Attachment A

17

Below is a chart detailing when loans/contributions were made to TFC, the amount of the
loans/contributions, a running balance of the “excessive” amount per category
(Contribution checks (Section I), Loans Made by Pete Turnham (Section I)and Collateral
Provide by Pete Turnham (Section II)), amount repaid to the Candidate by TFC, Amount
repaid to Pete Turnham either from TFC or from the Candidate’s personal accounts.

Outstanding Balance @

Funds Rec’d from Pete

3/30/04

Bank Running Amount Amount
Description Date Amount | Outstand’g Repaidto | Repaid to Pete
Balance | Joe Turnham Turmham
Contribution Check 1/21/02 4,0000 4,000. | __ --------- 0

Turnham Rpt’d as 1/31/02 42,000 42,000 | ----------
Candidate Loan

TFC Loan Repayment 2/15/02 (4,000) 38,000 4,000
TFC Loan Repayment 2/28/02 (19,500) 18,500 19,500
Funds Rec'd from Pete

Turnham Rpt’d as 4/11/02 30,000 48,500 | 9 ----------
Candidate Loan

TFC Loan Repayment 4/15/02_| (31,500) 17,000 31,500 30,000
TFC Loan Repayment 4/25/02 (1,500) 15,500 1,500
TFC Loan Repayment 7123/02 (1,500) 14,000 1,500
TFC Loan Repayment 10/10/02 | (1,000) 13,000 1,500
TFC Loan Repayment 10/25/02 _| (1,500) 11,500 1,500
TFC Loan Repayment 11/05/02_| (1,500) 10,000 1,500
TFC Loan Repayment 11/08/02 | (5,000) 5,000 5,000
TFC Loan Repayment 11/12/02 (2,000) 3,000 2,000

TFC Loan Bo 11/19/02 (3,000) 0 3,000

Outstanding Balance @ 3/30/04 0 0 30,000
Pete Turnham Collateral_| 02/06/03 62,502 62,502 ) 0)
Pete Turnham Collateral_| 02/06/03 28,000 90,502 0 0

Outstanding Balance @

3/30/04

90,252

TFC Loan be Diual 08/15/03 (250) 90,252 250 0

0



11

4. Loan for $30,000, 4/11/2002-
Counsel states Pete Turnham gave the Candidate a gift of $30,000 who then in
turn made a loan to TFC on the same day. Furthermore he states, TFC repaid this
loan four days later to the Candidate (he supports this statement by referring to
Attachment A in the Interim Audit Report). Therefore, he believes that since the
$30,000 remained outstanding for less than 30 days it should not be included per
11 C.F.R. 103.3(b)(3). However, the chart in Attachment A does not illustrate the
$30,000 being repaid to the Candidate four days later. Rather it shows a payment
of $30,000 being applied to the outstanding balance, which was $48,500, and
therefore part of the $30,000 repayment was applied to the $18,500 that was
outstanding. Additionally, TFC’s Schedules D show the $30,000 loan
outstanding through the July Quarterly 2003 report, over a year from the
incurrence of the loan. Although, Joe Turnham repaid Pete Tumham fifteen days
after this loan was made, $42,000 was still outstanding to Pete Turnham from
January 1, 2002, and therefore this repayment to Pete Turnham was applied to
that loan since it had been outstanding for longer than 30 days.

Again, TFC has not provided sufficient documentation to support their claim that these
funds represented a gift from Pete Turnham.

5. Auburn Loan for $90,502-

A. Counsel asserts that the collateral Pete Turnham provided for this loan is
consistent with a past pattern of Pete Turnham personally guaranteeing other
personal loans for the Candidate from the years 1993 through 2000. Adequate
documentation to support this claim was not supplied. TFC supplied a list
detailing only loan numbers, dates and amounts. Copies of loan agreements
were only provided for two of the loans itemized on the list. Both loans were
signed by the Candidate and his wife. Only one of these loans had a separate
guaranty signed by Pete Turmham which stated the guaranty was not secured.
Finally, these are loans that were guaranteed by Pete Turnham not
collateralized by Pete Turnham’s assets, as is the case for the Auburn Loan of
$90,502.

B. TFC Counsel also states that because the majority® of the Auburn Loan was
used for personal debts and the fact that is was obtained after the 2002
election, that this further supports that is was a gift from Pete Tumham. On
the contrary, because the loan proceeds from the loan were used to pay off
TFC debts and a TFC loan incurred prior to the 2002 election, the fact it was
received in 2003 and used partly for personal debt is not relevant.

C. TFC Counsel also states the Candidate was in a “Catch-22” because he was
unable to earn income while running for Congress and therefore would have
defaulted on his campaign and personal debt had Pete Turnham not co-signed
the loan. TFC Counsel believes the Commission should not force individuals

8 Of the 247,000 Auburn Loan, the Audit staff noted $90,502 was loaned to TFC (37%).


Part II
Overview of Campaign

Campaign Organization

Important Dates Joe Turnham For Congress

e Date of Registration November 21, 2001

e Audit Coverage November 21, 2001-December 31, 2002
Headquarters Auburm, Alabama

Bank Information

e Bank Depository 1

e Bank Accounts 4 Checking Accounts

Treasurer

e Treasurer When Audit Was Conducted Pete Tumham

e Treasurer During Period Covered by Audit _| Pete Turnham

Management Information

¢ Attended FEC Campaign Finance Seminar _| No

¢ Used Commonly Available Campaign Yes
Management Software Package
e Who Handled Accounting and Paid Consultant

Recordkeeping Tasks
Overview of Financial Activity

(Audited Amounts)

Cash on hand @ November 21, 2001 $0
Receipts

o From Individuals 422,833
o From Political Committees 337,582
o From Candidate Loans 80,500
o From Bank Loans 98,023
o Other Receipts 3,235
Total Receipts $ 942,173
Disbursements

o Operating & Other Disbursements 828,155
o Loan Repayments 112,523
Total Disbursements $ 940,678
Cash on hand @ December 31, 2002 $ 1,495



15

Committee Response to Recommendation and Audit Staff's
Assessment

In response to the recommendation, TFC Counsel stated he believes the bank loans were
made on a basis that assures repayment and in the ordinary course of business. He refers
to the Matter Under Review 5198 (MUR 5198) which he states, the Commission
determined that based on the totality of the circumstances, the bank in that case properly
extended the loans to the candidate. He believes BancorpSouth demonstrated their
efforts and compliance with Commission regulations in the same manner as the bank
referred to in MUR 5198. In a letter to TFC Counsel, BancorpSouth states that “based on
prior relationships with the Tumham family, the structure of the indebtedness, including
the personal guaranty and depository accounts maintained with the bank, assured the
bank the loans were be repaid in accordance of the stated terms and conditions.”
However, unlike the bank referred to in MUR 5198 Bancorp South did not provide a
copy of their bank policy and underwriting standards. This information has been
requested through a subpoena sent to Bancorp South in January 2004. Once this
information has been obtained and reviewed, the Commission can determine if the
aforementioned bank loans were made in the ordinary course of business and on a basis
that assures repayment.

Finding 3. Failure to Itemize Outstanding Debts and
Obligations

Summary

TFC failed to itemize outstanding debts totaling $14,943 to one vendor for the 2002
election cycle. In response to the interim audit report, TFC filed amended Schedules D
(Debts and Obligations) and Summary Pages to correctly disclose the debts.

Legal Standard

Continuous Reporting Required. A political committee must disclose the amount and
nature of outstanding debts and obligations until those debts are extinguished. 2 U.S.C.
§434(b)(8) and 11 CFR §§104.3(d) and 104.11(a).

Separate Schedules. A political committee must file separate schedules for debts owed
by the committee and debts owed to the committee, together with a statement explaining
the circumstances and conditions under which each debt and obligation was incurred or
extinguished. 11 CFR §104.11(a).

Itemizing Debts and Obligations

e A debt of $500 or less must be reported once it has been outstanding 60 days from the
date incurred (the date of the transaction); the committee reports it on the next
regularly scheduled report.

© A debt exceeding $500 must be disclosed in the report that covers the date on which
the debt was incurred. 11 CFR §104.11(b).


Ill. Excessive Contributions from Individuals Made Directly to TFC
The review of TFC’s receipt records identified five contributions from four

individuals that appeared to exceed the contribution limits by $5,000. Each
contributor had given the maximum amount for both the Primary and General
elections. The excessive portion of each contribution was attributed to another
individual. In each instance the only name imprinted on the check was the name of
the individual who signed it and TFC did not obtain the signature of the other
persons.

IV. Summary of Excessive Contributions

Excessive Amount Received

e Total Amount Contributed By Pete Turnham $166,502
e Turmham Irrevocable Trust Fund 4,000
e Excessive Contributions from Individuals 5,000

Total Amount of Excessive Contributions $175,502

Excessive Amount Attributable to Pete Tumham

e Contribution Checks $ 4,000
e Loan on 1/31/02 42,000
¢ Loan on 4/11/02 30,000
Subtotal of Money Given to TFC $ 76,000
e Collateral for Auburn Loan 90,502
Total Amount Contributed by Pete Turnham $166,502
Excessive Amount Repaid & Outstanding to Pete Tumham
e Total Amount of Money Given to TFC $ 76,000
e Amount Repaid from Candidate’s personal account
for 4/11/02 Loan $ 30,000)
Total Amount Outstanding to Pete Turnham $ 46,000

The Audit staff provided TFC representatives with a schedule of the excessive
contributions, as well as, a list of items that were not provided during fieldwork with
respect to the source of the loans made by the Candidate. TFC supplied some of the
information. The remaining information was obtained through a subpoena.

Interim Audit Report Recommendation

The Audit staff recommended that TFC:

© Provide evidence demonstrating that the contributions in question were not excessive,
including the collateral provided by Pete Turnham totaling $90,502. If amounts
received from Pete Turnham were “gifts of a personal nature which had been
customarily received prior to candidacy,” evidence of previous gifts of a similar
nature should have been provided.


Part IV
Findings and Recommendations

| Finding 1. Receipt of Contributions that Exceed Limits

Summary

The Audit staff identified contributions from individuals that appear to exceed the
contribution limits by $175,502, although not all outstanding at once. These consisted of
contributions made in connection with loans TFC received from BancorpSouth, loans
reported as being from the Candidate, loans collateralized by an individual and
contributions made by individuals. In response to the interim audit report, TFC refunded
$13,000 of excessive contributions to individuals. TFC believes the remainder is not
excessive because it represents gifts given from the Candidate’s father.

Legal Standard

Authorized Committee Limits. An authorized committee may not receive more than a
total of $1,000 per election from any one contributor. 2 U.S.C. §§441a(a)(1)(A) and (f);
11 CFR §§110.1(a) and (b) and 110.9(a)

Receipt of Excessive Contributions. No officer or employee of a political committee
may accept a contribution for the benefit of a candidate or make an expenditure on behalf
of a candidate that violates any limitation of this part. 11 CFR §110.9(a)

Contribution. The term contribution includes any loans (excluding a bank loan), a
guarantee, endorsement, and any other form of security. A loan which exceeds the
contribution limitations of 2 U.S.C. 441a and 11 CFR §110 shall be unlawful whether or
not it is repaid. 11 CFR §100.7(a)(1)(i)(A)

Expenditures by Candidates. Candidates for Federal office may make unlimited
expenditures from personal funds. 11 CFR §110.10(a)

Definition of Personal Funds. Personal funds of the candidate include the following:
1. 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:

a. Legal and rightful title, or

b. An equitable interest

2. Salary and other earned income from bona fide employment, dividends and proceeds
from the sale of the candidate’s stock or other investments, and gifts of a personal nature
which had been customarily received prior to candidacy. 11 CFR §110.10(b)(1) and (2)


Part III
Summaries

Findings and Recommendations

Finding 1. Receipt of Contributions that Exceed Limits
The Audit staff identified contributions from individuals that appear to exceed the
contribution limits by $175,502, although not all outstanding at once. These consisted of
contributions made in connection with loans TFC received from BancorpSouth, loans
reported as being from the Candidate, loans collateralized by an individual and
contributions made by individuals. In response to the interim audit report, TFC refunded
$13,000 of excessive contributions to individuals. TFC believes the remainder is not
excessive because it represents gifts given from the Candidate’s father. (For more detail,
see p. 4)

Finding 2. Receipt of Unsecured Bank Loans

TFC obtained three unsecured bank loans, totaling $98,023, that did not meet the
regulatory “assurance of repayment” standard. The loans were guaranteed by the
Candidate but not secured with any collateral owned by the Candidate or TFC. The
Audit staff requested a copy of the bank’s policy with respect to issuing unsecured loans
to political committees. BancorpSouth refused to comply with a subpoena request for
this information. In response to the interim audit report, TFC was unable to provide
adequate documentation to demonstrate that the bank loans were made on a basis which
assures repayment and made in the normal course of business. (For more detail, see p.
12)

Finding 3. Failure to Itemize Outstanding Debts and
Obligations

TEC failed to itemize outstanding debts totaling $14,943 to one vendor for the 2002
election cycle. In response to the interim audit report, TFC filed amended Schedules D
(Debts and Obligations) and Summary Pages to correctly disclose the debts. (For more
detail, see p. 14)


Facts and Analysis

The Audit staff reviewed disbursement records for TFC. The review for debt reporting
was limited to a few select vendors because of a lack of disbursement records, such as
vendor invoices (See Scope Limitation). TFC failed to properly disclose debts totaling
$14,943" to a fundraising vendor.

At the exit conference, the Audit staff provided TFC representatives with a schedule
detailing the debt owed to the vendor. They stated they would research the matter and
discuss it with the Candidate. No further information was provided.

Interim Audit Report Recommendation
The Audit staff recommended that TFC file amended Schedules D and Summary Pages
for the applicable reporting periods to disclose the outstanding debts.

Committee Response to Recommendation and Audit Staff's
Assessment

In response to the recommendation, TFC filed amended reports that correctly disclosed
the debts.

"| Each debt is included in this amount only once although some debts should have appeared on multiple
reports.

16


e Loan B for $17,075 on June 17, 2002 with a maturity date of September 15,
2002.

e Loan C for $60,873 on October 15, 2002 with a maturity date of January 13,
2003.

Loans A and B were repaid to BancorpSouth with the following funds:

© A payment of $4,000 (from a $6,000° check to BancorpSouth) written on one
of the Candidate’s personal account on September 23, 2002. On the same
day, a check for $10,000 was drawn by the Candidate on the Tumham
Irrevocable Trust (Trust Fund). This Trust Fund check was deposited to the
Candidate’s personal account on September 24, 2002. TFC failed to report
the receipt of the $4,000, as well as the $4,000 payment to the bank on its
disclosure reports. The beneficiary of the Trust Fund is RuthMary Kay
Turnham, the Candidate’s sister. The Candidate is the Trustee and his parents
are the Grantors. TFC suggested that the $10,000 payment from the Trust
Fund may be a fee paid to the Candidate for his services as a Trustee. The
Audit staff requested tax documents to show that these funds were treated as
income by the Candidate. To date, no such documentation has been supplied.
Absent production of the requested records, the $4,000 paid to BancorpSouth is
considered to be an excessive contribution by the Trust Fund.

e Proceeds of $34,098 from Loan C on October 15, 2002.

Loan C was repaid to BancorpSouth with the following funds:

e On February 4, 2003 the Candidate obtained a $247,000* personal loan from
Auburn Bank that was secured by Pete Turnham’s real estate, Pete Tumham’s
shares of Auburn Bank stock, and an assignment of the proceeds of the
Candidate’s term life insurance policy (Auburn Loan). From the proceeds of
this loan, $62,502 was used to repay Loan C on February 5, 2003. The
payment of the loan was incorrectly reported as an in-kind contribution from
the Candidate.

In addition to funds being used to repay Loan C from the Auburn Loan, proceeds were
used to make a new “Candidate” loan to TFC in the amount of $28,000. This loan is
reported by TFC on February 4, 2003 and represents an additional contribution by Pete
Turnham.

The total amount of the Auburn Loan used for TFC obligations was $90,502 ($62,502 +
$28,000).

> The remaining $2,000 was a partial repayment on a Friends of Joe Turnham (1998 Committee) loan.
* Proceeds of $14,514 from this loan were used to pay off the 1998 Committee loan owed to BancorpSouth.


FEDERAL ELECTION COMMISSION
Washington, DC 20463

August 17, 2005

MEMORANDUM

To: Robert W. Biersack
Press Officer

From: Joseph F. Stoltz
Assistant Staff ‘or

Audit Division

Subject: Public Issuance of the Report of the Audit Division on Joe Tumham For
Congress

Attached please find a copy of the audit report on Joe Turnham for Congress,
which was approved by the Commission on August 4, 2005.

The report may be released to the public on August 17, 2005.

Attachment as stated

cc: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library
DSDD Website


e If funds were not available to make the necessary refunds, disclose the refunds due
on Schedule D (Debts and Obligations) until funds became available to make the
refunds.

Committee Response to Recommendation and Audit Staff's
Assessment

In response to the recommendation:

1. $4,000 was refunded from the Candidate’s personal bank account to the Turnham
Irrevocable Trust Fund. A front copy (front only) of the check dated October 19,
2004 was supplied.

2. $5,000 was refunded from the Candidate’s personal bank account to the four
individuals noted above. Front copies of the checks dated October 19, 2004 were
supplied.

3. $4,000 was refunded from the Candidate’s personal bank account to Pete Turnham.
A front copy of the check dated October 19, 2004 was supplied.

4. Loan for $42,000, 1/31/2002

A. Counsel refers to Advisory Opinion (AO) 1988-7, which he states the
“Commission determined that monetary gifts received by a candidate from his
parents in the three years preceding his candidacy for Federal office indicated
a ‘repetitious custom of monetary gifts’ without regard to their son’s
candidacy.” Counsel believes the funds? ($7,000 in 1997; $18,628 worth of
Pete Turnham’s stock in 1998; $18,500 in 1999; $3,500 in 2000 and $10,500
in 2001) given by Pete Turnham to Joe Turnham “...in the four years
preceeding the 2001-02 election cycle, show a “repetitious custom of
monetary gifts” and should be viewed as the Candidate’s personal funds.
Counsel fails to note that the Commission stated it was because of the fact that
the “AO candidate” running for Federal office in 1988 did not run for Federal
office in 1984 or 1986, that the gifts he received from 1985 through 1987
appear to be of a personal nature, rather than made in anticipation of or related
to any campaign for Federal office. This is not the case for Joe Turnham. Joe
Turnham ran for office in the 1997-1998 election cycle, the same time TFC
Counsel states the Candidate began receiving funds from Pete Tumham. The
Audit staff informed Counsel prior to the interim audit report that in order to
show a pattern of gifts, documentation of money from Pete Tumham would
need to date prior to the Candidate’s 1997-1998 campaign. To date no such
documentation has been supplied. Furthermore, these amounts are
significantly lower than the $72,000 loaned in 2002 and the only
documentation supporting these amounts is deposit slips with “Turnham” on
the description line next to the amount. It could not be determined whether

5 These funds were not verified by the Audit Division.


e Demonstrate that a portion of the $4,000 received from the Trust Fund was
permissible because the beneficiary intended to make a contribution to TFC.
Documentation should have included a prior written consent or a signed statement
from the beneficiary concerning her intent. Alternatively, if this payment represents
a fee for services provided to the Trust Fund then supporting documentation should
have been submitted. Documentation should have included tax records
demonstrating the payment was claimed as income, as well as evidence of any past
compensation from the Trust Fund.

¢ Demonstrate why the excessive contributions made by Pete Tumham were not made
and received knowingly and willfully given that he was Treasurer of TFC and the
source of most of the excessive contributions.

e Absent such evidence:

1.

3.

Refund $46,000 to Pete Turnham and provide evidence of such refunds
(copies of the front and back of the negotiated refund checks) or demonstrate
that the Candidate has returned the remaining $42,000 to Pete Turnham;
Refund $4,000 to the Turnham Irrevocable Trust Fund and provide evidence
of such refunds (copies of the front and back of the negotiated refund
checks); and

Refund $5,000 to the individuals and provide evidence of such refunds
(copies of the front and back of the negotiated refund checks).

e Amend disclosure reports to show:

1.

2.

3.

Pete Turnham as the source of the loans totaling $72,000 ($42,000 + $30,000)
reported as loans from the Candidate.
The outstanding balance of $42,000 owed to Pete Turnham on Schedule D
(Debts and Obligations).
The receipt of loans from Auburn Bank in the amount of $90,502 on
Schedules A (Itemized Receipts), C (Loan Information) and C-1 (Loans and
Lines of Credit from Lending Institutions). The collateral for the loans must
be reported as real estate and stock belonging to Pete Turnham, as well as the
assignment of the Candidate’s life insurance. Amended reports should not
include the $28,000 currently disclosed as a loan from the Candidate because
it is included in the $90,502 noted above.
A loan repayment to BancorpSouth in the amount of $62,502 (all of the
entries that are on the current disclosure reports with respect to this loan
repayment should be removed).
The receipt of $4,000 from the Turnham Irrevocable Trust Fund, as well as
payments to BancorpSouth.
The repayment of the Auburn Bank Loan totaling $90,502. Payments on this
loan must be continuously reported until $90,502 in principle has been repaid
to the bank. These payments may take the form of one or a combination of
the following:

a. Payments made by the Candidate and disclosed as in-kind contributions

on Schedules A and B; or
b. Payments made by TFC to Auburn Bank and disclosed as loan
repayments.


Revised Regulations Applied. The Commission recently adopted new regulations that
allow committees greater latitude to designate contributions to different elections and to
reattribute contributions to joint account holders and has decided to apply these
regulations to current matters. The Audit staff has evaluated the excessive contributions
discussed below using the new regulations.

Facts and Analysis

I. Excessive Contributions of Money Made by the Candidate’s Father
The Candidate’s father, Pete Turnham, who was also TFC’s Treasurer, contributed
$6,000 to TFC. These contributions exceeded the limitations by $4,000. Notations on
the contribution checks attributed $3,000 each to him and Kay Turnham, ($1,000 each
for the primary, runoff, and general elections). Kay Turnham was not listed as an
account holder on the checks, there was no signed reattribution of any of the
contributions to Kay Turnham, and there was no runoff election.

In addition to the excessive contributions noted above, TFC reported the receipt of
loans from the Candidate’s personal funds totaling $80,500. Of this amount, $72,000
originated from Pete Turnham:

¢ $42,000, 1/31/2002 - A check from Pete Turnham was deposited into one of
the Candidate’s personal accounts on January 31, 2002. The memo line of the
check noted that it was a loan. On the same day, the Candidate wrote a
$42,000 check to TFC from this account. The balance in the account prior to
the deposit of the Pete Turnham check was $3,138.

© $30,000, 4/11/2002 - A check from Pete Turnham was deposited into one of
the Candidate’s personal accounts on April 11, 2002. On the same day, TFC
received $30,000 from this account.” Other than one $700 deposit and a
minor amount of interest there were no other deposits into this account in
2002. This account maintained a monthly balance of less than $50.

Payments on these loans were made to the Candidate throughout 2002. The entire
amount was paid to the Candidate by November 19, 2002. The largest amount
outstanding on the loan was $48,500 on April 11, 2002. To date, only $30,000 was
retumed to Pete Turnham. See Attachment A.

II. Excessive Contributions Made in Connection with Loan Repayments
During 2002 TFC received the following loans, totaling $98,023, from BancorpSouth

in Auburn, Alabama (See Finding 2):

© Loan A for $20,075 on May 28, 2002 with a maturity date of August 26,
2002.

2 Both checks were dated March 30, 2002 and the Candidate loan was reported on disclosure reports on
March 31, 2002. The balance in this bank account on March 25, 2002 was $46.


Part I
Background

Authority for Audit

This report is based on an audit of Joe Tumham for Congress (TFC), undertaken by the
Audit Division of the Federal Election Commission (the Commission) in accordance with
the Federal Election Campaign Act of 1971, as amended (the Act). The Audit Division
conducted the audit pursuant to 2 U.S.C. §438(b), which permits the Commission to
conduct audits and field investigations of any political committee that is required to file a
report under 2 U.S.C. §434. Prior to conducting any audit under this subsection, the
Commission must perform an internal review of reports filed by selected committees to
determine if the reports filed by a particular committee meet the threshold requirements
for substantial compliance with the Act. 2°U.S.C. §438(b).

Scope of Audit

Following Commission approved procedures, the Audit staff evaluated various factors
and as a result, this audit examined:

The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The disclosure of disbursements, debts and obligations.

The consistency between reported figures and bank records.

The completeness of records.

Other committee operations necessary to the review.

NAW LYNE

Limitations

Although, TFC’s disbursement records met the minimum recordkeeping requirements of
the Act, the review of debts and obligations was limited because TFC did not maintain
vendor invoices for a large number of disbursements. (See Finding 3)

Changes to the Law

On March 27, 2002, President Bush signed into law the Bipartisan Campaign Reform Act
of 2002 (BCRA). The BCRA contains many substantial and technical changes to the
federal campaign finance law. Most of the changes became effective November 6, 2002.
Except for the period November 6, 2002, through December 31, 2002, the period covered
by this audit pre-dates these changes. Therefore, the statutory and regulatory
requirements cited in this report are those that were in effect prior to November 6, 2002.


12

who are candidates for Congress to default on debts for fear of violating
campaign finance laws and that the Commission has remedied this situation
by allowing candidates to draw a salary from their campaigns. On a 2000
Personal Statement the Candidate’s income is listed as between $72,000 and
108,000; on a 2001 Personal Financial Statement supplied to Auburn Bank,
the Candidate listed his total cash income as $131,000 and on a 2002
Commercial Loan Application the Candidate listed his income as $91,000.
Furthermore, a letter dated January 8, 2003 from the Candidate to Bancorp
South stated the Candidate “has an established consulting income that has
been constant since 1999. Income from that profession earned an average of
approximately $85,000-90,000 per year for each of the last 3 years.” From the
documentation supplied it appears the Candidate was able maintain a
consistent salary throughout his run for Federal office.

D. TFC filed a Schedule C-1 showing Auburn Bank as the source of the $90,502,
not signed by a bank official. TFC did not correctly disclose the source of
the collateral. They failed to disclose Pete Tumham’s real estate and his
shares of Auburn Bank stock. They also failed to file a copy of the loan
agreement.

E. TFC filed Schedules B and C (2004 July Quarterly Report) showing $21,605
had been paid to date on the Auburn Bank Loan. TFC supplied
documentation showing that $30,825 has been paid towards the principal of
this loan. It appears that a new loan with the same collateral has been
obtained to pay off the remainder of this loan. TFC did not file Schedules C
and C-1 for this new loan.

Finally, Counsel stated that both Pete Tumham and Joe Turnham “...believe their actions
during the campaign were entirely lawful and therefore, there was no “knowing and
willful” violation of any federal campaign finance laws...” He stated that Pete Turnham
was given the title of Treasurer as an honorary designation by the Candidate and played
no formal role in the operation of the committee nor has Pete Turnham had any formal
campaign finance training.

Pete Turnham has been the Treasurer of TFC since inception. He is also the Treasurer of
Friends of Joe Turnham, the 1998 Committee and has been in that position since its
inception (March 3, 1998). Additionally, on Pete Turnham personal checks to TFC, he
redesignated and reattributed portions of the contributions exceeding the limits to other
individuals and to other elections, including a runoff that did not take place. These
designations and attributions demonstrate his knowledge of the contribution limitations.


14

Based on notations on information supplied by BancorpSouth, the Audit staff asked
BancorpSouth representatives if any member of the Turnham family served in any
capacity on the bank’s Board and if they could provide a copy of their policy with respect
to issuing unsecured loans. In response to a subpoena sent to the bank, they stated that
Tim Turnham, the Candidate’s brother, is a “local branch, non-decision, non-authority
Advisory member.” To date BancorpSouth has refused to provide a copy of its
unsecured loan policy stating that the policy is “proprietary and internal to
BancorpSouth.”

The following table illustrates the loan amounts; the bank balances when the loans were
received; the loan amount outstanding from the 1998 Committee; the maturity dates of
each of the loans; and, the date each loan was repaid.

Loan Loan Date and TFC Loan Date
Amount | Bank Balance’ | Bank Balance Maturity Loan
Date Date Repaid
Loan A $20,075 5/28/02 $7,250 8/26/02 _| 10/15/02
Loan B $17,075 6/17/02 ($10,502) 9/15/02_|_ 10/15/02
Loan C” $60,873 10/15/02 $23,771 1/13/03 | 2/5/03
1998 $14,160 Continuously na 1/13/03 2/5/03
Committee renewed
Loan

At the time TFC applied for Loan C from the bank, they had not repaid the first two
loans, which were at least 30 days overdue. TFC used part of the proceeds from Loan C
to repay Loans A and B. The 1998 Committee loan was still outstanding when all three
TFC loans were obtained.

As demonstrated above, BancorpSouth loaned TFC three loans totaling $98,023, with the
greatest amount outstanding at one time being $60,873. Given that none of the loans
were collateralized, TFC did not demonstrate that it had met the requirements for
assurance of repayment, or that the loans were made in the normal course of business.

At the exit conference, the Audit staff explained that the TFC loans were unsecured and
requested a copy of BancorpSouth’s loan policy with respect to issuing these types of
loans to political committees. Representatives stated they would try to get this
information from the bank.

Interim Audit Report Recommendation

The Audit staff recommended that TFC demonstrate that these loans were made in the
ordinary course of business and were made on a basis that assures repayment.
Demonstration should have been documents obtained through BancorpSouth.

° Bank Balance date is the balance at the close of business of the prior day noted in this column.
1 A portion of the proceeds of this loan were used to pay off Loans A and B.



Table of Contents

Part I. Background
Authority for Audit
Scope of Audit
Limitations
Changes to the Law

Part II. Overview of Campaign
Campaign Organization
Overview of Financial Activity

Part III. Summaries

Findings and Recommendations

Part IV. Findings and Recommendations
Finding 1. Receipt of Contributions that Exceed Limits
Finding 2. Receipt of Unsecured Bank Loans
Finding 3. Failure to Itemize Outstanding Debts and Obligations

Page

Ree

iS)

13
15


Report of the
Audit Division on

Joe Turnham for Congress

November 21, 2001-December 31, 2002

Why the Audit

Was Done

Federal law permits the
Commission to conduct
audits and field
investigations of any
political committee that
is required to file reports
under the Federal
Election Campaign Act
(the Act). The
Commission generally
conducts such audits
when a committee
appears not to have met
the threshold
requirements for
substantial compliance
with the Act.’ The audit
determines whether the
committee complied with
the limitations,
prohibitions and
disclosure requirements
of the Act.

Future Action
The Commission may
initiate an enforcement
action, at a later time,
with respect to any of the
matters discussed in this
report.

About the Committee (p. 2)

Joe Turnham for Congress (TFC) is the principal campaign
committee for Joe Turnham, Democratic candidate for the U.S.
House of Representatives from the state of Alabama, Third
District. TFC is headquartered in Auburn, Alabama. For more
information, see chart on Campaign Organization, p. 2.

Financial Activity (p. 2)
Receipts

ie}

o0o0oo0o0

From Individuals

From Political Committees
From Candidate Loans
From Bank Loans

Other Receipts

Total Receipts

Disbursements

o Operating & Other Disbursements

°
°

Loan Repayments
Total Disbursements

$ 422,833
337,582
80,500
98,023
3,235

$ 942,173

$ 828,155
112,523
$ 940,678

Findings and Recommendations (p. 3)
Receipt of Contributions that Exceed Limits (Finding 1)

' 2US.C. §438(b).

Receipt of Unsecured Bank Loans (Finding 2)

Failure to Itemize Outstanding Debts and Obligations
(Finding 3)


10

these deposit slips reflect funds from Pete Turnham or transfers from one of
the Candidate’s other bank accounts.® Copies of the checks from Pete
Turnham were not supplied, nor was paperwork showing the transfer of stock
to the Candidate from Pete Turnham.

B. Counsel also refers to Matter Under Review 5321 (MUR) in which he states a
candidate received an $800,000 gift from her mother during her candidacy for
Congress in 2002 and that the mother had given substantial gifts to her
daughter from 1996 through 2000. Furthermore, he states that the Office of
General Counsel conducted an investigation, found the $800,000 to be an
excessive contribution and recommended that the Commission enter into a
conciliation agreement. Counsel states that the Commission failed to adopt
this recommendation. While Counsel is correct in stating that the
Commission failed to adopt this recommendation, he does not acknowledge
that the Commission voted 3-3 on this recommendation. Therefore, this MUR
neither supports TFC’s contention that the funds from Pete Turnham were
gifts, nor does it dispute it.

C. Counsel states that Pete Tumham provided for another one of his children. He
states Pete Turnham gave Ruthmary Turnham (the Candidate’s sister) a
residence and $30,000 a year. Once again, documentation to substantiate this
claim was not supplied. Bank statements given to the Audit Division during
fieldwork showed a Trust Fund was setup for Ruthmary Turnham in 1996.
From January 2002 through February 2003 deposits’ were not made to this
Trust Fund, the only activity in this account was the withdrawal the Candidate
made to himself. (See Finding 1, Section II). Furthermore, Counsel does not
mention whether Pete Turnham provided any funds to Tim Turnham or Diane
McCrary, the Candidate’s other siblings. Therefore, any sort of pattern
showing the funds are consistent with giving gifts to all his children during the
same years, and for the same amount, has not been documented by TFC.

D. Counsel provided a copy of Pete Turnham’s Internal Revenue Service (IRS)
Form 709 (United States Gift (and Generation —-Skipping Transfer) Tax
Return dated November 3, 2003 that itemized both this $42,000 check and the
$30,000 check discussed below. However, according to Counsel the
Candidate returned the $30,000 gift to Pete Turnham prior to this November
2003 IRS Form.

In conclusion, TFC has not provided sufficient documentation to support their claim that
the $42,000 the Candidate received from Pete Turnham was a gift and not a loan, as the
$42,000 check itself stated on the memo line.

© Joe Turnham’s personal bank statements supplied during fieldwork showed transfers of funds, via check,
from one account to another.
7 The Audit Division only had bank statements for this time period.


13

| Finding 2. Receipt of Unsecured Bank Loans

Summary

TFC obtained three unsecured bank loans, totaling $98,023 that did not meet the
regulatory “assurance of repayment” standard. The loans were guaranteed by the
Candidate but not secured with any collateral owned by the Candidate or TFC. The
Audit staff requested a copy of the bank’s policy with respect to issuing unsecured loans
to political committees. BancorpSouth refused to comply with the subpoena request for
this information. In response to the interim audit report, TFC was unable to provide
adequate documentation to demonstrate that the bank loans were made on a basis which
assures repayment and made in the normal course of business.

Legal Standard
Loans Excluded from the Definition of Contribution. The term “contribution” does
not include a loan from a State or federal depository institution if such loan is made:
e in accordance with applicable banking laws and regulations;
e in the ordinary course of business;
¢ oma basis which assures repayment, as evidenced by a written instrument; and
¢ bearing the usual and customary interest rate of the lending institution. 2 U.S.C.
§431(8)(A)(vii); 11 CFR §100.7(b)(11).

Assurance of Repayment. Commission regulations state a loan is considered made on a
basis which assures repayment if the lending institution making the loan has:
1. Perfected a security interest in collateral owned by the candidate of political
committee receiving the loan.
2. Obtained a written agreement whereby the candidate or political committee
receiving the loan has pledged future receipts.
3. If these requirements are not met, the Commission will consider the totality of the
circumstances on a case by case basis in determining whether the loan was made
on a basis which assured repayment. 11 CFR §§100.7(b)(11) and 100.8(b)(12).

Facts and Analysis
TFC obtained three loans from BancorpSouth (see Finding 1). According to
documentation signed by the Vice President of BancorpSouth, the loans were
e “Unsecured”
e For the purpose of “Capital injection into business” and “Working Capital-
Purchases Inventory & Carry Receivables”
e Guaranteed by Joseph R Turnham (the Candidate)
© Notcollateralized by real estate, personal property, goods, negotiated
instruments, certificates of deposit, chattel papers, stocks, accounts
receivables, cash on deposit or similar traditional collateral, and future
receipts.