Memora:idum 'o Robert J. Costa
Proposed 4° dit Report
Philadelphi: 2900 (LRA #609)

Page 4

The advisory opinions referenced in our comments address contributions to
political committees. This audit involves donations to a host committee. The terms are
different, but the overriding legal principle is the same. Section 441b prohibits political
committees from accepting corporate financing for the purpose of influencing a federal
election. The Commission maintained the same concern about corporate financing of
federal elections when it promulgated the regulations for host committees and allowed
them to accept donations from local businesses. Explanation and Justification for
predecessor to 11 C.F.R. § 9008.52, 44 Fed. Reg. 63038 (Nov. 1, 1979); See Explanation
and Justification for 11 C.F.R. § 9008.52, 59 Fed. Reg. 33615 (June 29, 1994). If the
Commission was interested in restricting host committee donations from businesses to
only those situations where nothing is received in exchange for the donation, it could
have easily done so by including this language in the regulations.°

There is language in the regulations that requires businesses interested in funding
host committees to have a local presence. 11 C.F.R. § 9008.52(c)(2). The local presence
requirement is an attempt to ensure that the donations are commercially motivated, rather
than for the purpose of influencing a federal election. See 59 Fed. Reg. 33615 (June 29,
1994).” However, there is a rebuttable presumption that “any business (including a
branch of a regional or national chain, a licensed dealer or a franchise) or a labor
organization or other organization located outside the MA is not local.” 11 C.F.R.

§ 9008.52(c). This presumption may be rebutted by a showing that the volume of
business or activity in an area lying outside the MA would be directly affected by the
presence of the convention. Jd.

There is no mention in 11 C.F.R. § 9008.52(c)(2) of the concept of “affiliation”
or “distribution agreement” as an acceptable means of establishing a local presence in the
MA. Section 9008.52(c)(1) requires that the Committee demonstrate that CNN, Florida
Crystals and Flo-Sun maintain an office or facility within the MA which can include a
branch of a regional or national chain, a licensed dealer or a franchise located within the

6 The fact that a host committee may receive something in exchange for the donation is consistent
with the principle objective of a host committee to promote commerce within the convention city.
11 CFR. § 9008.52(a)(1).

7 Section 9008.52(c)(1)(i) — (xi) provides a list of the purposes for which the donation of funds and
in-kind donations may be utilized by a host committee. 11 C.F.R. § 9008.52(c)(1)(i) — (xi). All of the
purposes listed involve funds or in-kind donations that either defray costs associated with the convention or
provide accommodations or other convention services. There is no language contained in

§ 9008.52(c)(1)(i) — (xi) that permits a host committee to receive an in-kind donation that could then be
sold by the host committee as a means of fundraising. Therefore, the Committee should not be permitted to
sell in-kind donations, such as parking spaces and advertising space as a means of fundraising in this

instance either.


13

WB17 is owned by Tribune Broadcasting, which is part of Tribune. The web cites for
Tribune, WB17 and WPHL do not list CNN LP LLLP as part of its national or regional
chain, nor as a franchise or licensed dealer. The fact that CNN LP LLLP may broadcast its
programming on WPHL does not make it part of the Tribune or WB17 organizations. As
stated above, 11 CFR §9008.52(c)(2) states that for purposes of this section, any business
(including the branch of a national or regional chain, a franchise, or a licensed dealer) or
labor organization or other organizations with offices or facilities located within the
Metropolitan Area (MA) of the convention city shall be considered local. CNN LP LLLP
is not local.

As a result, it remains the opinion of the Audit staff that the Committee
received prohibited donations from Florida Crystals, Inc. ($25,000), Flo-Sun, Inc.
($25,000) and CNN LP LLLP ($16,250).

Regarding Voter.com and Access Industries, Inc., the Committee reiterated
its original position that the contributions from these entities were actually payments for
advertising opportunities. Specifically, the Committee stated:

“While the Audit Division states in the PAR that ‘contributions
which the Committee could not accept if made directly by
persons/entities outside the MA, cannot otherwise be accepted
if made by those same person/entities indirectly in payment for
the aforementioned services,’ this is not consistent with the
regulations governing host committees. These regulations
provide only that ‘donations’ to a host committee must come
from persons or entities located within the Philadelphia
Metropolitan Area. While the regulations do not define the
term ‘donation’ as used in this context, this is a term that has a
generally accepted meaning. Specifically, a ‘donation’ is an
‘offering or gift’ — that is, ‘something that is bestowed
voluntarily and without compensation.’ Given this definition,
the payments by Voter.com and Access Industries cannot be
deemed to constitute ‘donations’ to the host committee, for the
payments were not given without compensation. Rather, in
return for their respective payments, each of Voter.com and
Access Industries received advertising opportunities in
exchange for its payment to the host committee.”

The Committee did not submit any documentation that demonstrated the
amounts received for advertising represented the fair market value of the services provided.
Nor did the Committee submit documentation that demonstrated Voter.com and Access
Industries maintained a presence within the Philadelphia MA. Therefore, the Audit staff
maintains that donations the Committee could not accept if made directly by persons
outside the Philadelphia MA, cannot otherwise be accepted if made by those same persons
indirectly in payment for the aforementioned services. As a result, it remains the opinion


commii.ee were incur ed by the COA withou: proper authorization feom the nost committe: as
Tequired by the contractual agreement and procedures agreed to and followed by the COA and
the host committee. As Philadelphia 2000 further explained in its letter of May 16. 2001. had the
host committee reported amounts as due and owing for these disputed debts. purported creditors
of the host committee might also have seized upon such listings as admissions of liability by the
host committee, when, in fact, the amount claimed as due and owing was less than asserted or the
debt in question was not that of the host committee.”

In this regard, eight of the debts identified by the Audit Division, totaling $1.963.512.43
(as set forth on the schedule provided by the Audit Division), were, in fact. paid directly by the
COA as debts of the COA. To be responsive to the Audit Division's request. however,
Philadelphia 2000 has reported these eight items on Schedule D. Line 10 of the Amended Post-
Convention Report, with the amount due and owing listed as zero and a notation added that the
debts in question were paid by the COA.*

With respect to certain of the other debts identified by the Audit Division. the debts listed
for Reilly Sweeping ($3,168.50) and RTI Mechanical Constructors ($875) are not debts of the
host committee. Philadelphia 2000 mailed payments to these vendors and was subsequently
informed that the debts in question had previously been paid. These two items have thus been
omitted from Schedule D to the Amended Post-Convention Report. Similarly, the debt listed for
Under the Sun Productions ($2,400) is no longer due and owing to the vendor: Philadelphia 2000
has thus reported the item in the Amended Post-Convention Report as a $2.400 in-kind
contribution from Under the Sun Productions rather than a debt.°

, As Philadelphia 2000 further detailed in 1s response of May 16. 2001. at least one creditor of the host
commuttee made such an assertion. While the Audit Division has now stated in the PAR that the host committee
could have noted in its reports that the disclosure of a disputed debt does not constitute an admussion of liability or a
waiver of any claims that the host commuttee may have against the creditor. there 1s nothing in the regulations
applicable to a host commuttee which suggests that such an approach 1s available, and the instructions to Form 4 are
simularly silent as to the availability of this protection. Thus. at the ume of the filing of the Post-Convenuon Report.
Philadelphia 2000 did not have the benefit of the guidance now provided by the Audit Division.

The debts in question are: (a) Tierney & Partners ($600.000) (payment reported in the April 200] Quarterly
Report of the COA): (b) Weldon. Williams and Link ($94.771.44) (payment reported in the April 2001 Quarterly
Report of the COA): (c) Club Car ($94,152) (payment reported in the April 2001 Quarterly Report of the COA): (d)
Deaf Hearing Communications ($11,412.30) (payment reported in the April 2001 Quarterly Report of the COA): (e)
Freeman Decorating ($1.086,731.69) (payment reported in the April 2001 Quarterly Report of the COA): (f)
Hargrove ($18.600) (payment reported in the Apri! 2001 Quarterly Report of the COA): (g) Herman Goldner
($31,595) (payment reported in the July 2001 Quarterly Report of the COA): and (h) Wyndham Franklin Plaza
Hotel ($26.250) (payment reported in the April 2001 Quarterly Report of the COA). The amount paid by the COA
with respect to these debts was, in certain instances. for an amount less than that listed by the Audit Division on its
schedule and represented the settlement by the COA of a disputed debt with certain of the vendors in question.

° This 1s reported in Schedule A. Line 19a) of the Amended Post-Convention Report at page 20 of 40.

PHL_A #1547540 v5 3


(the ‘COA’), to draw upon Commerce Bank/Pennsylvania, N.A. ....... an aggregate
amount not to exceed Twenty Million Dollars ......... -” Both documents detail specific
procedures required for the letter of credit to be exercised, not only by the Committee but
also by the COA.

Documentation made available by representatives of the Bank demonstrated
that neither the Committee nor the COA exercised any portion of the letter of credit. The
letter of credit was returned to the Commerce Bank and canceled. Even though the letter of
credit was not exercised and eventually canceled, in the opinion of the staff, the Committee
should have disclosed the letter of credit on Schedules C (Loans) and C-1 (Loans and Lines
of Credit from Lending Institutions).

The matter was discussed with Committee representatives at the exit
conference. Their response at the exit conference as well as during the response period that
followed was similar. They stated:

“nowhere in the regulations applicable to host committees or in the
Form 4 in existence at the time of the filing of Philadelphia 2000’s
Post-Convention Report is there any requirement to report undrawn
letters or lines of credit. The Commission did impose such
requirements on political committees.”

Committee representatives further stated:

“Moreover, the Commission, in January 2001, revised Form 4 and
its schedules to provide for a new Schedule C-1 ‘Loans and Lines of
Credit from Lending Institutions.’ Before this time, there was no
reasonable location on Form 4 for a host committee to report a letter
of credit that had not been drawn upon, and Philadelphia 2000
correctly concluded that there was no need to report such a letter of
credit at that time.”

It should be noted that Section 9008.51 of Title 11 of the Code of Federal
Regulations requires host committees to register and file reports of their receipts and
disbursements with the Commission. Section 104.3(a)(2) of Title 11 of the Code of
Federal Regulations sets out the contents of reports to be filed and includes all
contributions, all transfers from affiliated committees, all loans, etc. As noted above, the
definition of a loan includes a guarantee, endorsement, or any other form of security. The
staff concluded that the letter of credit at issue qualifies as a guarantee or form of security
and is reportable on Schedules C and C-1. See 11 CFR §104.3(d).

In the preliminary audit report, the Audit staff recommended that the
Commission require the Committee to file amended reports to disclose the letter of credit
on Schedules C and C-1. On October 10, 2001, the Commission determined, by vote of 5
to 1, that the Committee was not required to disclose the letter of credit.


Memorandura to Robert J. Costa
Proposea Ar dit Peport
Puiladelphiz 2000 (LRA #609)
Page 5

MA.® CNN may well have an affiliation with WPHL, but there is no evidence that its
“affiliation” with WPHL constitutes being a licensed dealer, franchise or a branch of a
national or regional chain. ° In applying the same standard to Florida Crystals and Flo-
Sun, the distribution relationship, in and of itself, between the parent company, Florida
Crystals and American Sweetener Company is not sufficient to establish a local presence
in the Philadelphia MA. In this instance, the Committee did not attempt to rebut the
presumption of no local presence within the MA with a showing that the volume of
business or activity outside the MA for those entities in question (CNN, Voter.com,
Access Industries, Florida Crystals, Flo-Sun) would be directly affected by the presence
of the convention. !° Therefore, this Office concurs with the Audit staff’s position that the
Committee did not demonstrate that CNN, Florida Crystals and Flo-Sun have a presence
in the Philadelphia MA sufficient to satisfy the requirements of section 9008.52(c)(1). u

8 The Office of the General Counsel discovered, through research, that CNN does not have a bureau
or any office facilities located within the Philadelphia MA. The closest CNN bureaus are located in New
York and Washington, D.C. It is the understanding of the Office of General Counse] that when there are
news events in the Philadelphia MA that CNN wants to cover, the bureaus will either send mobile crews to
cover a story or obtain coverage through its affiliation with the local television station.

° The Audit staff found that WPHL are the call letters for a Philadelphia television station owned by
WB17, also a Philadelphia television station. Tribune Broadcasting owns WB17. The websites for
Tribune, WB17 and WPHL do not list CNN as part of its national or regional chain, or as a franchise or
licensed dealer. In addition, AOL/Time Wamer owns CNN and WB17 is owned by Tribune Broadcasting.

" In light of the fact that the volume of CNN’s business may be directly affected by the presence of
the host convention, the Committee may easily rebut the presumption with sufficient documentation on this

issue.

" The Committee acquired the parking spaces from donations from local businesses. Therefore,
there is no problem with respect to the Committee’s acquisition of the parking spaces. 11 C.F.R.

§ 9008.52(c)(2).


undersiatement: have been addressed ty the host conuminee i the Amended Post-Conveniion
Report as set forth below.

A. Changes in Value of In-kind Contributions.

The Audit Division has identified 33 instances in which the fair market value of an in-
kind contribution reported in the Post-Convention Report was subsequently determined to be
greater or less than the value onginally reported. In this regard, Philadelphia 2000 followed an
established set of procedures to determine the fair market value of in-kind contributions that it
received. Specifically, at or shortly after the time that a vendor provided an in-kind contribution
to the host committee, Philadelphia 2000 provided the vendor with an In-kind Verification form
to be completed. If an In-kind Verification form was not retumed by a vendor to the host
committee within a reasonable amount of time after the date of the contnbution in question.
representatives of Philadelphia 2000 would subsequently contact the vendor by telephone and. in
most instances, by letter in an effort to obtain the missing form.

At the time that Philadelphia 2000 prepared and filed its Post-Convention Repon, if the
host committee had not yet received a completed In-Kind Verification form from a vendor and
follow-up efforts to obtain the form had not yet proven successful, Philadelphia 2000 reported its
good faith estimate of the fair market value of the contribution in question, which good faith
estimate was typically determined by consulting with (i) the vendor in question, (ii) an individual
with knowledge of the business of the vendor in question, and/or (iii) representatives of the
Committee on Arrangements of the Republican National Committee. After the filing of the Post-
Convention Report, Philadelphia 2000 continued in its efforts to obtain completed In-Kind
Verification forms from the vendors that had not yet provided the form. These efforts proved to
be largely successful, and most vendors subsequently produced completed In-Kind Verification
forms to the host committee.

In its response to the issues raised by the Audit Division at the exit conference stage,
Philadelphia 2000 agreed to amend the Post-Convention Report to reflect the reported fair
market values set forth in the completed In-Kind Verification forms that were received by the
host committee after October 2, 2000, the date of the filing of the Post-Convention Report. The
chart attached as part of Exhibit D hereto indicates where these amended fair market values are
reported in the Amended Post-Convention Report.

B. In-Kind Contributions Reported in Error (No Contribution).

The two in-kind contributions that were previously reported in error for One South Broad
Street, L.P. ($26,138 from 5-12/99 and $112,966 from 1-9/00) have been removed and are not
included in the Amended Post-Convention Report. These contributions were initially included in
the Post-Convention Report because the host committee reasonably believed that certain of its
monthly rental payments were at a below-market rate. The landlord in question subsequently
informed Philadelphia 2000 that its rental payments were, in fact, consistent with the market rate
and that there was, thus, no in-kind contribution to be reported.

PHL_A #1547540 v5 6


repo:t the disbursement: in ques.ion. The char: attached hereto as Exi.ib_A iuentities where the
disbursements have been reported in the Amended Post-Convention Report.

With respect to the failure of the host committee to report these disbursements onginally
in the Post-Convention Report, the omission of the disbursements was inadvertent and :
represented an oversight by the person preparing the Post-Convention Report. At no point was
there an intent by the host committee to purposefully omit the disbursements. which were all
legitimate expenditures by the host committee and which represent less than one percent of the
total disbursements reported by the host committee.

B. Pavroll Disbursements.

\ As is explained in the PAR, payroll for the host committee was processed by the Greater
Philadelphia Chamber of Commerce (“GPCC”). Specifically, from 1997 to 2000. Philadelphia
2000 made payments to GPCC that were subsequently disbursed by GPCC to employees of
Philadelphia 2000 and to the appropriate federal, state and local tax authorities. As Philadelphia
2000's payments were made to GPCC, not directly to the host committee's employees or to the
federal, state and local tax authorities. Philadelphia 2000 reported these disbursements as they
actually had been made. The Audit Division has requested that the host committee amend the
Post-Convention Report to provide memo entries that identify the individual employee salanes
and the aggregate tax and other payments that were subsequently paid by GPCC from the host
committee disbursements in question.” Philadelphia 2000 has provided the memo entries in the
Amended Post-Convention Report as requested by the Audit Division.>

II. Reporting of Debts and Obligations.

The Audit Division has identified 45 debts totaling $8,040,643 that it believes should be
reported by the host committee on Schedule D until extinguished. As the host committee
explained in its letter of May 16, 2001 to the Audit Division responding to issues that had been
raised at the exit conference stage, the debts identified by the Audit Division orginally were not
set forth on Schedule D, or were listed with the amount due as “unknown,” because Philadelphia
2000 either did not have a reasonable basis upon which to estimate the amount then due and
owing or believed that the debt in question was an obligation of the Committee On
Arrangements of the Republican National Committee (the “"COA”), not the host committee. The
basis of the host committee’s concerns with respect to certain creditors was not that the
expenditures were inappropriate expenditures for a host committee under federal law. Rather.
the concern was that certain expenditures that might have been appropriately paid by the host

While the Audit Division has stated in the PAR that Philadelphia 2000's payroll disbursements were not
disclosed properly in the Post-Conventon Report. there 1s no federal statute or regulation which provides that the
payroll disbursements of a host communtee cannot be disclosed in the manner uulized by Philadelphia 2000 (or that
such disbursements must be reported in the manner requested by the Audit Division).

; The format in which Philadelphia 2000 has provided these memo entries was submutted to the Audit

Division for pre-approval. Kendrick Smmuth informed Philadelphia 2000 by e-mail on December 5. 2001 that the
format 1s acceptable to the Audit Division.

PHL_A #1547540 vS 2



Merporandum to Robert J. Costa
P-xpased Audit Report
Philaaelphia 209v (LRA #609)
Page 2

Il. Donations from Outside the Philadelphia Metropolitan
Area (Finding II.C.)

Host committees are permitted to accept donations and in-kind donations from
business entities. 11 C.F.R. § 9008.52(c)(1). However, the Commission’s regulations
limit host committees to only accepting donations from businesses located inside the
Metropolitan Area (“MA”) of the convention city. 11 C.F.R. § 9008.52(c)(2). Local
businesses include a branch of a national or regional chain, a franchise, or a licensed
dealer of a business. Jd.

The Preliminary Audit Report identified five donations totaling $151,250 to the
Committee from business entities located outside of the Philadelphia MA. Three of the
five donations, totaling $101,250, represent fees paid to the Committee for parking
spaces and/or advertising space. The Committee provided the parking spaces to CNN LP
LLP (“CNN”). It provided the advertising spaces to Voter.com and Access Industries.
Local businesses donated parking spaces to the Committee; and the Committee, in turn,
charged fees to businesses both inside and outside of the Philadelphia MA for the use of
those parking spaces. The advertising space was located on items, such as banners,
within the convention facilities. The two remaining donations were monetary in nature,
totaling $50,000 from Flo-Sun, Inc. (“Flo-Sun”) and its parent, Florida Crystals, Inc.

(“Florida Crystals”).

In its response to the Preliminary Audit Report, the Committee argues that the
payments received from CNN for the use of the parking spaces and Voter.com and
Access Industries, Inc. for advertising space were not “donations” to the Committee, but
rather “compensation” for goods and services. The Committee states that there is no
regulatory provision that prevents a host committee from charging for goods and services
provided to the public or requires that companies paying a host committee for goods and
services maintain a physical presence within the Philadelphia MA. According to the
Committee, if the “compensation” does not constitute a “donation”, then the entities in
question are not restricted by the requirement of showing a local presence within the MA.

In the alternative, the Committee argues that CNN maintained a presence within
the Philadelphia MA by virtue of the fact that it has a broadcast affiliation with one of the
television stations (WPHL) within the MA. The Committee contends that this
“affiliation” is sufficient to establish a local presence for CNN.? As for Florida Crystals
and Flo-Sun, the Committee states, “since Florida Crystals engaged the American
Sweetener Company to distribute its products and its (American Sweetener Company)

? The Committee, in its response to the Preliminary Audit Report, did not assert that Voter.com or
Access Industries had a local presence within the Philadelphia MA as required by 11 C.F.R.

§ 9008.52(c)(1). It also did not provide any documentation demonstrating that the amounts received for
advertising from these entities represent the fair market value of the services provided as recommended in

the Preliminary Audit Report.


admissions of liability by the Committee. Furthermore, the Committee stated that at least
one creditor made such an assertion. The Committee’s response further stated:

“While the Audit Division has now stated in the PAR that the
host committee could have noted in its reports that the
disclosure of a disputed debt does not constitute an admission
of liability or a waiver of any claims that the host committee
may have against the creditor, there is nothing in the
regulations applicable to a host committee which suggests that
such an approach is available, and the instructions to Form 4
are similarly silent as to the availability of this protection.
Thus, at the time of the filing of the Post-Convention Report,
Philadelphia 2000 did not have the benefit of the guidance now
provided by the Audit Division.”

Finally, the Committee stated that 8 of the payables, totaling $1,963,512,
were paid directly by the COA; that two vendors informed them that the debts in question
had been previously paid; that one debt of $2,400 was converted (by the vendor) to an in-
kind contribution; and, that the remaining 34 debts were disclosed on the amended report.

Based on the Committee’s response, the Audit staff verified that the COA
made payments to the 8 vendors discussed above and that the Committee reported an in-
kind contribution of $2,400 from another vendor.? However, the Committee did not
provide any documentation from the two vendors demonstrating that the debts ($4,044)
had been previously paid and therefore not owed.

Further, the Committee filed the necessary amended reports that materially
disclosed the debts on Schedule D.> However, Committee schedules that accompanied the
amendments indicated that debts to 9 vendors were reduced by $2,283,465 (see Exhibit A).
For example, the schedule indicated that Bell Atlantic/Verizon was owed $3,919,337 but
contained a notation that “The vendor accepted $2,050,000 in settlement on April 18, 2001.
The payment of this debt is reported in the July 2001 Quarterly Report. Pursuant to the
terms of the settlement, Philadelphia 2000 will continue to make certain payments to
Verizon to the extent that there are available funds.”

The Committee did not provide any documentation supporting the
settlement agreements nor did the creditors notify the Commission by letter of their intent
to forgive the above debts. It should be noted that 8 of the 9 vendors who apparently
forgave some portion of the debt owed by the Committee are located within the
Metropolitan Area of the convention city. As such, the forgiven portion of these debts can
be considered in-kind contributions. With respect to the vendor not located within the

2 It was permissible for the vendor to make the in-kind contribution since the vendor’s business is
located within the Metropolitan Area of the convention city.

The amended reports, disclosing the debts paid by the COA, were annotated “The COA paid
{amount] on [date].”


The Committee filed an amended Post-Convention Report that properly
disclosed the disbursements on Schedule B.

With respect to the $672,034 in payroll disbursements that had not been
properly disclosed on Schedule B, the Committee stated,

“While the Audit Division has stated in the PAR that
Philadelphia 2000’s payroll disbursements were not
disclosed properly in the Post-Convention Report, there is no
federal statue or regulation which provides that the payroll
disbursements of a host committee cannot be disclosed in the
manner utilized by Philadelphia 2000 (or that such
disbursements must be reported in the manner requested by
the Audit Division).”

Having stated the above, the amended Post-Convention Report included
memo entries that materially disclosed the actual recipients of the payments made by the
GPCC.

Cc. REPORTING OF DEBTS AND OBLIGATIONS

Section 434(b)(8) of Title 2 of the United States Code states that each report
shall disclose the amount and nature of outstanding debts and obligations owed by a
political committee.

Section 104.3(d) of Title 11 of the Code of Federal Regulations states, in
relevant part, that each report filed under 11 CFR 104.1 shall, on Schedule D, disclose the
amount and nature of outstanding debts and obligations owed by the reporting committee.
Where such debts and obligations are settled for less than their reported amount or value,
each report filed under 11 CFR 104.1 shall contain a statement as to the circumstances and
conditions under which such debts were extinguished and the amount paid.

Section 104.11(a) of Title 11 of the Code of Federal Regulations states, in
part, that debts and obligations owed by a political committee which remain outstanding
shall be continuously reported until extinguished.

Section 104.11(b) of Title 11 of the Code of Federal Regulations states, in
relevant part, that a debt or obligation, including a loan, written contract, written promise
or written agreement to make an expenditure, the amount of which is $500 or less, shall be
reported as of the time the payment is made or no later than 60 days after such obligation is
incurred, whichever comes first. A debt or obligation, including a loan, written contract,
written promise or written agreement to make an expenditure, the amount of which is over
$500 shall be reported as of the date on which the debt or obligation is incurred. If the
exact amount of a debt or obligation is not known, the report shall state that the amount
reported is an estimate. Once the exact amount is determined, the political committee shall


B. ITEMIZATION AND DISCLOSURE OF DISBURSEMENTS

Section 434(b)(4) of Title 2 of the United States Code states that each report
under this section shall disclose for the reporting period and the calendar year, the total
amount of all disbursements, including expenditures made to meet committee operating
expenses.

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.

As a result of our review of transactions requiring itemization, the Audit
staff identified 62 disbursements, totaling $380,213, which were not itemized on Schedule
B (Itemized Disbursements) for line 21(a) (Convention Expenditures-Itemized). The
majority of the disbursements were made from the Committee’s operating account in
calendar years 1997 through 1999 and were in amounts greater than $200. The Audit staff
could not determine the reason these payments were not itemized. Committee
representatives do not know the cause for the omission of disbursements from Schedule B.

Further, the Audit staff identified payments relative to the Committee’s
payroll, totaling $672,034, which were not disclosed properly on Schedules B for line
21(a).

With respect to each pay period, the Committee issued a single check to the
Greater Philadelphia Chamber of Commerce (GPCC). The GPCC processed the
Committee’s payroll, issued checks to Committee employees and to the appropriate
federal, state and local tax authorities. The Committee itemized the payments to the GPCC
rather than itemizing each payment made by the GPCC (payroll, payroll taxes, fees, etc.).

The Audit staff discussed these matters at the exit conference. Committee
representatives stated they would review our schedules detailing those disbursements
requiring itemization and further they were not aware their method of disclosing the above
payments for payroll was not acceptable. However, they agreed to file amended reports.

In the preliminary audit report, the Audit staff recommended that the
Committee: (a) file an amended Post-Convention Report which itemized $380,213 in
disbursements on Schedule B for line 21(a); and (b) file amended Schedules B for each
report to include memo entries that detailed the actual recipients relative to the $672,034 in
payments made to the GPCC involving the Committee’s payroll.

In response, the Committee acknowledged its failure to itemize $380,213 in
disbursements on Schedule B for line 21(a) and stated that the omission of the
disbursements was inadvertent and was an oversight by the person preparing the Post-
Convention Report.


Memorsndur to Robert J. Corte
Proposec Audit Repor*
Philadeiph's 2000 (LRA #609)
Page 3

distribution facility is located in Medford, New Jersey, this business relationship
establishes a local presence.”

The Office of General Counsel believes that host committees receive a donation
even when they offer something in exchange for the funds they receive. Neither the
Presidential Election Campaign Fund Act (“Fund Act”) nor the Commission’s regulations
define the term “donation” as reflected in section 9008.52(c)(1).° There are no
provisions in the Fund Act or regulations to support the Committee’s position that a
“donation” cannot result from the Committee’s sale of its goods and services.

In instances where the Commission could have drawn a distinction between
contributions (with no quid pro quo) and the contributions resulting from the sale of a
committee’s assets, the Commission specifically chose not to do so.4 For example, the
Commission’s general policy, as enunciated in several advisory opinions, is that the sale
or commercial use of committee assets by a committee constitutes fundraising for
political purposes, resulting in contributions subject to the limitations and prohibitions of
the Federal Election Campaign Act. See Advisory Opinions (“AOs”) 1989-4, 1988-12,
1983-2.

In determining if a committee’s sale of its assets results in a contribution, the
Commission has noted that if a committee receives more than the normal and usual
charge, there would be a contribution. See AO 1989-4. If we assume that fair market
value is the equivalent of normal and usual charge, then the issue of whether the
Committee received the fair market value for the assets would shed light on whether it
received a donation.* However, there remains an inherent contribution consequence
when a committee sells its assets. See AO 1989-4.

3 The Committee cites to Webster’s Dictionary as its source for the definition of “donation”.

‘ However, 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 1981-46. 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.

5 The Preliminary Audit Report recommended that the Committee provide documentation to
demonstrate that the amounts received for the parking spaces represented the fair market value of the
services provided. In its response to the Preliminary Audit Report, the Committee stated that CNN paid
$16,500 for 50 parking spaces for one week, or $47.17 per day, per spot. However, the Committee did not
submit evidence of the value of similar parking spaces in other locations during the relevant time period.
In order for the auditors to assess the fairness of the transaction, there must be some examination of the
value of the spaces on the open market. Therefore, the Office of General Counsel recommends that the
auditors revise the Proposed Report to include a sentence indicating that the Committee failed to submit
evidence of the value of similar parking spaces in other locations within the Philadelphia MA during the

relevant time period.


This matter was discussed at the exit conference. Committee
representatives stated they were unaware that many of the payables existed until well after
the convention. In addition, they were unable to report many of the payables as debts
because they lacked the invoices necessary to report the amount of debt, and in certain
instances, they assumed payables were liabilities of the COA.

In the response period following the exit conference, the Committee
representatives stated that with respect to four of the items in question (totaling
approximately $300,000), the Committee reported a value, and those items should be
removed from the list. Further, seven of the remaining items in question were reported as a
debt owed in either the Post-Convention or January 2001 Quarterly Reports, but the
amount of the payable was disclosed as “unknown”. One of the creditors was Bell
Atlantic/Verizon ($4,000,000). According to the Committee, it was not until March 2001
that the vendor provided documentation to support the amount claimed as owed.

The Committee is correct in stating that four of the above debts were
initially reported on Schedule D. However, as previously stated the amount of these debts
disclosed in subsequent reports was either listed as unknown or completely dropped from
the debt schedules. With respect to the Bell Atlantic/Verizon payable, the Audit staff
reviewed all the invoices made available. Nearly all of the invoices, dated between June
2000 and October 2000, are addressed to the Committee. Furthermore, the Committee
provided a copy of a letter from Bell Atlantic/Verizon dated November 7, 2000, requesting
payment of approximately $3,900,000 from the Committee. The letter was addressed to
the COA and indicated that a copy was sent to the Controller of the Committee.

In the preliminary audit report, the Audit staff recommended that the
Committee: (a) file an amended Post-Convention Report to disclose 45 debts totaling
$8,040,643 on Schedule D for line 10; and (b) file amended January 2001 Quarterly
Report, April 2001 Quarterly Report, and July 2001 Quarterly Report in order to continue
to disclose such debts until extinguished.

In response, the Committee stated:

“The basis of the host committee’s concerns with respect to
certain creditors was not that the expenditures were
inappropriate expenditures for a host committee under federal
law. Rather, the concern was that certain expenditures that
might have been appropriately paid by the host committee were
incurred by the COA without proper authorization from the
host committee as required by the contractual agreement and
procedures agreed to and followed by the COA and the host
committee.”

The Committee also asserted that had they reported these disputed payables
as due and owing, purported creditors might also have seized upon such listings as


Fhiladeiphia 2090 has reported the 34 -emainirg deb:s identified by the Audi Division
on Schedule D, Line 10 of the Amended Post-Convention Report as set forth on the chan
attached hereto as Exhibit B.

III. Contributions from Outside the Philadelphia Metropolitan Area.

The Audit Division has identified 5 contributions to the host committee, totaling
$151,250, that the division states were received from business entities located outside of the
Philadelphia Metropolitan Area. It is the position of the Audit Division that. unless the host
committee can demonstrate a presence within the Philadelphia Metropolitan Area for the
business entities in question, these contributions should be refunded (or listed as obligations of
the host committee if funds are not available to make such repayments).

With respect to the $16.250 payment received by the host committee from CNN LP
LLLP for parking,* CNN LP LLLP maintains a presence within the Philadelphia Metropolitan
Area. Specifically, CNN, which is a national cable news network, maintains broadcast affiliates
throughout the United States. As the website printout attached hereto as part of Exhibit C
demonstrates, certain of those affiliates are located in the Northeast, and one of those affiliates.
WPHL. is located in Philadelphia. Pennsylvania.” The presence of this affiliate within the
Philadelphia Metropolitan Area is sufficient to establish a local presence for CNN.”

Similarly, with respect to the $25.000 donations received from each of Florida Crystals,
Inc. and its corporate parent, Flo-Sun, Inc., Florida Crystals maintains a presence within the
Philadelphia Metropolitan Area. Specifically. as the website printout attached hereto as part of
Exhibit C demonstrates, Florida Crystals has engaged American Sweetener Company to
distribute Florida Crystals’ products throughout the East Coast of the United States.'' As the

Philadelphia 2000 has filed contemporaneously with this response amendments to the host committee's
previously filed quarterly reports that list unnl extinguished the 34 debts and obligations reported on Schedule D.
Line 10 to the Amended Post-Convention Report. The chart attached hereto as Exhibit B identifies where the
payment of the debts in question is reported. All such debts have been paid as of the date of this response

‘ CNN LP LLLP paid $16,500 to the host commuttee for the rental of 50 parking spaces for a one week
period (S47.14 per day, per parking spot). As 1s discussed below. this 1s the same parking fee that was paid by
numerous other business entities and individuals to the host comminee

° While the host commuttee was unable to print the website materials so that they would specifically show the
listing for WPHL, if the Audit Division accesses the website and scrolls down the list of CNN Northeast Affiliates.
it will see the listing for WPHL in Philadelphia.

" In addition. the payment by CNN for parking. $47.14 per parking spot. per day. was consistent with the
payments made to Philadelphia 2000 by other persons and entines for parking. Such payment. thus. represented the
fair market value for the parking spots in question and, as 1s discussed below with respect to the receipts from
Voter.com and Access Indusmies, Inc., should not be deemed a “donation” for purposes of the federal regulations
applicable to host commuttees.

" As the host commuttee previously demonstrated in tts letter to the Commussion of May 16. 2001. Florida
Crystals’ products are sold within Philadelphia.

PHL_A #1547540 v5 4


REPORT OF THE AUDIT DIVISION
ON

PHILADELPHIA 2000

Approved May 23, 2002

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



11

This matter was discussed with Committee representatives at the exit
conference. In the response period following the exit conference, the Committee submitted
documentation to support its position that the contributions were permissible.

The Committee’s response stated:

“the payments received by CNN LP LLLP, Access Industries,
Inc. and Voter.com were not ‘contributions’ to the host
committee. Rather, these payments represented compensation
for goods and services provided by Philadelphia 2000 to the
companies in question, and, in such instance, there was no
requirement that the companies in question maintain a physical
presence within the Philadelphia MA.” ...... “Specifically, the
payment from CNN LP LLLP ...was expressly for parking
spaces provided by Philadelphia 2000 during the time of the
nominating convention. The payments by Access Industries,
Inc. and Voter.com represented payments for advertising
opportunities.” The response continues, “There is nothing in
the regulations that prevents a host committee from charging
for goods and services that it might choose to provide to the
public. There is similarly nothing in the regulations that
requires a company that is paying a host committee for goods
and services to be located within the applicable MA.”

With respect to the remaining two contributions in question, the
Committee’s response stated:

“...Florida Crystals, Inc. has an established business
relationship with the Fresh Fields chain of supermarkets
whereby products manufactured by Florida Crystals, Inc. are
distributed and sold in the Philadelphia MA.” The Committee
also provided documentation that demonstrated Florida
Crystals, Inc. and Flo-Sun, Inc. are affiliated companies.

With respect to the funds received by the Committee in payment for parking
services and advertising space, the interim report stated that it is the Audit staff's opinion
that contributions which the Committee could not accept if made directly by
persons/entities outside the Philadelphia MA, cannot otherwise be accepted if made by
those same persons/entities indirectly in payment for the aforementioned services.

Finally, the fact that an entity (located outside the Philadelphia MA)
markets it products in retail stores (located within the Philadelphia MA) is not, in the Audit
staff's opinion, sufficient to rebut the regulatory presumption at 11 CFR 9008.52(c)(2).

In the preliminary audit report, the Audit staff recommended that the
Committee, with respect to the donations received from Florida Crystals, Inc. and Flo-Sun,


10

Metropolitan Area, absent a Commission approved debt settlement, the amount of the
forgiven debt, $65,409 ($99,547 — $34,138 [agreed payment]) represents a prohibited
contribution to the Committee.

D. CONTRIBUTIONS FROM OUTSIDE THE PHILADELPHIA METROPOLITAN
AREA

Section 9008.52(b) of Title 11 of the Code of Federal Regulations states
host committees may accept goods or services from commercial vendors under the same
terms and conditions (including reporting requirements) set forth at 11 CFR 9008.9 for
convention committees.

Section 9008.9 of Title 11 of the Code of Federal Regulations states, in
relevant part, that commercial vendors may sell, lease, rent or provide their goods or
services at reduced or discounted rates, or at no charge, provided that (a) the commercial
vendor provides reductions or discounts in the ordinary course of business, (b) the goods
and services are provided in exchange for promotional consideration and doing so is in the
ordinary course of business, or (c) the items are of de minimis value.

Section 9008.52(c)(1) of Title 11 of the Code of Federal Regulations states,
in relevant part, that local businesses (including banks), local labor organizations, and other
local organizations or individuals who maintain a local residence or who work for a local
business, local labor organization or local organization may donate funds or make in-kind
donations to a host committee.

Section 9008.52(c)(2) of Title 11 of the Code of Federal Regulations states
that for purposes of this section, any business (including the branch of a national or
regional chain, a franchise, or a licensed dealer) or labor organization or other organization
with offices or facilities located within the Metropolitan Area (MA) of the convention city
shall be considered local. There shall be a rebuttable presumption that any such entity
located outside the MA is not local. This presumption may be rebutted by a showing that
the volume of business or activity in an area outside of the MA would be directly affected
by the presence of the convention.

The Audit staff identified five contributions, totaling $151,250, received
from business entities located outside the Metropolitan Area of the convention city
(Philadelphia MA). Further, it does not appear that the business entities, in question,
maintained offices or facilities located within the Philadelphia MA.

Three of the five contributions represent fees paid to the Committee for
parking ($16,250) and/or advertising space ($85,000). Business entities, located within the
Philadelphia MA, donated parking facilities to the Committee. In turn, the Committee
charged fees for parking in such spaces. Further, the Committee charged for advertising
space within the convention facilities (banners, etc.).


either amend the report(s) containing the estimate or indicate the correct amount on the
report for the reporting period in which such amount is determined.

Section 116.10(a) of Title 11 of the Code of Federal Regulations states, a
political committee shall report a disputed debt in accordance with 11 CFR 104.3(d) and
104.11 if the creditor has provided something of value to the political committee. Until the
dispute is resolved, the political committee shall disclose on the appropriate reports any
amounts paid to the creditor, any amount the political committee admits it owes and the
amount the creditor claims is owed. The political committee may also note on the
appropriate reports that the disclosure of the disputed debt does not constitute an admission
of liability or a waiver of any claims the political committee may have against the creditor.

During the course of the audit, the Audit staff became aware of a dispute
between the Committee and the COA. The dispute concerned which entity was responsible
for paying outstanding vendor payables in excess of $8,300,000. Upon request, the
Committee provided a detailed schedule of the payables, including a majority of the vendor
invoices. Subsequently, an agreement was reached between the Committee and the COA
with respect to the disposition of the payables.

The Audit staff reviewed documentation made available relative to the
agreement between the Committee and the COA, including vendor invoices where
applicable. Further, the Audit staff reviewed the Site City Agreement for the 2000
Republican National Convention (the Agreement), which specifically addressed the
transfer of outstanding invoices from the COA to the Committee.' As such, invoices
addressed to the COA and transferred timely to the Committee via the stipulation noted in
the Agreement were considered obligations of the Committee. The majority of the
invoices associated with the total outstanding payables were dated between June 2000 and
September 2000. A host committee could pay for the types of services provided by these
vendors. As a result, the Committee should have reported debts to 45 vendors, totaling
$8,040,643.

The Committee did disclose on Schedule D for line 10 (Debts and
Obligations Owed by the Committee) debts owed to 13 of the 45 vendors (Post-Convention
Report). However, three debts were listed with amounts as “unknown”. In subsequent
reports, the amounts previously disclosed as owed, changed to “unknown” or were not
continuously disclosed on Schedule D.

' Specifically, Article 5, Section 5.2 of the Agreement states, in relevant part, the Committee shall provide
or cause to be provided all construction, modifications, .......in and to the Convention Complex. All
invoices for work done or services rendered shall be submitted to the COA. The COA shall deliver such
invoices as are approved by the COA to the Committee for payment in accordance with the procedure
agreed to pursuant to Section 6.7(e) of the Agreement. In addition, Article 6, Section 6.7(e) states, in
relevant part, the COA and the Committee will develop a procedure to permit the prompt payment by the
Committee of all such expenditures (including, without limitation, construction expenditures) identified

by the COA.


Law OrFices

BALLARY SPAHR ANDREWS & INGERSOLL, I.LP
!'735 MARKET STRELT. Gist “LOOF
PHILADELPHIA. PENNSYLVANIA 19103-7599
218-665 8500
FAX 215-864-8999
LAWYERS@BALLARDSPAHR.COM

December 27, 2001

VIA CERTIFIED MAIL

Federal Election Commission
Mr. Robert J. Costa

Audit Division - 7" Floor
999 E Street, N.W.
Washington, D.C. 20463

Re: Philadelphia 2000 (C00342519)
Dear Mr. Costa:

I submit this letter on behalf of Philadelphia 2000 in response to the issues raised by the
Audit Division in its “Preliminary Audit Report of the Audit Division on Philadelphia 2000”
dated as of October 25, 2001 (the “PARTM). Philadelphia 2000 has filed contemporaneously with
this response an Amended Post-Convention Report on Form 4 that addresses. as identified in the
discussion below. the issues raised in the PAR (the “Amended Post-Convention Repon”).'

I. Itemization and Disclosure of Disbursements.

A. Unreported Disbursements.

The Audit Division has identified 62 disbursements totaling $380.213 that were not
itemized on Schedule B of Philadelphia 2000's Post-Convention Report on Form 4 that was filed
with the Commission on October 2. 2000 (the “Post-Convention Report”). The fact that these
disbursements had not been reported in the Post-Convention Repon was first brought to the
attention of the host committee by the Audit Division at the exit conference stage. Upon
learning of this oversight. Philadelphia 2000 agreed to amend its Post-Convention Report to

‘ A copy of the Amended Post-Convention Report 1s enclosed for your convemence. In addition to
addressing the issues raised in the PAR. the Amended Post-Convention Report addresses certain other issues that
were brought to the attention of the host commumee during the audit process. such as changes in the value of in-kind
contributions (in addition to those identified by the Audit Division in the PAR).

PHL_A #1547540 v5,


Cc. ‘ash Contribuiions Reported as In-Finds.

The two cash conmbutions from the City of Philadelphia that were mistakenly reported
in the Post-Convention Report as in-kind contributions have been correctly listed as cash
contributions of $144,000 (Schedule A, Line 14(a), page 9 of 28) and $150,000 (Schedule A.
Line 14(a), page 9 of 28). The previously reported entries on Schedule B, Line 21(a) for these
items as in-kind contributions have been deleted.

D. Disbursement Reported as In-Kind Contribution.

The disbursement to the Greater Philadelphia Chamber of Commerce that was mistakenly
reported in the Post-Convention Report as an in-kind contribution has been correctly listed as a
disbursement of $5,500 (Schedule B, Line 24(a), page 1 of 42). The corresponding entry on
Schedule A, Line 19(a) for this item has been deleted.

E. In-Kind Contribution Reported Twice.

The duplicate $30,000 in-kind contribution from Norell that had been reported in the
Post-Convention Report as having been received during CY2000 has been deleted from the
Amended Post-Convention Report, as it was previously listed in error.

F. Unreported In-Kind Contributions.

The $80,000 in-kind contribution from National Association of Realtors that was omitted
from the Post-Convention Report has been included in the Amended Post-Convention Report
(Schedule A. Line 14(a), page 23 of 28). This item was inadvertently excluded from the Post-
Convention Report because the receipt in question was not provided directly to Philadelphia
2000 (it was provided to Liberty Solutions) and was mistakenly overlooked in the production of
the Post-Convention Report.

G. Unreported Cash Contributions.

The Audit Division has identified four cash contributions, totaling $17,000, that were
inadvertently omitted from the Post-Convention Report. These contributions all date from 1998,
prior to the date that the City of Philadelphia was awarded the 2000 Republican Presidential
Nominating Convention, and it appears that the records relating to these contributions were
inadvertently overlooked by the person preparing the Post-Convention Report. The contnbutions
in question have been reported in the Amended Post-Convention Report as set forth on the chart
attached hereto as Exhibit D.

H. Incorrect Amounts Reported for Cash Contributions.

The Audit Division has identified two cash contributions, totaling $62.500. that were
inadvertently reported in the Post-Convention Report as totaling $125,000. These contributions

PHL_A #1547540 v5 7


Il. AUDIT FINDINGS AND RECOMMENDATIONS
A. REPORTING OF LETTER OF CREDIT

Section 107.2 of Title 11 of the Code of Federal Regulations states each
host committee, and each committee or other organization or group of persons which
represents a State, municipality, local government agency or other political subdivision in
dealing with officials of a national political party with respect to matters involving a
presidential nominating convention, shall register and report in accordance with 11 CFR
§9008.51.

Section 434(b)(8) of Title 2 of the United States Code states, in part, that
each report under this section shall disclose the amount and nature of outstanding debts and
obligations owed by or to such political committee.

Sections 104.11(a) and (b) of Title 11 of the Code of Federal Regulations
state, in relevant part, that debts and obligations owed by a political committee which
remain outstanding shall be continuously reported until extinguished. A debt or obligation,
including a loan, written contract, written promise or written agreement to make an
expenditure, the amount of which is over $500 shall be reported as of the date on which the
debt or obligation is incurred.

Section 100.7(a)(1)() of Title 11 of the Code of Federal Regulations states,
in part, that the term contribution includes the following payments, services or other things
of value: a gift, subscription, loan, advance, or deposit of money or anything of value made
by any person for the purpose of influencing any election for Federal office is a
contribution. The term loan includes a guarantee, endorsement, or any other form of
security.

On January 22, 1999, the Commerce Bank/Pennsylvania, N.A. (the Bank)
issued an irrevocable letter of credit (No. 1147) in the amount of $20,000,000 in favor of
the Committee. It expired on December 29, 2000. The Philadelphia Authority for
Industrial Development (PAID), a branch of the Philadelphia City Government, secured the
letter of credit. The purpose of the letter of credit was to guarantee that the Committee
would meet its funding obligations for the convention.

The letter of credit document was signed by two officers of the Bank. The
associated “Guaranty Agreement” was signed by the Chairman of the Committee and by
both the President and Secretary of PAID. Even though representatives of the Committee
on Arrangements for the Republican National Committee (COA) did not sign either
document, it appears that the letter of credit was established in their favor as well.

The letter of credit document (at paragraph 1.) states “we hereby establish in
favor of Philadelphia 2000 (the ‘PHC’).......... this irrevocable Letter of Credit No. 1147
(the ‘Letter of Credit’) and hereby irrevocably authorize the PHC and, as applicable, its
designee, the Committee on Arrangements for the 2000 Republican National Convention



14

of the Audit staff that the Committee received prohibited funds from Voter.com ($60,000)
and Access Industries ($25,000).

On May 16, 2002, the Commission considered these issues. With respect to
the payment received from CNN LP LLLP, the Commission was equally divided and did
not approve that portion of the finding. The other portions of the finding were approved.

E. MISSTATEMENT OF FINANCIAL ACTIVITY

Sections 434(b)(1), (2) and (4) of Title 2 of the United States Code state, 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 9008.51(b)(1) of Title 11 of the Code of Federal Regulations states,
in relevant part, post-convention and quarterly reports filed by host committees shall
disclose all receipts and disbursements, including in-kind contributions, made with respect
to a presidential nominating convention.

The Audit staff's reconciliation of the Committee’s reported activity to its

bank activity revealed material misstatements with respect to reported receipts and
-disbursements. Reported receipts were understated by $2,143,811 and reported
disbursements were understated by $2,138,067. These net understatements were due
primarily to reporting incorrect valuations for certain in-kind contributions and not
reporting certain payments to vendors (see Finding II.B.). In many instances, the
Committee reported the value of in-kind contributions based on conversations with the
donors. Subsequently, the Committee received documentation from the donor supporting
in some cases a higher valuation and in others a lower valuation.

This matter was discussed with Committee representatives at the exit
conference who agreed to file amended disclosure reports.

In the preliminary audit report, the Audit staff recommended that the
Committee: (a) file amended Post-Convention Reports to disclose certain direct payments
to vendors on Schedule B for line 21(a); and (b) file amended Post-Convention Reports to
correctly disclose the value of the in-kind contributions on Schedule A for line 14(a) and
Schedule B for line 21(a) as appropriate.

In the response to the preliminary audit report, the Committee filed an
amended Post-Convention Report correctly disclosing the receipts and disbursements noted
above.


FEDERAL ELECTION COMMISSION
WASHINGTON, D.C. 20463

May 8, 2002

MEMORANDUM

TO: Robert J. Costa
Deputy Staff Director
Audit Division

THROUGH: James Pehrkon
Staff Director

FROM: Lawrence H. Nonon 27
General Counsel C~

Gregory R. Bakefq7"
Acting Associate General Counsel

Lorenzo Holloway A et
Assistant General Counsel

Kimberly D. Hart ray.) {” Qrar
Attorney

SUBJECT: Proposed Audit Report on Philadelphia 2000 (LRA #609)

I. Introduction

The Office of General Counsel reviewed the proposed Audit Report
(“Proposed Report”) on Philadelphia 2000 (the “Committee”) submitted to this Office on
March 23, 2002. The following memorandum summarizes our comments on the
Proposed Report.’ Generally, we concur with the findings in the Proposed Report and
provide additional legal analysis on one of the findings in the Proposed Report. We
concur with any findings not specifically discussed in this memorandum. If you have any
questions concerning our comments, please contact Kimberly D. Hart, the attorney

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.


D. AUDIT SCOPE AND PROCEDURES

The audit included testing of the following general categories:

1.

7.

8.

The receipt of contributions from prohibited sources, those from outside
of the Metropolitan Area of the convention city (see Finding II.D.);

Proper disclosure of contributions from individuals to include the
itemization of contributions when required, as well as, the completeness
and accuracy of the information disclosed;

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.B.);

Review of disbursements to determine compliance with the
requirements of 11 CFR §9008.52(c);

Proper disclosure of committee debts and obligations (see Findings I.A.
and IL.C.);

The accuracy of total reported receipts, disbursements and cash balances
as compared to committee bank records (see Finding II.E.);

Adequate recordkeeping for committee transactions; and,

Other audit procedures that were deemed necessary in the situation.

As part of the Commission’s standard audit process, an inventory of the
Committee records was conducted prior to the audit fieldwork. This inventory is
conducted to determine if the auditee’s records are materially complete and in an auditable
state. Based on our review of records presented, it was concluded that the records were
materially complete and fieldwork began immediately.

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


same website printout alsc indicates, the dismbutor of Flonda Crystals” producis main:ains an
office and distribution facilities in Medford, New Jersey, which is located within the
Philadelphia Metropolitan Area. The presence of this distributor within the Philadelphia
Metropolitan Area is sufficient to establish a local presence for Florida Crystals and its parent
company, Flo-Sun, Inc.

With respect to the payments received from Voter.com and Access Industries. Inc. as the
Audit Division notes in the PAR, these payments, totaling $85,000, were received by the host
committee as consideration for advertising opportunities provided by the host committee. While
the Audit Division states in the PAR that “contributions which the Committee could not accept if
made directly by persons/entities outside the MA. cannot otherwise be accepted if made by those
same persons/entities indirectly in payment for the aforementioned services.” this is not
consistent with the regulations governing host committees. These regulations provide only that
“donations” to a host committee must come from persons or entities located within the
Philadelphia Metropolitan Area. While the regulations do not define the term “donation” as used
in this context, this is a term that has a generally accepted meaning.

Specifically, a “donation” is an “offering or gift” — that is, “something that is bestowed
voluntarily and without compensation.” Given this definition, the payments by Voter.com and
Access Industries cannot be deemed to constitute “donations” to the host committee. for the
payments were not given without compensation. Rather. in retum for their respective payments.
each of Voter.com and Access Industries received advertising opportunities in exchange for its
payment to the host committee. As the brochure attached hereto as part of Exhibit C. makes
clear, for example, Voter.com was a corporate sponsor of PoliticalFest. a week long celebration
of government that was held at The Pennsylvania Convention Center.'* Voter.com was
prominently listed as a sponsor in such promotional materials and at the event itself. There ts
nothing in the regulations applicable to host committees that restricts host committees in their
ability to charge for such goods and services provided to non-local persons or entities.

In sum. the receipts from Florida Crystals. Inc., Flo-Sun, Inc.. Voter.com, Access
Industries, Inc., and CNN LP LLLP were properly accepted by Philadelphia 2000, as the entities
in question either maintained a presence within the Philadelphia Metropolitan Area or were not
required to do so due to the nature of the payments in question.

IV. Misstatement of Financial Activity

The Audit Division has stated that, due to a variety of factors. the receipts reported by the
host committee in the Post-Convention Report were understated by $2.143.811, and reported
disbursements were similarly understated by $2.138.067. The factors contributing to these

" See Webster's Il New Collage Dictionary (1995). at pp. 338 and 471 (defining words “donation” and
gift’).

8 While PoliticalFest was held in conjunction with the nomunating convention. it was a separate. bipartisan
event that was not attached to the convention itself. Philadelphia 2000. as a 501(c)(3) qualified non-profit
corporation 1s permuted to receive and spend funds in connection with such events.

PHL_A #1547540 v5

Ww


FEDERAL ELECTION COMMISSION
WASHINGTON, D.C. 20463

REPORT OF THE AUDIT DIVISION
ON
PHILADELPHIA 2000

I. BACKGROUND

A. AUDIT AUTHORITY

This report is based on the audit of Philadelphia 2000 (the Committee). The
audit sought to determine whether there has been compliance with the provisions of the
Federal Election Campaign Act of 1971, as amended (the Act). The audit was conducted
pursuant to 11 CFR §9008.54, which states that the Commission shall conduct an
examination and audit of each host committee registered under 11 CFR §9008.51.

B. AUDIT COVERAGE

The audit covered the period from March 12, 1997 through September 30,
2000. The Committee’s reports covering this period reflected an opening cash balance of
$-0-, total receipts of $66,003,645, total disbursements of $59,957,314, and a closing cash
balance of $6,046,331.

A limited review of the Committee’s disclosure reports for the period
October 1, 2000 through December 31, 2001 was performed.

Cc. COMMITTEE ORGANIZATION

The Committee incorporated as a Pennsylvania nonprofit corporation on
March 12, 1997, received a2 U.S.C. §501(c)(3) tax-exempt status on November 21, 1997,
and registered with the Federal Election Commission (the Commission) on January 28.
1999. The Committee established and maintained its headquarters in Philadelphia,
Pennsylvania. The Treasurer of the Committee is Ms. Karen Dougherty Buchholz.

The Committee utilized seven bank accounts to handle its financial activity.
From these.accounts, the Committee made approximately 1700 disbursements. and received.
approximately 550 contributions from individuals and local businesses totaling about
$35,077,699. In addition, the Committee received 195 in-kind contributions totaling
$28,621,483. The Committee also received loans totaling $3,135,000 and interest income
of $41,431.



have been correctly reported on the Ainended Post-Convention Repon as set foth or th. char.
attached hereto as Exhibit D.'*

I. Unreported Interest Income Received.

The Audit Division has identified certain interest payments that were inadvertently
omitted from the Post-Convention Report. These receipts have been included in the Amended
Post-Convention Report as set forth on the chart attached hereto as Exhibit D.

J. Unreported Disbursements.

As noted in Section I above, the issue of unreported disbursements has been addressed by
the host committee in the Amended Post-Convention Report. The chart attached hereto as
Exhibit A sets forth where in the Amended Post-Convention Report these disbursements have
been reported.

K. Incorrect Amounts Reported for Disbursements

The Audit Division has identified three disbursements, the amount of which was
incorrectly reported in the Post-Convention Report. The amount of these disbursements has been
corrected in the Amended Post-Convention Report as set forth on the chart attached hereto as
Exhibit D.

Vv. Conclusion.

In conclusion, the host committee has complied with the requests of the Audit Division to
make various amendments to the Post-Convention Report, and the matters identified in the PAR
have now been addressed. As Philadelphia 2000 has used its best efforts to obtain, maintain and
submit the information required of a host committee. it should be considered to be in compliance
with the regulations applicable to host committees. In these circumstances, Philadelphia 2000
respectfully submits that the Audit Division should recommend that no further action be taken by
the Commission with respect to the matters addressed in the PAR.

4

Sincerely,

a
! a. €
David L. Cotien
1

Enclosures
ce: Karen Dougherty Buchholz. Treasurer (w/enc.)
" This mustake apparently occurred because: (a) a $50,000 check from Subaru of America. Inc. was

photocopied on the same page as a $100.000 check from Wawa. Inc.. and the person preparing the Post-Convention
Report inadvertently reported the contribution from Subaru as being for $100.000: and (b) a $12.500 conmbution
from Liberty Property. L.P. was inadvertently listed as a $25.000 contnbution because it was attached to a separate
$12,500 contribution from the pnncipal of Liberty Property. L.P. See Exit Conference Outline, at Exhibit Al6

PHL_A #1547540 v5 8


12

Inc., demonstrate that the contributors maintained an address or had offices or facilities
located within the Philadelphia MA. With respect to the donations received for parking
and advertising, the Audit staff recommended that the Committee provide documentation
that demonstrated these entities maintained an address or had offices or facilities located
within the Philadelphia MA. In addition, the Committee was requested to provide
documentation that demonstrated the amounts received for parking and advertising
represented the fair market value of the services provided. Absent the submission of the
requested evidence, the Audit staff recommended that the amounts received be returned to
the donors. If funds were not available to make the necessary refunds, the donations that
required refunds were to be disclosed as debts on Schedule D (Debts and Obligations) until
such time that funds became available to make the refunds.

In the response to the preliminary audit report, the Committee asserted that
CNN LP LLLP maintains a presence within the Philadelphia MA. The Committee
submitted documentation demonstrating that CNN LP LLLP has broadcast affiliates
throughout the United States. One of its broadcast affiliates, WPHL, is located within the
Philadelphia MA. According to the Committee having a broadcast affiliate within the
Philadelphia MA establishes a local presence for CNN LP LLLP.

In footnotes to its response, the Committee stated that CNN LP LLLP paid
$16,500 for 50 parking spaces for one week, or $47.14 per day, per spot. Accordingly, the
Committee believes this charge ($47.14) represents the fair market value for the parking
spots in question because other individuals/entities paid the same amount to the
Committee. The fact that the Committee charged every individual/entity $47.14 per day,
per spot is not determinative of the fair market value for parking. The fair market value
can only be determined by comparing what the Committee charged to what other
commercial vendors charged for similar parking during the relevant period.

With respect to Florida Crystals, Inc. and its corporate parent Flo-Sun, Inc.,
the Committee stated that both entities have a presence within the Philadelphia MA.
According to the Committee, since Florida Crystals engaged the Atlantic Sweetener
Company to distribute its products and its distribution facility is located in Medford, New
Jersey, this business relationship establishes a local presence.

The Committee arguments addressing the contributions from Florida
Crystals, Inc., Flo-Sun, Inc., and CNN LP LLLP appear similar. The fact that entities
located outside the Philadelphia MA but whose products are distributed by separate entities
located within the Philadelphia MA does not, in the opinion of the Audit staff, establish a
presence within the Philadelphia MA for Florida Crystals, Inc., Flo-Sun, Inc., or CNN LP
LLLP. Furthermore, the Committee’s assertion with respect to parking fees paid by other
persons does not render the donation by CNN LP LLLP permissible. The other payments
received for parking were from persons located within the Philadelphia MA. CNN LP
LLLP was not.

It should be noted that the call letters, WPHL, represent a local Philadelphia
television station. That station is owned by WB17, also a Philadelphia television station.


Exhibit A

Apparent Debt Settlements by the Committee

Vendor Name Debt Amount Identified [ Amount Accepted by | Apparent Amount
by Audit staff Vendor as Payment Forgiven
in Full
Arena Vision 12,203.35) 8,000.00} 4,203.35)
Bell Atlantic / Verizon 3,919,336.78) 2,050,000.00} 1,869,336.78
\Central Parking Corporation 10,857.00} 6,285.00} 4,572.00}
|Greater Philadelphia Chamber of Commerce (GPCC) 29,936.32} 19,936.32] 10,000.00)
IKON 86,372.05 69,000.00} 17,372.05
QTV * 99,547.41 34,138.06 65,409.35)
\Staples 115,847.56) 70,215.96} 45,631.60}
\Universal Fabric Structures 774,605.08} 601,000.00} 173,605.08}
EROX 441,667.95, 348,333.00) 93,334.95)
Totals $5,490,373.50 $3,206,908.34 $2,283,465.16

* Business not located within the Metropolitan Area of the convention city