FEDERAL ELECTION COMMISSION

WASHINCTON. 0 C. 20463

May 29,1998

MEMORANDUM

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TO:

FROM:

SUBJECT:

RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

ROBERT 1 COSTA

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

PUBLIC ISSUANCE OF THE AUDIT REPORT ON

LUGAR FOR PRESIDENT COMMITIEE, INC., LUGAR

FOR PRESIDENT COMMITTEE LEGAL AND ACCOUNTING

COMPLIANCE FUND AND LUGAR FOR PRESIDENT - AUDIT

FUND

Attached please find a copy ofthe audit report and related documents on Lugar

for President Committee, Inc., Lugar for President Committee Legal and Accounting

Compliance Fund and Lugar for President - Audit Fund. The report was approved by

the Commission on May 19, 1998.

Infonnational copies ofthe report have been received"by all parties involved and

the report may be released to the public.

Attachment as stated

cc: Office of General Counsel

Office of Public Disclosure

Reports Analysis Division

FEC Library
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REPORT OF TIlE AUDIT DIVISION

ON

LUGAR FOR PRESIDENT COMMI'ITEE, INC.

LUGARFORPRESIDENTCOMMI'ITEE

LEGAL AND ACCOUNTING COMPLIANCE FUND

AND

LUGAR FOR PRESIDENT - AUDIT FUND

Approved May 19, 1998

FEDERAL ELECI10N COMMISSION

999 E STREET, N.W.

WASBINGTON, D.C

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REPORT OF THE AUDITDIVISION

ON

LUGAR FOR PRESIDENT COMMITTEE, INC.

LUGAR FOR PRESIDENT COMMITTEE

LEGALANDACCOUNnNGCO~L~CEFUND

AND

LUGAR FOR PRESIDENT - AUDIT FUND

Approved May 19, 1998

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
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TABLE OF CONTENTS

LUGAR FOR PRESIDENTCOMMITIEE, INC.

LUGAR FOR PRESIDENT COMMI1TEE LEGAL AND

ACCOUNTINGCO~L~CEFUND

AND

LUGAR FOR PRESIDENT COMMI1TEE - AUDIT FUND

Page

Executive Summary 1

Audit Report 3

Background 3

Findings 7

Legal Analysis 41

Supplement to Legal Analysis 43

Transmittal to Committee 45

Transmittal to Candidate 47

Chronology 49
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FEDERAL ELECTION COMMISSION

WASHINGTON. 0 C 20403

REPORT OF THE AUDIT DIVISION

ON

LUGAR FOR PRESIDENT COMMI'ITEE, INC.,

LUGAR FOR PRESIDENT COMMl'ITEE LEGAL AND ACCOUNTING

COMPLIANCE FUND, AND

LUGAR FOR PRESIDENT COMMl'ITEE - AUDIT FUND

EXECUTIVE SUMMARY

Lugar for President Committee, Inc. (the Committee) registered with the Federal

Election Commission on March 3, 1995. In addition, the Lugar for President Committee

'Legal and Accounting Compliance Fund (the Compliance Committee) and the Lugar For

President Committee - Audit Fund registered with the Federal Election Commission on

May 31, 1995 and March 15, 1996, respectively.

The audit was conducted pursuant to 26 U.S.C. §9038(a), requiring the

Commission to audit committees authorized by candidates who receive Federal Funds.

The Committee received $2,657..244 in matching funds from the United States Treasury.

The findings ofthe audit were presented to the committees at an exit conference

held on February 10, 1997 and in the Exit Conference Memorandum. 1Jte Committees'

response to those findings are contained in the audit report. .

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

MISSTATEMENT OF FINANCIAL ACTIVITY- 2 U.S.C. §§434(b)(1) and (4). The

Comminee misstated its total disbursements and cash balances on disclosure reports

covering. 1995 and 1996 activity. Amended disclosure reports were filed which

materially corrected these misstatements.

ITEMIZATION OF DISBURSEMENTS - 2 U.S.C. §434(b)(S)(A). The Committee

did not itemize 918 disbursements. totaling 594,777, that were less than or equal to $200

but were still required to be itemized on discloswe reports. The Committee filed

amended reports which materially itemized these disbursements.

ApPARENT NON=OUALIFIED CAMPAIGN EXPENSES - 11 CFR §9034.4(a)(5)(ii),

11 CFR §§9034.4(b)(3) and §9034.4(e)(6)(i). The Audit staffidentified bonus payments

made to two employees, totaling 53..000, which were not provided for pursuant to a

written contract made prior to the candidate's date ofineligibility, as required by 11 CFR

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§9034.4(a)(5)(ii). In addition, the Committee made payments, totaling 56,404, for

Compliance Committee contribution solicitation and processing costs. As a result, the

Commission determined that a pro-rata repayment to the United States Treasury in the

amount of53,336 was warranted pursuant to 26 U.S.C. §9038(b)(2) [53000 + 56,404 x

.35472 (the Committee's repayment ratio)].

ApPARENT PROHIBITED IN-KIND CONTRIBUTIONS - 2 U.S.C. §441b(a) and II

CFR §100.7(a)(I). During July of 1995, the Committee purchased a telephone call and

contact management system from Ontario Systems Corporation (OSC) at a cost of

$355,425. The system was repurchased by asc in March 1996 in exchange for 5232,500

and the Committee's agreement to serve as a beta teSt site for the political candidate

telemarketing industry. The Audit staffrequested additional documentation which

demonstrated that asc entered into similar repurchase agreements with other clients and

that the agreement between the Committee and ase confonned to the usual and nonnal

practice in asc's industry. The Audit staff concluded that the arrangement appeared to

be commercially reasonable based on an analysis ofthe information ultimately provided

and therefore, no in-kind contribution resulted.

The Committee made net payments. totaling 59,988, to three entities for use ofan

airplane for campaign travel. Although one ofthese entities, Eastway Aircraft Services,

Inc. (Eastv:ay), was licensed to operate a chaner air service, the Audit staff noted that the

Comminee followed the corporate travel provisions of 11 CFR §114.9(e) instead of

reimbursing Eastway for the usual and normal charter rates for travel on this plane. The

Audit staffrequested documentation relative to the Committee's arrangements with these

entities. The Comminee demonstrated that Eastway operated but did not own the plane

and that the owner ofthe plane made the plane available to the candidate under the

corporate travel provisions. Therefore.. the Comminee complied with th~ regulations at

11 CFR §114.9(e) and no in-kind contribution resulted.

STALE-DATED CHECKS - 11 CFR §9038.6. The Audit staffidentified checks

Issued hy the Committee. totaling $10..958.. that had not been negotiated. The

Commission detennined that this amount was payable to the United States Treasury. The

Committee paid 510..958 to the United States Treasury on April 24, 1997.

LlICAR FOR PRESIDENT COl\tl\IITTEE LEGAL AND ACCOUNTING COMPLIANCE

FlIND AND THE LllCAR FOR PRESIDENT COMMITIEE - AUDIT FUND

The Audit staff did not detect any material non-compliance during the audits of

these two comminees.

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FEDERAL ELECTION COMMISSION

WASHINGTON. 0 C 204b3

REPORTOF THE AUDITDIVISION

ON

LUGAR FOR PRESIDENTCOMMI1TEE, INC.,

LUGAR FOR PRESIDENTCOMMl1TEE LEGAL AND ACCOUNTING

COMPLIANCE FUNDt AND

LUGAR FOR PRESIDENTCOMMl1TEE - AUDITFUND

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7 I. BACKGROUND

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.A. AUDIT AUTHORln'

This report is based on an audit ofthe Lugar for President Committee, Inc. (the

Committee), the Lugar for President Committee Legal and Accounting Compliance Fund (the

Compliance Committee), and the Lugar for President Committee - Audit Fund (the Audit Fund).

The audit is mandated by Section 9038(a) ofTitle 26 ofthe United States Code. That section

states that U After each matching payment period, the Commission shall conduct a thorough

examination and audit ofthe qualified campaign expenses ofevery candidate and his authorized

committees who received payments under section 9037." Also, Section 9039(b) ofthe United

States Code and Section 9038.1(a)(2) ofthe Commission's Regulations state that the

Commission may conduct other examinations and audits from time to ~e as it deems necessary.

In addition to examining the receipt and use ofFederal funds, the audit seeks to

detennine ifthe campaign has materially complied with the limitatioDS, prohibitions, and

disclosure requirements ofthe Federal Election Campaign Act of 1971 (FECA), as amended.

B. AUDIT COVERAGE

The audit ofthe Comminee covered the period from its inception, March 3, 1995

through April 30, 1996. The Comminee reponed an opening cash balance of$-0-; total receipts

of59.328.581 J; total disbursements of59.085,912; and a closing cash balance of$194,669.1ln

addition, the Audit staff conducted a limited review through March 31, 1997, for purposes of

detennining the Committee's remaining matching fund entitlement

The reponed figures ave rounded to the nearest dollar..ount.

These figures do not sum due to the Commince's reported figures containing material

misstatements for 1995 and 1996. (See Finding II.A.).

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The audit ofthe Compliance Committee covered the period from its inception,

May 31, 1995 through April 30, 1996. The Compliance Committee reponed an opening cash

balance ofS-o-; total receipts of$103,559; total disbursements of591,084; and a closing cash

balance ofSI2,475.

The audit ofthe Audit Fund covered the period from its inception, March 15,

1996 through May 31, 1996. The Audit Fund reponed an opening cash balance ofS-O-; total

receipts of598,248; total disbursements of$-O-; and a closing cash balance of$98,248.

c. CAMPAIGN ORGANIZATION

The Committee, the Compliance Committee and the Audit Fund maintain their

headquarters in Indianapolis, IndiaDL The Treasurer for all three committees is Mr. Patrick J.

Kiely.3

The Committee registered with the Federal Election Commission on March 3,

1995. During the period audited, the Committee maintained depositories in Indianapolis, Indiana

and in Washington, DC. To handle its financial activity, the Committee utilized eleven bank

accounts. From these accounts the Committee made approximately 4,800 disbursements. In

addition, the Committee received approximately 44,000 contributions from 26,000 contributors.

These contributions totaled approximately $4,856,000.

In addition, the Committee received 52,657,244 in matching funds from the

United States Treasury. This amount represents 17.19010 ofthe 515,455,000 maximum

entitlement that any candidate could receive. Senator Lugar ("the Candidate") was determined

eligible to receive matching funds on August 30, 1995. The Committee made ten requests for

matching funds totaling $2,659,799. The Commission certified 99.90.4 ofthe requested amount.

For matching fund purposes, the Commission detennined that Senator Lugar's candidacy ended

on March 6, 1996, the date when the candidate publicly announced he was withdrawing from the

campaign. The Commission's Regulations at 11 CFR 9033.5(a)(l) state that the candidate's

ineligibility date shall be the day on which the candidate publicly announces that he or she is not

actively conducting campaigns in more than one State. On August 1, 1996, the Committee

received its final matching fund payment to defray qualified campaign expenses incurred through

March 6, 1996, and to help defray the cost ofwinding down the campaign.

The Compliance Committee registered with the Federal Election Commission on

May 31, 1995. To handle its financial activity, the Compliance Committee maintained one bank

account located in Washingto~ DC. During the audit period, the Compliance Committee

received 162 contributions from individuals, totaling 5103,559. Ofthese, 125 were contributions

received directly from individuals and 37 were originally contributions to the Committee

(Primary) that were redesignated by the contributor for the Compliance Committee. The

The Committee's treasurer from inception (March 3, 1995) to Mm'cb 22, 1995 was Mr. Joe Bill

Wiley.

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Compliance Committee's disbursements included traDSfers to the Audit Func1. refunds of

contributiODS, aDd miscellaneous bank fees.

The Audit FUDd registered with the Federal Election Commission on March IS,

1996. To baDdle its financial activity, the Audit Fund maintained one baDk account located in

WubiDgton, DC. QuriDg the audit period, the Audit FUDd received 149 coDttibutions &om

individuals, totaliDa 598,248. Ofthese, 133 were contributionsto the Compliance Committee

that were mfesi.....,ed by the contributorsfor Audit FUDd, fifteen were origiDally contributioDS to

the Committee (Primary) that were redesipated by the contributorsfor Audit Func1. and one was

a contribution received directly from an individual. _-As ofJune 30, 1997, the Audit Fund bad not

made any disbursements.

D. AUDIT SCoPE AND PRocmtJRES

In addition to a review ofexpenditures made by the Luprfor President

Committee, IDe. to determine ifthey were qualified or non-qualifiecl ampaign expeDSeS

(see Finding rnA), the audit oftile afomnentionecl committees covered the fonowing

general categories:

1. The receipt ofcontributions from prohibited sources, such as those

from corporatiODS or labor orpni?Jltions(FiDcIiDg m.B.);

2. the receipt ofconuibutions or loans in excess ofthe statutory

limitations;

3. proper disclosure ofcontributions from individuals, political

committees and other entities, to include the itemization of

contributions when required, as well as, the completeness and

accuracy ofthe information disclosed;

4. proper disclosure ofdisbursements including the itemj7JltjOD of

disbursements when required, as 'Well as, the completeness and

accuracy ofthe information disclosed (Finding II.B.);

s. proper disclosure ofcampaign debts and obligations;

6. the accuracy oftotal reponed receipts, disbursements and cash

balances as compared to campaign bank records (Finding n.A.);

7. adequate recordkeeping for rampaip 1I'aDSICtioas;

8. lCCUI'ICy oftile Stltement orNet ()utsbmding C8mpaign

Obligations filed by the Committee to disclose its finencie1

condition IDd to establish continuiDI matebiDl fund entitlement

(Finding III.C.);

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

10. other audit procedures that were deemed necessary in the situation

(see Finding m.D.).

As part ofthe Commission's standard audit process, an inventory of

campaign records is conducted prior to the audit fieldwork. This inventory is conducted

to detennine ifthe auditee's records are materially complete and in an auditable state.

Based on our review ofrecords presented. it was concluded that the records were

materially complete and fieldwork began immediately.

Dwing our testing ofthe Committee's disbursements, the Audit staff

noted instances where the available documentation was a canceled check (without a

notation as to purpose) and contemporaneous or other memoranda.4 The Committee used

contemporaneous or other memoranda created by the Committee's accountant or the

ChiefFinancial Officer to support several payments to consultants and other vendors.

The Audit staffnotes that many ofthe documents did Dot contain a creation date and/or a

signature ofthe person who prepared the document.

The Committee's accountant indicated that Committee personnel had

reviewed the vendor files, and, for any undocumented payments, contacted the individual

or vendor to obtain additional documentation. In some instances, Committee personnel

sent a facsimile ofthe list of payments to the individual or company in an effort to obtain

a signed acknowledgment.

The Audit staff's review ofthe available documentation indicated that for

some vendors, especially consultants, the Committee listed the date and amount of

payments to the person or entity and provided a purpose for each expenditure. In

addition. the Audit staff notes that the Committee did not (except in a few instances)

establish contracts or written employment agreements with its consultants or employees.

The Audit staff concluded that the available infonnation satisfied the

minimum recordkeeping requirements of 11 CFR §9033.11. However, the Audit staff

\\'as unable to verify the accuracy of cenain infonnation contained on many ofthe

contemporaneous or other memoranda because the Committee generated the documents

and no documentation from the payees was available for review.

Unless specifically discussed below, the Audit staffdid not detect any

material non-compliance. The Audit staff notes that the Commission may pursue further

any ofthe matters discussed in this memorandum in an enforcement action.

Section 9033.11(b)(I)(ii)(B) ofTitle II oftile Code ofFedcraI Replations provides for the use of

a contemporaneous memorandum IS an acceptable form ofdocumentation.

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D. AUDIT FINDINGS AND RECOMMENDATIONS: NON-REPAYMENT

MAmBS

A. MIssTATEMENTOr FINANCIAL ACTIVITY

Sections 434(b)(1) and (4) ofTitle 2 ofthe United States Code state, in

relevant part, that each report sball disclose the amount ofcash on hand at the beginning

ofeach reporting period and the total amount ofall disbursements for the reporting period

and the calendar year.

The Auditstaffs reconciliation ofthe Committee's reported fmancial

activity to its bank activity revealed material misstatements in the Committee's reported

disbursements and ending cash balances for 1995 and 1996.5

1. 1995 Misstatements

The Committee reported total disbursements ofS5,755,952 for the

1995 calendar year. The Audit staff detennined that the Committee understated its

disbursements by S100,751. This net understatement was due to the following:

unreported disbursements totaling S123,749; reported disbursements that were later

voided but not adjusted for on the reports totaling $24,746; and miscellaneous reporting

errors resulting in a net understatement of51,748. The Audit staffnotes that a large

amount ($107,327) ofthe unreponed disbursements had a payment date ofSeptember 11,

1995; however, the specific reason for the error is unknown.

The Committee reponed an ending cash balance at December 31 t

19950f$275,189. The Audit staffdetennined that the correct balance was 5211;271.

This overstatement was primarily due to unreponed offsets to operating expenditures

totaling $17.694; a mathematical error on the Committee's 1995 Year-End Report of

$18.000; and the misstatements described above.

2. 1996 Misstatements6

The Comminee reponed total disbursements ofS3,329,960. The

Audit staff detennined that the Comminee understated its disbursements by $40,721.

This net understatement was due to the following: unreponed disbursements totaling

$57.272; loan repayments that were reponed twice totaling S20,000; reported

disbursements that were later voided but not adjusted for on the reports totaling $4,188;

,

The dollar Imounts are rounded to the nearest dollar.

The Audit staff completed a reconciliation oftbe Committee's reponed fmancial activity from

January 1, through April 30. 1996.

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contribution refunds made by the Compliance Committee but reported as contribution

refunds on the Committee'sreports totaling 56,263; UDI'epOrted contribution refunds

totaling S1,250; and miscenaneous reponing errors resulting in a net understatement of

512,650.

_. The Committee reported an ending cash balance at Apri130, 1996

ofSI94,670. The Audit staffdetermined that the correct balance was 5122,755. This

overstatement was primarily due to the cmyover ofthe en'OI'S made during 1995; an error

in the total receipts balance carried forward from the Detailed Summary Pages (FEC

Form 3P, Page 2) to the Summary Page (FEe Form3P, Page 1) on its April Monthly

report, totaling 530,000; UDI'epOrted interest received in January, totaling 52,724; and the

misstatements described above.

The Audit staffprovided copies ofour 1995 and 1996 bank

reconciliation workpapers and discussed the noted misstatements with Committee

officials at a conference subsequent to the end offieldwork. The Committee officials

acknowledged the receipt ofthe workpapers, but did not offer any specific comments

concerning the misstatements.

In the Exit Conference Memorandum (the Memorandwn), the

Audit staffrecommended that the Committee file amended Summary and Detailed

Summary Pages (FEe Fonn 3P, Pages 1 and 2), along with accompanying itemized

schedules, as appropriate, for the 1995 and 1996 calendar years to correct the

misstatement offinancial activity.

In its response to the Memorandum, the Committee did not contest

this finding. On April 28, 1997, the Committee filed amended discloSW'e reports which

materially corrected the 1995 and 1996 misstatements.

B. ITEMIZATION Or DISBURSEMENTS

Section 434(b)(S)(A) ofTitle 2 ofthe United States Code states that each

repon shall disclose the name and address of each person to whom an expenditure in an

aggregate amount or value in excess of$200 within a calendar year is made by the

reponing committee to meet a candidate or committee operating expense, together with

the date. amoun~ and purpose ofsuch operating expenditure.

During oW' sample review ofdisbursements, the Audit staffDoted several

instances where the Committee did not itemize disbursements that were less than or equal

to $200. but due to previous payments to the same person required itemization. The

Audit staff concluded that the Committee's system for identifying such disbursements

was ineffective.

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Utilizing the available records, the Audit staffidentified 1,103

disbursements, totaling SI23,083, that were less than or equal to $200, but required

itemization. Ofthese, 918 totaling 594,777, were not itemized.

The Audit staffpresented a schedule ofthese disbursements to Committee

officials at a conf~ce subsequent to the end offieldwork. Committee officials

acknowledged that the problem existed but did not offer any specific comments

concerning the matter.

In the Memorandum, the Audit staffrecommended that the Committee file

amended Schedules B-P (Itemized Disbursements) to disclose the disbursements not

itemized as required.

In its response to the Memorandum, the Committee did not contest this

finding. On April 28, 1997, the Committee filed amended Schedules B-P which

materially disclosed the disbursements.

III. AUDIT FINDINGS AND RECOMMENDATIONS: AMOUNTS DUE

TO THE U.s. TREASURY

A. APPARENT NON-QVALlnED CAMPAIGN EXPENSES

Section 9032(9) ofTitle 26 ofthe United States Code defines, in part, the

term "'qualified campaign expense" as a purchase or payment incurred by a candidate, or

by his authorized committee, in connection with his campaign for nomination, and

neither the incurring nor payment ofwhich constitutes a violation ofany law ofthe

United States or ofthe State in which the expense is incurred or paid.

Section 9033.11(a) ofTitle 11 ofthe Code ofFederal Regulations states,

in pan. that each candidate shall have the burden ofproving that disbursements made by

the candidate or his authorized committee(s) or persons authorized to make expenditures

on behalf ofthe candidate or authorized committee(s) are qualified campaign expenses.

Section 9038.2(b)(2) ofTitle 11 ofthe Code ofFederal Regulations states,

in relevant part, that the Commission may determine that amounts ofany payments made

to a candidate from the matching payment account were used for purposes otherthan to

defray qualified campaign expenses. The amoWlt ofany repayment under this ~~on

shall bear the same ratio to the total amount determined to have been used for nonqualified campaign expenses as the amount ofmatching funds eenified to the candidate

bears to total deposits, as of90 days after the candidate's date ofineligibility.

During the Audit staffs review oftbe Committee's disbursements and

related documentation. we identified payments to individuals and vendors that appeared

to be non-qualified campaign expenses, categorized as follows:

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1. Paymcm gfRgp'!S5 to f,mplg)'ICI

Section 9034.4(aXSXii) ofTitle 11 ofdle Code ofFederal

Regulations states, in relevant part, that mODetary bonuses sbaU be coDSideled qualified

campaign expenses. provided that I1lIDODeIllly bonuses for committee employees and

consul1aDtS in n=copitiOD for campaip-related 8Ctivities 01' .-vices are provided for

pursuant to a written COdUaet made..to the date ofiDeliaibility; and, are paid DO later

than thirty days afterthe date ofineligibility [emphasis 1IddecI].

The Audit staffidentified fivepaymeDts to iDcIividuals and one

payment to a coDSUlting firm for monetary bonuses, to1aIing 518,000. The payments

were described as Mspecial bonus check", MsipiDa bonus", "bonus check", or "signing

fee·' on the canceled check or 8CCOmpIIlying documeDlltiOlL

The Audit staffprovided a list ofthese payments to Committee

officials at a conference subsequeat to the end offieldwork.. The Committee'steSpODSe

indicated that two ofthe payments ($6,000 to Richard Sc:bwBrm, a regioDal political

director, and 59,000 to JS Day, a ccmsulting firm), elated April 4, 1995, were prepayments

ofsalary or consultant fees. However, information contained in the Committee'srecords

describe the purpose ofthe disbursements as a "signing bemus" IDd "siping fee,"

respectively. The Committee's response did Dot offer my COIIlIIleDtS relative to the other

apparent bonus payments.

The Audit staffnotes that all ofthe apparent bonus payments \Vere

made prior to the Candidate's date ofineligibility (March 6, 1996); however, Done ofthe

payments were made pursuant to a written contract (see Section 1.0.) and, thus, were not

In accordance with 11 CFR §9034.4(a)(5Xii).

In the Memorandum, the Audit staffrecommended that the

Comminee provide documentation which demonstrated that the bonus payments were

qualified campaign expenses.

In response to the Memorandum. the Committee provided copies

of a proposal which outlined the responsibilities and fees for Richard ScbWll'll1 and JS

Day. The proposal indicated that the questioned payments to the two entities were for

fees relevant to the final month ofservice that would be prepaid overthe first two

months. The Audit staffnotes that Richard Schwarm, aad the priDcipals ofJS Day,

drafted the proposal. Further, the apparent date ofthe proposal was Man:b 24, 1995. The

Committee provided a notarized statement from the Campaip Mmaacr, Mr. R. M.t

Lubbers. that stated.

.'1be payments in question to James McKay ... R8cbeI Scbrepemum

were not bonuses in the sense that a bonus would be pIicl for specific

perfonnance against established objectives."

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Mr. Lubbers also stated that,

"The intention ofthese payments was to recognize their good work lOdate, and to keep them positive and productive in the difficult smnmer

months of 1995. I wanted to make sure they knew they were

appreciateg_and to stimulate their ~ntinued good work."

Additionally, the Committee's response contends,

"...that these were not bonuses in the co~ anticipated by the cited

FEC regulations. They were mn payments made to deplete the

treasury prior to the conclusion of a Primary Campaign. Hm were

they made to high level campaign officials who could influence their

own bonus payments by controlling receipts or disbursements. This

was a supplement to the regular compensation of two low-paid

employees intended to let them know they were appreciated."

In ref~ce to the proposal for the payments made to Richard

Schwarm and J5 Day, the Audit staffnotes that the document is DOt a written contract as

required by the Regulations. The document contains no signatures, thus, the Audit staff

is unable to verify whether either ofthe parties accepted the terms ofthe proposal.

Nonetheless, given the Committee'made the payments to the entities as specified in the

March 1995 proposal, the Audit staff now views the payments to Richard Schwarm and

J5 Day as prepayments offees and not impennissible monetary bonuses.

In regards to the payments made to Mr. McKay and Ms.

Schrepennan. the Audit staff agrees that the payments were Dot made to ·~ ...deplete the

[Committee's] treasury prior to the conclusion ofa Primary Campaign." However, the

Committee·s argument that the payments are not within the "context anticipated by the

cited FEC regulations" (for such payments) is not persuasive. The regulations clearly

state that all monetary bonuses for committee employees and consultants in recognition

for campaign-related activities or services are provided for pursuant to a written contract

made nrior to the date ofineligibility. There is no basis in the Regulations or the

Commission"s Explanation and Justification that would allow a committee to provide a

monetary bonus to any person absent a written contract made prior to the date of

ineligibilit)'.

Further, the Committee's response appears contradictory. The

Comminee indicates that the payments were supplements to the individuals regular

compensation for "the employees' extraordinary c:ffons" _ "in recopitiOD oftheir

good work." Notwithstanding, the Committee states that the payments M were erroneously

tenned •bonuses' in the sense that they were not paid for performance apinst specific

objectives.'"

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It is the Audit statf's opinion that the payments are bonuses and to

be considered a qualified campaign expease, must be provided for pursuant to a written

contract made prior to the date ofiDeligibility. The Committee acknowledges in its

response that they made the payments without a written con1rlCt. Consequently, the

Audit staffmaiDtaiDs tblt the two bonus payments to Mr. McKay and Ms. Scbreperman

totaling $3,000, ~_DOt made in accordance with 11 CFR. §9034.4(a)(S)(ii) and require

a pro-rata repayment to the United States Treasury.

2. Payment oftbe Compliance Cgmmittee's Congjbution

Solicitation and Processing Costs

Section 9034.4(bX3) ofTide 11 ofthe Code ofFederal

Regulations states, in relevant part, tb.at any expenses incurred before the candidate's date

ofineligibility for property, services, or facilities used to benefit the candidatet S general

election campaign are not qualified campaign expenses.

Section 9034.4(e)(6)(i) ofTitle 11 ofthe Code ofFederal

Regulations states, in part, that the costs ofa solicitation shall be attributed to the primary

election or the GELAC (General Election Le¥al and Accounting Compliance Fund),

depending on the purpose ofthe solicitation.

During our review ofcontributions to the Compliance Committee,

the Audit staff noted that solicitation devices contained direct appeals for contributions to

the Compliance Committee. The costs associated with the creation and mailing ofthese

solicitations (51,944) were paid for by the Committee.

Similarly, the Audit staffnoted an invoice from a vendor, dated

July 15,1996, which contained a $4,460 charge for processing contributions made to the

Compliance Committee. This charge was also paid by the Committee.

In the Memorandum" the Audit staffrecommended that the

Comminee provide documentation which demonstrated that the payments were qualified

campaign expenses.

In response to the Memorandum, the Committee did not submit

any evidence which demonstrated that the expenditures were qualified campaign

expenses. Instead, the Committee disputed the finding for two reasons. First, the

Comminee's contends that,

.,

.....the processing that is the subject ofthis recommendation in the Exit

Conference Memorandum was based on a contract signed before

August 16, 1995, the date the Regulation at issue went into effect....

This regulation should not be applied to a contract for processing these

The effective date ofthis regulation was August 16, 1995.

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receipts which was signed on March 6, 1995. As the Memorandum

tacitly acknowledges, there was no relevant Regulation in effect before

that date.

The Committee's argument concludes,

"The Memorandum's repayment determination of $4,460 for

processing costs should be rejected because it is based on a Regulation

not in effect at the time the contract was signed."

Secondly, the Committee's reSponse contends that,

"The current Regulations are internally inconsistent, contradictory, and

place a committee which simply exercises its rights granted by the

Regulations automatically in violation for following the Regulations.

Specifically, 11 CFR §9003.3(a)(l) states that a GELAC 'may be

established by such candidate prior to being Dominated or selected as

the candidate of a political party for the office of President or Vice

President ofthe United States.' However, another Regulation requires

a candidate who raises GELAC funds pursuant to this Regulation, but

not nominated or selected to be the Presidential or Vice Presidential

candidate, to return (or have redesignated) all ofthe funds collected by

the GELAC. 11 CFR §102.9(e)(2). None ofthe funds raised may be

attributed to any fundraising or overhead costs according to 11 CFR

§l02.9(e)(2).

"Yet, 11 CFR §9034.4(e)(6)(i) requires that a joint solicitation paid

for by both the primary committee and the GELAC.

"It cannot be both ways.

"This fundamental contradiction in the Regulation makes it impossible

for a committee exercising its rights granted by the Regulations to

comply. Whatever the correct answer is, it cannot be forcing the

Primary Comminee to repay 56.404.

"Therefore, the Committee respectfully asserts that the audit finding

should be rejected as to these charges, that these disbursements should

be allowed as qualified campaign expenses..."

The Committee also indicates in its discussion that the

"overwhelming purpose" ofthe solicitation, whose costs ($1,944) the Audit staff

questioned as being paid for by the Committee, was "raising funds for the Primary

Committee." The Audit staffnotes that eenain solicitations for both the Committee and

the Compliance Committee contained ~'1e same newsletter which discussed the Candidate

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and the campaign's progress. However, the contributor response form on the

Committee's solicitations instructed contributorsto "[P]lease make checks payable to

Lugar for President," whereas, for the Compliance Committee it stated, "[p]lease make

checks payable to the Lugar for President Compliance Committee" and made no

reference to the Committee. The solicitation in question is a direct solicitation on behalf

ofthe Compliance ~ommittee, not a jointsolicitation. Therefore, the associated costs are

expenses ofthe Compliance Committee, and by definition, caDDot be qualified campaign

expenses ofthe Committee.

Further, the Audit staffnotes that the effective date of 11 CFR

§9034.4(e)(6)(i) is iJTelevant in determining whether any ofthe processing costs in

question are qualified campaign expenses ofthe Committee. Section 9034.4(e)(6)(i) of

Title 11 ofthe Code ofFederal Regulations addresses only solicitation costs. Thus, the

Committee's argument that the costs ofprocessing the contributions are qualified

campaign expenses because the Committee signed a contract before the effective date of

the Regulation is Dot persuasive. The applicable regulatory language is at 11 CFR

§9032.9. This Regulation (in effect since 1977) describes a "qualified campaign

expense" as an expense incurred in connection with the candidate's campaign for

nomination. Expenses clearly related to the candidate's Compliance Committee do not

satisfy this standard.

In regards to the Committee's argument that "11 CFR

§9034.4(e)(6)(i) Contradicts Other Regulations," the Audit staffnotes that this argument

is also fallible. The fact that the Committee believes that this regulation appears to

contradict other regulations does not mean that the expenditures in question are qualified

campaign expenses. Indeed, the sum ofthe regulations slDTOunding a GELAC presents

comminees with several choices, some ofwhich may hold potential hazards. However,

the regulations also work to put the candidate on notice ofthe risks involved with

establishing a GELAC prior to receiving his or her party's nomination. Thus, the

regulations leave it up to the candidate to decide whether a proactive fundraising program

for the Compliance Committee early in the campaign is wise. Accordingly, one section

ofthe regulations in question unequivocally states, in pan, "..•any expenses incuned

before the candidate's date ofineligibility...for property, services, or facilities used to

benefit the candidate's general election campaign, are not qualified campaign expenses."

(11 CFR §9034.4(b)(3».

After considering the Committee'5 arguments, the Audit staff

maintains that the Compliance Committee's solicitation costs ($1,944) and contribution

processing costs ($4,460) paid by the Committee are not qualified campaign expenses

and thus. require a pro-rata repayment to the United States Treasury.

3. Other Non-Qualified Campaign Expenses

During the Audit staffs review of_ we identified a

payment of 58,893, made to KLF, Inc. (KLF) on June 4, 1996, which appeared to

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duplicate payment ofthe May monthly rental fee and applicable taxes (52,198), for a

telephone system and pagers.

The Audit staffpresented this matter to Committee officials at a

conference held subsequent to the end offieldwork. The Committee comacted KLF who

subsequently issued a credit to the Committee's account. A copy ofthe credit

authorization noted that there was a misprini on the invoice from KLF indicating that the

rental charges were for May when the correct month should have been June.

Nonetheless, KLF issued a credit because they removed the system on June 3, 1996, thus,

. the Committee paid for the June's rental charges in~.

The Committee provided a copy ofthe credit authorization from

KLF that detailed the credit, however, at the end offield-wcrJt die ComJw:r~ did not

provide evidence that it bad received a reimbursement.

In the Memorandum, the Audit staffrecommended that the

Committee provide documentation which demODS11'8ted that the payment to KLF was a

qualified campaign expense.

In response to the MemoraDdum, the Committee provided

documentation which demonstrated that the 52,198 credit to the Committee's account bad

been offset against a remaining amolUlt owed to KLF (51,330). Further, the Committee

provided evidence that they had received and deposited the refuDd cbeck fortbe balance

ofthe overpayment (5868). Thus, the Audit staffnow views the payment to KLF as a

qualified campaign expense.

To summarize, the Audit staffhas revised our anaJysis to reflect

the additional documentation and commentaJy provided by the Committee. The

remaining amount of non-qualified campaign expenses iDcludes impeamissible bonuses,

totaling 53,000; and, Compliance Comminee solicitation and COIl1ribution processing

costs. totaling $6,404 ($4,460 + SI,944). Accordingly,1beremnaim non-quaIified

campaign expenses, totaling 59,404. which are subject to a pro-rata repayment to the

United States Treasury.

Recommendation ##1

The Audit staffrecommends that the Commission determiDe 1bat 53,336 is

repayable to the United States Treasury pursuant to 26 U.S.C. §9038(b)(2).'

• The payment DIOUIIl is cala....ed .59.404 x .35472 (the eo-illee'••Ip8)'81G11 nIio •

calculated pursunt 10 II eFR §90JI.2(bX2Xiii).

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B. APPARENT PROHIBITED IN-KIND CONTlUlltmONS

Section 441b(a) ofTIde 2 ofthe UDited States Code states, in part, that it

is unlawful for any D81iemal baDk or any corporation organized by authority ofany law of

Congress, to make a contribution or expenditure in CODDeCtion with any election to any

political office, or f~ any corporation orlabor orpnizarion, to make a contribution or

expeDCliture in coDDeCtion with any election to federal office aDd that it is unlawful for

any candidate, political colDlDittee or any other person kDowiDgly to accept orreceive any

conuibution prohibited by this section.

Section 100.7(a)(l) ofTide 11 ofthe·Code ofFederal Regulations states,

in part. that the term contribution includes the following payments, services or other

things ofvalue: A gift. subscription, loan (except for a loan made in accordaace with 11

eFR §100.7(bXll», advaDCe, or deposit ofmcmey or 8II)1biDg ofvalue made by any

person for the purpose ofinfluencing any election for Federal office.

Section l00.7(aXlXiliXA) ofTitle 11 oftbe Code ofFederal Regulations

suites, in part, for purposes of 11 CPR §100.7(aXl), the term tmyIhing ofWJ1w iDcludes

all in-kind contributions. Unlessspecifically exempted under 11 CPR §100.7(b), the

provision ofany goods orservices without cbaqe or at a cbarge which is less tban the

usual and nonna! charge for such goods orservices is a contribution. Ifloods orservices

are provided at lessthan the usua1 and normal charge, the 8lD01IDt ofthe iD-kiDd

contribution isthe difference between the usual and normal cbaqe for the loods or

services at the time ofthe contribution and the amount cbarged the political c:ommiuee.

Section lOO.7(a)(IXiii)(B) ofTi1Je 11 oftbe Code ofFederal Regulations

states for purposes of II CFR §JOO.7(a)(1)(iii)(A), unuI1 andI'IOmIQ/ charge for goods

means the price ofthose goods in the market from which they ordinarily would have been

purchased at the time ofthe conaibution; and USIIQI tmd I'IOmIQ/ charge for any services,

other than those provided by an unpaid volunteer. means the hourly or piecework charge

for the services at a commercially reasonable rate prevailing at the time the services were

rendered.

1. Ontario Systems Corporation • Repurcb,y of

PhOne Bank Equipment

During July of 1995, the Committee entered into a written

agreement with Ontario Systems Corporation (OSC)' to provide an 66()nyx" telephone

• According 10 Otario CoqIorIlion.s website (hap:!Iwww..ontario.caaa) _ • repan 6am Dan "

EndsIna. lac.. die CJtaim8n ofOnwio CcajNJi__(die carpcMlIiuD ofOSC), Mr. V.

Smidt. is a ......(aloal willi Mr. David Sm'Ia) ill die 0 ofDeIa••• AYiIIiaIa. 80da

Mr. Smith mel Mr. Sm'Ia COIIIributed S1.000 to die CoIIIIIIiaIc. TIle AIIdit ..".......

netaw.e Avi8Iioa provided one ch8nertrip for die CoaIIIliaee. 1111eoa...reiInIIaned

netaw.e Avi8Iion for .. amount equal to • finI c" air r.re ($1,132).

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client had the option to purchase the system and software at the end ofthe rental period or

return it to OSC. According to the letter, both ofthe clients were testing different

concepts for OSC.

The Audit staffreviewed the documezr.ation provided and

concluded that OS~ had used other clients as test or beta sites; however, neither ofthe

examples demonstrated that OSC had offered a similar repurchase agreement to another

client.

At a conference held subsequent to the end offieldwork, the Audit

staffdiscussed our preliminary findings with the COmmittee and requested a more

defmitive response in regards to repurchase agreements that OSC had offered to other

clients. Committee officials did not offer any specific comments conceming the matter.

The Committee did submit comments in response to the meeting which stated:

".••based on the two cases already submitted, Lugar for President

believes that the 1IaDsaCtion with Lugar for President wu economically

the same as transactions for other customer[s] ofOntario."

After considering the Committee'. response, the Audit staff

maintained that the documentation made available did DOt demonstrate that OSC had

similar agreements with other clients. Althou~ it appeared that OSC had entered into

test site agreements with other clients, none ofthe examples provided included a

repurchase agreement provision with terms similar to those offered to the Committee.

Therefore. the Audit staff concluded that, absent a demonstration to the contrary, an

apparent prohibited in-kind contribution existed from OSC in the amount of5232,500.

In the Memorandwn, the Audit staffrecommended that the

Comminee:

(a) provide documentation from Ontario Systems Corporation

which demonstrates that OSC made written agreements that

included an offer to repmchase equipment Wlder terms

similar to those offered to the Committee, to include, but

not limited to, copies ofthe written agreement;

(b) provide documentation which demonstrates that a standard

exists within Ontario SyJ1emS Corporation's industry to

repurchase similar equipment at tams similar to those

offered to the Committee; or

(c) make a payment to the United Stales Treasury for

5232.500.

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In its response to the Memonmdum, the Commiuee did not provide

any additional documeDtatiOD, U requested in <a> IDd (b) above, from Ontario Systems

Corporation. IDIteId, the Committee elected to submit commentary and analysis from

Mr. R. Mark Lubbers, the Campailll Manager; amemorandum from Ms. Jan Abbs.

General Counsel for Ontario SystemS Corporation; amd tbree memoranda from campaign

employees.

Mr. Lubbers contended that the Committee "carmot provide

examples ofother repurchase qreements;" however, they can "make III equally

significant 'demonstration to the contrary'."

The Commiueet S response stated,

"The Committee respectfully submits that Jf we can show that the

financina arranaements for other beta site examples accepted by the

staff [Audit SUIffJ are economically the same u the terms of the

repurchase agreement, dim this is • demonstration to the contrary

necessary for the Audit staffto reverse its fiDdina."

The Commiuee conteDded that other beta sites (clients of

OSC) were fmanced throuah leue or rentalllTlllplDelltllDd that the net present valuell

(NPV) ofthe purchase/sell-back transaetion cam be made identical to the NPV ofa lease

or rental arrangement. The Committee's response continued,

"the payment method is irrelevant; and

"that what iI relevant is the comparison between the NPV oftile actual

purchase/sell-back transaction and the NPV of a WwI! [emphasis not

in oriainal] lease transaction. (the fmancialllTlJllement that had been

used in other beta test agreements with an Ontario customer).

··that in order for there to have been an in-kind contribution, the NPV

ofthe purchase/sell-back transaction would have had to have been _

IbID the NPV of a reasonable lease arranlement - in other words, that

It Net Praem Value (NPV) is. technique used in CIPitaI buclptiaa which calculata the present

value ofall oflhe project's expected cash inflows..outftows found today II the compII'Iy's

wei.... averaae COIl of capital. Simply put. NPV IIJIIUJWizes the expected net revenue

produced by • invaanent inIo • siftlJe r.-. dill illIdjusIed for risk, inflltion and the time

value ofIDCJIIIY. The NPV measures Ibe lCOIIOIftic CCIIlIlqulllcaof. imaanenl decision; thus.

lencnJly • in~_.11 willi die hiPat NPV would ...tbe IDOJt value to.~y. (See

Sources: bap:llwww"'uiucAdu, I",,,,dllm. tp Cgpgw 'iMP,c...- 10;

hap:llau.IIWIIeIIoo.ca,-!!lID' pfPrpem YaIM; IJIqrJIwww._,Lecgg 2:

Net Pmsm VB"'"Ibc AltmwWg; bap:J1www .lestooIz.camlCIIpiIaIJdmI, Haw C_

Meesm ":dca Capjpl pPl'"'jIum; IIId bap:JIwww.apic.aov.lb.ca. Hgw Mgch '9 Bjd for

BecfCqws.

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If the NPV of the purcbllelseU-bick t1IDIKtiOD is peater dIaD a

NIIODabIe or likely lease uallCtion, *- there was DO iD-kiDd

contributiOlL"

Next, die Committee'.respoase provided • calculation oftbe NPV

ofthe purcb8lel.U:back 1naIIICtion (5-134.243) and then posed this question,

"What would the moathIy lease rate have to have been in order to

make tile NPV of. lease or NDta1 payment method .....' to the

purcbaselseU-back payment methodr

The Committee then calcu11ted that alDOJltbJy lease rate of

523,035, for a six JDOD1h I..period (mid-Aupst 1995 to February 15, 1996) would

have created • C81b-fJow with a NPV equal to die NPV oltbe purchaIeI.lI·back

uansaction.

The Committee'. respoDIe stated,

.....if the Committee b8d bid • choice betweea the purchaIeI.U·back

paymeJlt method ad • 1heori1icaJ[Iic] lease payment method, it would

have been iDdifferent about tile choice II • I.. rate of

S23.03SIm0Dth."

FiDally, the Committee's response coneluded that:

"The existence of this NPV breakeven poiDt is the bail of the

Committee'l previous response that the trInIICtion between LFP IDd

OSC was •....IDIaDy tla, sa..' u other 1rIIIIICtioDI between OSC

and its beta site customers.

"The analysis. however. lives funher iDsiabt into the ecoaomics of

this traDSICtion that will permit die Commiaion to cteramiDe that DO

in-kind contribution lOOk place. Apia," fact, .... Is ......

Proan- or .... ofI'er to co.,.n (empblsis DOt in oriJiDal). But

haviDa peaed the lease rate that would have been required to make

the 8Ct'aI Pun:baelSeIl-B.ck idcIticallO • lale 1fPIJIeIIIeDI, we CID

uk the followiDa question: Is it rasonabIe or likely that if om.io

had • lease propam. that they would have IaIed the Onyx syllem,

with. maUl price ofS331,500. for 23,000Im0aIb?

1be Colla_ respec1fuIly submits thIt tile to tbiI quIIIioD

is, 'No.' It illIeitber reasonable aor likely OatIrio, if it ....

lease prOll'" would chirp • lease .... _ would reccwer 4CM ofits

market Vllue ill 6 months." (The Audit IIIIft..... _ ill GIll of die

previous examples provided by OSC, aJtbouIb the tams mel values

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are DOt lDIloaous to the Committee'. arranaement, OSC recovered

approximately 21% ofthe market price ofIII Onyx system, ill the fom

of. IlOft-refundable rental fee over a term offour IDd a halfmonths.]

The Committee's response continued,

"At that _, on • product with • multi-year useful life and the

capacity to have its software upp8ded, Ontario would undoubtedly be

breakinI even against their direct colts in leu than a year, and

probably breakinI even in less than a year apiDst their fully loaded

costs - direct coltS plus allocated indirect COltS. In sum, it is

inarpable that, ifOntario bad a lease program, it would be cbarging a

leue rate JIll ... S23,03S per month. ADd if that conclusion is

reasonable, then it is not possible to conclude that an in-kind

contribution occurred as a result of the 1rIDSIICtion between Ontario

Systems and the Committee."

The Audit staffbad previously obtained documentation from the

Committee concemina two clients ofOntario Systems Corporation. This documentation

indicated that OSC bad some fonn ofbeta site apeemcnt with thole clients; DO detailed

lenns were disclosed concernina compensation for selection. a beta lite. The

Comminee araued that ifit could show that the fmancina arranaements with the other

beta sites are economically the same as the Committee's purcbuelsell-back transaction

then there was no in-kind contribution. The Audit staffapeed; however, the net present

value analysis put fonh by the Committee did not accomplish this task.

The analysis did not compare the fiDlDcina arrangements of

OSC'5 other beta site customers with the transaction in question. The Committee did not

provide any documentation which indicated that OSC ever made an aetualtOffer to lease

the equipment to the Committee, thus, there is no basis in fact for the Committee's lease

amount of 523,03S per month. The Committee acknowledged that "there is no lease

proiflm or lease offer to compare" and that the lease payment method is "tbeoriticaJ

(sic]"·

Further, the results ofthe NPV analysis showed that the

purchase/sell-back tranIICtion is economically the same u a hypothetical monthly lease

amount. The existence ofthe same NPV for the purcbuelsell-back transaction and the

theoretical leue value, does NOT provide any basil for the Committee'l conclusion that

"the transaction between LFP and OSC was 'ecoDOlDicaIIy tbe ....e' u other

cransactions between CSC and ill beta lite CUIIDmeI1." The lDIIysis compared two

separate transactions available to the Commiuee and the raults, even assumina that the

monthly leue value wu flCtUl11y correct. limply iDdieated that either fmancing option

would have the same economic impact to the Committee.

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Lt it is unlikely that

e evidential. 12

55 transaetlODS.

the equipment at

quipment at a rate

Iso provided

al Counsel to

.7, Ms. Abbs

ionship with the

lition and use of

srepurchased an

e ofthe

its needs and not

was not given.

Ie or buy back the

:laimed that, in

age ofthe

»also stated that

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PV calculation

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its conservative aDd cautious approach to comply with all applicable

rules and regulations, was willing to pay ase to be a Beta Site."

In regards to the decision about the terms ofthe agreement, Ms.

Abbs stated,

"...ose had used a lease arrangement for a Beta Site previously...The

lease arrangement was rejected by ose and the LFP for two reasons.

One reason was that there was no standard contract form for a lease

arrangement. Secondly, and most imponandy, the lease arrangement

appeared to place ose in the position ofabaDk for the LFP. Simply

stated, neither pany wanted it to appear that ose was providing

financing for the LFP."

Ms. Abbs further claimed that,

"[n]o special financing of the business arrangement was offered by

asc. The LFP was required to pay for products in the same manner

as other customers. This was done because of the conservative and

cautious approach taken by the LFP and ose to usure compliance

with all applicable rules and regulations. This was done even though

the LFP was a Beta Site for which ase would typically consider terms

and conditions not regularly made pan of a contract and alternative

financing possibilities. If anything unusual occurred in this situation,

it was that the 'special' treatment ase is accustomed to providing its

customers could not be a pan ofthe arrangement."

Ms. Abbs also indicated that,

U[r]egular business factors were taken into consideration to detennine

the appropriate amount of reimbursement to the LFP upon termination

ofthe contract and return ofproducts."

A footnote to this statement indicated that ase intended to

maintain the confidentiality ofthis information and "does not waive any rights or release

any such infonnation." Ms. Abbs also stated,

"asc also took into account the value of what was being returned to

osee Significantly, ase would be receiving equipment which had

been little used. Indeed, the equipment returned was in excellent

condition. The LFP had kept not only the boxes, but the original

packing materials. It would have been very difficult to distinguish the

returned equipment from new equipment. The entire system could

have been resol~ but was not because ase bad other needs for the

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equipment. OSC could re-configure the telephone switch and sell it to

another customer. (This was done.)·'

Ms. Abbs continued to explain that asc used the rest ofthe

equipment, including the main computer and the terminals to complete a computer

upgrade oftheir o~ facility.

Finally, Ms. Abbs concluded that,

"[t]he value of the returned products to.OSC exceeded the amount

reimbursed to the LFP...There simply is no basis concluding that the

amount reimbursed to the LFP was anything other than a return 'to the

LFP ofits own money upon the cancellation ofthe contract and return

ofasc products.·'

Counsel for asc provided two generic examples ofpast situations

in which asc repurchased equipment from its clients. In one example, OSC repurchased

equipment from a client who determined that OSC's products did not suit their needs.

asc did not explain the reason for the other repurchase. The Audit staffmaintained that

neither ofthese examples were relevant to the repurchase ofthe Committee's equipment.

The Committee's contract included a specific clause to repurchase the equipment within

nine months ofoperation from the date ofsystem acceptance. The Committee was, to om

knowledge, completely satisfied with the equipment. Further, Ms. Abbs did not disclose

any specific infonnation about the other clients contracts. As such, the Audit staffhas no

knowledge ofthe tenns and conditions ofthose client's agreements and was unable to

make a comparison to the Committee's arrangement.

Further, Ms. Abbs indicated that extensive effort was put into

researching the terms ofthe agreement and finding the most conservative and cautious

approach to executing the transaction. Ms. Abbs stated that no standard contract existed

for political clients and/or "Beta Site" clients. The Audit staffcontended that the fact that

the client is a political client is irrelevant. The Regulations at 100.7(a)(1)(iii) simply

require that a political comminee pay the "usual and nonnal" charge for any goods and

services provided to them. Applied to this transaction, the Committee should have paid

the usual and normal price when purchasing the equipment. Likewise, when the

equipment was repurchased by asc. the transaction should have been in the ordinary

course of asc's business and the repurchase value (5232,500) should have been asc's

usual and Donnal value for repurchasing such equipment.

Ms. Abbs reiterated that the Committee received no 4'special"

treatment from OSC. At one point. Ms. Abbs specifically stated that no special financing

arrangements were made to the Committee. Further, Ms. Abbs remarked that,

"[t]his was done even though the LFP was a Beta Site for which OSC

would typically consider terms and conditions not regularly made part

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of a contract and alternative financing possibilities. If anything

unusual occurred in this situation, it was that the 'special' treatment

asc is accustomed to providing its customers could Dot be a part of

the arrangement."

_. This statement is inconsistent with the Committee's original

contract which stated,

·'[iln exchange for serving as a beta site for the political candidate

telemarketing industry, ose will grant to Lugar for President a

repurchase option which may be exercised at any time dming the first

nine (9) months of operation from the date of system acceptance as

defined in the attached Terms and ConditiODS. As a beta site, Lugar

for President will grant ase the right to review and publish statistical

results observed on the Onyx system in use at Lugar for President and

will provide ose direct access to Lugar for President employees for

interviews and debriefing not to exceed 80 bolUS oftime. ID Delange

for these coDlidentioDS, tile reparclaue OpdoD may be aerciled

for the amoDDt of 5232,500.00, payable witbiD thirty (30) clays

from the date DOdee is received by OSC of Lugar for PresideDt'.

desire to exercise tills optiG." [emphasis not in original].

Accordingly, the language in the original contract afforded the

Conuninee a "special" financing arrangement -the repurchase option in question- in

return for the Committee serving as a beta site.

Finally, Ms. Abbs mentioned that "regular businestfactors were

taken into consideration" when ose calculated the appropriate amount ofthe repurchase

option. Ms. Abbs also indicated that OSC reconfigured and then resold the telephone

switch. In concluding, Ms. Abbs stated that "[t]he value ofthe retmned products to OSC

exceeded the amount reimbursed to the LFP." These statements addressed critical factors

in attempting to detennine whether or DOt ose made an apparent prohibited in-kind

contribution to the Committee. However, as previously noted by Ms. Abbs, ose

considers the information confidential and proprietary and will not release it.

In doing so, OSC bas declined to provide any additional competent

evidential matter, such as a detailed breakdown ofthe equipment and its fair market

value, including documents which suppon the fair market valuatiOD. Such information

was necessary to assist the Committee in demonstrating that an apparent prohibited inkind contribution did not exist or existed in an amount less than $232,500.

After considering the available documentation and the

Committee's response to the Memorandum, the Audit staffmaintained that asc

apparently had other beta site agreements with other customers. However, neither ofthe

other beta site examples made available to the Audit staffindicated that those clients

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received equivalent incentivesin exchange for being a beta site. According to the

representations ofasc's COUDSel, the only disclosed instances where OSC repurchased

equipment from its customers, notwithstanding the Committee's arrangement, were in

situations where the client was dissatisfied with their products.

_. As stated above, the Audit staffJeCODlIDended in the Memorandum

that the Committee provide documentation from Ontario Systems Corporation which

demonstrated that osc had made written agreements with other clients that included an

offer to repurchase equipment under terms similar to those offered to the Committee; and,

to provide documentation which demonstrated that a standard exits within OSC's

industry to repurchase similar equipment at terms siinilarto those offered to the

Committee.

The Audit staffconcluded that the net present value analysis and

other commentary submitted by the Committee did not demonstrate that the agreement to

repurchase the equipment was commercially reasonable. Likewise, the Committee's

effons did not prove that it was in the ordinary course ofOSC's businessto offer to

repurchase their equipment at the terms and conditions offered to the Committee.

As previously noted, neither the Committee nor OSC bad provided

adequate documentation with which to determine whether or not the agreement was

commercially reasonable. 13 Thus, the Audit staffconcluded that the amount ofthe

apparent prohibited contribution, ifany, on a worst case basis, was equal to 5232,500.

On September 18, 1997, the Commission directed the Audit

Division and the Office ofGeneral Counsel to attempt to secure the information (about

the valuation ofthe equipment upon the repurchase date and the valuation ofthe beta site

option) from the Committee and the vendor (OSe). In addition, the Commission

authorized the issuance ofsubpoenas, ifnecessary.

The Commission approved subpoenas to produce documents and

ans"'er interrogatories on October 7. 1997. On November 7, 1997, the Commission

received responses from both the Committee and OSC.

The Comminee's response included documents already submitted

in response to the Memorandum, additional memoranda which take issue with certain

statements made and procedures followed by the Audit staff, and other miscellaneous

documents. Counsel for the Committee states,

u There were several unknown variables to consider when allempting to evaluate whether the

agreement was commercially reasonable and whether or DOt an apparent prohibited contribution

existed. For example. the economic variables used by OSC to calculate the value oftile

repurchase option. such as the economic value oftile Committee scrvin& as a beta site and the

estimated fair market value ofthe equipment.

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&4At the September 18, 1997 OpeD Session Meeting, the Audit Division

misaeplesented to the Commission certaiD facts regarding the alleged

lack of cooperation by LFP in supplyiDg information as to the

valuation of the 'beta' site and the valuation of the returned ONYX

system. Further, subsequent to the September 18, 1997 meeting,

Commission staff caused the iSSI!.ft of Subpoenas in this matter in

apparent contravention to the stated °intelltion aDd explicit language of

an order of the Commission adopted UlUlDjmously on September 18,

1997.

"Under the Commis.5ioDts procedural ruleS, the Audit Division draws

'conclusions' and recommends 'findings' to the Commission based on

its audit of LFP. In this pt~ the Audit Division is under DO

obligation to share with the Commission the ectual text of any ofthe

materials provided by LFP or ase, iDcludiDg their respouses to these

SubpoeDas. In fact, the Audit Division is free to cbaracterize and

·summarize the arguments made and the documents provided by LFP

and asc, without actually forwardiDa either the documents or the

factual analysis submitted by LFP and OSC to the iDdividual members

ofthe Commission."

Further, the Campaign ManIpr(Mr. Mark Lubbers) also takes

issue. Mr. Lubbers, in a memorandwn to Committee CouDse1, argues that,

"Yesterday, I listened to the entire audio tape ofthe September 18 FEe

discussion ofthe LFP audit. I am exbelilely frustrated.

U As you know, I was surprised this week when we received the

subpoena. Based on your account of the September 18 meeting, I

expected the audit staff to contact us m to issuing the subpoenas.

Having now listened to the tape, I am DlOIe than surprised! From the

motion they passed and the preceding discussion, there is DO doubt that

the Commission directed the staff to use subpoenas tal! .If they could

not get the information voluntarily. What gives? Is the staff allowed

to ignore a specific directive ofthe Commission?"

Mr. Lubbers also contends that,

4'10 listening to the tape, I find the staff (mostly Mr. Robert Costa)

consistently leading the Commission to believe that we have been

unresponsive to their requests for information.

"On numerous occasions during the September 18 JDNriul. Mr. Costa

and others made indirect and direct statements assertiDa that we bad

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failed to provide specific informatiOD that the Audit Division had

requested. This is fUgA'" pptrae."

Mr. Lubbers claims, in part, that

"No official or representative of either LFP or OSC has ever been

asked by any representative ofthe FEC, in writing or any other means

of communication, to provide information about the value of either the

repurchased Onyx SystemS [sic] or the value ofthe beta test site."

Mr. Lubbers continues,

"We received multiple requests for information about the similarity of

our transaction to other Ontario transactions, and about the usual and

customary practices in Ontario's industry. BUT It go time did we

ever receive a requ"t from tile ItIfflboat the ecogomje vllu" jp

qUestion."

First, the Audit stafrmade several requests, both written and

verbal.. for additional documentation concerning the OSC transactiOD. On August 30,

1996. the Audit staffrequested that the Committee obtain additional documentation from

ase which demonstrated that ose entered into similar repurchase agreements with other

clients and that OSC's agreement with the Committee conformed to the usual and nonnal

practice in ase'strade or industry. Further, the Audit stafrrequested documentation

regarding the use ofthe Committee as a beta site. The request noted that such

documentation should include instances where OSC used other clients as beta sites and

include infonnation which documents the use oftbe Committee as a beta site. In

addition, the Audit staffdiscussed this matter with Committee officials on October 29,

J996. at a conference held at the conclusion offieldwork. At this conference, the Audit

staff made a verbal request for additional documentation concerning the transactions with

ase. Finally, the Audit stafrrecommended in the Memorandwu, that the Committee

provide documentation from Ontario Systems Corporation which demonstrates that OSC

made "Tinen agreements that included an offer to repurchase equipment underB.mII

(emphasis not in original] similar to those offered to the Committee, to include, but not

limited to. copies ofthe written agreement: and, provide documentation which

demonstrates that a standard exists within Ontario Systems Corporation's industry to

repurchase similar equipment at tenns similar to those offered to the Committee.

The Audit staff acknowledges that the August 30th and October

29th requests were general requests for additional documentation primarily concerned

with the form ofthe transaction. However, the recommendation in the Memorandum

specifically addresses the tenns ofthe transaction. "Terms" as defined by SIDe/c's Lgw

Dictionary, Sixth Edition is conditions, obligations, rights, price etc., u specified in a

contract or instrument. 1be recommendation, in OlD' opinion, encompasses all documents

including those documents which assign values to the Committee's, as well as, any of

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OSC's other client's equipment. The Committee's argument that the Audit staffnever

asked for these documents is without merit Although the Audit staffdid not specifically

explain each interrogatory and list each document, as done in the we clearly

requested all documents including the terms relative to the transactions in question.

_. Next, the Committee questions whether or not the Commission's

staffcan "ignore a specific directive" ofthe Commission. The Commission approved a

motion directing the Office ofGeneral Counsel and the Audit Division to obtain

additional documentation from the Committee and OSC. In addition, the Commission

approved the use ofsubpoenas, ifnecessary. The A!Jdit staffand the Office ofGeneral

Counsel evaluated the circumstaDces ofthis case and decided that the use ofsubpoenas

was necessary. asc bad already refused to provide docmnentation on the basis that the

documents were confidential and proprietary in nature. It was the opinion ofthe Audit

staff and the Office ofGeneral Counsel that further delays could be avoided by utilizing

subpoenas. As previously noted, the Commission approved the subpoenas on October 7,

1997.

Finally, the Committee's Counsel argues that the Audit Division

"draws 'conclusions' and recommends 'findings' to the Commission...," and, ".•is under

no obligation to share with the Commission the actual text ofany ofthe materials

provided by LFP or OSC." Briefly, the Audit staff uses a Commission approved audit

program in conducting our audits. In addition, the Audit staffconducts each audit in

accordance with Generally Accepted Government Auditing Standards (GAGAS).

Accordingly, the Audit staff perfonns an objective analysis ofany documentation

provided by a comminee. Furthermore, each Title 26 audit report undergoes several

levels ofrevie\\·, including an analysis by the Office ofGeneral Counsel. The Audit staff

includes in our workpapers the entire text of each document(s) submitted by a committee.

The workpapers are available at every level ofreview. Further, prior to the

Commission·s consideration of any report, the Audit staff circulates a copy ofthe report

to each Commissioner. The Commissioner'ts have complete access to the Audit staff

responsible for the report. as well as. the workpapers which contain the entire text of

documents submitted by the committee. Consequently, the allegations ofthe Committee

and its representatives that the Audit staffis not obligated to provide the actual text of

documents submitted are without merit.

Notwithstanding the above, the Audit staff analyzed the arguments

provided by the Committee and documentation provided by osel4• Documentation

provided by ase included: vendor invoices and purchase orders (from OSC's purchase

I' ase swes in i1s response to the Subpoena and Order, dated October 10, 1997, that all the

information provided is "highly sensitive commercial and financial information[.l disclosure of

which to competitors would have a demonsnble adverse economic: consequence to Ontario

Systems Corporation. Accordingly. ase formally requests.. exemption to the application ofthe

Freedom ofInformation Act for this infonnation, in its entirety. pursuant to II eFR §4.S(aX4).

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ofthe equipment); general ledger repons; a product cost analysis; and examples of

contracts with three other clients.

Based on our review, it now appears that asc did not make a

prohibited contribution to the Committee.

The Audit staffbased its conclusion entirely on the financial

impact ofthe transactions on OSC. Neitherthe Committee nor ose has demonstrated,

including the documentation submitted in response to subpoena, that it is in the ordinary

course ofose's business to offer to repurchase its apdpment &om a customer, at the

tenns and conditions offered to the Committee. Speemcally, ase bas not provided any

evidence that it has repurchased equipment from other clients in exchange for being a

beta site. A specific clause in the Committee's origiDaJ contract contained that provision.

ose bas demonstrated that they have repurchased equipment from

other clients. However, in the examples provided, the repurchase ofttle equipment was a

business decision ose made subsequent to the origiDaJ contract. The Audit staffnotes

that the existence ofany UDdisclosed circumstances associated with these examples could

have a negative or positive impact on OSC's business., thus effecting the terms of a

repurchase.IS In none ofthe examples did ose offer to repurchase the equipment as part

ofthe original contract.

In addition, the Committee argues that, "the system i1Blfat the

time ofrepurchase had a fair market value ofat least 5232,500." Neither the Committee

nor OSC has provided any docmnentation, such as an independent appraisal,16 to justify

such a conclusion. Thus, the Audit staff cannot render an opinion as to whether or not the

$232.500 represents a fair market value for the equipment and software returned to OSC.

The Committee's argument utilizes OSC's accounting wbook values" and several

assumptions about the fair market value ofOSC's proprietary equipment and software.

Although, the "book values" recorded by OSC seem accurate, they

are not necessarily representative ofa fair market value. Further, the Committee'5

conclusion that no prohibited in-kind contribution exists is only valid ifthe Audit staff

assumes that the Committee can return OSC's proprietary software to OSC at its original

.5

..

esc repurchased equipment from one ofits customers according 10 a "Settlement Apeement."

The Audit staffis nOl aware ofany mitigatir,g circumstances relative to the agreement which

could have additional fmancial implications for esc (e.l. pendinglitiption, etc.).

Counsel for the Committee indicated that the Committee contacted • "Big 6" accounting fum

about undenakinl an incIepcndent appraisal ofthe computer equipment returned to OSC. The

fum indicated thai tbey could conduct .. appraisal for approximately $25.000. The film srated

thai the appraisal would take duee weeks to one month to complete. The finn also srated that.

"such an appraisal is acneral1y only undenaken by • client ill contemplation oflitiption.." The

Committee srated that it would obtain such an appraisal, iflleCeSlllY. as pan ofits litiption

posture.

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cost. The Committee's contract dictates that the software cannot be sold to a third party

without prior approval from OSC. Likewise, there are additional stipulations involved in

the sale ofOSC'5 software to an additional third party (e.g., maintaining OSC'5 service

agreement). It is the opinion ofthe Audit staffthat the fair market value ofthe equipment

returned to ose approximates the values placed on the equipment by the Committee.

However, the software bas no market value to the Committee since it is a proprietary

asset owned by OSC. Consequently, the Audit staffdisagrees with the Committee'5

argument.

Nonetheless, the Regulations.at Section lOO.7(a)(1)(iii) dictate that

an in-kind contribution exists "[i]fgoods or serviceS are provided at less than the usual

and normal charge." The "usual and normol charge for goods means the price ofthose

goods in the market from which they ordinarily would have been purchased at the time of

the contribution; and usual and normal charge for any services...means the hourly or

piecework charge for services at a commercially reasonable rate prevailing at the time the

services were rendered.9t Additional analysis indicates that the Committee apparently

paid the "'usual and normal charge" for the goods and services provided by OSC. In this

panicular case, the financial impact to OSC from the transactions with the Committee,

was similar to the estimated financial impact from a repurchase settlement involving

another client ofOSC's,17 both ofwhich appear commercially reasonable.

Based on our analysis ofthe information provided, the fmancial

impact ofthe ttansaetions between the Committee and ase appears commercially

reasonable. Therefore, no payment to the U.S. Treasury seems wmanted in this instance.

2. Air Chaner Services

The Committee used various means of air travel during the

campaign including several air chatter services. The Audit staff's review ofthis activity

identified an entity that appears to have made an apparent prohibited in-kind

contributions to the Committee.

Eastway Aircraft Services. Inc.II(subsequently referred to as

"Eastway") is an air chaner service located in Ronkonko~ New York. Eastway was

incorporated in the state ofNew York on April 5. 1985. Documents obtained from the

Federal Aviation Administration (FAA) indicate that Eastway maintains a valid Air

Carrier Certificate which authorizes it to ··operate as an air canier and conduct common

I'

II

The repurchase settlement predated the Commineet 5 agreement by approximately nine months.

Documents provided to the Audit staff'indicate that Eastway bas become MExcelaire Services.

Inc." Apparently, a name change was made in January of 1996. The Audit staffalso notes that

both entities advenise their services in the Summer 1996 edition o( n.Air Clptcr Quide.

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carriage operations." Eastway operates its charterservice out ofLong Island MacArthur

Airport.

The Auditstaffidentified payments to three different entities:

"Eastway Aircraft Svcs", "TudorInvesliheDt Corp.", and "TIC Aviation" for eight

different charters on an aircraft with the regislratiOD DUIDber NIlTn' The total amount

paid for the 1rips 59,988.19 In some iDstances, cbecksIDIde payable to Eastway were

endorsed and cashed by "Excelaire Services." (See Footnote ##18).

The Committee provided twQ-Ietters from the Operational

Coordinator ofTudor Investment COlpOraUon. The letters stated,

"...T.I.C. Aviation or Tudor Aviation, is the Corporate Flight

Depiitment of Tudor InvestmeDt Corporation. Tudor Investment

Corporation is the aircraft owner of Falcon 900 • NII7TF. Eastway

Aircraft Charter or Excelaire Services, as they are DOW known as (Dame

change 1/96) is the operator of before mentioned aircraft, NI17TF";

and,

·'we operated ALLflights[sic] with SeD8tOr Lugar onboard under FAR

Part 135 and paid applicable transportation tax" [emphasis not in

original].

In most cases, the Committee contacted a nvel agent to obtain a

first class air fare for each trip and then made a payment, in advance, for an am01D1t equal

to the nwnber ofcampaign related passengers multiplied by the quoted rate. In so doing,

the Committee treated the travel with the chaner company as "corporate-travel" and

followed the regulations at 11 CFR §114.9(e), which describes a candidate's use of

corporate or labor organization airplanes and other transportation. This regulation

requires a candidate, candidate's agent or person traveling on behalfofthe candidate to

reimburse, in advance, a corporation for the use ofa plane which is owned or leased by a

corporation otber tbaD • corpontioD liceased to offer co...erdaI aen1ces for travel

in connection with a Federal election [emphasis added]. In the case oftravel to a city

served by regularly scheduled commercial air service, the regulation requires

reimbursement at a rate equal to the first class air fare; whereas, for travel to a city Dot

served by a regularly scheduled commercial service, the usual charter rate.

The representative from Tudor Investment Corporation indicated

that all ofthe flights were operated under ·'FAR Part 135." Part 135.1 ofTitle 14 ofthe

Code ofFederal ReauJatiODS states, in pan. that "This part prescribesJUles 10vemiDg the

commuter or on-demand operations ofeach person who holds or is requiIed to hold 8D

It The Commiaee made paymentstotalinl S11,747 and received two reIIrecI rdIDcIs teMIlin&

SI,759 for. net cost ofS9.911 (SI 1,747. SI,759).

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Air Carrier Certificate..." Therefore, it appears that Tudor Investment Corporation

considered the trips in question to be commercial charterflights.

It is the opiDion ofthe Audit staffthat the Committee's reliance on

II CPR §114.9(e) is misplacecl. The requirement ofpayment in advance at a first class

commercial rate is appHcable for the flights in question. The Regulations at 114.9(e)

addresses the use ofan airp1aDe which is 0WDed or leased by a corporation, otllerthaD •

eorpontioD Iiceased to offer co••erciaI aemce [empbuis added]. Apparently, Tudor

Investment Corporation OWDS the plane (N117TF) that the Committee cbartered from

. Eastway.20 However, the plane is included on a FM approved list ofavailable aircraft

b Eastwa 21 • tba · · Ii -de · _L___ . Jor use y y, a corporation t malJltaI'"a cease to pIOVi 8U' WIGIu;.r servtce

to the general public and commercial entities.

Therefore, it is also the opinion ofthe Aludit staffthat the

Committee should have reimbursed Eastway for the usual aDd normal charter rate for all

travel onboard the aircraft. Eastway advertises itsservicesin 1M4irC_I" Gqide,

published semi-annually by Charter Guides ofCambridae, Massachusetts. The Audit

staffnotesthat Excelaire Services, Inc. <see Footnote ##17) advertises the availability ofa

plane similar to the one used by the Committee (N117TF, a Dassault-Breguet Mystere

Falcon 900 or DA900B), at a per hour rate ofS4,47S. The difference between the amount

paid and the usual and normal charge for the air charterlepleseDts aD apparent prohibited

in-kind contribution from Eastway.

In the Memorandum, the Auditstaffrecommended that the

Committee:

<8> provide documentation from Eastway Aircraft Services,

Inc. and/or Excelaire Services, Inc. that details the normal

charter rate for each flight taken by the Committee;

(b> provide documentation frOm Eastway Aircraft Services,

Inc. and/or Tudor Investment Corporation that details

whether or not a corporate affiJjatiOD existed between

Eastway and Tudor Investment Corporation, as well as,

documentation which details what type ofagreement

existed between the two entities with regards to the aircraft

in question (N11TfF), to iDclude, but DOt limited to, copies

ofthe written agreement;

21

21

The Committee diet not provide ..y evidcace of. corpoI_ aftUiIdaD or _IF .... apeemeat

between Tudor mvesanent Corporation aDd EaIway.

The airaaft listina- ofJ...-y II, 190, inspeetted ......oved by die FAA. effective

October 15, 1996.

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(c) make 8 payment to the United States Treasury equal to the

difference between the usual and normal cost ofthe

charters and the amoUDt paid by the Committee.

In its response to the Memorandum, the Committee did Dot provide

the documentation ~uested in section (8) above, nor did it provide any competent

evidential documentation relating to what type ofagreement exists between Eastway and

nco Instead, the Committee elected to submit commentary from Mr. R. Mark Lubbers; a

memorandum from Mr. Andrew S. Paul, General COUDSeI for Tudor Investment

Corporation; and several memoranda from other campaign employees anellor consultants

describing their knowledge ofthe Committee's use ofTIC's aircraft.

The Committee contends "that the factual analysis employed by

the Audit staffis incorrect," and that the Committee, "believesthat all payments made by

the Committee for use ofaircraft N117TF were correctly made using the authority found

at 11 CFR §114.9(e).." The Committee lists three reasons to support their contention.

First, the Committee argues that TIC owns the plane while

Eastway merely maintains and operates the aircraft. Statements from Mr. Paul indicate

that "[t]here is no corporate ownership, control orsubsidiary relationship between TIC

and Eastway." In an attempt to explain the business arrangement, Mr. Paul states that

U[w]hen not used by TIC, the Aircraft is available through Eastway for charter to third

panies...Eastway does possess an Air Carrier Certificate and the Aircraft is listed on

Eastway's FAR Part 135 certificate."

Next.. the Committee contends that the candidate used the aircraft

as an invitee ofTIC and Paul Tudor Jones; not as a charter customer ofEastway. The

Comminee further states,

.....the candidate and his campaign staff were informed by Paul Tudor

Jones that his company, TIC owned a Falcon 900 and that on those

occasions when the aircraft was not being used by JODes or TIC

executives, Senator Lugar would be invited to use the aircraft for

campaign travel ."

Mr. Paul indicates in his discussioD that,

~'[ t]he proper amounts were collected prior to each LFP flight and such

amounts, whether paid to Eastway or to TIC offset the costs which TIC

incurred for such flights. Because Eastway managed the Aircraft for

TIC. it made no difference whether LFP's payment checks were made

out to TIC or to Eastway. In fact, it appears that at different times LFP

was told by TIC personnel to pay to either TIC or Eastway. Payments

by LFP for use of the Aircraft, whether the checks were made out to

Eastway or directly to TIC, were credited to TIC's account."

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FiDally, the Committee's response notes,

"[i]n large measure the Audit staff bases its conclusion on its

application ofthe provision of 11 CFR §114.9(e) which would prohibit

corporate travel if the sponsoring corporation were a corporation

liceused to offer commercial seMce. Successful application of this

provision ofthe Regulations to this fact situation would require either

(1) that Eastway was the sponsor corporation which bad provided the

aircraft, or (2) that TIC was liceused to offer commercial air service.

In fact, neither ofthese is true." .

Considering the representations in the commentary provided by the

Committee (including the comments ofMr. Paul), the Audit staffagrees that the plane is

owned by TIC. In addition, the Audit staffconcursthat TIC is not licensed to offer

commercial services and TIC does not maintain a valid Air Carrier Certificate. Further,

based on the arguments presented, TIC apparently made the aircraft available to the

candidate.

Thus, it is the opinion ofthe Audit staffthat the Committee's

transactions with TIC were in accordance with the provisions of 11 CFR §114.9(e).

c. DETERMINAnON OF NET OUTSTANDING CAMPAIGN 08UGATIONS

Section 9034.5(a) ofTitle 11 ofthe Code ofFederal Regulations requires

that \,-'ithin 15 calendar days after the candidate's date ofineligibility, the candidate shall

submit a statement of net outstanding campaign obligations which refl~ the total ofall

outstanding obligations for qualified campaign expenses, plus estimated necessary .

winding down costs.

In addition, Section 9034.I(b) ofTitle II oftbe Code ofFederal

Regulations Slates, in pan. that ifon the date ofineligibility a candidate bas net

outstanding campaign obligations as defined under II CFR §9034.5, that candidate may

continue to receive matching payments provided that on the date ofpayment there are

remaining net outstanding campaign obligations.

Senator Lugar's date ofineligibility was March 6, 1996. The Audit staff

reviewed the Committee's financial activity through March 31, 1997, analyzed winding

down costs, and prepared the Statement ofNet Outstanding Campaign Obligations which

appears below.

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LUGAR FOR PRESIDENT COMMITTEE, INC.

STATEMENT OF NET OUTSTANDING CAMPAIGN OBLIGATIONS

As of March 6, 1996

As Determined March 31. 1997

ASSETS

Cash in Bank

Accounts Receivable

Capital Assets (80% of coat)

Other Assets

$ 105.693 Ca)

148.448

305,410

19.245

$ 578,795

225,436

46.932

352.605

1.328,500 (b)

10,958 (e)

10,958

Total Assets

Accounts Payable for Qualified Campaign Expenses

Loans Payable

Amount Payable to U. S. Treasury

Stale-dated Checks (_5ec:tion 111.0.)

Actual Winding Down Costs (March 7. 1996· March 31. 1997)

Estimated Winding Down Costs (April 1. 1997. Juty 31. '997)

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oOBLIGATIONS

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Total Obligations

Net Outstanding Campaign Obligations

1.964.432

($1.385,636)

FOOTNOTES TO NOCO

(a) Outstanding checks issued prior to the date ofineliaibility .ct determined to be staIe-dated have

been added back to the Cash in Bank figure.

(b) This amount includes $60,000 in ouwanding loans from the Friends ofDick Lupr. The Audit

staff notes that any chance in the amount ofthe liability could affect the calculation ofthe

Candidate's remaining entitlemenL

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Shown below are adjUSlmeats for funds received after March 6, 1996.

based on the most current fi"""CiaJ iDformatiOD available at the close offieldwork:

D. STALE-DATED COMMI1TEE CHECKS

As presented above, the Committee bas Dot received matching fund

payments in excess ofits entidement.

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Net Outstanding Campaign

Obligations _~ficit) as of3n196

Matching Funds Received

3n196 to 8/1/96

Net Private ContributiODS

Received 3n196 to 8/1/96

Interest Received

3n196 to 8/1/96

Remaining Net 0utstandiDg

Campaign Obligations (Deficit)

($1,385,6)6)

1,254,364

38,704

1.00S

($ 91.523)

Section 9038.6 ofTitle 11 ofthe Code ofFederal Replations states, in

pan. that ifthe committee bas checks outstanding to creditors or contributors that have

not been cashed. the committee sball notify the Commission. The committee shall

inform the Commission ofits effons to locate the payees, ifsuch efforts have been

necessary. and its efforts to encourage the payees to cash the OutstBDdiDg checks. The

committee shall also submit a check for the total amoUDt ofsuch outstBDding checks

payable to the United States Treasury.

During our review ofthe Committee's disbursement activity, the Audit

staffidentified 27 stale-dated check.s totaling SI0,958.

The Audit staffprovided.schedule ofthe stale-dated cbecb to

Committee officials at a coaference held subsequent to the ad offieldwork. The

Committee'sresponse indicated that one ofthe questioned checks was lost and another,

never received by the payee. Further, the Committee stated that tbe)twould void both

checks from their accounting system and issue replacemcDt checks.

The Audit staffnotes that any cbecks O1J!SbI'KIq to creditors or

contributors that have DOt been cashed are staIe-datecl aDd the total mDOUIlt ofsuch checks

are payable to the United States Treasmy. Further, the Committee did DOt provide any

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evidence which demonstrated that they had voided and replaced the two checks in a

timely manner, nor did they demonstrate that the original checks have been cashed by the

payees. Therefore, it is the Audit staff's opinion that the two checks are still stale-dated

checks.

In the Memorand~ the Audit staffrecommended that the Committee

present evidence that the checks were not outstanding (i.e., copies ofthe front and back of

the negotiated checks), or that the outstanding checks are voided and/or that no

Committee obligation exists.

In response to the Memorandum, the Committee issued a check to the

United States Treasury, dated April 24, 1997, for the amount ofthe stale-dated checks

($10,958). The Audit staffdelivered the check to the United States Treasury on April 29,

1997.

RecommendatioD #2

The Audit staffrecommends that the Commission make a determination that the

total amount ofstale-dated checks ($10,958) is payable to the United States Treasury. As

noted above, the Committee made the payment on April 24, 1997.

'\'. LUGAR FOR PRESIDENT COMMIII EE LEGAL AND ACCOUNTING

COMPLIANCE FUND (COMPLIANCE COMMlJlEEl

The Audit staffdid not detect any material non-compliance matters resulting from

the audit ofthe Compliance Committee.

\'. LUGAR FOR PRESIDENT COMMlTrEE - AUDIT FUND <FINES

COMMITrEEl

The Audit staffdid not detect any material non-compliance matters resulting from

the audit ofthe Fines Comminee.

Ifresidual monies exist in the Fines Committee account(s) after payment ofal1

fines and civil penalties, the Fines Committee must take the following action with respect

to such monies:

a. Return any residual monies to contributors on either a pro-rata basis or a

first-in, first-out basis;

b. Disgorge any residual monies to the United States Treasury;

c. Contribute any residual monies to any organization described in section

170(c) ofTitle 26 ofthe United States Code; or

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d. TI'BJISfer my residual moniesto any DatiODll, state, or local committee of

any political pm1Y so long as such monies are DOt used in comedion with

any Federal election.

VI. SUMMARy or AMOUNTS DUEm THE u.s. TREASURY

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Finding UI.A.

~inding 111.0. Stale-dated Committee Checks

Total

S 3,336

10.95822

$14.294

22 As noted in Findin& III.D.• this amoum bas been paid.

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FEDERAL ELECTION COMMISSION

WASHINGTON. 0 ( 204&1

MEMORANDUM

EECEIt'EO

FEDERAL ELEe flOt!

COM."SSIO;f

AUDI"'" DtVIS'I)~

API 3 9 S9 Afl '99

April 3, 1998

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TO:

THROUGH:

FROM:

. Robert J. Costa

Assistant Director

Audit Divi n-:,\

/

/

John c. S~"'_I'

StaffDi t,....~~

/

Lawrence M Noble ./".

General Co I-?l./

Kim Brigbt.boleman

Associate General Counsel

. tv) Rhonda J. Vosdlngh(;:f.

Assistant General Counsel

Joel J. Roessner :5 r

Attomc)'

SUBJECT: Proposed Revised Report ofthe Audit Division on Lugar for President

Conlmittee. Inc.; Lugar for President Committee Legal and Accounting

Conlpliance Fund; and Lugar for President Committee • Audit Fund (LRA

#479)

I. INTRODUCTION

The Office ofGeneral Counsel has reviewed the proposed revised Report ofthe

Audit Division on Lugur lor .'residenl Committee. Inc. (the ··ConlnliltL."C"). Lugar for

President Committee Legal and Accounting Compliance Fund" and Lugar for President

Committee· Audit Fund. submitted to this Office on December 19" 1997.

The Audit Division drafted one previous proposed Audit Report., which was

subnlittcd to this Office un June 19. 1997. On August S" 1997. this Office submitted a

Memorandum setting forth its comments on the previous proposed report. In that

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Memorandum to R~rt J. Costa

Proposed Audit Report on Lugar for President Committee, Inc., el aI.

(LRA 1#479)

Page 2

Memorandum. this Office agreed with the Audit Division's conclusion that the

Committee had not provided sufficient infonnation to properly value the benefits

exchanged between the Committee and Ontario Systems Corporation ("OSC") in

connection with an agreement to purchase certain telecommunications equipment" and

that it therefore appeared that the Committee received an in-kind contribution in the

amount of$232.500. However, this Office did not agree with the Audit Division on the

issue of how the benefits exchanged between the Committee and OSC should be

measured.

The proposed revised Audit Report concludes that, based on additional

infonnation, it appears that the Committee did not receive a contribution from ose. 1 See

proposed Audit Report at 28. Based upon meetings between the Audit Division and this

Office. we understand that the analysis employed by the Audit Division compares the two

transactions in tenns ofOSC's costs (measured as the cost to ose of providing the

equipment. plus the repurchase price paid by aSC) and the consideration received by

ose (measured as the purchase price paid to asc, plus the book value ofthe equipment

returned to OSe).

The information upon which the Audit Division relied, and the valuation method

used, differ from this Office's views" as set forth in this Office's August 5. 1997

Memorandum. However. in light ofthe limited infonnation available to the Audit

Division. its valuation appears to be the best estimate possible, and this Office defers to

the Audit Division"s conclusion. The Office ofGeneral Counsel therefore concurs with

the findings in the proposed revised Audit Report? Ifyou have any questions concerning

our comments, please contact Joel J. Roessner, the attorney assigned to this audit.

As noted a page 24 ofthe proposed Audit Repon. the Commission on September 18. 1997

directed the Audit Division and this Office to secure additional information relevant to this issue.

The comments in the August S. 1997 Memorandum also addressed the issue whether cenain air

transportation whidl had been provided to the candidate was an in-kind contribution. The Audit Division's

revised conclusions regarding the air transponation issue. set forth at pages 29-33 ofthe proposed revised

Audit Report, are consistent with tlus Oflicc's previous cUinments, and this Office agrees with this part of

the proposed revised Audit Repon.

Page 42
FEDERAL ELECTION COMMISSION

WAStUNCTON. 0 C 204bl

May 7, 1998

MEMORANDUM

TO:

THROUGH:

FROM:

Robert J. Costa

Assistant S~tor

Audit Di~l~ "

John c. sJrwI' '\ StaffDi~

Lawrence M. Noble , ..-

General Counsel -f.~'

Kim Bright-ColemanIU)~ Associate General Co~1

Rhonda J. Vosdingh'L}'

Assistant General Cou~sel

Joel J. Roessner ~~.': .1 J,- Attorney ....

SUIJJECT: Considcration ofPart ofthe Proposed Revised Report ofthe Audit

Division on Lugar for President Comlnittee, Inc.: Lugar for President

Conlnlittec Legal and Accounting Compliance Fund~ and Lugar tor

President Committee - Audit Fund (LRA #479) in closed session

The Audit Division drafted a revised Audit Report on the Lugar for President

COlnmittee. Inc. C'Committec"), which was submitted to this Office on

I)~ccmhcr 19. 1997. The revised Audit Report concludes thaL based on additional

I",ormation. it appears that the Conlmiuec did not n:ceive a contribution fronl Onlario

Systems Corporation ("OSe"), See revised Audit Report at 28. This Office submitted a

Memorandum in which it concurred with the findings in the revised Audit Report. l"hc

document concerns the audit of a publicly financed presidential candidate. and unless an

exception applies. would be considered in open session. IJ C.J:.R. §§ 2.3~ 2.4; 9038.1 (c).

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M........... 10 Robart J. Costa

Proposed Audit Report on Lupr for President Conunittee. Inc., fII CII.

(LRA 11479)

Paae2

The Office ofGeneral Counsel recommends that the issue whether the Committee

received a contribution &om OSC be considered in closed session. The issue ofan

apparent contribution arising from the Committee's option to resell telecommunications

equipment to ase is disCussed with reference to materials provided by OSC subject to a

claim to protection from disclosure on the ground that the material provided includes

confidential and proprietary business infonnation. The Office ofGeneral Counsel agrees

that the material provided to the Commission includes confidential and proprietary

business infonnation, and recommends that this issue be considered in closed session.

11 C.F.R. § 2.4(b)(2). This Office further recommends that the remaining issues in the

revised Audit Report be considered, and that the revised Audit Report be approved. in

open session.

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FEDERAL ELECTION COMMISSION

WASHINeTON 0 C 2CMf»]

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May 27,1998

Mr. Patrick J. Kiely, Treasurer

Lugar for President Committee, Inc.

Post Office Box 20484

Indianapolis, IN 46220

Dear Mr. Kiely:

Attached please find the Report ofthe Audit Division on Lugar for President

Committee, Inc., Lugar for President Committee Legal and Accounting Compliance

Fund. and Lugar for President Committee - Audit Fund. The Commission approved the

repan on May 19, 1998. As noted on page 4 ofthe attached report, the Commission may

pursue any ofthe matters discussed in an enforcement action.

In accordance with 11 CFR §§9038.2(c)(l) and (d)(I), the Commission has made

a detennination that a repayment to the Secretary ofthe Treasury in the amount ofS3.336

is required within 90 calendar days after service ofthis report (August 28, 1998). A

payment relative to stale-elated checks, in the amount ofSI0,958, was made on April 24,

1997.

Should the Candidate dispute the Commission's determination that a repayment is

required. Commission regulations at 11 CFR §9038.2(c)(2) provide the Candidate with an

opponunit)' to submit in writing, within 60 calendar days after service ofthe

Commission's notice (Jul)' 29. 1998). legal and factual materials to demonstrate that no

repayment, or a lesser repayment. is required. Further, II CFR §9038.2(c)(2)(ii) pennits

a Candidate who has submitted wrinen materials to request an opportunity to address the

Commission in open session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted

within the 60 day period when deciding whether to revise the repayment detennination.

Such materials may be submitted by counsel ifthe Candidate so elects. Ifthe Candidate

decides to file a response to the repayment detennination, please contact Kim L. BrightColeman ofthe Office ofGeneral Counsel at (202) 694-1650 or toll free at (800) 424-

9530. Ifthe Candidate does not dispute this determination within the 60 day period

provided. it will be considered final.

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Mr.....,._.".1••

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n.Cwni.....lppioVlld Audit RIpan wID be pIICId 011 tbe public nconI OIl

May 29. 1991. SIIouIcI,...... aD)' cpndoaa ......... die public .....oftbisreport.

pJ_COIIIaCt RaIl Harris oftbe Cammi '.Prell Oftice It (202) 694-1220.

Aay cpIIIIkmJ'OU may line to -.COYeNd cIuriDa the audit or in the

audit report IbouId be diIected to Ma1y FaviD orRick Halter ofdle Audit Division at

(202) 694-1200 ortoll free at (100) 424-9530.

Assistant StatfDirector

Audit Division

Anachment as stated

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FEDERAL ELECTION COMMISSION

WASHtNCto~ 0 C 2CM4»J

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May 27,1998

Senator Richard Lugar

Lugar for President Committee, Inc.

c/o Mr. Keith Davis

Huckaby-Davis and Associates

228 South Washington Street, Suite 200

Alexandria, VA 22314

Dear Senator Lugar:

Attached please fmd the Report ofthe Audit Division on Lugar for President

Committee, Inc., Lugar for President Committee Legal and Accounting Compliance

Fund. and Lugar for President Committee - Audit FUDd. The Commission approved the

repan on May 19, 1998. As noted on page 4 ofthe attached report, the Commission may

pursue any ofthe matters discussed in an enforcement action.

In accordance with 11 CFR §§9038.2(c)(l) and (d)(I), the Commission has made a

determination that a repayment to the Secretary ofthe Treasury in the amount of53,336 is

required within 90 calendar days after service ofthis repon (August 28. 1998). A payment

relative to stale-dated checks. in the amount of51 0,958, was made on April 24, 1997. .

Should you dispute the Commission's detennination that a repayment is required,

Commission regulations at 11 CFR §9038.2(c)(2) provide you with an opportunity to

submit in writing, within 60 calendar days after service ofthe Commission's notice (July

:!9. 1998). legal and factual materials to demonstrate that no repaymen~ or a lesser

repayment. is required. Funher. 11 CFR §9038.2(c)(2)(ii) pennits a Candidate who has

submitted written materials to request an opponunity to address the Commission in open

session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted

\\ithin the 60 day period when deciding whether to revise the repayment determination.

Such materials may be submitted by counsel if you so elect. Ifyou decide to file a

response to the repayment determination. please contact Kim L. Bright-eolem8ll ofthe

Office ofGeneral Counsel at (202) 694·1650 or toll free at (800) 424-9530. If you do not

dispute this determination within the 60 day period provided, it will be coDJidered final.

Page 47
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TIle Ccnmieimllppioved Audit Report will be p.eed 0Il1be public record OIl

May 29, 1998. SbDU1d you Jaw IIJY cpellioDs..._ die public reIeae oftbisreport.

pIeIIe COII1aCt RoD Hmis oltbe CO"'D'issioD's Plea OfIice at (202) 694-1220.

AIry quesdcms.)'Ollllla)' haW.....to IIIIIten c:ownd duriDI the audit or in the

audit reportsbouId be diNcted to MIrty Favia orRick Haher oftbe Audit Division at

(202) 694-1200 ortoU heat (800) 424-9530.

AttaebmcDt as stated

Page 48
CHRONOLOGY

LUGAR FOR PRESIDENT COMMITIEE, INC.

LUGAR FOR PRESIDENT COMMIITEE LEGAL AND

ACCOUNTINGCO~L~CEFUND

AND

9 LUGAR FOR PRESIDENT COMMITIEE - AUDIT FUND 9

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Audit Fieldwork

Exit Conference Memorandum

to the Committee

Response Received to the

Exit Conference Memorandum

Audit Report Approved

Page 49

7/8/96-10/21/96

2110197

4125197

5/19/98
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