary
course of the commercial vendor’s business and the terms are substantially similar to
extensions of credit to nonpolitical debtors that are of similar risk and size of obligation.

Section 116.3(c) of Title 11 of the Code of Federal Regulations states that
in determining whether credit was extended in the ordinary course of business, the
Commission will consider:

1. Whether the commercial vendor followed its established
procedures and its past practice in approving the extension of
credit;

2. Whether the commercial vendor received prompt payment in full
if it previously extended credit to the same candidate or political
committee; and,

3. Whether the extension of credit conformed to the usual and
normal practice in the commercial vendor’s trade or industry.

1. America Direct, Inc.

America Direct, Inc. served as a direct mail vendor for the
Committee. The Audit staff reviewed 22 invoices totaling $748,032 and noted the
following with respect to eight of the invoices.

Five invoices, totaling $108,071, dated between February 17, 1999
and April 1, 1999 were paid by a single check on July 26, 1999. Prior to payment, the
invoices were outstanding 117 to 160 days.

20




Memorandum to Robert J. Costa
Proposed Audit Report

Bauer for President 2000, Inc.
Page 5

not have been developed for its own use.’ However, these same facts may suggest that
the Committee’s transfer of the list was a part of its normal course of operations. The
Committee’s campaign strategy may have shifted prior to the transfer of the list to
Lukens. For example, the Committee may have anticipated an early withdrawal from the
campaign. Thus, the Committee may no longer have needed to use the list. Therefore,
the facts are not sufficient in the context of the audit to draw a definite conclusion about
the Committee’s transaction with Lukens. Nevertheless, given the questions that are
raised in this matter, we believe that it is appropriate to maintain this issue as a finding in
the proposed Audit Report.

C. Personal Loan

The Candidate used an account that was jointly held with Mrs. Bauer to make a
loan of $45,000 to the Committee. The Audit staff concludes Mrs. Bauer made an
excessive contribution as a result of the Candidate’s loan to the Committee. According to
the Audit Division, the maximum amount of unspent funds in the account on the date of
the loan was $63,128. Therefore, the Audit Division concludes that since the Candidate
owned half of the funds in the account ($31,564), the difference between the Candidate’s
share in the account and the amount of the loan represents a contribution from Mrs. Bauer
of $13,436 ($45,000 - $31,564). Thus, Mrs. Bauer made an excessive contribution in the
amount of $12,436 ($13,436 - $1,000).

An individual, other than the candidate, is limited to contributions aggregating
$1,000 per election to a Federal candidate and his authorized political committees.
2 U.S.C. § 441a(a)(1)(A). However, a publicly financed presidential candidate may
contribute personal funds in connection with his or her nomination up to $50,000. See
11 C.F.R. § 9035.2(a)(1). Personal funds of a candidate are defined, in part, as any assets
which, under applicable state law, at the time he or she became a candidate, the candidate
had legal right of access to or control over, and with respect to which the candidate had
either: (i) legal and rightful title, or (ii) an equitable interest. 11 C.F.R. § 110.10(b)(1).
However, pursuant to 11 C.F.R. § 110.10(b)(3), a candidate may use a portion of assets
jointly owned with his or her spouse as personal funds. The portion of the jointly owned
assets that shall be considered as personal funds of the candidate shall be that portion
which is the candidate’s share under the instrument of conveyance or ownership. 11
C.F.R. § 110.10(b)(3). If no specific share is indicated by an instrument of conveyance or
ownership, the value of one-half of the property shall be considered as personal funds of
the candidate. 11 C.F.R. § 110.10(b)(3); see Explanation and Justification for
110.10(b)(3), 48 Fed. Reg. 19020 (April 27, 1983).

The Committee argues that section 110.10(b)(1)(i) governs the transaction at
issue. The Committee contends that under state law Mr. Bauer had a legal right to all of
the funds in the account. The Committee further argues that even under section

. The Committee could legally use the list after the sale. However, the information does not indicate

whether the Committee continued to use its own list after the rental to Lukens.

31


B. MISSTATEMENT OF FINANCIAL ACTIVITY

Section 434(b)(1), (2) and (4) of Title 2 of the United States Code states,
in relevant part, that each report shall disclose the amount of cash on hand at the
beginning of each reporting period and the total amount of all receipts and all
disbursements for the reporting period and the calendar year.

Section 104.18(f) of Title 11 of the Code of Federal Regulations states, in
part, if a committee files an amendment to a report that was filed electronically, it shall
also submit the amendment in an electronic format. The committee shall submit a
complete version of the report as amended, rather than just those portions of the report
that are being amended.

The Audit staff's reconciliation of the Committee’s reported activity to its
bank activity revealed material misstatements with respect to reported disbursements in
calendar year 1999 and reported receipts and disbursements in 2000.

For calendar year 1999 reported disbursements were understated $633,113.
This understatement was due primarily to Committee not reporting payroll, payroll taxes
and 401(k) payments ($364,647) 7 transactions from state accounts ($72,252), vendor
payments including wire transfers ($98,746) and interest expense and bank fees
($62,866).

For calendar year 2000 reported receipts were understated $223,653. This
net understatement was due primarily to the Committee reporting errors with respect to
matching fund receipts ($138,334) and offsets to expenditures and interest income
($80,838). During the same period reported disbursements were understated $152,752,
due primarily to the Committee not reporting various payments totaling $106,292 and
other miscellaneous reporting errors.

Although the Committee did not provide workpapers detailing how the
dollar amounts shown on its disclosure reports were calculated, our analysis of the
Committee’s reporting processes and procedures appear to indicate that these
irregularities resulted from the lack of internal reconciliations.

In the preliminary audit report, the Audit staff recommended that the
Committee file amended electronic reports for calendar years 1999 and 2000 to correct
the misstatements.

In response, the Committee submitted amended electronic reports that
materially resolved the misstatements.

The Committee failed to report payroll for an entire pay period and did not report any 401(k)
payments.


19

notes, however, that the Audit staff's conclusion that the
extensions of credit of the nature noted here are not in the
ordinary course of these businesses conflicts with thirty-
years of information in the Commission’s files concerning
Presidential committees and vendors.”

The Committee has not demonstrated that any of the vendors made
commercially reasonable attempts to collect payment from the Committee. Furthermore,
the Committee did not present evidence from the vendors that demonstrated the credits
extended were in the normal course of the vendors’ business; as well as, evidence
regarding the vendors’ billing policies for similar non-political clients, advance payment
policies or debt collection policies. The above extensions of credit represent
contributions to the Committee.

The Commission voted to receive this finding without any determination
on the merits of the analysis of the facts or the interpretation of the law contained therein.

I. AUDIT FINDINGS AND RECOMMENDATIONS — AMOUNTS DUE
TO THE UNITED STATES. TREASURY

A. DETERMINATION OF NET OUTSTANDING CAMPAIGN OBLIGATIONS

Section 9034.5(a) of Title 11 of the Code of Federal Regulations requires
that within 15 calendar days after the candidate’s date of ineligibility, the candidate shall
submit a statement of net outstanding campaign obligations which reflects the total of all
outstanding obligations for qualified campaign expenses, plus estimated necessary
winding down costs.

In addition, Section 9034.1(b) of Title 11 of the Code of Federal
Regulations states, in part, that if on the date of ineligibility a candidate has net
outstanding campaign obligations as defined under 11 CFR 9034.5, that candidate may
continue to receive matching payments provided that on the date of payment there are
remaining net outstanding campaign obligations.

Mr. Bauer’s date of ineligibility was February 4, 2000. The Audit staff reviewed
the Committee’s financial activity through May 31, 2000, reviewed disclosure reports through

December 31, 2001, analyzed winding down costs, and prepared the Statement of Net
Outstanding Campaign Obligations that appears below.

23


15

2. Offsets to Expenditures

During the audit period, the Committee received offsets to
expenditures totaling $166,977. However, it failed to itemize offsets totaling $88,034 on
Schedule A-P for line 20(a) (Offsets to Expenditures - Operating). The majority of the
offsets in question were received during the latter part of 1999 through January 2000.

In the preliminary audit report, the Audit staff recommended that
the Committee, for the reporting periods affected, file complete electronic reports
itemizing the Candidate loan ($45,000), draws of the line of credit ($4,396,756) and
offsets to expenditures ($88,034) on Schedules A-P for the appropriate line and the three
draws on the line of credit ($1,901,000) on Schedule C-P-1 as required.

In response, the Committee filed amended electronic reports,
which correctly disclosed the Candidate loan, the draws on the line of credit and the
offsets to expenditures.

D. ITEMIZATION OF DISBURSEMENTS

Section 434(b)(5)(A) of Title 2 of the United States Code states, in part,
that each report under this section shall disclose the name and address of each person to
whom an expenditure in an aggregate amount or value in excess of $200 within a
calendar year is made by the reporting committee to meet a candidate or committee
operating expense, together with the date, amount, and purpose of such operating
expenditure.

Section 104.18(f) of Title 2 Title 11 of the Code of Federal Regulations
states, in part, that if a committee files an amendment to a report that was filed
electronically, it shall also submit the amendment in an electronic format. The committee
shall submit a complete version of the report as amended, rather than just those portions
of the report that are being amended.

The Audit staff conducted a sample review of disbursements and
determined that in a material number of instances disbursements requiring itemization
were not disclosed on Schedules B-P (Itemized Disbursements). A majority of the
exceptions related to disbursements from the operating and state bank accounts.

In the preliminary audit report, the Audit staff recommended that the
Committee, for the reporting periods affected, file complete amended electronic reports
disclosing all disbursements that required itemization.

In response, the Committee submitted amended electronic reports that
materially disclosed the above disbursements.

19


Memorandum to Robert J. Costa
Proposed Audit Report

Bauer for President 2000, Inc.
Page 6

110.10(b)(3), the result would be the same because Mr. Bauer also had a right to the full
amount of assets under the agreement with the bank governing the account, the
“4nstrument of ownership.” Finally, the Committee argues that Mr. Bauer’s act of
drawing a check on a joint account cannot cause Mrs. Bauer to violate the contribution
limitation. The Committee argues that the Act and the Fifth Amendment to the United
States Constitution require an act by the party charged with a violation.

Generally, whether a spousal contribution will result from the candidate’s use of
jointly held property is determined by the instrument of conveyance or ownership or by
the one-half-interest rule. 11 C.F.R. § 110.10(b)(3); see also AO 1991-10.° The
Commission’s regulations regarding jointly held property do not specifically address joint
bank accounts. See 11 C.F.R. § 110.10(b)(3). In a memorandum to the Commission
dated October 30, 1981, proposing revisions to section 110.10, the Office of General
Counsel noted a distinction between jointly held bank accounts and other jointly held
property. See Agenda document #81-181, page 7, footnote 3. The memorandum noted
that with a joint bank account, where joint tenancy is established, each party has access
and control over the entire bank account, as either spouse can withdraw any part, or the
entire amount of funds from such account. The regulations were never changed to
address a distinction between joint bank accounts and other jointly held property. See 11
C.F.R. § 110.10(b)(3). However, subsequent enforcement matters, addressing the issue
of joint bank accounts followed this distinction. See MURs 2292 and 3505. Thus, the
Commission treated joint bank accounts as an exception to the one-half interest rule
under section 110.10(b)(3) because each account holder has access and control over the
whole. Jd. This Office notes that the bank statement for the account at issue includes
both the names of Mr. Gary Bauer and Mrs. Carol Bauer followed by JTWROS indicating
that the account is a joint account with the right of survivorship. In addition, only Mr.
Bauer’s signature was needed to withdraw funds from the account indicating he had
access and control over the whole account. Therefore, the Office of General Counsel
recommends that the Audit Division revise the proposed Audit Report in accordance with
these enforcement matters.

° In AO 1991-10, a candidate and spouse jointly held assets in a Kidder Peabody Investor Account.
The account required the signatures of both parties for withdrawals. thereby indicating that the candidate
did not have legal right of access to or control over the account. without the benefit of a spousal signature.
However, the candidate only sought to withdraw 50% of the assets in the account and since there is an
exception for the use of jointly owned assets with a spouse. under the Commission regulations, the
candidate could use up to one-half of the account for his campaign and therefore make the withdrawal. See
11 CF.R. § 110.10(b)(3).

32


Counsel offered no evidence that the Committee’s list was
“developed for its own use,” rather than as a fundraising item. Nor did Counsel offer any
documentation to support its own statement that the Audit staff “misconstrued the
arrangement between Lukens and the Committee with respect to the rental of names.”

Factually, this transaction and the agreement between Lukens and
the Committee demonstrates that an asset of the Committee that is normally used to
solicit contributions, was placed with a vendor to be marketed to all interested parties. As
a result, the proceeds from this specific transaction represent a contribution to the
Committee, subject to the limitations and prohibitions of the Act. As a result, the
Committee has not demonstrated that Lukens did not make and it did not receive and
prohibited contributions of $70,000.

The Commission voted to receive this finding without any
determination on the merits of the analysis of the facts or the interpretation of the law
contained therein.

3. Purchase of Assets

The Committee purchased office equipment, furniture, supplies
and printed materials from CWF for $15,372 on June 28, 1999. The Bill of Sale,
although not dated, was annotated “prepared by CWF 3/16/99” and faxed to the
Committee on June 28, 1999.

Since the Committee did not pay CWF until June 28, 1999, CWF
made a contribution to the Committee equal to the value ($15,372) of the assets for the
period March 16, 1999, through June 28, 1999.° Consequently, an excessive contribution
of $14,372 ($15,372 [value of assets] - $5,000 [limit] + $4,000 [contribution on 1/29/99])
occurred as a result of this transaction.

In the preliminary audit report, the Audit staff recommended that
the Committee provide evidence to demonstrate that CWF did not make an excessive
contribution of $14,372. Additionally, the Audit staff requested the terms of the
agreement between the two parties, if any, and the date that the Committee took
possession of the assets.

In response, the Committee disputed the Audit staff's conclusion.
The Committee’s Counsel asserted that it, “has not yet located additional documentation,
although efforts to do so have been made and will continue to be made. The material will
be supplied promptly upon receipt.”

To date, the Committee has not provided evidence or
documentation demonstrating that CWF did not make an excessive contribution of
$14,372. Nor has the Committee provided documentation regarding the terms of any

6 Although requested, the Committee did not provide documentation demonstrating the exact date it

took possession of the above items.

14


The Committee registered with the Federal Election Commission (the
Commission) on February 4, 1999 as the principal campaign committee for Gary L.
Bauer, candidate for the Republican Party’s nomination for the office of President of the
United States. During the audit period, the Committee maintained depositories in
California, Iowa, Louisiana, New Hampshire, Virginia and Washington, D.C. To handle
its financial activity the Committee utilized 13 bank accounts. From these accounts the
Committee made approximately 3,974 disbursements. In addition, the Committee
received approximately 147,000 contributions from 59,000 contributors. These
contributions totaled approximately $7,510,000.

Mr. Bauer was determined eligible to receive matching funds on May 27,
1999. The Committee made 20 requests for matching funds and received $5,052,748
from the United States Treasury. This amount represents 30% of the $16,890,000
maximum entitlement that any candidate could receive. For matching fund purposes, the
Commission determined that Mr. Bauer’s candidacy ended on February 4, 2000, the date
he publicly announced his withdrawal. On March 1, 2001, the Committee received its
final matching fund payment to defray qualified campaign expenses and to help defray
the cost of winding down the campaign.

D. AUDIT SCOPE AND PROCEDURES

In addition to a review of expenditures made by the Committee to
determine if they were qualified or non-qualified campaign expenses, the audit covered
the following general categories:

1. the receipt of contributions from prohibited sources, such as those
from corporations or labor organizations (see Finding II.A.2. and
Finding IL.E.);

2. the receipt of contributions or loans in excess of the statutory
limitations (see Finding II.A.1., 3. and 4.);

3. proper disclosure of contributions from individuals, political
committees and other entities, to include the itemization of
contributions when required, as well as, the completeness and accuracy
of the information disclosed (see Finding II.C.);

4. proper disclosure of disbursements including the itemization of
disbursements when required, as well as, the completeness and
accuracy of the information disclosed (see Finding II.D.);

5. proper disclosure of campaign debts and obligations (See Finding
ILC.);

6. the accuracy of total reported receipts, disbursements and cash
balances as compared to campaign bank records (see Finding II.B.);



Memorandum to Robert J. Costa
Proposed Audit Report

Bauer for President 2000, Inc.
Page 3

occur. /d. If that future use does not occur for any reason, a contribution may result
depending on the circumstances of the particular situation and the status of any person
who does not provide or obtain the promised future use. Jd. The Commission has also
indicated that the purchase price at a “usual and normal charge” for mailing lists and
other goods in the market place must be reasonably capable of objective verification. AO
1989-4. In addition, the Commission views lists as a unique type of committee asset in
that each list’s value, at least in part, is determined on the basis of the committee's
political fundraising efforts or other political use of the list. AO 1983-2.

The Office of General Counsel believes that CWF made an excessive in-kind
contribution to the Committee. The exchange agreement was not for a corresponding
number of names. See AO 1981-46. Furthermore, the names were not of equal value.
Id. CWF provided the Committee with significantly more names than the Committee
provided to CWF. The Committee argued that the examination of the exchange
agreement should account for potential use at the time of the agreement. In light of the
fact that contracting parties can agree to exchange intangible items, the Office of General
Counsel believes that factors other than the actual number of names exchanged may be
appropriate to consider. However, a factor such as the potential use of names that may be
generated is not reasonably capable of objective verification. See AO 1989-4. Although
the Committee asserts that the exchange at issue was of equal value according to industry
standards, the Committee has not provided any verifiable support for this assertion. The
exchange agreement does not refer to any quantifiable number of names the Committee
expected to be generated. In addition, the Committee argues that its use of CWF’s list
added value to CWF’s list. However, the Committee has not provided any objectively
verifiable support for added value based on the Committee’s use of the list.

B. Rental of Donors List

The Audit Division concludes that the Lukens Cook Company (“Lukens”) made a
$70,000 contribution to the Committee. Lukens entered into an agreement with the
Committee for the rental and exchange rights for the Committee's donor file. Pursuant
to the agreement, Lukens could exercise the nghts to the file between January 15, 2000
and October 1, 2000. The agreement defines rental and exchange rights as the exclusive
right to market, rent or exchange the Committee's complete donor file, either in part or
total. Under the agreement, the Committee reserved the right to exclude 400 donor
names. In addition, during the period of time that Lukens was granted the rental and
exchange rights to the Committee’s donor file, the Committee could not sell, rent.
exchange, barter, or broker the list to any other organization.

Generally, a Committee's sale or commercial use of its assets is fundraising for
political purposes which results in contributions subject to the limitations and
prohibitions of the Federal Election Campaign Act of 1971, as amended (“the Act”). See
AOs 1990-26, 1989-4, 1988-12, 1983-2, 1981-7, 1980-70, 1980-34, 1980-19, 1979-76,
and 1979-17. However, the Commission has allowed isolated sales of committee assets

29


22

In the preliminary audit report, the Audit staff recommended that the
Committee provide evidence that the checks were either not outstanding or that they were
voided and no obligation existed. If the checks were not outstanding, the evidence
provided should have included copies of the front and back of the negotiated checks. If
the checks were voided, the evidence should have included statements from the vendors
acknowledging that they have been paid in full, or an account reconciliation showing that
all billings have been paid. Absent the submission of such evidence, the Audit staff
recommended that the Commission determine that stale-dated checks, totaling $3,784, are
payable to the United States Treasury.

In response to the preliminary audit report, the Committee issued a check
to the United States Treasury in the amount of the $3,784. This check was delivered to
the United States Treasury on January 3, 2002.

26


the names on the Committee’s list originated from CWF’s list, the Audit staff believe the
list was not developed in the normal course of its operation primarily for is own use, but
rather as a fundraising item. The Audit staff determined the funds received were subject
to the limitations and prohibitions of the Act and, as a result, the Committee accepted a
prohibited contribution of $70,000. In response, the Committee’s Counsel neither
submitted any documentation requested nor made a payment to the United States
Treasury.

The Commission voted to receive this finding without any determination on the
merits of the analysis of the facts or the interpretation of the law contained therein.

PURCHASE OF ASSETS - The Committee purchased office equipment, furniture,
supplies and printed materials from CWF for $15,372 on June 28, 1999. The Bill of Sale,
although not dated, was annotated “prepared by CWF 3/16/99” and faxed to the
Committee on June 28, 1999. The Audit staff concluded the Committee accepted an
excessive contribution from CWF equal to the value of the assets for the period March
16, 1999 through June 28, 1999. Although recommended, the Committee did not provide
evidence or documentation demonstrating that CWF did not make an excessive
contribution.

The Commission voted to receive this finding without any determination on the
merits of the analysis of the facts or the interpretation of the law contained therein.

PERSONAL LOAN — On October 15, 1999, the Candidate loaned the Committee
$45,000. An analysis of the bank account, held jointly with the Candidate’s spouse,
indicated that Mr. Bauer’s equitable share of funds in the account on the date of the loan
was only $31,564, The difference between the amount of the loan and the Candidate’s
equitable share represented an excessive contribution from Mrs. Bauer of at least $12,436
($13,564 — 1,000 limitation). Although recommended, the Committee did not provided
copies of six checks that if negotiated by the payee would result in the a higher excessive
contribution by Mrs. Bauer. Further, the Committee response did not demonstrate the
Candidate’s ownership share of the funds in the account exceeded 50%.

The Commission considered two motions with respect to this finding: The first
motion was to reject the analysis presented above; the second was to receive this finding
without any determination on the merits of the analysis of the facts or the interpretation
of the law contained therein. Each motion failed by a vote of 3 to 3.


FEDERAL ELECTION COMMISSION

WASHINGTON, DC 20464

REPORT OF THE AUDIT DIVISION
ON
BAUER FOR PRESIDENT 2000, INC.

EXECUTIVE SUMMARY

Bauer for President 2000, Inc. (the Committee) registered with the Federal
Election Commission on February 4, 1999. The Committee is the principle campaign
committee of Gary L. Bauer, candidate for the 2000 Republican nomination for President
of the United States.

The audit was conducted pursuant to 26 U.S.C. §9038(a), requiring the
Commission to audit committees authorized by candidates who receive Federal Funds.
The Committee received $5,052,748 in matching funds from the United States Treasury.

The findings of the audit were presented to the Committee at an exit conference
held on November 28, 2000 and in the Preliminary Audit Report. The Committee’s
responses to those findings are contained in the audit report.

In the Audit Report, the Commission made the determination that the Committee
pay the United States Treasury $3,784 for checks issued by the Committee that were
never cashed. The Committee has paid $3,784 to the United States Treasury.

The following is an overview of the findings contained in the audit report.

APPARENT IMPERMISSIBLE CONTRIBUTIONS — 2 U.S.C. §431(A)(8)(A)(i); §441a(1)(A)
and (2)(A); §441b(a); 11CFR §100.7(a)(2).

Donor List — The Audit staff determined that contributor lists exchanged between
the Committee and Campaign for Working Families PAC! (CWF) did not fall within two
recognizable industry standards viewed by the Commission as acceptable exchange of
contributor lists. In response, the Committee’s Counsel offered no evidence that the
exchange of names between the Committee and CWF was of equal value. As a result,
CWF made and the Committee received an excessive in-kind contribution of $87,409.

Rental of Donor List - The Committee rented its donor list, for an eight-month
period, to a corporate entity while it was actively campaigning and raising funds for the
Primary election. In return, the Committee was paid $70,000. Because the majority of

' Gary Bauer is chairman of this political committee.


ll

agreement between the parties or the date the Committee took possession of the assets.
As aresult, the Audit staff's position that CWF made and the Committee accepted an
excessive contribution of $14,372 remains unchanged.

The Commission voted to receive this finding without any
determination on the merits of the analysis of the facts or the interpretation of the law
contained therein.

4. Personal Loan

On October 15, 1999, the Candidate loaned the Committee
$45,000. The “loan memorandum” signed by the Candidate and by the treasurer of the
Committee stated the loan was due and payable upon demand. The loan issued by check
(number 3095), signed by the Candidate, was drawn on an account titled Gary L. Bauer
and Carol Bauer. The Committee repaid the loan on January 11, 2000. Absent evidence
to the contrary, in order for the loan to be considered entirely from the Candidate, the
account from which the loan originated must have an unspent fund balance of at least
$90,000 on the date the loan was made.

Using bank records made available, the Audit staff calculated that
the maximum amount of unspent funds in the account on October 15, 1999 was $63,128.
Therefore, the Candidate’s equitable share was $31,564 ($63,128 / 2). The difference
between the amount of the loan and the Candidate’s equitable share represents a
contribution from Mrs. Bauer in the amount of $13,436 ($45,000 - $31,564).
Consequently, Mrs. Bauer’s contribution exceeded the limitation by $12,436 ($13,436 -
$1,000).

It should be noted that six checks apparently written prior to the
check that transmitted the loan had not cleared the account. The value of these checks
will reduce the amount of unspent funds in the account as well as the Candidate’s
equitable share and, therefore, increase the amount of the excessive contribution
attributed to Mrs. Bauer.

This matter was discussed with the Committee at the exit
conference held subsequent to fieldwork. Workpapers detailing the Audit staff's analysis
were given to Committee representatives.

In the preliminary audit report, the Audit staff recommended that
the Committee provide evidence that demonstrated an excessive contribution of $12,436
from Mrs. Bauer did not result from the $45,000 loan. Such documentation should have
included a copy of an instrument of conveyance or ownership showing that the
Candidate’s share is more than one-half. Further, within the same 60 day period, the
Audit staff recommended that the Committee make available copies of canceled checks,
numbered 3081 to 3083, 3085, 3086 and 3094 as well as copies of bank statement(s) that
indicated these checks had cleared the bank. Any increase to the amount of the


FEDERAL ELECTION COMMISSION

WASHINGTON. DC 20463

REPORT OF THE AUDIT DIVISION
ON
BAUER FOR PRESIDENT 2000, INC.

1 BACKGROUND
A. AUDIT AUTHORITY

This report is based on an audit of Bauer for President 2000, Inc. (the
Committee). The audit is mandated by Section 9038(a) of Title 26 of the United States
Code. That section states that “After each matching payment period, the Commission
shall conduct a thorough examination and audit of the qualified campaign expenses of
every candidate and his authorized committees who received payments under section
9037”. Also, Section 9039(b) of the United States Code and Section 9038.1(a)(2) of the
Commission’s Regulations state that the Commission may conduct other examinations
and audits from time to time, as it deems necessary.

In addition to examining the receipt and use of Federal funds, the audit
seeks to determine if the campaign has materially complied with the limitations,
prohibitions, and disclosure requirements of the Federal Election Campaign Act of 1971
(the Act), as amended.

B. AUDIT COVERAGE

The audit covered the period from the Committee’s inception, February 4,
1999 through May 31, 2000. The Committee reported an opening cash balance of $-0-;
total receipts of $16,374,904; total disbursements of $16,027,417; and a closing cash
balance of $40,207. In addition, a limited review of the Committee’s disclosure reports
filed through December 31, 2001 was conducted for purposes of determining the
Committee’s matching fund entitlement based on its financial position.

Cc. CAMPAIGN ORGANIZATION

The Committee maintains its headquarters in Arlington, VA. The
Treasurer was Constance G. Mackey from February 4, 1999 until May 19, 1999. The
current Treasurer, Francis P. Cannon, was designated May 20, 1999.



7

Two invoices in the amounts of $62,579 and $31,328 were dated
December 6, 1999. The Committee paid the first invoice ($62,579) in two installments.
The first payment of $33,000 was made on May 31, 2000 or 177 days subsequent to the
date of the invoice. The final payment of $29,579 was made on July 24, 2000 or 231
days subsequent to the date on the invoice. The second invoice ($31,328) was not paid
until April 19, 2000 or 135 days subsequent to the date of the invoice.

The final invoice from this vendor was dated December 28, 1999,
in the amount of $57,884 and not paid until June 30, 2000 or 185 days subsequent to the
date of the invoice.

The terms noted on the invoices were either “due on receipt” or
“net 30.” Based on records made available and discussions with Committee
representatives, it does not appear that the vendor sent subsequent invoices or made
additional attempts to collect the amounts due. The Committee did report the amounts
due as debts owed by the Committee on Schedules D-P, (Debts and Obligations).

Based upon the above, it is the Audit staff's opinion that the
extension of credit by America Direct, Inc. was not in the ordinary course of business and
results in a prohibited contribution of $259,862 for the period the invoices remained
outstanding.

2. Moore Response Marketing Services

Moore Response Marketing Services, a corporation, also provided
the Committee with direct mail services. The Audit staff reviewed nine invoices totaling
$611,773 dated between July 1999 and November 1999. It appears that two of the
invoices were not paid timely.

According to a memorandum sent to the Committee on November
5, 1999, the vendor was to print, personalize and mail 1,200,000 copies of a booklet
entitled, “Why Bauer.” On November 11, 1999, the vendor invoiced the Committee
$408,001 for services described as “print, personalize and mail ‘Why Bauer’ package
($380,401) and design 3 print versions copy design, graphic art ($27,600.00).”

The Committee made four payments, totaling $293,956, in a timely
manner, leaving a balance due of $114,045. The Committee made additional payments of
$30,000 and $20,000 on May 23, 2000 and July 3, 2000 respectively. However, these
payments were between 194 and 235 days subsequent to the date of the invoice. As of
end of fieldwork, the Committee had not paid the remaining balance of $64,045, but did
disclose this amount due the vendor as a debt owed by the Committee on Schedule D-P.

The second invoice from this vendor was dated August 4, 1999 in
the amount of $11,713. The Committee’s initial payment of $1,669 was made timely.
However, the Committee did not pay the remaining balance of $10,044 until February 14,
2000, or 194 days subsequent to the date of the invoice. The terms noted on both

21


FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 20463

June 19, 2002

MEMORANDUM

TO: RON M. HARRIS
PRESS OFFICER
PRESS OFFICE A

FROM: JOSEPH F. STOLTZ
ASSISTANT STAFF CTOR
AUDIT DIVISION +

SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON
BAUER FOR PRESIDENT 2000, INC.

Attached please find a copy of the final audit report and related documents on
Bauer for President 2000, Inc. that was approved by the Commission on May 31, 2002.

All parties involved have received informational copies of the report and the report
may be released to the public.

Attachment as stated

ce: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library


Section 100.7(a)(1)(iii)(A) and (B) of Title 11 of the Code of Federal
Regulations provides, in part, any goods or services without charge or at a charge which
is less than the usual and normal charge for such goods or services is a contribution. If
goods or services are provided at less than the usual and normal charge, the amount of the
in-kind contribution is the difference between the usual and normal charge for the good
and services at the time of the contribution and the amount charged the political
committee. Usual and normal charge for goods or services means the price of those
goods in the market from which they ordinarily would have been purchased at the time of
the contribution.

Section 100.7(a)(2) of Title 11 of the Code of Federal Regulations states
the entire amount paid to attend a fundraiser or other political event and the entire amount
paid as the purchase price for a fundraising item sold by a political committee is a
contribution.

Section 110.10(b)(1) and (3) of Title 11 of the Code of Federal
Regulations defines personal funds of the Candidate to mean any assets which, under
applicable state law, at the time he or she became a candidate, the candidate had legal
right of access to or control over, and with respect to which the candidate had either legal
and rightful title or an equitable interest. A candidate may use a portion of assets jointly
owned with his or her spouse as personal funds. The portion of the jointly owned assets
that shall be considered as personal funds of the candidate shall be that portion which is
the candidate's share under the instrument(s) of conveyance or ownership. If no specific
share is indicated by an instrument of conveyance or ownership, the value of one-half of
the property used shall be considered as personal funds of the candidate.

Sections 9035.2(a)(1) and (c) of Title 11 of the Code of Federal
Regulations state, no candidate who has accepted matching funds shall knowingly make
expenditures from his or her personal funds, or funds of his or her immediate family, in
connection with his or her campaign for nomination for election to the office of President
which exceed $50,000, in the aggregate. This section shall not operate to prohibit any
member of the candidate's immediate family from contributing his or her personal funds
to the candidate, subject to the limitations of 11 CFR part 110. The provisions of this
section also shall not limit the candidate's liability for, nor the candidate's ability to pay,
any repayments required under 11 CFR part 9038. If the candidate or his or her
committee knowingly incurs expenditures in excess of the limitations of 11 CFR
110.8(a), the Commission may seek civil penalties under 11 CFR part 111 in addition to
any repayment determinations made on the basis of such excessive expenditures. For
purposes of this section, personal funds have the same meaning as specified in 1] CFR
110.10.

Section 441b(a) of Title 2 of the United States Code states, in part, that it
is unlawful for any corporation to make a contribution or expenditure in connection with
any election to federal office and that it is unlawful for any candidate, political committee
or any other person knowingly to accept or receive any contribution prohibited by this
section.


7. adequate recordkeeping for campaign transactions;

8. accuracy of the Statement of Net Outstanding Campaign Obligations
filed by the Committee to disclose its financial condition and to
establish continuing matching fund entitlement (see Finding III.A.);

9. the Committee’s compliance with spending limitations; and,

10. other audit procedures that were deemed necessary in the situation (see
Finding II.B.)

As part of the Commission’s standard audit process, an inventory of
campaign records was conducted prior to the audit fieldwork. The inventory was to
determine if the Committee’s records were materially complete and in an auditable state.
Based on a review of the records, fieldwork commenced immediately.

Unless specifically discussed below, no material non-compliance was
detected. It should be noted that the Commission may pursue further any of the matters
discussed in this report in an enforcement action.

Il. AUDIT FINDINGS AND RECOMMENDATIONS — NON-REPAYMENT.
MATTERS

A. APPARENT IMPERMISSIBLE CONTRIBUTIONS

Section 431(8)(A)(i) of Title 2 of the United States Code states in part,
that a contribution includes a gift, subscription, loan, advance, or deposit of money or
anything of value for the purpose of influencing a Federal election.

Section 441a(a)(1)(A) of Title 2 of the United States Code states, in part,
no person shall make contributions to any candidate and his authorized committees with
tespect to any election for Federal office which, in the aggregate, exceed $1,000.

Section 441a(a)(2)(A) of Title 2 of the United States Code states, in part,
no multicandidate political committee shall make contributions to any candidate and his
authorized committees with respect to any election for Federal office which, in the
aggregate, exceed $5,000.

Section 100.7(a)(1)(i)(A) and (B) of Title 11 of the Code of Federal
Regulations states in part, that a loan, which exceeds the contribution limitations, shall be
unlawful whether or not it is repaid. A loan is a contribution at the time it is made and is
a contribution to the extent that it remains unpaid. The aggregate amount loaned to a
candidate or committee by a contributor, when added to other contributions from that
individual to that candidate or committee, shall not exceed the contribution limitations set
forth at 11 CFR part 110.


Memorandum to Robert J. Costa
Proposed Audit Report

Bauer for President 2000, Inc.
Page 2

Il. APPARENT IMPERMISSIBLE CONTRIBUTIONS (Finding II.A.)
A. Donors List

The Audit Division concludes that the Committee received an excessive in-kind
contribution from Campaign for Working Families PAC (“CWF”) when it failed to
properly compensate CWF for a donor list. Pursuant to an agreement between CWF and
the Committee, the Committee received a complete copy of CWF’s donor and non-donor
files (137,120 names). In exchange, the Committee agreed to provide CWF with a
complete copy of its donor and non-donor files at the end of the campaign. The
Committee used CWF’s files 22 times during the period from February 5, 1999 through
December 24, 1999 for an aggregate use of 957,338 names. CWF provided
documentation showing that it used the Committee’s donor file, consisting of 25,547
names a total of 8 times from June 2000 to February 2001 for an aggregate use of 174,501
names. Accordingly, the Audit staff concludes that the Committee’s exchange obligation
to CWF was equal to 782,837 names (957,338-174,501). According to the Audit
Division, based on industry sources, CWF rents its mailing list for $115 per 1000 names.
The Committee rents its mailing list for $130 per 1,000 names. As a result, CWF made,
and the Committee received, an excessive in-kind contribution of $87,409."

In response to the Preliminary Audit Report, the Committee asserts that it
participated in a list exchange with CWF of equal value. According to the Committee,
the Committee and CWF anticipated that the Committee would generate a very large
number of new names. The Committee argues that the value of the future use of the
potential names the Committee expected to generate for CWF’s use should be considered
at the time of the agreement. Thus, even though the exchange did not include a
corresponding number of names, the Committee argues that, judged by industry
standards, the exchange was of equal value. The Committee also argues that its use of the
CWF list added value to the CWF list.

Goods or services provided at less than the usual or normal charge constitute an
in-kind contribution. 11 C.F.R. § 100.7(a)(1)(iii)(A). The “usual and normal charge” for
goods means the price of those goods in the market from which they ordinarily would
have been purchased at the time of the contribution..." 11 C.F.R. § 100.7(a)(1)(iii)(B).
The Commission has taken the position that when a committee provides names to another
political committee in exchange for its own future use of a corresponding number of
names, which are of equal value, this constitutes an arms length business transaction
between the committees and is not a reportable contribution. See Advisory Opinion
(“AO”) 1981-46. However, this conclusion assumes the fact that the future use will

? The fair market value that an entity would pay for the use of 957,338 names from CWF donor files
would be $110,094 (957,338/1000 x $115). The fair market value that an entity would pay for the use of
174,501 names form the Committee's donor files would be $22,685. Therefore, the excessive contribution
by CWF to the Committee is $87,409 ($110.094-S22.685).

28


FEDERAL ELECTION COMMISSION
WASHINGTON. DC 20464

May 6, 2002

MEMORANDUM

TO: Robert J. Costa
Deputy Staff Director

THROUGH: James A. Pehrkon
Staff Director

FROM: Lawrence H. BYorton
General Counsel”

ie
Gregory R. Baker Gy ,
Acting Associate General Counsel

Lorenzo Holloway - ¥4——

Assistant General Counsel

Susan L. Kay" .
Attorney

Michelle Abellera :
Attorney ,

SUBJECT: Bauer for President 2000, Inc.-Proposed Audit Report (LRA #543)

I. INTRODUCTION

The Office of General Counsel reviewed the proposed Audit Report (“Report”) on
Bauer for President 2000, Inc. (“the Committee”) submitted to this Office on March 25,
2002. The following memorandum summarizes our comments on the proposed Report.
We concur with the findings in the proposed Report that are not discussed in the
following memorandum. If you have any questions, please contact Susan Kay, the
attomey assigned to this audit.

' The Office of General Counsel recommends that the Commission consider this document in open

session since the Report does not include matters exempt from public disclosure. See 11 C.F.R. § 2.4

27


MISSTATEMENT OF FINANCIAL ACTIVITY — 2 U.S.C. §§434(b)(1) and (4). The
Committee misstated total disbursements in 1999, and receipts and disbursements in
2000. The Committee file amended electronic reports to correct the misstatements.

ITEMIZATION OF RECEIPTS — 11 CFR §104.3(d)(1) and (3); §104.3(a)(4)(iv) and
(v). The Committee did not itemize a $45,000 loan from the Candidate or nine draws on
a line of credit on Schedule A-P for lines 19(a) and 19(b), as required. Further, three of
the 9 draws on the line of credit were not disclosed on Schedule C-P-1 for the 1999 Year-
End reporting period. Finally, the Committee failed to itemize offsets totaling $88,034 on
Schedule A-P for line 20(a). The Committee filed amended electronic reports itemizing
the loans and the offsets on the appropriate schedules.

ITEMIZATION OF DISBURSEMENTS — 2 U.S.C. §434(b)(5)(A). The Audit staff
conducted a sample review of disbursements and determined that in a material number of
instances disbursements, the majority from the operating and state bank accounts was not
disclosed on Schedules B-P. The Committee filed amended electronic reports, which
materially disclosed the disbursements.

APPARENT PROHIBITED CONTRIBUTIONS RESULTING FROM EXTENSIONS OF
CREDIT BY COMMERCIAL VENDORS — 2 U.S.C. §441(a); 11 CFR §116.3(a)(b) and (c).
The audit revealed that three direct mail vendors extended credit to the Committee by
allowing invoices to remain outstanding between 103 and 235 days. The Audit staff
concluded that these vendors did not make commercially reasonable attempts to collect
$726,564 for services rendered, thereby making an apparent prohibited contribution.

The Commission voted to receive this finding without any determination on the
merits of the analysis of the facts or the interpretation of the law contained therein.

DETERMINATION OF NET OUTSTANDING CAMPAIGN OBLIGATIONS — 11CFR
§§9034.5(a) and 9034.1(b). A Statement of Net Outstanding Campaign Obligations was
prepared to determine the Committee’s financial position as of the Candidate’s date of
ineligibility, February 4, 2000. The Audit staff concluded that the Committee did not
receive matching funds in excess of its entitlement.

STALE-DATED CHECKS — 11 CFR §9038.6. The Committee paid the United
States Treasury $3,784 for unnegotiated, stale-dated checks that had been issued by the
Committee.


14

(on ITEMIZATION OF RECEIPTS

Section 104.3(d)(1) and (3) of Title 11 of the Code of Federal Regulations
States, in part, that when a political committee obtains a loan from, or establishes a line of
credit at a lending institution, it shall disclose in the next due report information on
Schedule C-P-1. Additionally, political committees shall file in the next report a
Schedule C-P-1 each time a draw is made on a line of credit, and each time a loan or line
of credit is restructured to change the terms of repayment.

Section 104.3(a)(4)(iv) of Title 11 of the Code of Federal Regulations
requires that the reporting committee disclose each person who makes a loan to the
reporting committee during the reporting period, together with the identification of any
endorser or guarantor of such loan, the date such loan was made and the amount or value
of such loan.

Section 104.3(a)(4)(v) of Title 11 of the Code of Federal Regulations
requires that the reporting committee disclose each person who provides a rebate, refund
or other offset to operating expenditures where the aggregate amount or value is in excess
of $200 within the calendar year, together with the date and amount of any such receipt.

Section 104.18(f) of Title 11 of the Code of Federal Regulations states, in
part, if a committee files an amendment to a report that was filed electronically, it shall
also submit the amendment in an electronic format. The committee shall submit a
complete version of the report as amended, rather than just those portions of the report
that are being amended

1. Loans

Candidate loans and other loans, including draws on lines of credit,
are required to be reported on Form 3P, page 2 (Detailed Summary of Receipts and
Disbursements) for lines 19(a) (Loans Received from or Guaranteed by Candidate) and
19(b) (Other Loans); and, itemized on Schedule A-P (Itemized Receipts) for each
respective line number. In addition, outstanding loans and each draw on a line of credit
should be disclosed on Schedules C-P (Loans) and C-P-1 (Loans and Lines of Credit
from Lending Institutions).

The Committee received a $45,000 loan from the Candidate and
established a $3,000,000 line of credit at a lending institution. The Committee made nine
draws on the line of credit totaling $4.396,756.* Although the loan and line of credit
were reported on Schedule C-P and Form 3P, page 2, the Committee did not itemize the
loan or the nine draws on the line of credit on Schedule A-P for lines 19(a) and 19(b), as
required. Further, three of the 9 draws on the line of credit ($1,901,000) were not
disclosed on Schedule C-P-1 for the 1999 Year-End reporting period.

At no time did the amount owed on the line of credit exceed $3,000,000.

18


20

BAUER FOR PRESIDENT 2000, INC.
STATEMENT OF NET OUTSTANDING CAMPAIGN OBLIGATIONS

As of February 4, 2000
As Determined December 31, 2000

ASSETS
Cash in Bank $217,234 (a)
Deposits to Vendors 210,639
Capital Assets 79,777
Total Assets $507,650
OBLIGATIONS
Accounts Payable for Qualified Campaign Expenses $1,899,642
Loans Payable 1,810,303
Refund of Excessive Contribution (see Section II.A.1.) 87,409
Amount Payable to U. S. Treasury
Prohibited Contribution (see Section II.A.2.) 70,000
Stale-dated Checks (see Section III.B.) 3,784
Actual Wind Down Costs (February 5, 2000 - December 31, 2001) 1,176,565
Total Obligations ($5,047,703)
Net Outstanding Campaign Obligations ($4,540,053)
FOOTNOTE TO NOCO

(a) Outstanding checks issued prior to the date of ineligibility and determined to be
stale-dated have been added back to the Cash in Bank figure.

24


TABLE OF CONTENTS

BAUER FOR PRESIDENT 2000, INC.

Page

Executive Summary 1
Final Audit Report 5
Background 5
Findings 7
Legal Analysis 27
Transmittal to Committee 33

Chronology 35


period June 2000 to February 2001 for an aggregate mailing of 174,501 names. As of
May 2001, the Committee’s exchange obligation to CWF was 782,837 names (957,338 —
174,501).

According to industry sources, CWF rents its mailing list for $115
per 1,000 names (minimum of 5,000 names). The Committee rents its mailing list for
$130 per 1,000 names. Therefore, the fair market value that an entity would pay for the
use of 957,338 names from CWF’s donor files would be $110,094 (957,338 / 1,000 x
$115). Likewise, the fair market value that an entity would pay for the use of 174,501
names from the Committee’s donor files would be $22,685.

The preliminary audit report stated that it was the opinion of the
Audit staff that the “exchange” between CWF and the Committee did not represent an
arm’s length transaction according to industry standards. As a result, CWF made and the
Committee received an apparent excessive in-kind contribution of $87,409 ($110,094 -
$22,685). The Audit staff recommended the Committee provide evidence that CWF did
not make and the Committee did not accept an excessive in-kind contribution of $87,409.
Such evidence was to demonstrate that the exchange was of equal value according to
industry standards. Absent such evidence, a refund $87,409 was to be made to CWF and
evidence provided. If funds were not available to make the refund, the Committee was to
disclose on Schedule D (Debts and Obligations) as debt owed to CWF until such time
that funds become available.

In response to the preliminary audit report, the Committee’s
Counsel asserted:

“[the] Audit Staff makes no effort to determine the
‘value’ of the ‘future’ use of the names expected to
be generated by the Committee at the time the
exchange agreement was made. Instead, its analysis
rests on a comparison of CWF’s ‘actual use’ of the
Committee’s list versus the Committee’s actual use
of CWF’s list. What CWF chose to do during the
term of the agreement, however, does not establish
the value of its right to the ‘future use’ of the
potential Committee’s list, at the time of the
exchange agreement, which is the relevant time for
the valuation of the exchange. The Committee
submits that, judged by industry standards, CWF’s
right to use the potentially very large number of new
names that the parties anticipated that the
Committee would generate more than equaled the
value of the right to use the names CWF proposed
to provide to the Committee. Moreover, use of the
list by the Committee added value to the CWF list.”

11


(January 2000), the Committee had still not paid CWF and the exchange process did not
begin until June 2000, approximately 6 months after the list was rented to Lukens.

More importantly, the rental to Lukens fails to meet the operative
language contained in the exception that the donor file was “primarily for its own use,
rather than as an item to be sold to others as part of a campaign fundraising activity.” As
previously stated, in January 2000, the Committee was still active and raising funds. The
same day the Committee received $70,000 from Lukens (January 3"), it received its first
matching fund payment of $1,969,127. No state primary or caucus had occurred.

It is the opinion of the Audit staff that the funds received from
Lukens are subject to the prohibitions and limitations of the Act. As a result, Lukens
made and the Committee received a prohibited contribution of $70,000.5

In the preliminary audit report, the Audit staff recommended that
the Committee provide evidence that Lukens did not make and the Committee did not
accept a prohibited contribution of $70,000. Such evidence was to demonstrate that
Lukens is not a corporation and that the $70,000 payment by Lukens did not result in a
contribution to the Committee. For example, documentation was to demonstrate that
Lukens used or marketed the list during the rental period. Further, the documentation
was to show that the Committee’s donor file was developed in the normal course of its
operations and primarily for its own use, rather than as an item to be sold to others or for
use in a campaign fundraising activity. Absent such evidence, it was recommended that
the Committee disgorge $70,000 to the United States Treasury.

In response, the Committee’s Counsel neither submitted any
documentation requested nor made a payment to the United States Treasury.
Rather the response maintains:

“The Audit Staff's conclusion that the Committee’s list was
not ‘developed for its own use,’ but rather as a fundraising
item, is unsupportable in light of Mr. Bauer’s active
candidacy in the 2000 Presidential election. Moreover, the
Audit Staff has misconstrued the arrangement between
Lukens and the Committee with respect to the rental of
names. In any event, the Audit Staff's suggestion that
names obtained initially from third parties do not qualify
‘as developed’ by the Committee is contrary to industry
practice, a practice that has not been questioned previously
by the Commission.”

According to Dun & Bradstreet, Lukens incorporated in the State of Virginia on July 27, 1987.
According to the Corporation Division of the Virginia Secretary of State’s Office, Lukens is not
listed as a corporation. However, its current business license was issued by the City of Alexandria.
The name on the business license is The Lukens Cook Company, Inc.

13


REPORT OF THE AUDIT DIVISION
ON

BAUER FOR PRESIDENT 2000, INC.

May 31, 2002

FEDERAL ELECTION COMMISSION
999 E STREET, N.W.
WASHINGTON, D.C.



CHRONOLOGY

BAUER FOR PRESIDENT 2000, INC.

Audit Fieldwork
Exit Conference

Preliminary Audit Report to
the Committee

Response to the
Preliminary Audit Report

Final Audit Report Approved

06/12/00 — 10/27/00

11/28/00

10/11/01

01/02/02

05/31/02

35



invoices were “payable upon receipt.” Based on records made available and discussions
with Committee representatives, it does not appear that the vendor sent subsequent
invoices or made additional attempts to collect the amounts due.

Based upon the above, it is the opinion of the Audit staff that
Moore Response Marketing Services’ extension of credit was not in the ordinary course
of business and resulted in a prohibited contribution of $124,089 ($114,045 + $10,044)
for the period the invoices remained outstanding.

3. RST Marketing Associates, Inc. (RST)

RST also direct mail vendor, billed the Committee $1,149,315.
Twelve invoices totaling $342,613 were not paid timely.

Seven invoices in amounts ranging from $1,500 to $12,000
remained outstanding between 134 to 164 days. The remaining five invoices in amounts
between $40,000 and $93,000 remained outstanding between 103 and 195 days.

According to the terms noted on the invoices, payment was “due in
30 days.” Based on records made available and discussions with Committee
representatives, it does not appear that the vendor sent subsequent invoices or made
additional attempts to collect the amounts due. The Committee did report the amounts as
debts owed by the Committee on Schedules D-P, (Debts and Obligations).

Based upon the above, it is the opinion of the Audit staff that
RST’s extension of credit was not in the ordinary course of business and resulted in a
prohibited contribution of $342,613 for the period the invoices remained outstanding.

In the preliminary audit report, the Audit staff recommended that the
Committee provide additional documentation, which was to include statements from the
vendors that demonstrated the credits extended were in the normal course of the vendor’s
business and did not represent a prohibited contribution by the vendors. The information
provided was to include examples of other non-political customers and clients of similar
size and risk for which similar services have been provided and similar billing
arrangements have been used. It was also recommended that the Committee provide
information concerning the vendor’s billing policies for similar nonpolitical clients and
work, advance payment policies, debt collection policies, and billing cycles.

In its response the Committee stated that it:

“disputes the contention that it received an in-kind
contribution from any of the listed vendors or that it
received credit other than in the ordinary course of
business. The Committee has sought to obtain the
documentation indicated by the Commission, but has not
yet been able to do so. The Committee will submit such
documentation promptly upon receipt. The Committee

22


REPORT OF THE AUDIT DIVISION ;
ON

BAUER FOR PRESIDENT 2000, INC.

May 31, 2002

FEDERAL ELECTION COMMISSION.
i 999 E STREET, N.W.
WASHINGTON, D.C. |



Memorandum to Robert J. Costa
Proposed Audit Report

Bauer for President 2000, Inc.
Page 4

without inherent contribution consequences when those assets were purchased or
developed for the committee’s own particular use and when the asset had an
ascertainable market value. See AOs 1989-4 and 1986-14. Further, the Commission has
specifically recognized that where the asset in question was a political committee's
mailing or contributor list which has a unique quality and was developed by the political
committee in the normal course of its operations and primarily for it own use, rather than
as an item to be sold to others or for use in campaign fundraising activity, the sale would
not constitute a contribution. See AOs 1986-14, 1982-41, 1981-53, 1981-46 and 1979-
18. The Commission developed this mailing and contributor list exception because the
Commission views such lists as a unique type of asset of the committees involved in that
each list’s value, at least in part, is determined on the basis of the committee’s political
fundraising efforts or other political use of the list. AO 1983-2.

In the Preliminary Audit Report, the Audit staff requested additional information
from the Committee in order to establish whether the Committee’s donor file was
developed in the normal course of the Committee’s operations and primarily for its own
use, rather as an item to be sold to others or for use in campaign fundraising activity. In
its response to the Preliminary Audit Report, the Committee argues that the list in
question was developed for its own use, not as a fundraising item, and uses Mr. Bauer’s
candidacy in the 2000 Presidential election as support for its argument. In addition, the
Committee argues that the fact that the names were initially obtained from a third party
does not disqualify them as names developed by the Committee. Further, the Committee
argues that the Audit staff misconstrued the arrangement between Lukens and the
Committee with respect to the rental of names.’

The Committee’s response to the Preliminary Audit Report and the information
from the audit do not conclusively establish that the list was developed primarily for the
Committee’s own use in the normal course of its operations. The facts show that the
Committee rented the list at a time when the Candidate should have been actively
campaigning for the Republican Party nomination. The Committee received the $70,000
from Lukens for the list on January 3. 2000. This is the same date that the Committee
received its first payment of public funds. Since public funds could only be used for the
purpose of seeking the nomination, 11 C.F.R. §§ 9032.9(a)(1), (2) and 9034.4(a)(1), the
Candidate should have been actively campaigning for that cause at the same time that the
Committee received the $70,000 from Lukens.’ The fact that the Committee rented the
list during what is presumed to have been its active campaign indicates that the list may

3 The Committee does not explain how the Audit staff may have misconstrued the arrangement

between Lukens and the Comminee

‘ At this time, the Commission had not declared the Candidate inactive and, therefore, no longer
eligible for public funds for the purpose of seeking the Republican Party nomination. 11 C.F.R.
§ 9033.6(a). The candidate was declared ineligible when he announced his withdrawal from the campaign

on February 4, 2000.

30



21

Shown below are adjustments for funds received after February 4, 2000,
based on the most current financial information available:

Net Outstanding Campaign ($4,540,053)
Obligations (Deficit) as of 2/4/00

Net Private Contributions 715,716
Received 2/5/00 to 12/31/00

Other Receipts/Income Received 42,246
2/5/00 to 12/31/00

Matching Funds Received 2,909,763
2/5/00 to 12/31/00

SUBTOTAL: Remaining Net ($872,328)
Outstanding Campaign Obligations
(Deficit) @ 12/31/00

Net Private Contributions Received 42,146
1/1/01 to 3/1/01

Matching Funds Received 1/2/01 58,863

Matching Funds Received 3/1/01 98,668

Remaining Net Outstanding Campaign ($672,651)
Obligations (Deficit)

As presented above, the Committee has not received matching fund
payments in excess of its entitlement.

B. STALE-DATED COMMITTEE CHECKS

Section 9038.6 of Title 11 of the Code of Federal Regulations states that if
the committee has checks outstanding to creditors or contributors that have not been
cashed, the committee shall notify the Commission. The committee shall inform the
Commission of its efforts to locate the payees, if such efforts have been necessary, and its
efforts to encourage the payees to cash the outstanding checks. The committee shall also
submit a check for the total amount of such outstanding checks, payable to the United
States Treasury.

Our bank reconciliation identified 23 checks made payable to contributors

totaling $3,784 that had not been negotiated by the payees. As a result, the value of stale-
dated checks is payable to the United States Treasury.

25


1. Donor List

The Candidate formed Campaign for Working Families PAC
(CWF) in 1996. CWF registered as a political committee with the Commission in
November 1996 and qualified for multicandidate status in August 1997. During the 2000
election cycle, CWF reported $2,728,839 in receipts. CWF maintains a donor list and
markets the list in the SRDS Direct Marketing List Source. According to the December
1998 through December 1999 issues, CWF’s donor list, which consists of 137,120 donors
and responders, rents for $115 per 1,000 names with a minimum order of 5,000 names.
The publication identifies the list manager as Pinnacle List Company.

On January 3, 2000, the Committee received $70,000 from The
Lukens Cook Company (Lukens).' A written agreement, dated December 30, 1999,
signed by representatives of the Committee and Lukens stipulated that for compensation
of $70,000 Lukens had “exclusive rights to market, rent or exchange the complete Bauer
for President donor file either in part or in total,” for a period of 8 1/2 months starting
January 15, 2000 through October 1, 2000. The complete file, according to the
agreement, consisted of 63,281 donors and 20,000 non-donors. The agreement also
granted CWF (through the Committee) “five full uses” of the donor file during a specific
time period to “fulfill its exchange obligation to Campaign for Working Families.”
(Emphasis added).

The agreement, at item 6, references a prior agreement. It states,
“per prior agreement, at the termination of this agreement, on October 1, 2000, Lukens
shall retain a permanent joint ownership right to that portion of the Bauer for President
donor file that did not originate as donors to Campaign for Working Families.”
(Emphasis added). This language indicates that the Committee had access to a CWF
donor file.

Other than a payment representing the purchase of campaign
materials and equipment”, the Committee did not make any additional payments to CWF.
Further, the Committee has not reported any debt owed to CWF relative to this
transaction even though it is apparent from the language in the agreement that an
obligation existed at some point in time.

On November 15, 2000, the Audit staff issued a written request for
information and documentation concerning the Committee’s “exchange obligation” to
CWF. The Committee did not respond to this inquiry. The matter was then addressed at
the exit conference. Committee representatives stated they were continuing to gather

information and were not prepared to respond. Further, the Committee did not submit

Lukens also served as one of the Committee's direct mail vendors. During the audit period, the
Committee paid Lukens $258,699 for direct mail service.

A donor list was not part of this purchase.


Counsel is correct in stating that the Audit staff made no effort to
determine the “value” of the “future” use of the names expected to be generated by the
Committee. Such an effort could never produce a reliable result. Counsel appears to be
saying that had the campaign been more successful, its fundraising efforts would have
generated more names to exchange with CWF, resulting in an equal exchange of names
between the Committee and CWF. The Audit staff analyzed only the facts as they existed
and concluded the exchange between the Committee and CWF was not equal and resulted
in an excessive contribution.

As previously stated, the Commission, in AO 1981-46, recognized
two acceptable industry standards of list exchange: first, if the exchange of names is of
equal ‘value’ according to accepted industry practice; and, second, when a committee
provides names to another political committee in exchange for its own future use of a
corresponding number of names which are of equal value. Counsel offers no evidence
that the exchange of names between the Committee and CWF was of equal value.
Counsel merely suggests that had the Committee generated more names, the exchange
would have been in accordance with industry standards. The fact remains the exchange
was not equal. As a result, the Committee has not demonstrated that CWF did not make
and the Committee did not accept an excessive in-kind contribution of $87,409.

2. Rental of Donor List

As previously stated in Section II.A.1., Lukens rented the
Committee’s complete donor file for the period January 15, 2000 through October 1,
2000 for $70,000. Lukens paid the Committee on January 3, 2000. At that time of this
payment, the Candidate was actively campaigning and received his first matching fund
payment of $1,969,167, also on January 3, 2000. In accordance with 11 CFR
§100.7(a)(2), the entire amount paid as the purchase price for a fundraising item sold by a
political committee is a contribution. However, the Commission has published a number
of advisory opinions relative to the sale or rental of committee assets. In those advisory
opinions, the Commission generally has viewed such ventures by on-going committees
simply as another form of fundraising for political purposes in which the proceeds result
in contributions subject to the Act (Advisory Opinions 1983-2, 1981-7, 1980-70, 1980-
34, 1980-19, 1979-76, and 1979-17). The Commission also has recognized a narrow,
limited exception, where the asset involved was a political committee’s mailing or
contributor list that had a unique quality and was developed by the political committee in
the normal course of its operations primarily for its own use, rather than as an item to be
sold to others as part of a campaign fundraising activity (Advisory Opinions 1982-41,
1981-53, 1981-46 and 1979-18).

The rental of the Committee’s complete donor file to Lukens does
not appear to fall under the narrow, limited exception described in the four advisory
opinions cited above. It appears questionable that this donor file can be considered
developed by the Committee in the normal course of its operations. Of the 63,281 donors
and 20,000 non-donors rented to Lukens, only 25,547 names (31%) were not names
obtained from CWF. Furthermore, at the time the donor file was rented to Lukens

12