SECRETARIAT 

FEDERAL ELECTION COMMISSION 7017 uiy , , o -v . ^ 

WASHINGTON, D.C. 20463 M H JT IjJ 

May 10, 2012 

MEMORANDUM 

To: The Commission 

Through: \ A Alec Palmer vXiw/s^ 

<f Staff Director ^ 

From: Patricia Carmona 

Chief Compliance Officer 

Tom Hintermister 

Assistant Staff Director 

Audit Division 

Marty Kuesf^ ^ 

Audit Manager 

By: Bill Antosz b'^WjK 

Lead Auditor ^cJ 

Subject: Audit Division Recommendation Memorandum on the Los Angeles 

County Democratic Central Committee (A09-07) 

Pursuant to Commission Directive No. 70 (FEC Directive on Processing Audit Reports), 

the Audit staff's recommendations are presented below and the findings are discussed in 

the attached Draft Final Audit Report (DFAR). The Office of General Counsel has 

reviewed this memorandum and concurs with the recommendations. 

Finding 1. Misstatement of Financial Activity 

The Audit staff recommends that the Commission find that Los Angeles County 

Democratic Central Committee (LACDCC) misstated their financial activity for 

calendar years 2007 and 2008. 

Finding 2. Misstatement of Levin Financial Activity 

The Audit staff recommends that the Commission find that Los Angeles County 

Democratic Central Committee misstated their Levin financial activity for calendar 

year 2008. 

LACDCC requested an audit hearing to discuss the new facts that had come to light as a 

result of the arrest of its former treasurer on September 2"'', 2011. Its request for a hearing 

was granted and was subsequently held on December 14, 2011. 
In their hearing testimony, LACDCC representatives described the alleged embezzlement 

activity of their former treasurer and the known extent of the losses incurred by a number 

of her former client committees. They stated their belief that LACDCC . .lost almost 

$200,000, given all of their accounts, which include state accounts and federal accounts." 

Next, LACDCC representatives questioned whether the committee should be held 

responsible for reporting unauthorized and unknown transactions that were attributed to its 

former Treasurer's alleged embezzlement scheme. Further, LACDCC representatives 

requested that the Commission revisit the issues raised in the DFAR, which, they 

contended, in light of the arrest of the former treasurer, was not an accurate presentation 

of the committee's financial activity. LACDCC representatives indicated that transactions 

involved with the former treasurer's malfeasance cannot and should not be characterized 

as activity of the committee. 

Also during the audit hearing, LACDCC was requested to provide additional relevant 

documentation, including materials that would: 

• Provide detailed documentation/information about the aforementioned $200,000 

embezzlement and how this might apply to or affect the conclusions of the DFAR; 

• Demonstrate how each transaction identified in either of the misstatement findings 

was a result of the former treasurer's alleged unauthorized activity; 

• Provide information regarding the intemal controls in place at the time of the 

possible misappropriation; and 

• Document any post-discovery steps taken by LACDCC pursuant to the 

Commission's "Best Practices for Committee Management". 

Subsequent to the audit hearing, the Audit staff forwarded its workpapers related to the 

misstatements of financial activity and again requested the documentation/information 

discussed at the audit hearing. 

On Febmary 21,2012, LACDCC representatives provided supplemental information. The 

additional information did not include any new documentation or information relating to 

the alleged $200,000 embezzlement. The response did include a detailed discussion on 

the key misstatement components that were highlighted in the Audit report. LACDCC 

believes that these transactions were all the result of the former Treasurer's alleged 

embezzlement scheme and subsequent cover-up, and questions whether it or its former 

Treasurer should be held responsible for failing to report these unauthorized and unknown 

transactions. If the Commission proceeds to issue an Audit report that states any findings 

against the committee or the former Treasurer. LACDCC proposes that the following 

language be used to characterize the transactions at issue: "Unauthorized transfer of funds 

by the Committee's former treasurer". 

The supplemental information also included the intemal controls that were in place during 

the period that the alleged misappropriations took place. LACDCC explained that it had 

hired an experienced campaign finance firm and retained an experienced law firm to 

oversee the committee's activities and finances. Tasks at the campaign finance firm were 

divided among its employees. Payments were only permitted if they were authorized by 

one of three designated committee representatives who were not employed by nor had any 

business relationship with the campaign finance firm. LACDCC received daily financial 

reports, which were sent to at least two officers and its counsel. Thus, LACDCC believed 

that it had sufficient controls in place to avoid any misconduct. 
LACDCC has implemented additional practices to ensure as much accountability as 

possible. New safeguards in place include: 

• The Committee receives copies of its monthly bank statements and reconciliation 

reports from its new compliance firm. 

• The Committee has authorization to contact the bank directly to verify its account 

activity on a regular basis. 

• Committee representatives may not approve payments or reimbursements for 

themselves. 

LACDCC concluded by requesting that the Commission re-evaluate the findings, and 

issue an Audit report that properly characterizes these transactions and places 

responsibility in the hands of those who should be held accountable. 

Recommendations to Audit Report post Audit Hearing 

It is further recommended that the Commission approve that the Audit Hearing section of 

the Proposed Final Audit Report contain a brief discussion of the circumstances 

conceming the former Treasurer's alleged illegal activity and that she has plead guilty to 

five counts of mail fraud involving several other state and federal committees (but not 

naming LACDCC) that were also her clients. The discussion will also explain that the 

fact pattem for the misstated transactions presented in the DFAR are similar to those 

described with respect to other committees in the criminal charges filed against the former 

Treasurer. 

It is also recommended that the Proposed Final Audit Report not adjust the amount of 

misstated activity identified by the Audit staff in Findings 1 and 2. Consistent with the 

handling of prior audits involving embezzlement, such as the Lockheed Martin 

Employees' Political Action Committee (A03-54). the Audit staff maintains that all 

receipts and disbursements of a committee's federal account are reportable; including 

those that may have been involved in the alleged embezzlement. Given the unknown 

circumstances and amounts involved in the alleged embezzlement, the Audit staff 

recommends that the Proposed Final Audit Report request LACDCC to amend reports for 

the audit period or provide information with current filings that properly discloses any 

unauthorized transactions when and if sufficient information is made available. 

If this memorandum is approved, a Proposed Final Audit Report will be prepared within 

30 days of the Commission's vote. Should an objection be received. Directive No. 70 

states that the Audit Division Recommendation Memorandum will be placed on the next 

regularly scheduled open session agenda. 

Documents related to this audit report can be viewed in the Voting Ballot Matters folder. 

Should you have any questions, please contact Bill Antosz or Marty Kuest at 694-1200. 

Attachments: 

- Draft Final Audit Report on the Los Angeles County Democratic Central 

Committee 

- Legal Analysis, Draft Final Audit Report for Los Angeles County Democratic 

Central Committee (LRA 816). August 10. 2011 

cc: Office of General Counsel 
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.' llie 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. 

Draft Final Audit Report of the 

Audit Division on the 

Los Angeles County Democratic 

Central Committee 

January 1, 2007 - December 31, 2008 

About the Committee (p. 2) 

Los Angeles County Democratic Central Committee is a local 

party committee headquartered in Burbank, Califomia. For more 

information, see the chart on the Committee Organization, p.2. 

Financial Activity (p. 2) 

• Receipts 

o Contributions 

o Loans Received 

o Otiier Receipts 

o Transfers from Non-Federal Funds 

o Transfers from Levin Funds 

Total Receipts 

• Disbursements 

o Operating Expenditures 

o Loan Repayments 

o Other Disbursements 

Total Disbursements 

• Levin Receipts 

• Levin Disbursements 

$ 297,749 

7,700 

10,025 

503,595 

38,845 

S 857,914 

$ 787.495 

7,700 

79,573 

$ 874,768 

$153,473 

$156,930 

Findings and Recommendations (p. 3) 

• Misstatement of Financial Activity (Finding 1) 

• Misstatement of Levin Financial Activity (Finding 2) 

2 U.S.C. §438(b). 
Draft Final Audit Report of 

the Audit Division 

on the 

Los Angeles County Democratic 

Central Committee 

January 1, 2007 - December 31, 2008 
Table of Contents 

Page 

Part I. Background 

Authority for Audit 1 

Scope of Audit 1 

Part II. Overview of Committee 

Committee Organization 2 

Overview of Financial Activity 2 

Part III. Summaries 

Findings and Recommendations 3 

Part IV. Findings and Recommendations 

Finding 1. Misstatementof Financial Activity 4 

Finding 2. Misstatement of Levin Financial Activity 9 
Part I 

Background 

Authority for Audit 

This report is based on an audit of the Los Angeles County Democratic Central 

Committee (LACDCC), 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 

ofany 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 intemal 

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 the following 

areas in this audit: 

1. the consistency between reported figures and bank records; 

2. the disclosure ofindividual contributors' occupation and name of employer; 

3. the disclosure of disbursements, debts and obligations; 

4. the disclosure of expenses allocated between federal, Levin and non-federal accounts; 

5. the completeness of records; and 

6. other committee operations necessary to the review. 

Scope Limitation 

The treasurer of LACDCC (the Treasurer) operates an accounting firm that handles 

LACDCC's accounting, recordkeeping and reporting. The firm also acts as LACDCC's 

credit card processor. The same credit card merchant account is used to process 

contributions for LACDCC and a number of other clients. The Audit staff did not have 

access to complete records for this account and therefore was limited in its ability to 

verify the proper accounting of transactions relating to the account. 
Part II 

Overview of Committee 

Committee Organization 

Important Dates LACDCC 

• Date of Registration September 6, 1994 

• Audit Coverage January 1, 2007 - December 31,2008 

Headquarters Burbank, CA 

Bank Information 

• Bank Depositories 1 

• Bank Accounts 4 (1 Federal Account, 1 Levin Account and 2 

Non-Federal Accounts) 

Treasurer 

• Treasurer When Audit Was Conducted Kinde Durkee 

• Treasurer During Period Covered by Audit Kinde Durkee 

Management Information 

• Attended FEC Campaign Finance Seminar Yes 

• Used Commonly Available Campaign 

Management Software Package 

Yes 

• Who Handled Accounting and Recordkeeping 

Tasks 

Paid stafi* and volunteer 

Overview of Financial Activity 

(Audited Amounts) 

Federal Cash-on-hand ® January 1,2007 S 18,888 

o Contributions 297,749 

o Loans Received 7,700 

o Other Receipts 10.025 

o Transfers from Non-Federal Funds 503.595 

o Transfers from Levin Funds 38,845 

Totai Federal Receipts S 857,914 

o Operating Expenditures 787.495 

o Loan Repayments 7.700 

o Other Disbursements 79.573 

Total Federal Disbursements $ 874,768 

Federal Cash-on-hand @ December 31,2008 $ 2,034 

Levin Cash-on-Hand January 1,2007 S381 

Total Levin Receipts $ 153,473 

Total Levin Disbursements S 156,930 

Levin Cash-on-hand @ December 31,2008 -S 3,076 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

A comparison of LACDCC's reported federal activity with bank records revealed a 

misstatement of cash-on-hand, receipts and disbursements in 2007 and 2008. In 2007, 

LACDCC overstated beginning cash-on-hand by $5,228, understated receipts by S8,920, 

understated disbursements by $9,311 and overstated ending cash-on-hand by $5,619. In 

2008, LACDCC understated receipts by $34,278, disbursements by $33.411 and ending 

cash-on-hand by $25,661. In response to the Interim Audit Report, LACDCC amended 

its reports to correct the misstatements presented in that report. 

The Audit staff also identified an apparent prohibited or excessive contribution contained 

in the 2008 misstated receipts. In response to the Interim Audit Report, LACDCC 

provided evidence showing that the receipts should not be considered contributions. 

(For more detail, see p. 4.) 

Finding 2. Misstatement of Levin Financial Activity 

A comparison of LACDCC's reported Levin activity with bank records revealed a 

misstatement of cash-on-hand, receipts and disbursements in 2008. Specifically, 

LACDCC understated receipts by $16,328 and disbursements by $101,669 and overstated 

ending cash-on-hand by $85,341. In response to the Interim Audit Report, LACDCC 

amended its reports to correct the misstatement of Levin financial activity. 

(For more detail, see p. 9.) 
Part IV 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

Summary 

A comparison of LACDCC's reported federal activity with bank records revealed a 

misstatement of cash-on-hand, receipts and disbursements in 2007 and 2008. In 2007, 

LACDCC overstated beginning cash-on-hand by $5,228, understated receipts by $8,920, 

understated disbursements by $9,311 and overstated ending cash-on-hand by $5,619. In 

2008, LACDCC understated receipts by $34,278, disbursements by $33,411 and ending 

cash-on-hand by $25,661. In response to the Interim Audit Report, LACDCC amended 

its reports to correct the misstatements presented in that report. 

The Audit staff also identified an apparent prohibited or excessive contribution contained 

in the 2008 misstated receipts. In response to the Interim Audit Report, LACDCC 

provided evidence showing that the receipts should not be considered contributions. 

Legal Standard 

A. Contents of Reports. Each report must disclose: 

• The amount of cash-on-hand at the beginning and end of the reporting period; 

• The total amount of receipts for the reporting period and the calendar year; and 

• The total amoimt of disbursements for the reporting period and the calendar year; 

and; 

• Certain transactions that require itemization on Schedule A (Itemized Receipts) or 

Schedule B (Itemized Disbursements). 2 U.S.C. §434(b)(l), (2) and (4). 

B. Receipt of Prohibited Contributions - General Prohibition. 

Candidates and committees may not accept contributions (in the form of money, in-kind 

contributions or loans) from the treasury fiinds of the following prohibited sources: 

• Corporations (i.e. any incorporated organization, including a non-stock corporation, 

an incorporated membership organization or an incorporated cooperative); 

• Labor Organizations; or 

• National Banks. 2 U.S.C. §44lb. 

C. Extension of Credit by Commercial Vendor. 

A commercial vendor, whether or not it is a corporation, may extend credit to a candidate 

or political committee provided that: 

• The credit is extended in the vendor's ordinary course of business (see below); and 

• The terms of the credit are similar to the terms the vendor observes when extending a 

similar amount of credit to a nonpolitical client of similar risk. 11 CFR §116.3(a) and 

(b). 
D. Definition of Ordinary Course of Business. 

In determining whether credit was extended in the ordinary course of business, the 

Commission will consider whether: 

• The commercial vendor followed its established procedures and its past practice in 

approving the extension of credit; 

• The commercial vendor received prompt, full payment if it previously extended credit 

to the same candidate or political committee and 

• The extension of credit conformed to the usual and normal practice in the commercial 

vendor's industry or trade. 11 CFR § 116.3(c) 

E. Party Committee Limits. 

A party committee may not receive more than $5,000 per year from any one contributor. 

2 U.S.C. §441a(a)(l)(C), (2)(C) and (f); 11 CFR §§110.1(d) and 110.9. 

F. Contributions by Limited Liability Companies (LLCs). 

A limited liability company is a business entity tiiat is recognized as an LLC under the 

laws of the state in which it is established. An LLC that elects to be treated as a 

corporation by tiie Intemal Revenue Service under 26 CFR 301.7701-3 shall be 

considered a corporation pursuant to 11 CFR Part 114. An LLC that makes a 

contribution to a candidate or committee shall provide information as to how the 

contribution is to be attributed and affirm that it is eligible to make the contribution. 11 

CFR §110.1(g) 

Facts and Analsrsis 

A. Facts 

The Audit staff reconciled the reported financial activity with the bank records for 2007 

and 2008. It determined that LACDCC misstated cash-on-hand, receipts and 

disbursements for both years. The following charts outline the discrepancies and provide 

explanations for the differences. 

2007 Activity 

Reported Bank Records Discrepancy 

Opening Cash Balance $24,116 $18,888 $5,228 

Overstated 

Receipts $312,959 $321,879 $8,920 

Understated 

Disbursements $299,683 $308,994 $9,311 

Understated 

Ending Cash Balance $37,392 $31,773 $5,619 

Overstated 
The net understatement of receipts resulted from the following: 

•. Offset to operating expenditures not reported 

• Unexplained differences 

Net Understatement of Receipts 

The net understatement of disbursements resulted from the following: 

• Disbursements not reported 

• Disbursements reported with incorrect amounts 

• Reported disbursements that did not clear bank 

• Reported voided disbursements 

Net Understatement of Disbursements 

+ $9,245 

325 

$8,920 

+ $847 

+ 9,389 

98 

- 827 

$9,311 

2008 Activity 

Reported Bank Records Discrepancy 

Opening Cash Balance $37,392 $31,773 $5,619 

Overstated 

Receipts $501,758 $536,035 $34,277 

Understated 

Disbursements $532,364 $565,774 $33,410 

Understated 

Ending Cash Balance $6,786 $2,034 $4,752 

Overstated 

The net understatement of receipts resulted from the following: 

• Unreported advance from credit card processor (see below) 

• Unreported transfers from non-federal account (see below) 

• Reported transfer from Levin fund that was never made 

• Unexplained differences 

Net Understatement of Receipts 

The net understatement of disbursements resulted from the following: 

Unreported repayment of advance from credit card processor 

Unreported disbursements to credit card processor (see below) 

Unreported disbursements 

Reported disbursements with incorrect amounts 

Reported disbursements that did not clear bank 

Reported voided disbursements 

Reported disbursement paid from Levin account 

Net Understatement of Disbursements 

+ $7,700 

+ 42,596 

- 16,272 

+ 253 

$34,277 

+ $7,700 

+ 15,000 

+ 7,877 

+ 26,873 

- 1,374 

- 66 

- 22.600 

$33,410 

LACDCC misstated tiie cash balances tiiroughout 2007 and 2008 due to tiie errors 

outlined above and unknown adjustments from prior reporting periods. LACDCC 

overstated the cash balance on December 31. 2008 by $4,752. 
Advance from and Repayment to Credit Card Processor-$7,700 

LACDCC's federal account received advances from its accounting firm and credit card 

processor, Durkee & Associates,^ on credit card proceeds that were being delayed. The 

advances totaled $7,700 and occurred between December 22 and December 26, 2008. 

The committee prepared and dated checks to repay the advances on the days it received 

them, but the checks did not clear the bank until Febmary 17, 2009. LACDCC did not 

report the advances of $7,700 and the repayments of the same amount, as noted above. 

In addition to the reporting issues relating to these transactions, the Audit staff considers 

the $7,700 received from Durkee & Associates an advance or an extension of credit 

outside the ordinary course of business. See 2 U.S.C. § 431(8)(A)(i) or see 11 C.F.R. §§ 

100.55, 116.1(e), 116.3. As such, the $7,700 received by LACDCC is a contribution and 

either an excessive contribution of $2,700 ($7,700 less the allowable contribution limit of 

$5,000) or a prohibited contribution of $7,700, depending on whether Durkee & 

Associates, as a limited liability company, elected to be treated as a partnership or a 

corporation for tax purposes. 

Disbursed to Credit Card Processor-$15,000 

On December 31,2008, three checks totaling $15,000 were drawn from the federal 

account. Each check was payable to Durkee & Associates. LACDCC did not report the 

checks on its disclosure reports. LACDCC's counsel explained that the Treasurer 

withdrew the ftmds from the federal account as part of the reconciliation process to 

identify possible errors involving the deposit of credit card contributions. LACDCC 

retumed the funds to the federal account once it determined that there were no problems 

with credit card contributions. As was the case with the redeposit of the $45,000 to the 

Levin account (see Finding 2), however, LACDDC redeposited the $15,000 in the federal 

account months later. Durkee & Associates retumed the money in four increments 

between May and December of2009. 

The Treasurer provided a listing of credit card contributions totaling $61,491 that were 

deposited into the shared credit card merchant account and identified as contributions to 

LACDCC. These credit card contributions apparently represent the funds Durkee & 

Associates withdrew from LACDCC's bank accounts (Levin account ($45,000) and the 

federal account ($ 15,000)) while reconciling the credit card merchant account. Based on 

available records of Durkee & Associates, the Audit staff could not determine whether 

LACDCC funds were used by Durkee & Associates during the period it held them. 

^ Durkee & Associates is operated by LACDCC's Treasurer, Kinde Durkee. Durkee & Associates is an 

accounting and business management fimi with clients including political and non-profit organizations, as 

well as small businesses. 
Transfer from Non-federal Account-$ 15,000 

LACDCC failed to report a transfer received from its non-federal account in the amount 

of $15,000. According to LACDCC's counsel, the $15,000 was erroneously transferred 

from LACDCC's non-federal account to its federal account on December 31, 2008, the 

same day t it wrote the checks to the credit card processor. Without receipt of this 

transfer, LACDCC's federal bank account would have had a negative balance of $7,044 

on December 31, 2008. 

LACDCC transferred $15,000 on November 9, 2009 to retum the fiinds to the nonfederal account. LACDCC's counsel stated the purpose for the original transfer was 

unclear, and that no one from LACDCC's management was informed of, or consulted 

about, the erroneous $15,000 transfer or the retum of those funds. Rather, LACDCC 

management became aware of these transactions solely as a result of this audit. The 

Audit staff could not determine the reason for tiie transfer from the non-federal account 

based on available records. The Audit staff verified that the funds were retumed to the 

LACDCC's non-federal account. 

The non-federal account transferred less than its share of ailocated federal/non-federal 

costs during the audit period. As such, the federal account could have accepted the nonfederal transfer without resulting in overfunding. 

B. Interim Audit Report & Audit Division Recommendation 

The Audit staff presented tiie misstatements noted above to the representatives for 

LACDCC during the exit conference. The representatives did not provide any 

information to explain the misstatements, but indicated that they would file amended 

reports to correct these errors. 

The Audit staff recommended that LACDCC file amended reports to correct the 

misstatements. LACDCC should amend the cash balance of its most recent report with 

an explanation that the amendments are due to audit adjustments from a prior reporting 

period. 

LACDCC should also provide information conceming the $7,700 advance from its credit 

card processor to establish that it was made in the ordinary course of business. The 

information should include: 

• The specific terms that Durkee & Associates apply to such extensions of credit; 

• Whether similar terms are offered to nonpolitical customers of similar size and 

risk of obligation; 

• Rationale for why Durkee & Associates chose the time it did to negotiate 

LACDCC's checks representing repayment; 

• Information about Durkee & Associates' tax status; and 

• Any other information LACDCC believes might clarify the transactions. 
C. Committee Response to Interim Audit Report 

In response to the Interim Audit Report recommendation, LACDCC amended its reports, 

correcting the misreporting. Also, LACDCC amended its cash balance on its May 2011 

monthly report and noted that the adjustment was pursuant to the Audit staffs direction. 

To establish that the advance of $7,700 from its credit card processor was made in the 

ordinary course of business, LACDCC's response explained that Durkee & Associates 

considered short-term advances to its clients as benefits encompassed in its 3 percent 

credit card transaction fee. It provided a listing of 45 short-term advances that Durkee & 

Associates made to both its political and non-political clients dating back to 2001. 

LACDCC sufficiently demonstrated that the $7,700 from Durkee & Associates had a 

business purpose and was not for the purpose of infiuencing a federal election. As a 

result, the transaction is not considered a contribution. 

Finding 2. Misstatement of Levin Financial Activity 

Summary 

A comparison of LACDCC's reported Levin activity with bank records revealed a 

misstatement of cash-on-hand, receipts and disbursements in 2008. For 2008, LACDCC 

understated receipts by $16,328 and disbursements by $101,669 and overstated ending 

cash-on-hand by $85,341. In response to the Interim Audit Report, LACDCC amended 

its reports to correct the misstatement of Levin financial activity. 

Legal Standard 

A. Reporting. 

If a state, district or local party committee's combined annual receipts and disbursements 

for federal election activity (FEA) total $5,000 or more during the calendar year, tiie 

committee must disclose receipts and disbursements of Federal funds and Levin funds 

used for FEA. 11 CFR §300.36 (b)(2). 

B. Contents of Levin Reports. Each report must disclose: 

• The amount of cash-on-hand for Levin funds at the beginning and end of the 

reporting period; 

• The total amount of Levin fund receipts for the reporting period and the calendar 

year; 

• The total amount of Levin fund disbursements for the reporting period and the 

calendar year; and 

• Certain transactions that require itemization on Schedule L-A (Itemized Receipts of 

Levin Funds) or Schedule L-B (Itemized Disbursements of Levin Funds). 11 CFR 

§300.36 (b)(2). 
10 

Facts and Analysis 

A. Facts 

The Audit staff reconciled the reported Levin financial activity with the bank records for 

2007 and 2008. Staff determined that LACDCC misstated cash-on-hand, receipts and 

disbursements for 2008. The following chart outlines the discrepancies for 2008 and 

provides explanations for the misstated Levin activity. 

2008 Levin Activity 

Reported Bank Records Discrepancy 

Opening Cash Balance $960 $960 $0 

Receipts $135,990 $152,318 $16,328 

Understated 

Disbursements $54,685 $156,354 $101,669 

Understated 

Ending Cash Balance $82,265 $(3,076)' $85,341 

Overstated 

+ $6,328 

+ 5.000 

+ 5.000 

$16,328 

+ $45,000 

+ 35,000 

+ 32,941 

- 16,272 

+ 5.000 

The understatement of receipts resulted from the following: 

• Unreported transfer from federal account 

• Unreported contribution 

• Refund of contribution reported as a negative receipt instead 

of a disbursement 

Understatement of Receipts 

The understatement of disbursements resulted from the following: 

• Unreported disbursements to Durkee & Associates (see below) 

• Unreported transfer to non-party committee (see below) 

• Other unreported disbursements 

• Disbursement incorrectly reported as transfer to federal account^ 

• Refund of contribution reported as a negative receipt instead 

of a disbursement 

Net Understatement of Disbursements $101,669 

LACDCC misstated its Levin ending cash balances for 2008 due to the errors outiined 

above. On December 31,2008, the committee overstated the Levin cash by $85,341. 

' The negative ending cash balance was due to an outstanding check that was not negotiated until February 

2009. During the period that it was outstanding, the Levin bank statements showed a positive cash balance. 

^ LACDCC disbursed $22,600 from its Levin account to a vendor, but it reported this transaction as a 

$ 16,272 transfer to the federal account, which is the amount that could have been transferred from the 

Levin account if the disbursement had been paid properly from the federal account. The S22,600 is 

included in the $32,941 amount of disbursements that were not reported. LACDCC also did not report the 

transfer of $6,328 - the federal share of the $22,600 expenditure - from its federal account to the Levin 

account. 
11 

Amount Disbursed from Levin Fund-S45,000 

Between December 5 and December 22,2008, four checks made out to Durkee & 

Associates totaling $45,000 were drawn on the Levin account. LACDDC did not report 

the checks on its Schedules L. According to LACDCC's counsel, Durkee & Associates 

closely examined its credit card merchant account^ at the end of 2008 and determined that 

a number of clients had received duplicate transfers relating to credit card contributions. 

Durkee & Associates concluded that reversing all credit card transfers made to its clients 

was the best way to avoid potential reporting issues. Durkee & Associates would then retransfer the correct amount of credit card contributions based upon a reconciliation of its 

merchant account. 

However, credit card contributions were not deposited into the Levin account during the 

audit period. As such, there seemed to be no reason for Divkee & Associates to 

withdraw funds from this account. LACDCC deposited credit card contributions in the 

federal account. However, between December 5 and December 22, 2008, LACDCC did 

not have $45,000 in its federal bank account (See Finding I. above). The $45,000 

withdrawn from the Levin account was not re-deposited until March 23,2010. 

The committee made an earlier attempt to redeposit the money in March 2009. 

LACDCC's counsel provided a check in the amount of $45,000 made out to the Levin 

Fund, along witii a deposit ticket dated March 13. 2009. However, this check never 

cleared and was not posted to the account. 

LACDCC's counsel states that LACDCC management was not informed of, or consulted 

about, the $45,000 originally withdrawn from the Levin Fund account, the merchant 

account check issued to LACDCC in March 2009 or the merchant account check issued 

to LACDCC in March 2010. LACDCC management became aware of these transactions 

only as a result of the audit. The Treasurer contends that Durkee & Associates has since 

improved its intemal controls to avoid this type of situation in the future. LACDCC 

forwarded a description of the internal control improvements to the Audit staff. These 

intemal controls include general changes to accounting and recordkeeping procedures, 

but do not specifically detail procedures that would minimize the risk of commingling 

LACDCC proceeds with those of other committees and Durkee & Associates. 

Amount Transferred from Levin Account-S35,000 

On November 25,2008, LACDCC made a transfer of $35,000 from the Levin account to 

a non-party committee, Pasadena Area United Democratic Headquarters (Pasadena 

United), which is another Durkee & Associates client. The committee did not report the 

transfer on its Schedules L. LACDCC's counsel explained that the transfer was supposed 

to be made from Durkee & Associates' credit card merchant account to Pasadena United, 

but the funds were taken from the Levin account in error. 

^ This merchant account was a shared account that received credit card contributions for LACDCC and 

Durkee & Associates* other political committee clients, many of which had the same treasurer as 

LACDCC. 
12 

The Treasurer refunded the $35,000 to the Levin Fund account from the Durkee & 

Associates merchant account in three increments between December 17,2009 and 

Januaiy 28,2010. The Treasurer explained that this was more efficient than transferring 

$35,000 from Pasadena United to the Levin account and then transferring $35,000 to 

Pasadena United from the Durkee & Associates merchant account. The Treasurer 

believed this was an appropriate resolution because the merchant account was the 

intended source of the fimds. 

LACDCC's counsel states that no one from LACDCC management was informed of, or 

consulted about, the error, the method of reversing the erroneous transaction, the timing 

or reporting of the error, the retum of funds or any other aspect of the corrective effort 

undertaken by the Treasurer. 

B. Interim Audit Report & Audit Division Recommendation 

The Audit staff presented the misstatements of Levin activity to the representatives for 

LACDCC during the exit conference. The representatives did not provide any 

information to explain the misstatements, but indicated that they would file amended 

reports to correct the errors. 

The Audit staff recommended that LACDCC file amended reports to correct the 

misstatements of Levin activity. The Audit staff also recommended that LACDCC 

reconcile the cash balance on its most recent report to identify any subsequent 

discrepancies that could affect the recommended adjustments to cash. 

C. Committee Response to Interim Audit Report 

In response to the Interim Audit Report recommendation, LACDCC amended its reports 

correcting the misreporting. 
FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

Apri l 20, 2012 

MEMORANDUM 

TO: 

FROM: 

SUBJECT: 

Patricia Carmona 

Chief Compliance Officer 

Thomas Hintermister 

Assistant Staff Director 

Audit Division 

Anthony Herman 

General Coimsel 

Christopher Hughey 

Deputy General Counsel / 

Lawrence L. Calvert, 

Associate General Counse unsel l 

Lorenzo Holloway 

Assistant General Counsel 

For Public Finance and Audit Advice 

Delanie DeWitt Painter 

Attomey 

Audit Division Recommendation Memorandum and Draft Final Audit Report for 

Los Angeles County Democratic Central Committee. (LRA 816) 

I. INTRODUCTION 

The Office of General Counsel has reviewed the proposed Audit Division 

Recommendation Memorandum (**ADRM") and accompanying proposed Draft Final Audit 

Report ("DFAR") on Los Angeles County Democratic Central Committee (**tiie Committee"). We 

have also reviewed the Committee's response to tiie DFAR ("DFAR Response") and considered 

the Committee's conunents at the audit hearing on December 14,2011 and its written 

supplemental response after the audit hearing submitted on February 21,2012 ("Supplemental 

Response"). We generally concur with tiie ADRM. We concur that tiie Proposed Final Audit 

Report ("PFAR") should contain a brief discussion of the former treasurer's criminal activities. 

We also agree witii tiie ADRM recommendation that the amounts of tiie misstatement findings 

(Findings 1 and 2) should not be adjusted because the Conunittee was required to report all 
Audit Division Recommendation Memorandum 

Los Angeles County Democratic Central Conimittee (LRA 816) 

Page 2 

receipts and disbursements, including transactions that it contends were unauthorized. We 

understand that the Audit Division will also attach our comments on the Audit Division's proposed 

DFAR to the ADRM.' If you have any questions, please contact Delanie DeWitt Painter, tiie 

attomey assigned to tiiis audit. 

As a tiireshold issue, we concur with the Audit staff's recommendation in the ADRM that 

the Audit Hearing section of the PFAR should contain a brief discussion of the former Committee 

treasurer's criminal activities. This information is the basis for the Committee's arguments at the 

audit hearing, and describing arguments made by a committee at an audit hearing is part of the 

standard format for an audit report. The information will also provide the public a more complete 

picture of the circumstances surrounding the Committee's finances during the audit period. The 

Committee's response to the DFAR, the audit hearing, and the supplemental response focus on the 

alleged^ embezzlement and fraudulent activity by the Committee's former treasurer, Kinde 

Durkee. Durkee operated an accounting and business management firm, Durkee and Associates 

("D&A") which handled the Conunittee's accounting, recordkeeping, and reporting. It also 

processed the Committee's credit card transactions. On September 2,2011 - by coincidence, 

rouglhly the same time as the DFAR was transmitted to the Coinmittee — Durkee was arrested and 

charged with mail fraud related to embezzlement and unauthorized transfers involving a Califomia 

state candidate's committee for which she was also treasurer.^ Subsequentiy, an Information was 

filed including the original charges and additional charges against Durkee to include transactions 

involving several other state and federal committees (but not naming the Committee here) that 

were also Durkee cUents. The Information stated that there were at least 50 victims of Durkee's 

fraudulent scheme and that she caused losses of more than $7 million to her clients. Durkee 

pleaded guilty to all of the charges in the Information, five counts of mail fraud, on March 30, 

2012. See Plea Agreement • United States v. Durkee, 2:12 - cr - 0123 - KJM (E.D.C.A. Mar. 30, 

2012); http://www.washingtonpost.coin/national/calif-democratic-campaign-treasiirer-pleads-

' We commented in the DFAR only on a payment by Durkee and Associates ("D&A") to the Committee's 

federal account of $7,700 for delayed credit card proceeds and concurred with the auditors that the transaction was not 

a contribution by D&A. 

^ We use the word "alleged" because there has been no specific legal determination in any forum that Durkee 

engaged in illegal activities with respect to this Committee's funds. Rather, the Committee alleges that Durkee took 

illegal actions with respect to its funds, and that those actions caused most of the misstatements identified in the audit. 

^ The original criminal complaint, dated September 2.2011, provided with the Committee's DFAR response, 

charges Durkee with violating 18 U.S.C. § 1341 by mailing inaccurate disclosure reports to the Califomia Fair 

Political Practices Commission as a part of a fraudulent scheme to obtain money from a state candidate's campaign. 

The criminal complaint alleges that Durkee, through D&A, misappropriated money fh)m her client's bank accounts 

and mailed false state disclosure reports to hide the misappropriations. The criminal complaint alleges that Durkee 

transferred funds from the candidate committee's accounts to her firm's bank accounts without the client's knowledge 

or authorization, and sometimes refimded misappropriated frmds to cover checks and avoid detection. The complaint 

alleges she routinely moved substantial sums of money out of client accounts into D&A accounts or other client 

accounts. Durkee allegedly admitted to FBI agents "that she has been misappropriating her client's money for years" 

and filing false reports with the state. Complaint, United States v. Durkee, 2:1 lmj274 DAD (E.D.C.A. Sept. 2.2011) 

at 4. 
Audit Division Recommendation Memorandum 

Los Angeles County Democratic Central Committee (LRA 816) 

Page 3 

-guilty-to-looting-7m-fix)m-candidates-committees/2012/03/30/gIQABzaflS_story.html, "Calif 

Democratic campaign treasurer pleads guilty to looting $7M from candidates, committees," 

Washington Post (Mar. 30,2012). 

The Committee asserts that the majority of the misstatements identified in this audit were 

caused by Durkee's alleged illegal actions with respect to Committee funds. We question whether 

all of the transactions related to the misstatement findings in the audit report were caused by 

Durkee's alleged illegal activity, but we agree that the ADRM should explain the circumstances 

surrounding the Durkee criminal case, including that there are similarities between tiie fact 

patterns described in the DFAR and those described with respect to other conunittees in the 

criminal charges, and stating that Durkee pleaded guilty to five counts of mail fraud. 

IL MISSTATEMENT OF FINANCIAL ACTIVITY AND MISSTATEMENT OF 

LEVIN FINANCIAL ACTIVFTY (FINDINGS 1 AND 2) 

The DFAR concludes that the Committee misstated receipts and disbursements in 2007 

and 2008 (Finding 1). In 2007, the Coinmittee overstated beginning cash-on-hand by $5,228, 

understated receipts by $8,920, understated disbursements by $9,311 and overstated ending 

cash-on-hand by $5,619. In 2008, the Committee understated receipts by $34,278, disbursements 

by $33,411 and ending cash-on-hand by $25,661. The Committee also misstated Levin activity 

cash-on-hand, receipts and disbursements in 2008 (Finding 2). The Committee understated 

receipts by $16,328 and disbursements by $101,669 and overstated ending cash-on-hand by 

$85,341. In response to the IAR, and prior to Durkee's removal as treasurer, the Committee 

amended its reports to correct both the 2007 and 2008 misstatements. The ADRM recommends 

tiiat the PFAR "not adjust tiie amount of misstated activity" in Findings 1 and 2 because "all 

receipts and disbursements of a committee's federal account are reportable." ADRM at 3. 

The Committee contends that the financial transactions related to tiie audit findings "bear a 

striking resemblance" to transactions in the original criminal complaint.^ DFAR Response at 2. 

The Committee argues that Durkee "engaged in unauthorized transactions that had no relation to 

the Committee's activities." It argues that Durkee's unauthorized use of Committee funds and 

efforts to cover up her activity "are the basis for most, if not all, of the misstatements that 

* The audit revealed that D&A transferred to its own accounts funds from the Committee's federal and Levin 

accounts. Most of the frmds at issue were transferred to a merchant account that D&A used to process credit card 

transactions for the Committee and other clients. With respect to the federal account, D&A owed the Committee 

$15,000 that D&A repaid in four installment payments between May 26,2009 and December IS, 2009, and $3,564 in 

credit card proceeds that were delayed. From the Levin account, D&A transferred to itself $45,000 that was repaid on 

March 23,2010, and disbursed $35,000 to another D&A client, Pasadena Area United Democratic Headquarters, that 

was repaid by D&A in transfers between December 17,2009 and January 28,2010. D&A eventually retumed all of 

the funds to die Committee's federal and Levin accounts, but did not return some of the fimds until more than a year 

after withdrawing them from the accounts. In addition to these transactions, $15,000 was transferred from the 

Committee's non-federal account to its federal account on December 31,2008 and retumed to the Committee's 

non-federal account on November 9,2009. The Committee's responses and/or its comments at the audit hearing 

addressed the following transactions discussed in die DFAR: $7,700 advance from and repayment to credit card 

processor; $15,000 in checks paid to D&A from the federal account; $15,000 transfer frx>m non-federal account; 

$45,000 in checks written to D&A from the Levin account; and the $35,000 transfer from the Levin account to 

Pasadena United Democratic Headquarters. 
Audit Division Recommendation Memorandum 

Los Angeles County Democratic Central Committee (LRA 816) 

Page 4 

ultimately appeared on the Committee's campaign finance reports." Id.\ Supplemental Response 

at 2. The Committee "believes these transactions to be so completely outside the realm of any 

authorized activity that they cannot be properly characterized as 'receipts' or 'disbursements'" 

under 2 U.S.C. § 434(b)(2) and (4) and 11 C.F.R. § 104.1, and it argues tiiat the failure to disclose 

them should not be treated as misstatements in the report. Supplemental Response at 2. The 

Committee argues that it was not required to report these transactions as receipts and 

disbursements because "embezzlement" and "cover up" do not fit into the categories of receipts 

delineated in section 434(b). Audit Hearing Transcript at 23. The Committee proposes that if the 

Commission makes audit findings it should characterize the transactions not as "misstatements of 

financial information" but as "unauthorized transfer of funds by the Committee's former 

treasurer." Supplemental Response at 5. Moreover, while it argues that it should not be required 

to report these transactions at all, it argues in the altemative that if it is required to report the 

transactions it should be permitted to characterize them using the same plu-ase, "unauthorized 

transfer of fimds by the Committee's former treasurer." Id. 

We agree with the Committee that at least those specific transactions described in prose in 

the DFAR "bear a striking resemblance" to the pattem of transactions described in the original 

criminal complaint. We disagree, however, with the Committee's argument that these transactions 

are neither "receipts" nor "disbursements." Unlike the terms "contribution" and "expenditure," 

which are carefully defined terms of art in the Act and regulations, "receipts" and "disbursements" 

are not specifically defined; instead, they carry their meaning in ordinary usage of, in essence, 

money in and money out. And a committee must report all receipts and disbursements, 2 U.S.C. 

§ 434(a)(1) and (b), 11 C.F.R. § 104.3, including "otiier forms of receipts" and "any otiier 

disbursements." 2 U.S.C. § 434(b)(2)(J) and (4)(H); 11 C.F.R. § 104.3(a)(2) and (b)(1). There are 

no exceptions in the statute or regulations for unauthorized transactions, embezzled funds or 

possible criminal activity. The statute and regulations do not define or list every possible type of 

receipt or disbursement, nor do they consider intent or whetiier receipts or disbursements are 

"authorized." The "otiier" receipts and disbursements are broad catdi-all categories tiiat include 

any transactions that are not otherwise specifically listed, such as the transactions the Committee 

contends were not authorized. A receipt or disbursement that was not authorized still must be 

disclosed. Committees are generally responsible for the accurate reporting of even embezzled 

funds. See, e.g.. Advisory Opinion ("AO") 2006-16 (Detert)(ConMnittee should report 

misappropriated funds as an "other disbursement" and reimbursement of those funds as an "other 

receipt"); MUR 5872 (Hague); MUR 5923 (American Dream PAC); MUR 6299 (NRCC); MUR 

5962 (Istook); MUR 5610 (Dole); MUR 5721 (Lockheed). Therefore, committees must account 

for all transactions - every penny in and every penny out of a committee's accounts should be 

disclosed to provide a complete and accurate picture of its finances. In particular, omitting certain 

receipts and disbursements firom disclosure reports would result in inaccurate reporting oftiie 

Committee's ending cash on hand, which is the Committee's cash on hand at the beginning of a 

reporting period, plus all receipts during the period, minus all disbursements during the period. 

As noted above, the Committee has also suggested that the audit report and any additional 

required amendments describe these transactions as '^mauthorized transfers by the Committee's 

former treasurer." But while the Committee has asserted tiiat the particular fact patterns described 

in prose in the DFAR represent unauthorized transactions, and those fact patterns resemble the 
Audit Division Recommendation Memorandum 

Los Angeles County Democratic Central Committee (LRA 816) 

Page 5 

patterns of transactions in the criminal complaint, those transactions do not account for all of the 

misstatements itemized in the charts at pages 5-6 and 10 of the DFAR. Other misstatements 

identified in the charts may have represented unauthorized transactions, but they might also have 

represented ordinary reporting errors. Thus, we do not see a basis for changing the 

characterization of these transactions or the titie of the misstatement findings in the audit report. 

Therefore, we concur that the amounts of the misstatement findings should not be changed and that 

the Committee was required to report all transactions, including those it contends were not 

authorized, as receipts or disbursements.^ 

^ As noted, the Committee has already amended its reports in response to the Interim Audit Report, but did so 

while Durkee was treasurer. Nevertheless, if the Committee wishes further to amend its reports, it could work with the 

Reports Analysis Division conceming the proper characterization of the puipose ofany disbursements it establishes to 

have been unauthorized.