FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C 204hl

June 5, 2001

MEMORANDUM

TO:

FROM:

SUBJECT:

RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

ROBERTJ.COSTA

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

CALIFORNIA STATE REPUBLICAN PARTY

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

Califomia ~tate Republican Party, which was approved by the Commission on May 24,

2001.

Informational copies ofthe report have been received by all parties involved and

the report may be released to the public on June 5, 2001.

Attachment as stated

cc: Office of General Counsel

Office of Public Disclosure

Reports Analysis Division

FEC Library
REPORT OF THE AUDIT DIVISION

ON

California State Republican Party

Approved May 24, 2001

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
TABLE OF CONTENTS

CALIFORNIA STATE REPUBLICAN PARTY
FEDERAL ELECTION COMMISSION

Washington, DC 20463

CALIFORNIA REPUBLICAN STATE PARTY

EXECUTIVE SUMMARY

The California Republican State Party (CRP) registered with the Federal Election

Commission as the California Republican Party on March 5, 1981 and maintains its

headquarters in Burbank, California. The Treasurer during the period covered by the

audit was Shawn Steel. The current Treasurer is Michael Der Manoue!. Jr.

The audit was conducted pursuant to 2 USc. §438(b), which states that the

Commission may conduct audits of any political committee whose reports fail to meet the

threshold level of compliance set by the Commission.

The six audit findings summarized below were presented to the CRP at the

completion offieldwork and later in the interim audit report (JAR). CRP's responses to

the findings are contained in the audit report.

MISSTATEl\lE1\;T OF FINA!'iCIAL ACTIVITY - 2 USc. ~434(b)(I), (2) and (4). A

comparison of the CRP's reported financial activity to its bank records for the period

January I, 1997 to December 31, 1998, revealed an underreporting of disbursements of

51.740,744 and an overstatement of closing cash on hand of51,742,757. After

notification of the audit the CRP filed amended reports that corrected most of the misreporting. In response to the audit, the CRP filed a comprehensive amended report that

materially corrected the public record.

EXCESSIVE COORDII\ATED PARTY EXPEI\DITl:RES 01\ BEHALF OF FEDERAL

CANDIDATES-2 U.S.c. §§44Ia(d)(l) and (3); 441a(a)(2)(A); I J C.F.R §§

IIO.7(b)(2)(i) and (ii). The CRP spent 52.368.491 on behalfofthe Matt Fong for Senate

Committee (MFSC). Because the CRP failed to obtain prior wrinen authorization from

the Republican National Comminee to utilize a portion of its spending limitation. this

amount exceeds the CRP's 441 ala) and 441 aid) contribution limitation by 5845.554

($2,368.491-S 1,517,93 7-S5,OOO(

The two limns are combmed for purposes of calculating the exceSSl\'c amount of coordinated

expendnures

Page I of 33 Approved OS/24/01
Additionally, the CRP spent 52.663 in excess ofits coordinated spending

limitation on behalf ofBordonaro For Congress in the March 10. 1998 Congressional

District 22 Special Election. Both the National Republican Congressional Committee

and the CRP utilized their 441 a(d) and 441 a(a) spending limit.

In the MFSC case, the CRP and the RNC assert that a delegation of coordinated

spending authority was made. however the requisite written authorization cannOl be

located. The lack of documentation is attributed to an "administratIve oversight".

With respect to the excessive amount attributed to Tom Bordonaro. the CRP does

not contest the finding, noting that the amount is small and that it simply lost track of the

amount spent on behalf ofthe Bordonaro campaign.

DISCLOSURE OF RECEIPTS-INDIVIDUALS -2 USc. §§ 434(b )(3 )(A), 431 (13 )(A)

and 11 C.F.R §§104.3(a)(4). A review of contributions from individuals detennined that

contributor infonnation was not disclosed accurately. The errors included identifying the

wrong account holder on checks drawn on both joint and single accounts. This was

primarily the result of a flaw in a computer program.

In response to the audit. the CRP asserted systemic changes were implemented in

its donor receipt procedures.

DISCLOSURE OF DEBTS AND OBLIGATIONS - 2 USc. §434(b)(8) and 1J C.F.R

iii 04.11 (a) and (b). The CRP failed to itemize a number of debts and obligations on its

disclosure reports. Subsequent to being notified of the audit the CRP filed amended

schedules that materially corrected the deficiency.

ITEMIZAnON OF REFUNDS AND REBATES -II C.F.R §§ 100.10 and 104.3(4)(v).

On its original 1998 reports the CRP included in receipts, but failed to itemize. 88 refunds

and rebates totaling $33,080. After notification ofthe audit, the CRP filed amended

reports that corrected all but 46 items.

In response to the audit. the CRP filed amended schedules that materially

corrected the itemization problems.

REPORTI"iG OF COMMITTEE LOA!' -II C.F.R §§ 104.3(d) and I04.3(a)(4 )(iv) The

CRP failed to file Schedules A (Itemized Receipts). C (Loans) and C-1 (Loans and Lines

ofCredit From Lending Institutions), itemizing the receipt of the loan. Subsequent to

notification of the audit. Schedules A and C were filed. After the exit conference. the

CRP submitted a Schedule C-1.

Page 2 of 33 Approved OS/24/0 J
FEDERAL ELECTION COMMISSION

WASHINGTON 0 C 'll4h.\

REPORT OF THE AUDIT DIVISION

ON THE

CALIFORNIA STATE REPUBLICAN PARTY

I. BACKGROUND

A. AUDIT AUTHORITY

This report is based on an audit ofthe California State Republican Party I

(CRP), undertaken by the Audit Division ofthe Federal Election Commission (the

Commission) in accordance with the provisions ofthe Federal Election Campaign Act of

197 I, as amended (the Act). The audit was conducted pursuant to Section 438(b) of Title

2 of the United States Code, which states. in part. that the Commission may conduct

audits and field investigations of any political committee required to file a report under

section 434 of this title. Prior to conducting any audit under this subsection, the

Commission shall perform an internal review ofreports filed by selected committees to

determine ifthe reports filed by a particular committee meet the threshold requirements

for substantial compliance with the Act.

B. AUDIT COVERAGE

The audit covered the period from January I. 1997, through December 3 I,

1998. During this period, the CRP reported a beginning cash balance of S89.551; total

receipts of 513.256,664; total disbursements ofSJ 1.538.974; and a closing cash balance

ofS1.807,241.~

C. COMMITTEE ORGA1\;IZATIO,",

The CRP registered with the Federal Election Commission as the

California Republican Party on March 5. ]98] and maintains its headquarters in Burbank,

Formerly known as the California Republican Pany

All figures In thiS reporT have been rounded 10 the nearest dollar

Page 3 of 33 Approved OS/24/0 I
2

California. The Treasurer during the period covered by the audit was Shawn Steel. The

current Treasurer is Michael Der Manoue!, Jr.

To manage its federal financial activity, the CRP used seven bank

accounts. From these accounts the CRP made approximately 4,300 disbursements.

Receipts were primarily composed of contributions from individuals (54,217,200):

contributions from other political committees (526.202); transfers from affiliated and

other party committees ($2,602,712); loan received (5300,000); offsets to operating

expenditures (585,992); and transfers from its non-federal accounts (55,893,538)

During the audit period. the CRP maintained eleven non-federal bank

accounts, with total reported receipts of 5 11.905,306 and total reponed disbursements of

$11.671.694 3

D. AUDIT SCOPE AND PROCEDURES

The audit included testing of the following general categories:

1. The receipt of contributions or loans in excess of the statutory limitations;

2. the receipt of contributions from prohibited sources, such as those from

corporations or labor organizations;

3. proper disclosure of contributions 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 (See Findings H.C. and F.);

4, proper disclosure of disbursements including the itemization of

disbursements when required, as well as, the completeness and accuracy of

the information disclosed;

5. proper disclosure of debts and obligations (See Finding II.D.);

6, the accuracy of total reported receipts, disbursements and cash balances as

compared to bank records (See Finding II.A.):

7. adequate recordkeeping for transactions;

S, proper disclosure of the allocation of costs associated with administrative

expenses and activities conducted jomtly on behalf of federal and nonfederal elections and candidates (See Findings [l,B!, and 2.); and

These numbers ha\'e not been audJled

Page 4 of 33 Approved 05'24/01
3

9. other audit procedures that were deemed necessary in the

situation (See Finding Il.E.).

Unless specifically discussed below. no material noncompliance with

statutory or regulatory requirements was detected. It should be noted that the

Commission may pursue any ofthe matters discussed in this report in an enforcement

action.

II. AUDIT FINDINGS AND RECOMMENDATIONS

A. MISSTATEI\IEl"T OF FI"'ANCIAL ACTIVITY

Sections 434(b)(I). (2) and (4) of Title 2 of the United States Code state.

in relevant part. that each report shali disclose the amount of cash on hand at the

beginning of each reporting period. the total amount of all receipts. and the total amount

of all disbursements for the reporting period and calendar year.

Sections 434(b)(3)(A) and (B) of Title 2 ofthe United States Code state. in

part. that each report under this section shall disclose the identification of each person

(other than a political committee) who makes a contribution to the reporting commillee

during the reporting period. whose contribution or contributions have an aggregate

amount or value in excess of5200 within the calendar year. together with the date and

amount ofsuch contributior.; and. the identi fication of each political committee which

makes a contribution to the reponing committee. together with the date and amount.

Section 434(b)(5)(A) of Title :2 of the United States Code states. in part.

that each report under this section shall disclose the name and address of each person to

whom an expenditure in an aggregate amount or value in excess of 5200 within the

calendar year is made by the reporting committee to meet a committee operating cxpense.

together with the date. amount. and purpose ofsuch operating expenditure.

Section 431 (13) ofTitle 2 of the United States Code states the tcrm

"identification" means. in the case of any individual. the name. the mailing address. and

the occupation of such individual. as well as the name of his or her employer; and. in the

case of any other person. the full name and address ofsuch person.

The Audit staffs reconciliation of the CRP's reported financial activity to

its bank activity. from January I. 1997 through December 31. J 998. revealed that the

CRP had materially misstated its disbursement and closing cash on hand balances for

1998. The adjustments to receipts are also presented In order to assist CRP in arriving at

the correct closing cash figure.

Page 5 of 33 Approved OS/24/0 I
4

I. Receipts

The CRP's reported receipts were overstated by 51,612. The

components ofthe misstatement are as follows:

,.,

Reported Receipts

Voided Checks Reported As Receipts

Vendor Refund Not Reported

Value of Leased Equipment Reported

as a Receipt

Reconciling ltem

Correct Reportable Receipts

2. Disbursements

-12,107

20,000

-18,1 84

5 I0.360.758

£10,359,146

The CRP's reported disbursement totals were understated by

£1,740,744. All of the expenditures that are included in this amount required itemization

on supporting schedules. Further, £645,460 of the unreported disbursements were

expenditures made on behalf ofthe Matt Fong for US Senate Committee (MFSC). The

CRP completed filing amended reports in September 1999 that contained additional

disbursements totaling S1,747,908 after it was notified of the Commission's audit.

However, portions of the additional disbursements were reported incorrectly and the CRP

did not supply supporting schedules for 5500.000 of the 5645,460 of MFSC expenditures.

This amount (5500,000) was comprised of two wire transfers on October I, 1999 and

October 13, 1999 to Russo Marsh Inc. for television ads. Furthermore, this same amount

is part ofthe 441 a(d) excessive contribution noted in Finding Ll.B. J. The CRP stated the

failure to provide the supporting schedules was an oversight. The explanation of

differences below does not consider the amended reports.

Page 6 of 33 Approved OS/24/0 I
The components ofthe misstatement are as follows:

Reported Disbursements 58.637.885

, "

Disbursements Not Reported

Reported Voided Checks

Transfer From Federal to Non Federal

Not Reported

Disbursements Reported Twice

Value ofLeased Equipment Reported

as a Disbursement

Reconciling Amount

Correct Reportable Disbursements

3. Ending Cash On Hand

S1.769.052

-32.463

18.433

-7,300

-18,184

S11.206 1.740,744

510.378,629

The reported ending cash on hand at December 3 J, 1998 was

overstated by SJ,742,757, resulting from the misstatements detailed above.

At the Exit Conference. CRP representatives were provided with

documentation explaining the misstatements. The CRP stated some of the misstatements

were due to problems with personnel and agreed to amend the original reports at the

appropriate time.

The interim audit report recommended the CRP file a

comprehensive amended reporl for calendar year 1998. to include corrected Summary and

Detailed Summary Pages as well as amended Schedules A. and Schedules B.

In response to the interim audit report, the CRP ackno\\'ledged that

there were errors in the original FEC disclosure reports. These errors were attrihuted to

the inexperienced staff. inept accounting software. and a large volume of activity.

Furthermore. the CRP suggests that it did not complete the filing of amended reports

before the receipt of the audit noti fication letter because of changes in personnel and the

need to reconstruct manual records. The CRP goes on to explain that the preparation of

the amended reports was ongoing at the time the audit notification letter was received, as

evidenced by numerous telephone conversations between CRP staff and the

Commission's Report Analysis Division (RAD).

Page 7 of 33 Approved OS/24/0 I
6

As is the Commission's policy, the audit evaluated the disclosure

reports as they existed when the CRP was notified ofthe audit. The CRP began receil'jng

letters from RAD concerning its reports in January 1999, but did not complete filing

amended reports until September 1999. Those amended reports contained additional

disbursements totaling $1.7 million (nearly 17% ofthe CRP's reportable disbursements).

The filing ofthe amended reports was not completed until almost a year after the election

that the additional disbursements sought to influence. Further. the amended reports

incorrectly reported some disbursements and failed to itemize the 5500.000 payment to

Russo Marsh on behalfofMFSC. The CRP does not take issue with the conclusions

about the reports as originally filed, or the errors that remained in the September 1999

amended reports, however, it does request that the Commission view favorably its efforts

in filing those reports.

As recommended above, the CRP filed a comprehensive

amendment that materially corrected the original reports. This comprehensive amendment

accurately completes the public record.

B. EXCESSIVE COORD/!'iATED PARTY EXPENDITURES ON BEHALF OF

FEDERAL CANDIDATES

Section 441 a( d)( 1) and (3) of Title 2 of the United States Code states. in

part. that notwithstanding any other provision of law with respect to limitations on

expenditures or limitations on contributions. the national committee of a political party

and a State committee of a political party. including any subordinate committee of a State

committee. may make expenditures in connection with the general election campaign of a

candidate for Federal office who is affiliated \vith such party.~

Section 44Ia(a)(2)(A) ofTitle :2 of the United States Code states that no

multi-candidate political committee shall make contributions to any candidate and his

authorized political committee with respect to any election for Federal office which, in

the aggregate. exceed 55.000.

Section J IO.7(b)(1)li) and Iii) of Title I I of the Code of Federal

Regulations explains the dollar value restnction placed on expenditures made on behalf

ofa candidate for election to the office of Senator and Representative. The California

1998 party spending limit for Senate and Congressional nominees was S1.517.937 and

$32.550, respectively. applied separately for the State and the National Party

On May). 2000. m FEC \ Colorado Republican Federal Campaign Committee. the l,;nlted States

Court of Appeals for the Tenth CirCUit ruled that these spendlllg hmilatlons were uneonslilulional ThiS

deCISion IS bmdmQ ani\' m the 10" Clrcuil which does not mclude California. (FEe \ C,,!oJ'{Jr!o

RCPllbllCll1l Fcr!o:iI C;lIIplllgli CIlI/II/llflec. 213 F.3d 1221 ( 1O,j, Clr 2000). cert. granted. 6R l'.S.LW

1679(LS.OcrIO.2000)(:\oOO-1911

Page 8 of 33 Approved OS/24/01
7

Section 431(9)(A)(i) of Title 2 ofthe United States Code states thaI the

teml "expenditure" includes any purchase, payment, distribution, loan, advance, deposit.

or gift of money or anything of value, made by any person for the purpose of influencing

any election for Federal office.

Seetion 431 (17) of Title 2 of the United States Code states, in part. that the

term "independent expenditure" means an expenditure by a person expressly ad\'ocatlng

the election or defeat of a clearly identified candidate which is made without cooperation

or consultation with any candidate.

Section 100.22 of Title 11 of the Code of Federal Regulations states, in

part, that the teml expressh' adl'ocall/lg means any communication that uses phrases such

as "vote for the President," or "support the Democratic nominee", among others, or

communications of campaign slogan(s) or individual word(s), which in context can have

no other reasonable meaning than to urge the election or defeat of one or more clearly

identified candidate(s).

Section 100. J 7 of Title 11 ofthe Code of Federal Regulations states, in

part, that the term clearz)' idenlified means the candidate's name, nickname, photograph,

or drawing appears, or the identity of the candidate is otherwise apparent through an

unambiguous reference such as "the President," "your Congressman," or "the

incumbent," or through an unambiguous reference to his or her status as a candidate such

as "the Democratic presidential nominee" or "the Republican candidate for Senate in the

State of Georgia."

Section 106.I(a) of Title 11 of the Code of Federal Regulations states, in

pan. that expenditures, including in-kind contributions. independent expenditures, and

coordinated expenditures made on behalf of more than one clearly identified candidate

shall be attributed to each such candidate according to the benefit reasonably expected to

be derived.

Scctions 434(b)(4)(H) and (6)(B)(iiil ofTltk 2 of the United States Code

state, in part, that for any political committee other than an authorized committee, each

repon filed under this section shall disclose the name and address of each person who

receives any disbursement during the reporting penod in an aggregate amount or value in

excess of 5200 within the calendar year In connection with an independent expenditure by

the reponing committee, together wilh the dale, amount. and purpose of any such

independent expenditure and a statement which indicates whether such independent

expenditure is in support of. or in opposition to, a candidate. as well as the name and

office sought by such candidate, and a cenification, under penalty of perJury, whether

such independent expenditure is made in cooperation, consultation, or concen, with, or at

the request or suggestion of. any candidate or any authorized committee or agent of such

committee.

Page 9 of 33 Approved OS/24/0 I
8

Section 44Id(a) ofTitle:: ofthe United States Code "Jtes, in part. that

whenever any person makes an expenditure for the purpose offinannng communicatIons

expressly advocating the election or defeat of a clearly identified candidate, such

communication shall clearly state who paid for the communication and whether the

communication was authorized by a candidate, or an authorized political committee of a

candidate.

1, Excessive Coordinated Part\' Expenditures on Behalf of Tile Matt

Fong For US Senate Committee

Section 11O,7(a)(4) Title II ofthe Code of Federa! Regulations allows the

national committee of a political party to make expenditures under 2 USC §44! a(d) and

II CFR §110,7(a)(4) through a designated agent, such as a state party committee,S

Additionally, the Commission's Campaign Guide for Political Party Committees states in

part, that the assigning committee mustfirst alllhori::e the spending in a wriflen

agreemelll that should specifY the amount the agt;:;i may spend,

The CRP spent S2,368,491 on behalf of the MFSC Of this amount:

51,560,767 was reported as either coordinated expenditures or as operating expenditures

with a notation attributing them to the MFSC; 5645.220 was not included in the

disbursement totals, or in amounts attributed to MFSC on any CRP disclosure report filed

prior to the notification ofthe audit, although a portion of the amount was itemized on

Schedules F as memo-tyPe entries; 5124.2226 was reponed but not attributed to the

MFSC; and, 538,282 was paid wholly from the non federal account and therefore not

included on any Federal disclosure report. This amount (5)2,368,491) exceeds the CRP's

441 a( a) and 441 a( d) contribution limitations by 5845.554 (52.368,491-51,517,937-

55.000)7

In FEC I'. DClllocl'allc SCI/(/(orla! CUlllpwgl/ COlli III lIfCc. ~5~ C.S ]I ( I'lSI j, the Ull\ted Slotes

Supreme CauT1 held thot the ComrrussJOn oeted wllhm ItS dlsCretJOll wben mterpretlDg 2 L:.S.c.

§441 a(d)(3) to allow for pany comnunees to delegole theIr spending oUlhonty under" USc.

§ 441a(d)(3), ThIS cose arose from a complaint filed by the Democratic Senotona] Compalgn

Comrrunee (OSCC). The OSCC alleged that the !\ollonol Republicon SenalOnol CommIttee (NRSC)

was prohiblled by the Federo] Elecllan CampaIgn Act of ]971. os amended. from octmg os the agent of

state Republlcon Pany comnunees for the purpose of moklng 44] 01 d)( 3) expendnurcs. Sn'ero! stote

Republicon Porty comnunees emered mto \\Tmen ogreemems With the NRSC whlcb deslgnoted the

NRSC os theIr ogent for makmg 4~ Ja(dj( 31 expenditures

The $645.220 and the $124.222 represent ponlons of expenditures olJocohle to more tban one

condldate ond m some cases both federol ond non-federal condldates For those thot had 0 non-federol

aspecl. the non-federol account o\'erpold liS alioCOled ponlon by $66,573

The fWo limits Jre combined for purposes of calculatmg tht: excessIve amount of coord1l1Jted

expenditures

Page lOaf 33 Approved OS/24/0]
9

The expenditures identified above are comprised of the cost of: television

ads featuring Mr. Fong ($1,756,349); the cost of advocacy mailers featuring only Mr.

Fang ($243,651); the cost of mailers featuring Mr. Fang among other candidates, but not

qualifying as exempt party activity as defined by 11 CFR §§100.7(b)(9)8 and (15), or

§§100.8(b)(10) and (16) ($146,068); allocated phone bank costs ($11 1,812); invoices

forwarded from the MFSC ($47,267); the cost of polling information provided to both the

CRP and the MFSC at the same time (557.363);' and, Mr. Fong's allocable portion of a

charter flight with other Republican candidates (55,981).

Documentation establishing coordination between the CRP and the MFSC

for these expenses includes:

• Scripts from all ofthe television ads featuring Mr. Fong with the

disclaimer "Paid for by the California Republican Pany and authoriz.ed

by the Matt Fong, U.S. Senate Committee, Inc."

• A statement from a partner in the firm that handled the media and

ponions ofthe mailings, and who was the campaign manager for the

MFSC, explaining that the CRP and the MFSC worked together on the

various projects the CRP funded.

• A letter from the polling company stating" The questionnaires for these

projects were designed by representatives of Moore Information, the

CRP and the Fong campaign. working in conjunction with each other."

• Documentation showing Mr. Fong was a passenger on the charter flight

paid by the CRP.

• The CRP general ledger account codes and legal clearance forms list

most ofthese expenses as either a "COORDINATED EXPENSE" or

"fNK1ND CONTRIBTUIOK"

• Correspondence from CRP Counsel stating it made various coordinated

expenditures on behalf of Matt Fong and advismg the CRP to cnsurc

that it reported such activity.

As of year end 1998, the CRP disclosed coordinated expenditures on

behalf of MFSC in the amount of 5 1.500.848. or 5 I 7,(J89 less than the 441 a( d)( 3)

limitation. in addition, the CRP reported lI1-kind contributions of559.920 or 554.920

In Ad\'lsory Opimon t978-89. the CommisSion concluded publlc"uons th"t cont"ll1 blOp"phlc'IJ

Il1form"uon on the candidate. the c"ndld"te's poslllOn on speCifiC IsSues. "nd statements ofpany

philosophy. do not fall \\'llhll1 the slate card C\empuon

A portion of the total COS! of the poJiJng se"xes 15 atmburoble to CRl' The non federal account

overpaid ItS share of that cost by 57.106

Page 11 of 33 Approved OS/24/0)
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more than the 441a(a) contribution limitation. The CRP's chart of accounts has two

coordinated expenditure accounts, one for Congressional District 22 (Bordonaro) and the

other relating to Mr. Fong. A CRP printout ofthe account relating to Mr. Fong dated

December 3, 1998, shows total coordinated expenditures in the amount of52,008,858.

The printout is annotated to show that only a portion of some expenditures were

considered to be on behalf of Mr. Fong, the adjusted total is S2,000,239 IO On its

Schedules F, Coordinated Expenditures. (original and post audit notification

amendments) the CRP states that it was not designated to make coordinated expenditures

on behalf of any other party committee. However. when the Audit staff inquired. the

CRP representative stated that she believed the Republican National Committee (RNC)

assigned its coordinated party spending authomy to the CRP as allowed by 11 CFR

11 O. 7(a)(4). A copy ofthe prior written authorization was requested repeatedly, but was

not provided during fieldwork. Further, the RNC's reports make no mention of any

assignment of the spending limitation. At the exit conference, the CRP was given a

schedule itemizing all expenditures made on behalf ofthe MFSC. After the exit

conference, a period is provided for the submission of additional materials. The CRP

submitted a memorandum stating it had made a request of the RNC regarding the

delegation of its coordinated authority on behalf of Mr. Fong and was awaiting a

response.

Counsel for the CRP. later faxed the Audit Division a copy of a letter from

RNC Counsel dated January 31. :WOO. The letter states that the RNC is confident it

transferred the limit based on RNC Party Rule 34(1), which prohibits the RNC from

supporting a candidate who is nominated by a blanket primary. Only three states had a

blanket primary in 1998. California, Washington and Alaska. According to RNC

Counsel, the latter 2 states select their nominees at a convention. thus obviating the need

for Party Rule 34(1). The letter from RNC Counsel is not prior written authorization, but

rather an explanation of why "the RNC did not contribute to or make any expenditures on

behalf of' Mr. Fong's candidacy. Transferring its spending limitation to the CRP would

appear to undermine the RNC's own rule.

A November 19, J998 memorandum (Memorandum) from two RNC

National Committee members appears to itemIze. in round numbers, the financial support

provided by the RNC, the NRSC, and the NRCC to California during the 1998 election

cycle. further complicates this issue. One item under the heading RNC. lists "Fang

coordinated contribution-S500,OOO." Although. the RNC transferred numerous amounts

to the CRP, this amount cannot be directly traced to any of the disbursements included in

the S2,368,491 that the CRP made on behalf of MFSC. Entries under the heading NRSC

show contributions to "Fong of S17.500 and Fang coordinated ofS 1.200.000."

Commission reports show the NRSC contributlllg 517.500 to the MFSC and transferring

599.000 to the CRP in November and December 1998. The reports do not show

coordinated expenditures on behalf of the MFSC. The numbers on the Memorandum do

111 The difference berween the reponed coordmated expendnures of 5 1.500.S48 Jnd the 52.000.2J9

sho\\11 on the CRP's accountmg ledger IS payments to Russo i\1nrsh and Raper. Inc. totalmg 5500.000

for media that were not reported. Jnd 5608 for printed matet10l reported on Schedule F.

Page 12 of 30, Approved OS/24/0 I
11

not comport with RNC, NRSC or CRP Federal reports and do not match party transfers.

Additionally these numbers are not consistent with the January 31,2000 letter from R:\C

Counsel. On February 15, 2000, the Audit staff contacted RNC Counsel to request an

explanation of the Memorandum (CRP Counsel authorized the Audit staff to discuss this

matter with RNC personnel). After various phone conversations, RNC Counsel faxed a

letter to the Audit Division, dated June 2, 2000, stating:

...it appears the figures reflected therein mav have come

from figures projected or requested prior to the 1998

election. According the RNC's 1998 political director,

Tony Hammond, at least three meetings were held that year

with the National Committee members where various

figures for spending on the California election were

discussed. Mr. Hammond believes the figures reflected in

the November 18, 1998 (sic) memorandum could have been

prepared using the figures discussed at any of these

meetings, all of which were held prior to the 1998

election.(emphasis added)

In an effort to clarify the source of the spending referenced in the

Memorandum, the Audit staff requested a copy of the early spending figures referenced

above. To date, the RNC has not responded.

The documentation submitted at the time of the interim audit report did

not establish that the RNC aJthorized the CRP to utilize its coordinated spending

limitation in advance of the expenditures. I I Rather it suggested, that since Party rules

prevented the RNC from supporting Mr. Fong, the Commission should assume the

transfer of its spending authority to the CRP. On the contrary, an authorization would

appear to be inconsistent with the RNC's Party Rules as explained in the Jetter from RNC

Counsel. Further, since the CRP's disclosure reports did not reflect coordinated spending

in excess of its own limitation, there would appear to be little incentive for it to have

sought additional spending authority. Finally, the Memorandum from the RNC

Committee members provided no clarification of the situatIOn.

Il As IS explained below In the finding concerning the CRP's coordinated expenditures on hehalf of

Bordonaro For Congress. the CRP cxeculed an ad"ana agreemenr wllh the :\al!onal Republican

CongressIOnal Comnunee (l':RCC I when ItS cOOrdlnaled spendmg authonty was transferred on

February 9. 1998. Another agreement was execuled when a portion of the spending authonty was

transferred back on February 12. 1998

Page 13 of 33 Approved OS/24/0 I
12

2. Excessive Coordinated Partv Expenditures on Behalf of

Bordonaro for Congress

The CRP spent $2,663 in excess ofits coordinated spending limitation on

behalf of Bordonaro For Congress (BFC) in the March 10, J998 Congressional District

22 Special EJection. I! Tom Bordonaro was the only Republican candidate on the ballot

and no other office was at stake in this election.

The CRP made disbursements for a mailing that contained a letter from

California Governor Pete Wilson, and an Absentee Ballot Application. Governor

Wilson's letter contains statements such as, "We can stop them right here in California by

electing a Republican to Congress on March 10Ih... If you and your Republican neighbors

vote, we will win... The most convenient way for you to vote is through the mail and

...return your application to vote-by-mail. Your vote could very well make the

difference."(emphasis added) Such mailings in connection with this election are not

considered a "generic GOTV" party disbursement because they urge the election of a

clearly identified candidate, the only Republican candidate. The total costs associated

with the mailing are $38,153, which includes production and postage. The mailing was

handled by a direct mail company as defined by II CFR §IOO.7(b)(15)(i), thus precluding

the possibility of considering it an exempt party activity as defined by II CFR

§§IOO.7(b)(9) and (15), or 100.8(b)(IO) and (16). The CRP reported $6,660 as "CD22

Postage Mailer Postage" on Schedule B. Line 21 b (Other Federal Operating

Expenditures) and 59,300 as "Bulk Mail Postage" on Schedule F, Line 25 (Schedule of

Itemized Coordinated Expenditures Made By Political Party Committees or Designated

Agents on Behalf of Candidates for Federal Office), attributable to BFC. The remaining

522,253 was not reponed (See Finding 11.A. above).

Evidence supporting coordination of this mailing includes a memorandum

from CRP CounseL as well as, CRP accounting records. The memorandum from CRP

Counsel dated February 10, 1998 discusses, .....conversations regarding the various ways

in which the CRP could support Tom Bordonaro in the special election to be held in the

22"d Congressional District later that month, and the various ways in which the NRCC

and Bordonaro have requested, this support." (emphasis added) Funhennore, it outlines

the NRCCs request to have the CRP characterize these mai lers "as a 'generic GOTV

expense' thereby not counting as a 'contribution' or 'coordinated party expenditure'

specifically for Bordonaro." CRP Counsel disagreed with the NRCC and consulted with

RNC Counsel. who "tentatively" agreed with him. CRP Counsel summarized four

options in which the CRP may send out mailers: Coordinated: Generic GOTV: Volunteer

Activities; and Independent Expenditure. Other CRP correspondence stated thaI it would

only be under unusual circumstances that mailings to SuppOr1 candidates would he

" The vacancy resulred from the death of Representallve Walrer Capps. An eJectJOn was heJd On January

J3. 1998 and because no candidate received more than 50"·;, of the \·ote. the candldale from each party

who recel\'ed the most votes partiCipated In a runoff c1eCllon on !\Iarch 10. 1998

Page 14 of 33 Approved OS/241O]
13

reported as independent expenditures, because "political parties typically coordinate their

activities with their candidates." Furthermore, the CRP categorized the production cost

(S22,153) and most of the postage cost (S9,300) in its general ledger as

"COORDINATED EXPENDITURE-CD22," the remaining S6,600 portion of the postage

was classified as "GOTY." The CRP also maintained a ledger account titled

"INDEPENDENT EXPENDITURE CD22," which contained expenditures separate from

those at issue.

The above expenditures were for the purpose of innuencing a federal

election and urging the public to vote for a clearly identified candidate. Further. there is

evidence of coordination between the CRP and BFC, therefore the expenditures are not

independent. These expenditures are either coordinated expenditures or contributions.

The sum ofthe expenditures exceeds the sum of the available coordinated expenditure

limitation and the contribution limitation by 52,663 (538,153-«$32,550-

531,81O)+529,75013+S5,000)(See Footnote 7, on page 8).

At the Exit Conference, the staff explained the excessive amounts

attributed to each candidate, along with providing the CRP supporting schedules.

The interim audit report recommended the CRP provide evidence

demonstrating that the expenditures in question were not coordinated expenditures made

on behalf of, or contributions to the MFSC and BFC,

If the CRP's response included the contention that it was authorized to

make coordinated expenditures as an agent of the RNC with respect to the MFSC, the

Audit staff recommended that the CRP provide:

• a copy of a written authorization executed prior to the use of the

RNC's 441a(d) limit.

• documentation of and explanations for the amounts on the

Memorandum

If these expenditures were independent expenditures. the Audit staff

recommended that the CRP: (1) file amended Schedule(s) H4 and E (Independent

Expenditures) to report the independent expenditures and certify that they were not made

in coordination with the candidates. (2) provide documentation to refute the evidence of

coordination cited above: and (3) file amended Summary and Detailed Summary pages

for the reports at issue by reponing period. if necessary.

" The CRP provliJed the Audn slJff a copy of \\TlIten JUlhoflzJlIon dated Februan' 9. 1998 transferring

531.810 of ItS 44la( dl IlJrut. the amounl of the limllallon for the prO"lous year, to the ""/onal

Republican CongreSSIOnal COmnlJltee ("ReCI, On February Ie. 1995 tlie i\RCC tr"nskrred Se9.750

back to CRP by means of another \\Tlnen authoflzatlOn, The 1998 coordll1ated spendll1g limitation

was 532.550

Page 15 of 33 Approved OS/2410 I
14

Absent the submission of the materials discussed above, the report

recommended that the CRP file amended Schedules F, along with the appropriate

adjustments on the SummaryfDetailed Summary Pages. Furthermore, the CRP should

seek refunds from the MFSC and the BFC Committee.

Finally, documentation was requested demonstrating that the federal

account(s) reimbursed the non-federal account(s) SIll,961 [(S38,282+66,573-7,106].

The documentation submitted was to include a copy of a check or other debit advice

showing the transfer, and copies of the relevant bank statements for both the federal and

non-federal accounts,

In response to the interim audit report, the CRP concedes that it cannot

locate a written record demonstrating the delegation of the RNC's coordinated

expenditure authority on behalf of MFSC. The CRP further notes that it prepared and

maintained copies ofits delegation letters with respect to the 22nd Congressional District

Congressional Election, and that both it and the RNC are experienced with 2 USc.

441 a(d) compliance. The lack of documentation in this instance is attributed to an

"administrative oversight". Finally, CRP contends that affidavits from Michael

Schroederl4 and Mitch Bainwd5

, along with the letter submitted by RNC Counsel, fully

resolve the issue ofthe delegation in the CRP's favor.

Both Mr. Schroeder and Mr. Bainwol state they recall conversationsJ6

regarding the delegation ofspending authority from the RNC to the CRP. They state that

the RNC could not use its coordinated spending limitation on behalf ofMFSC due to

Party Rule 34(f). Discussions ensued concerning whether the Party Rule prevented the

RNC from delegating its spending authority to the CRP. Both affidavits state that it was

agreed that the coordinated spending limitation would be transferred to the CRP and that

a document would be prepared evidencing the delegation. Mr. Schroeder states that he

does not recall ever seeing or receiving such a document.

With respect to Party Rule 34(f) and the interim audit report's suggestion

it would be undermined by the delegation of the RNC's coordinated spending authority,

Mr. Schroeder explains that he was author of Rule 34(t) and a member ofthe RNC Rules

Committee in 1996 when it was adopted. The RNC's General Counsel at that time was

asked whether the rule would preclude the delegation ofthe RNC's coordinated spending

authority and if the rule prevented the RNC from using it. Mr. Schroeder states that the

Counsel's opinion was that it did not.

Mr. Schroeder IS Ihe former Chairmen of Ihe Calrfornla Republrcan Pany from 19% Ihrol1gh 1999.

15

",

Me. Bainwolls the former Executive DIrector of the Republrcan ;-,:atlonaJ CommIttee fur 1995

The conversalJOns Involved the Chan of the :-':RSC. the Polltlca) DJreclOr of the :-':RSC. the candidate

and the RNC Western Regional DtreclOr

Page 16 of 33 Approved OS/24/01
15

Although the CRP and the RNC assert that a delegation of coordinated

spending authority was made, it is clear the requisite written authorization did not occur.

Further, it is clear that both the CRP and the RNC understood the need for a writ!en

authorization17. The record also demonstrates that there was initially doubt about

whether the spending authority could be transferred under RNC Party Rules. At some

point that question was apparently resolved in favor of the transfer. Finally. since the

CRP did not report utilizing more than its own limitation. its disclosure reports did not

suggest that a delegation of spending authority was necessary. The amended repons fi led

in September of 1999 indicated that the CRP's limitation had been exceeded by

approximately 540,000 while again failing to acknowledge more than 5500.000 in

coordinated expenses on behalf of MFSC.

With respect to the Memorandum. the CRP claims it was "prepared

without reference to any federal election campaign reports or documents of either the

RNC or the Committee." As a result. "it is not surprising" that the numbers do not

comport with any Federal reports. Hence, the CRP believes this Memorandum should

have no bearing on the resolution ofthe 441 (a)(d) expenditure issue.

This response does not clarify the purpose of the Memorandum or the

source of the figures contained therein. The CRP only addresses the Memorandum with

respect to itself and the RNC. As stated earlier, the amounts associated with the RNC do

not directlv match its Federal reports, however. the RNC did transfer amounts in excess

of the 5500.000 figure mentioned in the Memorandum during the election period. More

significantly, the CRP makes no comment on the Memorandum's accurate entry for

NRSC contributions to Mr. Fong's campaign or the entry entitled "Fong coordinated -

S1.200,000." The fact this Memorandum is dated subsequent to the election and that

questions regarding its origin remain unresolved. make it difficult to disregard.

With respect to the excessive amount at!ributed to Tom Bordonaro, the

CRP does not contest the finding. It appears to the CRP that it simply lost track ofthe

amount spent on behalf ofthe Bordenaro campaign. The CRP argues that the amount of

the overage is small and it should be deemed insignificant. A small difference (5603) in

the amount calculated by the Audit staff and the CRP is noted in the response. The CRP

derives their number from subtracting the amount transferred to the NRCC (53 J.81 0) and

the amount transferred back from the NRCC (529.750).

Subsequent to the CRP's response to the interIm audil report. RNC counsel suhmlllcd a COPy of a

\\Tilten authOrIzation proVided to the Washington State RepublIcan Part" lor the 199R election cycle.

Page J 7 of 33 Approved OS/24/0 I
16

The correct calculation is as follows:

2 U.S.c. 44Ia(d)(2) Coordinated Spending Limitation

Less: Amount Transferred to the NRCC

Plus Amount Transferred from the NRCC

2 U.S.c. 441 a(a) Contribution Limitation

Amount Available to Spend On BehalfofBFC

Amount Expended on Behalf ofBFC

Amount in Excess of Available Spending Authority

(531.810)

529.750

532.550

(52.060)

55.000

535.490

(538.153)

( 52663)

The CRP has filed amended reports correctly itemizing all expenditures

made on behalf ofMatt Fong and Tom Bordonaro on Schedule F (Coordinated

Expenditures), as recommended. Also as recommended, the CRP federal account

reimbursed the non-federal account 5 III ,961 for over-funding of federal activity. The

CRP response to the interim audit report makes no claim that any ofthe expenditures

questioned were not on behalf of Matt Fong or Tom Bordonaro. or that any were

independent.

Finally, the CRP believes this finding should be deferred until the

Supreme Court decides Federal Election Commission I'. Colorado Republican Federal

Campaign Committee. The importance ofthis case and its possible effects are

recognized, however, there is no reason to withhold the discussion ofthis matter pending

the outcome. Should the Court determine that the 2 USc. 44Ja(d)(2) limitations are

unconstitutional. the Commission will take no further action with respect to these issues.

C. DISCLOSURE OF RECEIPTS-hDI\'lDlIALS

Section 434(b)(3)(A) ofTitle 2 of the United States Code requires. in part,

a political committee to report the identification of each person who makes a contribution

to the committee in an aggregate amount or value in cxcess of 5200 per calendar year.

together with the date and amount of any such contribution.

Section 431(13)(A) of Title 2 of the United States Code defines the term

"identification" to be. in the case of any individual. the name. the mailing address, and the

occupation ofsuch individual. as well as the name of his or her employer.

Section J04.3(a)(4) of Title II ofthe Code of Federal Regulations states,

in part. that the identification of each contributor and the aggregate year-to-date total for

such contributor shall be reported for each person whose contribution or contributions

aggregate in excess of5200 per calendar year and for all committees which make

contributions to the reporting committee dunng the reportIng period.

The Audit staff reviewed contributions from indIviduals on a sample basis

and determined contributor information was not disclosed accurately for a material

Page 18 of 33 Approved OS/24/(J]
17

number. The errors included identifying the wrong account holder on checks drawn on

both joint and single accounts. This was primarily the result of a computer program that

assigned one contributor identification number (ill) to each household. For example. if a

contribution was to be attributed to the husband only. it was recorded in the database and

disclosed on FEC reports as "M/M John Doe." Additionally. the CRP failed to pro\'ide

the aggregate year-to-date totals for the "1998 Fall Convention" receipts. The

computerized schedule itemizing these receipts was not an approved format and did not

allow for this information.

At the exit conference. the Audit staff explained the irregularities. The

CRP did not comment.

The interim audit repon recommended the CRP demonstrate that

procedural changes have been made to avoid the recurrence ofthe noted errors in future

repons. In response, the CRP assened systemic changes were implemented in its donor

receipt procedures. The CRP believes its 1999-2000 filings "substantiate these

corrections and systemic improvements."

Although the 200018 filings reveal a substantial decrease in the rate of

"MIM's" appearing on the Schedule A's, they are still present. The CRP should continue

to review their procedures to avoid further problems.

D. DEBTS AND OBLIGAT10i\S

Section 434(b)(8) of Title 2 of the United States Code states. in part, that

each report filed under this section shall disclose the amount and nature of outstanding

debts and obligations owed by a political committee.

Sections 104.11 (a) and (b) of Title II of the Code of Federal Regulations

state, in part, that debts and obligations owed by or to a political committee which remain

outstanding shall be continuously reponed until extinguished. These debts and

obligations shall be reported on separate schedules together with a statement explaining

the circumstances and conditions under which each dcbt and obligation was incurred or

extinguished. A debt or obligation. the amount of which IS 5500 or less, shall be reported

as of the time payment is made or not later than 60 days after such obligation is incurred,

whichever comes first. A debt or obligation which IS over 5500 shall be reponed as of

the date on which the debt or obligation is Incurred. except that any obligation incurred

for rent. salary or other regularly reocCUrrIng admilllstrative expense shall not be reported

as a debt before the payment due date.

A test of debts and obligations owed to vendors revealed the eRP failed to

itemize a material number on the disclosure reports and amendments thereto. filed he fore

" The procedural recommendation was made In lale Decemher 1999 Anv changes would not be

reflected In disclosure reportS filed before tim dale

Page 19 of 33 Approved OS/24/01
18

the Audit Notification Lener. The CRP did not file debt schedules for the period Jul\' J.

1998 through December 31, 1998. Subsequent to the Audit Notification Letter amended

schedules for these report periods were filed which materially corrected the deficiency.

At the exit conference and in the Interim Audit Report. the CRP was

advised that no further action would be required with respect to this finding.

In the interim audit report. no further action was recommended \\ith

respect to this matter. The CRP did not dispute this finding.

Section 104.3(4)(v) ofTitle 11 ofthe Code of Federal Regulations requires

that the reporting committee disclose each person who provides a rebate, refund or other

offset to operating expenditures where the aggregate amount or value in excess of S200

within the calendar year, together with the date and amount of any such receipt. Person is

defined at II CFR § 100. I 0 as an individual. partnership, committee. association.

corporation, labor organization, and any other organization. or group of persons.

E. ITEMIZATION OF R£Fl'NDS .... ND REBATES

The review of offsets to operating expenditures (RefundsfRebates)

revealed that on its original 1998 reports. the CRP included in receipts but failed to

itemize. 88 refunds and rebates totaling 533.080. After notification of the audit. the CRP

filed amendments for two report periods (October Quarterly and Post-General) that

corrected 42 errors totaling S15,568. Still requiring itemization were 46 items totaling

S17,512 received between January 1. 1998. and June 30. 1998. The eRP had not filed

Schedules A to support the reported refunds/rebates received from vendors for these

periods. In addition. the CRP failed to report a refund from one vendor for S20.000,

which also requires itemization. (See Finding II.A.)

At the Exit Conference the CRP was provided a schedule ofthe

itemization errors for vendor refunds and rebates. The CRP did not comment.

The staffrecommended that the CRP fi Ie as part of a comprehensive

amended report for 1998, Schedules A. by reporting period. itemizing the remaining

receipts noted above.

In response to the recommendation, the CRP filed the required schedules.

These amended schedules materially corrected the itemization problems.

F. REPORTING OF COi\1\IITTEE LOA"

Section 104.3( d) of Ti tIe J I of the Code of Federal Regula! ions slates in

relevant part. each report filed under II CFR I 04.1 shall. on Schedule C (Loans) or D

Page 20 of 33 Approved OS/24/01
19

(Other Debts), disclose the amount and nature of outstanding debts and obligations owed

by the reporting committee. and that when a political committee obtains a loan, or

establishes a line of credit, at a lending institution as described in 11 CFR ~~ I00. 7(b)( 1J)

and IOO.8(b)(12), it shall disclose the date. amount. interest rate. and repayment schedule

on Schedule C-l.

Section 104.3(a)(4)(iv) ofTitJe 11 of the Code of Federal Regulallons

states in pan. each repon filed shall disclose each person who makes a loan to the

reponing committee. during the reponing period. together with the identification of any

endorser or guarantor ofsuch loan. the date such loan was made and the value of such

loan.

The CRP received a loan from Pacific Century Bank on October 28. 1998

for £300,000. The loan was repaid with interest on November 20, 1998.

The CRP failed to file Schedules A (Itemized Receipts). C (Loans) and

C-I (Loans and Lines of Credit From Lending Institutions). itemizing the receipt ofthe

loan. Subsequent to notification of the audit. Schedules A and C were filed. At the exit

conference. the CRP was provided a schedule detailing the review of the loan. After the

exit conference, the CRP submitted a Schedule C-I.

In the interim audit report. no further action was recommended with

respect to this matter. The CRP did not dispute this finding.

Page 21 of 33 Appro\'ed OS/24/01
Page 21 of 33 Approved 05124/01
,. :C·::I'l:.:t

FEDE:-=\':'L ~~:=:~I.~~;

C':;'•. '-, <."

,",'- .

FEDERAL ELECTION COMMISSION

April 19, 2001

MEMORANDUM

TO:

THROUGH:

FROM:

BY:

SUBJECT:

Robert J. Costa

Assistant Staff Director

Audit Division

James A. Pehrk~ };

StaffDirector ..~.

Lois G. Lerner

Acting General Counsel

f', 'j--" Gregory R. Baker /1'

Acting Associate General Counsel

Peter G. Blumberg ~lt.tb Acting Assistant General Counsel

Delbert K. Rigsby 0aAttorney

Final Audit Report on the California State Republican Party (LRA #579)

I. INTRODUCTION

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

California State Republican Party (the "Committee"), which was submitted to this Office on

March 16,2001. 1

This memorandum presents our comments on the proposed Report. If you

have any questions concerning our comments, please contact Delbert K. Rigsby, the attorney

assigned to this review.

This Office recommends that the CommissIon consider the proposed Fmal Audit Repon In open session

because thIS document does not include maners exempt from public dIsclosure. See 11 C.F.R. 2.4.

Page 23 of 33 Approved OS/24/01
Memorandum to Robert J. Costa

Fmal Audit Report of the California State Republican Party

(LRA #579)

Page 2

II. EXCESSIVE COORDINATED PARTY EXPENDITURES ON BEHALF OF

FEDERAL CANDIDATES (II. Bl

This Office concurs with the Audit Division's finding that the Committee may have

exceeded its coordinated party expenditure limit on behalf of Matt Fong for Senate Committee

and Bordonaro for Congress. This Office notes that the proposed Report states that rnor written

authorization is required to delegate authority for 2 U.S.c. § 441 a(d) expenditures, citing the

Commission's Campaign Guide for Political Party Committees. With regard to the Committee's

expenditures on behalf ofMatt Fong for Senate, the proposed Report states that although the

Committee and the Republican National Committee ("RNC") assert that a delegation of

coordinated spending authority was made, it was clear that the requisite written authorization did

not occur and that the Committee and the RNC understood the need for a written authorization.

This Office reiterates its comments on the Interim Audit Report ofthe California State

Republican Party that while there is no provision in the Federal Election Campaign Act of 1971,

as amended, or the Commission's regulations that requires prior written authorization to delegate

authority relating to 44Ia(d) expenditures, the Audit staffs approach is consistent with longstanding Commission policy. See OGC's Comments on the Interim Audit Report at 2-3. This

Office's comments on the Interim Audit Report are attached and incorporated herein by

reference.

This Office also concurs with the Audit Division's view that the finding relating to

excessive coordinated expenses made by the Committee should not be deferred until the United

States Supreme Court rules on FEC \', Colorado Republican Federal Campaign Commirree,

213 F.3d 1221 (10th Cir. 2000), em, granted, 68 U.S.L.W. 1679 (U.S. Oct. 10,2000) (No, 00-

191). In its response to the Interim Audit Report, the Committee argued that it would be

appropriate for the Commission to defer reaching any finding that the Committee exceeded its

441 a(d) limits until Colorado Republican has been decided by the United States Supreme Court,

The 10th Circuit's opinion in Colorado Republican only applies to the states of Colorado,

Kansas, New Mexico, Oklahoma, Utah and Wyoming, and does not prohibit the Commission

from making any determination in the proposed Report with respect to the California State

Republican Party's compliance with 2 USc. § 441 a(d)3 When referencing the 10th Circuit's

decision on page 16 ofthe proposed Report, this Office recommends that the Audit staff include

the citation for the decision which is found above in this paragraph.

Finally, this Office notes that footnote 13 in the proposed Report refers to February 9,

1998 as the date that the Committee provided the Audit staff with written authorization relating

to its 441 a(d) spending authority on behalf of Bordonaro for Congress ThiS Office recommends

The parenthetIcal reference corresponds to the sectIOn number In the proposed Report

On June 23.2000, the Comrrusslon lssued an advISOry to the pubhc on the 10th ClrcuJl's opInion In

Colorado Republican which states that "until the Supreme Court resolves the case. the Federal EleclJon ConUlUSSlon

will not file any actIon In the courts 10 the Tenth ClfCUJlto enforce seclJon44laldl(3j The CommISSion will.

however. generally contmue the adnumstratlve processmg ofmaners concerning sec lion 441a(d)(3)," Th,s Office

beheves that the fmdlng on coordma\ed expenditures In the proposed Fmal Audn Report IS conSIstent wJlh the

ComrrusslOn's approach regarding thIS case,

Page 24 of 33 Approved OS/24101
Memorandwn to Roben J. Costa

Final Audit Repon of the California State Republican Pany

(LRA #579)

Page 3

that footnote 13 be revised to reflect that February 9,1998 represents the date of the written

authorization and not the date that it was provided to the Audit staff.

Attachment

Memorandum from Lawrence M. Noble to Robert J. Costa, Inrerim Audit Reporr ol/the

California State Republican Party (LRA #579), October 25,2000.

Page 25 of 33 Approved OS/24/0 I
Page 26 of 33 Approved 05 /

24/01
FEDERAL ELECT/O'.. CO.\l\IISS/O"\,

Oc:8Der 25, 2000

'IDIOR-\..'iDVM

Robert J. Costa

Assistant StaffDirector

Audit Division

TO:

FROM: lawrence M. Noble

General Counsel

BY: Kim Leslie Bright~ Associate General Counsel

Rhonda 1. vosding.h~ Assistant General Counsel

THROUGH: James A. Pehrkon

Staff Director

Delbert K. Rigsby DKPAttorney

SUBJECT: Interim Audit Report on the CalifornIa State Republican Party (lRA # 579)

1. INTRODUCTION

The Office of General Counsel has reviewed the proposed Interim Audit Repol1 of the

California State Republican Party (the "Committee"). which was submitted to this Office on

August 25, 2000.' nus memorandum presents OUI comments on the proposed Repol1. If you

have any questions concerning our comments. please contact Delbert K. Rigsby, the attorney

assigned to this review. Attachment )

------ Page / of _t1__

Page 27 of33 Approved OS/24/01
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II. EXCESSIVE COORD I:"!.-\.TEO PARTY EXPPiDJTl'RES 0:-; BEHAl.F OF

FEDERAL C.-\.:-;DlDATES (II. S.)'

ThIS 0 ffice concurs with the: .-\udlt DI vIsion' S recommendation that the COIT'.n1lttee

provide eVidence that the expenditures questloned In t'le proposed Report were not coordInated

expenditures made on behalf of, or contnbutlons [0 the .\1atC FOllg for Senate Comnmtee J.nd

Bordonaro for Congress, The proposed RepoT1 states that prior wntten authonzatlon IS requIred

to delegate authority for 2 U.S.c. § .14!a( d) expenditures. citing the COmrr:1SSIOn .s Camp:J.lgn

Guide for Political Parry Corr.minees (the "Ca!npaign Guide") and FEC v. Democral/c

5enalorial Campaign Commlllee. 454 US. 27 (1981). The Campaign Guide states that a

national parry or state party may a.5Slgn all or part of its coordinated parry spending authonry to

another'parry committee, and the assigning committe, must first authorize the spending in a

wrinen agreemt:nt that shOl.:ld specify the amount the deSignated agent may spend. Campazgn

Guzde at 16. See also 11 C.F.R. §§ llD.7(a)(4) and llD.7(b). J In 1997. the Commission issued

a notice of proposed mlemaking on independent and coordinated party comminee ~xpenditure

limitations that requested comment on whether to add a prior written authorization requircm(::::tt

to the regulations. See 62 Fed. Reg. 24367. 24371. Tne Commission considered adding

language to II C.F.R. § 110.iCc) to "~et forth the Commission's current policy regarding the

assignment" ofilie coordinated party expenditure limitations reflected in the Campaign Guide.

[d. Specifically, the revised regulation would have provided "that whenever a party committee

aUL'1orizes another party comminee to use part or all of its coordinated expenditure limitation, the

authorization must be in writing, must specify a dollar amount, and must be made befo~e the

comminee so authorized actually makes the coordinated expenditure:' [d. However, no final

rules have been adopted. 4

While there is no provision in the Federal Election Campaign Act of 1971, as dIIlended,

or the Commission's regulations that requires prior wnnen authorization to delegate authonry

relating to 441a(d) expenditures, the proposed report's approach is consistent with long-standing

Commission policy. In previous enforcement maners, the Commission has considered

expenditures by party comminees to be unauthonzed where there was no prior wrinen

The parentbetical rcfCTCDCe corresponds Co the secoon cumber III the proposed Report.

Section 110.7(a)(4) permits a nanonal party commHlee to maJce coordinaled e"pendirur~ wnh respect to

presldennal candidates through a clcsignaled agent such as a sute and subordinale party conmunee. Secnon 110.7(b)

pemu15 a nanona! party committee and a sUte party COmIDlnee to maJce coordinated expendirures lor candidates for

federal office In that state, bUI d~ not e:<pucltly proVlde thaI such expendirures may be made through a deSIgnated

agenL Since the ability to designate agen13 for spending authonty under Secnon 441a(d) IS available for presldennal

campaIgns, II should also be available for campaIgn! for the LOlled States Congress and Uruled States Senate.

Because of a cecent federal court deCISIOn. FEe v Colo'ado Republzcan Federal CampaIgn Commlrtee.

213 F3d I22! (iOthCir. 2000). cert granted. 68 L S L.W \679 (US. Oct. 10.2000) (No. 00-191). the law

regardlllg coordinated expendJrures IS WlSenJed In some Junsdlcnoos. Once the legal Issues surrounding coordlIl.3ted

expendlrures are resolved. the COlTUl1,lSSlOrwnay 1rafl oew regulanons.regarding coordinated expendJtures by party

comrmnees. and It IS pOSSible that a pnor "-Tlnen author'.2at,on requlI=ettt to dekgate .authonty under Secnon

~.j la(d) could be Included In the new rules.
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.luthonzatlon. and found reason to believe that the responoJents vlOiated 2 L'SC -+-+ 1alII. but

louk no funher actIOn.' See \IL'Rs 2-0 I. 2 51. -+21:; and -+21-+.

The COlln's deCIsion In Federal Elec:zon CommiSSIOn v. Democrallc SenalOriul

C.1mpalgn C:Jmmmee. .+54 es. 27 ( 1981 ). IS not a basIs to require pnor wnnen authonlatlOT] to

delegate authonty fer:; esc § -+41a(d) expenditures. See Proposed Repon. n.S. D ThiS case

Involved a chaJlenge by the Democratic Se:1atorial CampaIgn Committee to agency agreements

between several state Republican Party COmIT1lttees and the ~ational Republican Senatonal

Committee C:"iRSC) in whIch the state committees designated the NRSC to be their agent for

spending funds pursuant to 2 LJ.S.C 44Iald)(3). In Democratic Senatorial Campaign

Cammlttee, the United State~ Supremt: Court held that Section 441a(d)(3) does not expressiy or

by necessary Implication foreclose the use of agency agreements, and that while Section

441a(d)(3) does not authorize the NRSC to make expendirures in its own right, it does not follow

that it may not act as agent of a committee that is expressly authorized to make expenditures.

This Office does not believe that this decision can he interpreted to require prior written

authorization regarding the delegation ofalithority for Section 44 Ia(d) expenditures. Thus, t.i.is

Office recommends that footnote 5 which discusses this case be deleted from the Interim Audit

Report.

This Office also recommends other changes to this section ofthe proposed Report.

Specifically. footnote 4 should be revised to include the CItation for the decision in FEC v.

Colorado Republican Federal Campaign Committee. 213 F.3d 1221 (10th Cir. 2000). cerro

granted. 68 U.S.L.W. 1679 (U.S. Oct. 10.2000) (No. 00-191), and reflect the correct name of the

court which is the United States Court of Appeals for the Tenth Circuit instead ofthe U.S.

District Court for the lOth Circuit. On October 10. 2000, the United States Supreme Court

granted a petition for \loTit of certiorari to review the Judgment of the United States Court of

Appeals for the Tenth Circuit in this case.

Additionally, the proposed Report's formulation ofthe amount of excessive coordinated

expenditures made by the Committee on behalf of Matt Fong for Senate Committee and

Bordonaro for Congress, which is found on pages 7 and 12, respectively, combines both the

441a(a) contribution limit and the 441a(d) coordinated expenditure limit in the calculation. The

proposed Report should be revised to clarify that the two limits are combined for purposes of

calculating the excessive amount of coordinated expenditures.

For example. tn MlJR 4213. t!ll5 Office's analysIs scared "state parnes may not malee coordUlared party

expendJrures on behalf of the presldennal nclcet wllhout pnor wntten authonzanoD from the nanonal party

cOrTlITUttee." Ftrst General Counsel's Repon dated Apnl 12. 1995 at4.

Foomote 5 in the proposed Repon references Nanonal Republican Senatonal Campaign v Democranc

SenalOriai Campaign Comml/lee (CIVil Acnon ~o. 80-1129) and FEC v. Demoeranc SenalOriai Campaign

Commlltee (CIVIl AcnOD No. 80·939). wluch were ClSe! for reView before the Uruted States Supreme Court. The

L'ruted States Supreme Coun consolidated these cases for purposes of oral argument. and the Court's deCISIon IS

,ICed as Federal Elecnon CommISSion v Democranc SenalOrlal Campaign Commlrtee'- 454 U S. 27 (1981}.
\ !~::l()rJ~dum [Q Rcb~n J CJ:;iJ

\"~I[ or :he CJI,(om;J su:~ R~?ubIICJn PJl":\

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Finally. this Office IS attachmg lts response :0 the rirst audil '1uery for thc Cillfcrnla

Republican Party regarding the Commlltee's expenditures In a special electlon In 1998 to fill the

V:lcant seat in the 2Znd Congressional District In California. That query raised a number of

questlons relatcd tc the proposed Report's fmding U.B.:., "Excessive Coordinatc:d Party

Expenditures on Behalf of Bordonaro for Congress," specIfically: I) whether the January 13.

J 998 special election is considered a general election; 2) whether there is a separate expendllure

limit under 2 U.S.C. § 441 a(d) fer the January 12. 1998 election and the March 10, 1998

dection, 3) whether the Committee could divide its 441a(d) limit between the t\'iO Republican

candidates in the January 1.1, 1998 election; 4) whether the Committee can make "genenc

GOTV" party disbursements in direct relation to both special electIOns if only one federal office

is on the ballot; and 5) whether the Committee's disbursements are either 441 a(d) expenditures

or contributions to any candidates. As noted in that memorandum. this Office recommends it be

attached to the proposed Report when il is circulated to me Commission.

Attaclunent

Memorandum from Kim Leslie Bright. Associate General Counsel. to Robert J. Costa, Assistant

Staff Director. Audit Division. Audit Query on California Republican Parry (LRA #-579).

March 14,2000.

Attachment ..!,./ _

Page Vf of _4__ Page 30 of 33 Approved OS/24/01
FEDERAl ELECT/O" (0"'1"'115510"

WASHJ"CTO' D C 211~b'

June 1.2001

::i

Mr. Michael Der ManoueL Treasurer

California State Republican Pany

1903 W. Magnolia Blvd.

Burbank. CA 91506

Dear Mr. Der Manouel:

Attached please find the Final Audit Repon on California State Republican Pany.

The Commission approved the repon on May 24.2001.

The Commission approved Final Audit Repon will be placed on the public record

on June 5. 2001. Should you have any questions regarding the public release of the

repon. please contact the Commission's Press Office at (202) 694-1220. Any questions

you have related [0 matters covered during the audit or in the repon should be directed to

Ms. Erica Holder or Mr. Russ Bruner of the Audit Division at (202) 694-1200 or toll free

at (800) 424-9530.

Sincerely.

Raben J. CostJ

ASSistant Staff Director

Audit DI\ision

Attachment as stated

cc: Charles E. Bell. Jr. Esq.

Page 31 of 33 Approved OS/24/01
Page 32 of 33 Approved OS/24/01
CHRONOLOGY

CALIFORNIA REPUBLICAN STATE PARTY

:\99·50

Audit Fieldwork

Interim Audit Report to

the Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

1all 7/99--12/09199

11/27/00

01/17/01

OS/24/01

Page 33 of 33 Approved OS/24/01
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