FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C. 20463 

May 12, 2011 

MEMORANDUM 

TO: 

FROM: 

Joseph F. Stoltz 

Assistant Staff Director 

Christopher Hughey 

Acting General Counsel / 

Lawrence L. Calvert, Jr. ^ ^.' ^ ' 

Associate General Counsel ' 

For General Law and Advice 

Lorenzo Holloway 

Assistant General Counsef 

For Public Finance and Audit Advice 

Allison T. Steinle P(V> 

Attomey 

SUBJECT: Draft Final Audit Report on John Edwards for President, Inc. (LRA 743) 

I. INTRODUCTION 

The Office of the General Counsel has reviewed the proposed Draft Final Audit Report 

("DFAR") for John Edwards for President, Inc. ("the Committee"). Our comments address 

various aspects of Finding 1. We concur with the remaining findings not specifically discussed 

in this memorandum. If you have any questions, please contact Allison T. Steinle, the attomey 

assigned to this audit. 

II. nNDING 1 - MATCHING FUNDS RECEIVED IN EXCESS OF ENTITLEMENT 

A. THE COMMITTEE HAS NOT ESTABLISHED THAT CERTAIN PAYROLL 

EXPENSES PAID AFTER DOI ARE QUALIFIED CAMPAIGN EXPENSES 

The Audit Division concluded that certain payroll expenses paid after DOI are nonqualified campaign expenses, and as a resuh did not include these expenses as a liability on the 

Statement of Net Outstanding Campaign Obligations ("NOCO Statement"). Specifically, the 

Committee made $761,192 in payments to staffers, and for associated payroll taxes, on February 

7,2008. Ninety-nine staff members received payments. The Committee's normal pay periods 
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for January 2008 ended on January 15,2008 and January 30, 2008, but tiie Committee appears to 

have created an extra pay period that both began and ended on January 31,2008 and was paid on 

Febmary 7,2008. 

In response to the exit conference, the Committee submitted a written response and 

spreadsheet that broke down these payments as follows: (1) $204,322 in back pay owed from the 

January 30,2008 pay period; (2) $205,182 in "salary increases" paid for December 23,2007 to 

Januaiy 30, 2008; and (3) $351,688 in winding down expenses paid for January 31,2008 to 

Febmary 15,2008. The Preluninary Audit Report ("PAR") concluded that everything but the 

back pay owed from the January 30,2008 pay period was a monetary bonus paid after the 

candidate's date of ineligibility ("DOI"), and that this monetary bonus was not a qualified 

campaign expense because it was not provided for in a written contract made prior to DOI. See 

II C.F.R. § 9034.4(a)(5). 

In response to the PAR, the Committee submitted another written response and an 

additional spreadsheet that appears to break down the payments differently. Specifically, it now 

characterizes the payments as follows: (1) $204,322 in back pay owed from the January 30,2008 

pay period; (2) $44,916 in back pay owed to six staffers for reduced salaries from August 16, 

2007 to January 30,2008; (3) $187,567 in staff salaries for winding down activities firom January 

31,2008 to Febmary 7,2008; and (4) $320,659 in lump sum payments for lodging, fuel, and 

meal costs that the Committee made to staffers in lieu of reimbursements. The proposed DFAR 

concludes that $232,739 in back pay, which includes $28,417 in back pay owed to five ofthe six 

staffers for reduced salaries between August 16,2007 to January 30,2008, was a qualified 

campaign expense, but that the Committee has not established that the remaining amount was a 

qualified campaign expense. See 26 U.S.C. § 9033.1(a)(1); 11 C.F.R. § 9033.11(a).. 

We agree with the Audit Division that everything but $232,739 in back pay should be 

considered a non-qualified campaign expense. We address each part of the Committee's new 

breakdown below. 

Back Pay Owedfrom the January 30, 2008 Pay Period and to Six Staffers from August 

16. 2007 to January 30, 2008 

The Committee claims that $249,238 of the payroll is back pay owed to staffers who 

received reduced salaries from the January 30,2008 pay period, and to six staffers who received 

reduced salaries from August 16,2007 to January 30, 2008. See Response of John Edwards for 

President to PAR at 2 (Dec. 14,2010). 

Qualified campaign expenses are defined as expenses "incurred by or on behalf of a 

candidate or his or her authorized committee from the date the individual becomes a candidate 

through tiie last date oftiie candidate's eligibility." 26 U.S.C. § 9032(9); 11 C.F.R. § 9039.9. 

We agree with the Audit Division that the $232,739 of this amount was back pay and 

therefore was a qualified campaign expense. The auditors have verified that the Committee had 

incurred and owed $232,739 in salary expenses prior to DOI. Specifically, staffers were only 
Memorandum to Joseph F. Stoltz 

John Edwards for President, Inc. Draft Final Audit Report 

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Page 3 of8 

paid half of their normal net salary for the pay period that ended on January 30, 2008 and were 

therefore owed an additional $204,322 in ordinary salary prior to DOI. In addition, five staffers 

were only paid a portion of their normal net salary between August 16,2007 to January 30,2008, 

and were therefore owed an additional $28,417 in ordinary salary prior to DOI.' 

Staff Salaries for Winding Down Activities from January 31, 2008 to February 7, 2008 

The Committee clauns that $187,567 in payroll was intended as "staff salaries" for 

winding down activities from January 31,2008 to February 7,2008.^ The Committee states that 

these salaries were paid to all 99 employees, and were intended as an additional salary payment 

to help retain staff for necessary winding down activities such as returning cars to their required 

destination, closing offices and volunteer sites, and returning rental equipment. See Response of 

John Edwards for President to PAR at 2-3 (Dec. 14,2010). 

Winding down expenses are considered qualified campaign expenses so long as they are 

"associated with the termination of political activity related to a candidate's seeking his or her 

election," and can include staff salaries. 11 C.F.R. §§ 9034.4(a)(3)(i); 9034.11. However, tiie 

Commission's regulations place the burden on a committee to prove that an expense is a 

qualified campaign expense, and candidates agree in writing to "obtain and fiimish to the 

Commission any evidence it may request of qualified campaign expenses." 26 U.S.C. 

§ 9033.1(a)(1); 11 C.F.R. § 9033.11(a). laLaRouche's Comm. for a New Bretton Woods v. 

FEC, 439 F.3d 733,738 (D.C. Cir. 2006), tiie court concluded that tfie Commission was not 

required to find that an expense was a qualified campaign expense where the committee failed to 

produce any document by which the Commission could either quantify or determine the 

reasonableness of the expense. 

Here, the Committee has not provided any documentation or a verifiable basis to support 

its assertion that $187,567 was an additional salary payment to compensate employees for 

winding down activities. It has not produced any written contracts or other contemporaneous 

documentation to verify this claim, and has stated that no employment contracts that specified 

staff salaries existed. In fact, the Committee has provided several conflicting breakdowns and 

explanations for what various elements of the payment were intended to compensate staffers for 

over the course of the audit. See, e.g., note 2 supra. Accordingly, we conclude that the 

Committee has not met its burden of proving that the $187,567 was a qualified campaign 

expense. 

' The Audit Division did not include one staffer listed by the Committee as receiving a reduced salary from 

August 16,2007 to January 30,2008, and subsequently owed S 16,500 in back pay, because that back pay was not 

included in the February 7,2008 payroll in question. 

^ The Committee has apparentiy abandoned the theory that $205,182 of the $761,192 in payroll was intended 

as "salary increases" for the period between December 23, 2007 and January 30, 2008, "primarily to compensate 

staff for the fact that [the Committee] dispatched staff to many different field locations throughout the country for 

the January primaries and caucuses, placing them on an around-the clock schedule." See Response of John Edwards 

for President to Supplemental Exit Conference Preliminary Audit Findings at 1-2 (Apr. 16,2009). 
Memorandum to Joseph F. Stoltz 

John Edwards for President, Inc. Draft Final Audit Report 

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Page 4 of8 

The Audit Division has informed this Office that 85 ofthe 99 staffers did not receive any 

other salary payments in February because they did not remain on the payroll after DOI. 

Therefore, to the extent to the $187,567 represents a salary payment to those staffers, the 

Committee should provide any written contracts, memoranda, payroll records, e-mails, or other 

contemporaneous documents that establish this amount was intended as an ordinary salary 

payment to reimburse staff for winding down activities. However, 14 staffers remained on the 

payroll after DOI and continued to receive ordinary biweekly salary payments throughout the 

month of Febmary. Therefore, to the extent tiiat tiie $187,567 represents an increase in these 14 

staffers' ordinary salary, the Committee should document that this amount was intended as a 

permanent increase in ordinary salary to compensate staff for winding down activities, or provide 

a written contract made prior to DOI that provided for a monetary bonus pursuant to section 

9034.4(a)(5).^ 

Reimbursements for Winding Down Activities 

The Committee claims that the remaining $320,659 in payroll was intended to reimburse 

employees for the lodging, fiiel, and meal costs they incurred while conducting winding down 

activities "in lieu ofany attempt to have employees tum in receipts for reimbursement." See 

Response of John Edwards for President to PAR at 4 (Dec. 14,2010). 

Again, however, the Committee has not provided any documentation or a verifiable basis 

to support its assertion that $320,659 was for salary payments to reimburse staff for winding 

down activities. 26 U.S.C. § 9033.1(a)(1); 11 C.F.R. § 9033.11(a); LaRouche, 439 F.3d at 738. 

Accordingly, we conclude that the Committee has not met its burden of proving that $320,659 

was a qualified campaign expense. To establish that the $320,659 was a qualified campaign 

expense, the Committee should provide any written contracts, memoranda, payroll records, emails, or other contemporaneous documents that establish this amount was intended as an 

ordinary salary payment to reimburse staff for winding down activities. 

Moreover, we note the Committee's claim that it made lump sum payments averaging 

$3,239 to each of its 99 staffers, which were intended as reimbursements for the lodging, fiiel, 

and meal costs they incurred while conducting winding down activities, could create additional 

^ The Committee argues that "there is no regulation or odier provision that gives the Audit Staff the authority 

to bar [fhe Committee] from paying employees more than the half pay that was missed by increasing their pay for 

that January 30 payroll period." See Response of John Edwards for President to PAR at 3 n.6 (Dec. 14,2010). 

However, tiie Commission's regulations do establish which salary payments after DOI are qualified campaign 

expenses. Specifically, they state that monetary bonuses paid to staff after DOI in recognition of campaign-related 

activities or services are considered qualified campaign expenses only if they are paid no later than 30 days after 

DOI and are provided for in a written contract made prior to DOI. 11 C.F.R. § 9034.4(a)(5). The Commission 

specifically promulgated section 9034.4(a)(5) to prevent "publicly funded campaigns [fhom] paying large monetary 

bonuses after [DOI] upon discovery of excess public funds." See Explanation and Justification for Public Financing 

of Presidential Candidates and Nominating Conventions, 68 Fed. Reg. 47,386,47,390 (Aug. 8,2003). Therefore, 

we believe die Committee must either document that the $187,567 was intended as an ordinary salary payment to 

compensate staff for winding down activities, or produce a written contract made prior to DOI that provided for the 

monetary bonuses pursuant to section 9034.4(a)(5). 
Memorandum to Joseph F. Stoltz 

John Edwards for President, Inc. Draft Final Audit Report 

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Page 5 of8 

issues. Commission regulations limit how committees may reimburse staff for costs incurred 

from their personal funds in the course of providing services to or on behalf of a campaign. 11 

C.F.R. §§ 100.79(a), 116.5. Specifically, payments made from staffers' personal fiinds for 

transportation and usual and normal subsistence expenses that exceed an aggregate of $1,000 per 

election or $2,000 per caiendar year are considered contributions unless they are reimbursed by 

tiie Committee within 30 days afrer the expense was incurred or 60 days after the closing date of 

the billing statement if they were put on a credit card. Id. Committees are required to treat and 

report the obligations arising from these staff payments as debts until they are reimbursed. 11 

C.F.R. § 116.5(c), (e). Accordingly, here, the Committee could have potentially been in 

violation of section 116.5 if it paid lump sum amounts that were not sufficient to cover the 

staffers' actual lodging, fiiel, and meal costs. 11 C.F.R. §§ 100.79(a), 116.5. Conversely, ifthe 

Committee paid lump sum amounts that were in excess of staffers' actual lodging, fuel, and meal 

costs, those excess amounts were not, by definition, reimbursements of costs. See Black's Law 

Dictionary 1312 (8th ed. 1999) (defining reimbursements as repayments or indemnifications). 

Rather, they were simply salary payments paid after DOI, which, as discussed above, have not 

been properly documented. 

B. DISPUTED WINDING DOWN COSTS ARE NOT CURRENTLY MOOTED 

BY THE COMMITTEE'S LIMIT ON WINDING DOWN EXPENSES 

Finding 1 in the proposed DFAR includes a statement that "[e]ven if the Commission 

were to accept [the Committee's] position with respect to the [winding down amounts] in 

question, [the Committee] has reached the limit on winding down expenses." The proposed 

DFAR states that including any disputed winding down expenses **would not affect the amount 

of matching funds determined to be in excess of the candidate's entitlement. [The Coinmittee] 

would still be required to make a repayment of matching fiinds, totaling $2,136,507." 

It is our understanding that the Committee has not, in fact, reached its limit on winding 

down expenses as of the date of this memorandum, and that the Audit Division's statement was 

only intended to reflect the fact that the Committee may eventually reach its limit on winding 

down expenses, mooting its dispute on whether $556,871 of the salary payment in question 

qualifies as a winding down expense and hence a qualified campaign expense. However, there is 

still a possibility that the inclusion of this amount could impact the Committee's total repayment 

determination. If the Committee did not spend the remainder of its undisputed estimated 

winding costs listed on the NOCO Statement through October 31,2012, the disputed winding 

down costs may have an impact on the NOCO and affect the amount the Committee received in 

excess of entitlement. Accordingly, we recommend that the Audit Division revise the proposed 

DFAR to reflect tiiis fact. 

C. THE COMMITTEE'S GENERAL OBJECTION TO REPAYMENT OF 

MATCHING FUNDS 

Based on a review of the Committee's NOCO Statement, the Audit Division recommends 

that the Commission determine that tiie Committee repay $2,136,507 to the United States 

Treasury because the Committee received public funds in excess of entitlement. The Committee, 
Memorandum to Joseph F. Stoltz 

John Edwards for President, Inc. Draft Final Audit Report 

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Page 6 of8 

however, argues that repayment is not due because entitlement to public funds for eligible 

candidates must be based "solely on the source, size, and timing ofthe contributions received 

prior to the date of ineligibility." See Response of John Edwards for President to PAR at 5 (Dec. 

14, 2010). We understand this to mean, in essence, that in the Committee's view, if it received a 

matchable contribution prior to the candidate's DOI, it is entitled to a matching payment for that 

contribution, regardless of when it submitted the contribution for matching and regardless of 

whether the matching payment was made prior to or after DOI. Accordingly, the Committee 

argues that the size of the Committee's Net Outstanding Campaign Obligations ("NOCOs") at 

the time the United States Treasury actually paid the public fiinds was irrelevant to the 

Committee's entitlement and the "[m]atching all contributions received by a candidate prior to 

the [DOI] is a far more equitable approach." Id. 

This is not an issue of first impression. Contrary to what we understand to be the 

Committee's position, the Commission's regulations specifically provide that that an ineligible 

candidate without NOCOs has no entitlement to additional matching payments ''''regardless of the 

date of deposit of the underlying contributions." 11 C.F.R. § 9034.1(a) (emphasis added), llie 

Commission has consistently rejected arguments similar to die Committee's, and concluded that 

for an ineligible candidate to receive matching funds, not only must the matched contributions be 

matchable—^a requirement that applies both before and after DOI—^but the ineligible candidate 

must also have remaining debts on the most recent NOCO Statement. See, e.g., 11 C.F.R. 

9034.1(a) and (b); Explanation and Justification for 11 C.F.R. § 9034.1,48 Fed. Reg. 5,224, 

5,227 (Feb. 4,1983); Mondale for President Committee Final Audit Report ("FAR") at 57-58, 

64-68 (Oct. 28, 1986); Dukakis for President Committee FAR at 31-33 (Dec. 17,1991); 

Clinton/Gore *92 Committee FAR at 12-13 (Dec. 27,1994). 

As the Commission noted at length in the Clinton/Gore '92 Committee FAR, the 

Commission has a long and consistent history of conditioning a candidate's remaining 

entitlement after DOI on the candidate's NOCOs at the time the matching funds are paid. 

Section 9034.1(b) of the Commission's regulations states that after DOI, candidates may 

continue to receive payments only to the extent they have sufficient NOCOs. Section 9034.1(b) 

dates to a December 1976 memorandum from the Oflice of General Counsel to the Commission 

proposing an amendment to then section 134.3(c)(2) of the Commission's regulations. The 

proposed rule stated that "a candidate shall be entitied to no fiirther matching fiinds if, at the time 

of any submission for ceitifrcation, the total contributions and matching funds received after the 

ineligibility date equals or exceeds the net obligations outstanding on the date of ineligibility." 

The 1979 Explanation and Justification for section 9034.1 explained that for candidates who 

have NOCOs after DOI, "[b]asically, these candidates are entitled to payments only if the private 

contributions received between tiie date of ineligibility and the date of submission are not 

sufficient to discharge the net debt." Explanation and Justification for 11 CF.R. § 9034.1,44 

Fed. Reg. 20,336,20,338 (Apr. 4,1979). The Commission explained that this regulation 

"furthers the policy that the candidate should use private contributions to discharge campaign 

obligations wherever possible." Id. Most importantly, in 1983, the Commission revised these 

regulations to make clear **that to receive matching fiinds after the date of ineligibility, 

candidates must have net outstanding campaign obligations as of the date of payment rather than 

the date of submission. Thus, if the candidate's financial position changed between the date of 
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John Edwards for President, Inc. Drafi Final Audit Report 

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Page 7 of8 

his or her submission for matching funds and the date of payment, reducing the candidate's net 

outstanding campaign obligations, that candidate's entitlement would be reduced accordingly." 

Explanation and Justification for 11 CF.R. § 9034.1,48 Fed. Reg. 5,224, 5,227 (Feb. 4,1983); 

see also Explanation and Justification for 11 C.F.R. § 9034.5, 60 Fed. Reg. 31,854, 31,868 (June 

16,1995). Accordingly, the Commission has repeatedly rejected the position advanced here by 

the Committee as contrary to the plain meaning ofthe Commission's regulations, as well as long 

standing Commission practice and policy. See, e.g., Mondale for President Conimittee FAR at 

57-58,64-68 (Oct. 28,1986); Dukakis for President Committee FAR at 31-33 (Dec. 17,1991); 

Clinton/Gore '92 Committee FAR at 12-13 (Dec. 27,1994). 

The Committee also argues that the unique circumstances of 2007 and 2008 demonstrate 

why the position taken by the Commission over the years is wrong, and why its position is the 

only fair approach to detennining the Committee's entitlement to public fimds. To evaluate the 

Committee's argument, it is necessary to begin by briefly recounting what those circumstances 

were. 

The Commission first determined Senator Edwards to be eligible for and entitled to 

matching fiinds in December 2007. Under normal circumstances, the United States Treasury 

would have made the initial payment of matching funds to the Committee on January 2,2008, 

the furst business day oftiie election year. See 11 C.F.R. §§ 9037.1, 9037.2. However, a 

shortfall in the Presidential Election Campaign Fund meant that there were no funds available in 

the Matching Payment Account for the Treasury to pay to Senator Edwards or any other 

candidate on January 2. In fact, the United States Treasury did not make the first payment to the 

Committee until Febmary 14,2008. Senator Edwards withdrew from the campaign on January 

30, 2008, making that date his DOI. See 11 C.F.R. § 9033.5. At that time, of course, he had 

received no payments at all from the Treasury and would not for another 15 days. 

Moreover, on December 31,2007, the Commission lost its quorum. As a result, it could 

not certify Senator Edwards' entitlement to any amounts in addition to those it had certified 

earlier tiiat month. See 26 U.S.C. § 9036; 2 U.S.C. § 437c(c). As it happened, tiie Commission 

was unable to certify Senator Edwards' entitlement to any additional amoimts until July 2008, 

months after the candidate's DOI. 

The Committee asserts that even under the Commission's longstanding approach to postDOI payments, but for the shortfall in the Presidential Election Campaign Fund and the lack ofa 

Commission quomm, it would have already received by January 30 all but $2.9 million of the 

$12.8 million in matching funds it was eventually paid. Because of that, it notes, none ofthe 

amount it would have received prior to DOI would have been subject to repayment for having 

been received in excess of entitlement. See Response of John Edwards for President to PAR at 5 

(Dec. 14,2010). Thus, the Committee appears to argue that the Commission should change its 

approach and pay matching funds for all matchable contributions deposited by the Committee 

prior to DOI, because otherwise shortfalls in the Presidential Election Campaign Fund and 

unique circumstances like the lack ofa Commission quomm will shortchange committees in the 

end, preventing them from receiving funds they otherwise would have received, or in some 
Memorandum to Joseph F. Stoltz 

John Edwards for President, Inc. Draft Final Audit Report 

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Page 8 of8 

instances, like this one, requiring them to repay funds that they otherwise would not have had to 

repay. See id. 

The question, then, is whether, as the Committee claims, the unique circumstances of 

2007 and 2008 call for the Commission to ignore the plain meaning of 11 C.F.R. § 9034.1 and 

change its long standing practice and policy. We conclude they do not. The Committee's claim 

that section 9034.1(b) "never contemplated the extraordinary circumstances that occurred in 

2008," see Response of John Edwards for President to PAR at 6 (Dec. 14, 2010), is incorrect.* 

When drafting the regulations, the Commission considered that a shortfall in the Presidential 

Election Campaign Fund might prevent a committee from being paid the full amoimt the 

Commission had certified prior to DOI. Explanation and Justification for 11 C.F.R. § 9034.1, 56 

Fed. Reg. 35,898, 35,904-05 (July 29,1991). The Commission nevertheless concluded that postDOI entitlement would be based on the candidate's NOCO at the time of payment of public 

funds rather than the date the matchable contributions were received or the date of submission. 

In particular, the Commission's regulations provide that "[ajfter the candidate's date of 

ineligibility, if the candidate does not receive the entire amount of matching funds on a regularly 

scheduled payment date due to a shortfall in the matching payment account, the candidate shall 

also submit a revised statement of net outstanding campaign obligations," on which basis the 

Commission may "revise the amount previously certified for payment." 11 CF.R. §§ 

9034.5(f)(3), 9036.4(c)(2). If, therefore, a shortfall delays payment, any eventual payment will 

be based on any subsequent NOCO statement, and this may result in a reduction even to amounts 

already certified by the Commission. The Committee may wind up not receiving amounts it 

otherwise would have received but for the shortfall. The Commission was well aware of this 

when it promulgated the regulation. See also 56 Fed. Reg. at 35,904-05 (noting that candidates' 

receipt of matching funds "could be affected by the amount of funds available in the matching 

payment account"). 

Regardless of whether the Committee was paid the fiill amount the Commission had 

certified prior to DOI, the Committee should not be permitted to receive public funds after DOI 

unless it has NOCOs that those funds will be used to pay. In this instance, the Committee's 

NOCO Statements at the time of payment appeared to support fiirther payment of public funds, 

but the audit has revealed that the NOCOs were in fact overstated. Consequentiy, the Committee 

received funds in excess of entitlement. 

^ The Committee also argues that, although section 9034.1 was upheld in LaRouche v. FEC, 28 F.3d 137 

(D.C. Cir. 1994), "there have been a [sic] dramatic changes in die Supreme Court interpretations of the law in this 

area" and "the Commission should re-examine its interpretation of section 9034 in light of current decisions." See 

Response of John Edwards for President to PAR at 6 n.l 1 (Dec. 14,2010), The Committee, however, does not cite 

to any specific cases on which the Commission could base such a re-examination, and there are not any recent 

Supreme Court cases that have directly addressed or interpreted candidate entitlements or repayment determinations 

under section 9034.