Part I
Background

Authority for Audit

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

Scope of Audit

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

. The receipt of excessive contributions and loans.

. The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The consistency between reported figures and bank records.

. The completeness of receipt records.

. A reported debt to the Candidate’s spouse.

. Other committee operations necessary to the review.

NAWRWH

Changes to the Law

On March 27, 2002, President Bush signed into law the Bipartisan Campaign Reform Act
of 2002 (BCRA). The BCRA contains many substantial and technical changes to the
federal campaign finance law. Most of the changes became effective November 6, 2002.
Except for November 7, 2002 through December 31. 2002, the period covered by this
audit pre-dates these changes. Therefore, the statutory and regulatory requirements cited
in this report are primarily those that were in effect prior to November 7, 2002.


Interim Audit Report Recommendation

The Audit staff recommended that KKFC:

¢ Provide for review, all credit card statements for the periods covering KKFC’s
inception to current date (May 2002 — April 2004*) including any card to which any
portion of the balance was transferred:

¢ Provide cancelled checks or other payment records that show the source of the funds
used to make payments on the balances:

e Provide evidence demonstrating that the credit card charges were made using the
Candidate’s personal funds;

e Absent such evidence, refund to the Candidate’s wife the amount of the outstanding
credit card balances and provide evidence of such refund (copies of the front and
back of the negotiated refund check(s) along with evidence payment was made on the
credit card balances);

«If funds were not available to make the necessary refund, the refund amount must
continue to be disclosed as a debt on Schedule D until funds became available.

Committee Response to Recommendation and Audit Staff's
Assessment

In response, Counsel for KKFC again stated that the credit card, viewed as a joint credit
card of the Candidate and his spouse, “was used by Committee staff to make campaign-
related purchases with the understanding that the Committee was obligated to pay for all
campaign-related charges... All of the campaign charges made with the credit card and
related finance charges were paid by the Committee, the Candidate, or were transferred to
credit cards issued to the candidate. As a result, the spouse did not make excessive
contributions to her husband's campaign.” Counsel further stated “The spouse never
paid for any of the charges made by the Committee with the credit card.”

Counsel provided a spreadsheet, copies of canceled checks, credit card statements and an

investment account statement to support these ussertions. In the response, Counsel stated

the following:

¢ KKFC incurred campaign-related expenditures totaling $59,812 and finances charges
totaling $4,791,

¢ KKFC made payments to Ms. McNealy’s credit card account totaling $22,015:

¢ Transfers totaling $23,999 were made from Ms. McNealy’s credit card account to
three other credit cards purportedly issued to the candidate:

© A payment in the amount of $18,124 was made to Ms. McNealy’s credit card account
from an investment account jointly owned by the Candidate and his wife: and

e A debt (owed by the Committee) in the amount of $465 remains outstanding.

Counsel also stated that KKFC was in the process of amending its disclosure reports to
reflect the payments and transfers.” As of January 6, 2005. the amendments had not been
filed.

* Excluding statements previously provided
> On December 8, 2004, Counsel met with representatives from both the Audit Division and Reports
Analysis Division to discuss the correct format to file the amended reports.


Part Ii
Summary

Finding and Recommendation

Receipt of Contributions that Exceed the Limit

A credit card held in the Candidate’s spouse's name was used to make campuign related
expenditures totaling $59,812. These charges exceed the contribution limitation by
$57,812. In the interim audit report, the Audit staff recommended that KKFC provide
evidence that the contributions were made using the Candidate’s personal funds or refund
the outstanding amount to the Candidate’s spouse. Evidence provided by KKFC and
information obtained by subpoena verify that the amount owed to the spouse’s credit card
account was paid, albeit untimely. (For more detail, see p.4.)



Part II
Overview of Campaign

Campaign Organization

Important Dates

Kevin Kelley for Congress

e Date of Registration

May 13, 2002

e Audit Coverage

May 9, 2002 - December 31, 2002

Headquarters

Redford, MI

Bank Information

¢ Bank Depositories

1

e Bank Accounts

1 Checking Account

Treasurer

e Treasurer When Audit Was Conducted

Karen Potter White

e Treasurer During Period Covered by Audit

Richard A. Young

Management Information

¢ Attended FEC Campaign Finance Seminar

Unknown

e Used Commonly Available Campaign
Management Software Package

Yes

e Who Handled Accounting and
Recordkeeping Tasks

Committee Staff

Overview of Financial Activity
(Audited Amounts)

Cash on hand @ January 1, 2001 $0
Receipts

o From Individuals 289,615

o From Political Committees 366,872

o Other Receipts 7,374
Total Receipts $663,861
Disbursements

oO _Operating and Other Disbursements 646,593
Total Disbursements $646,593
Cash on hand @ December 31, 2002 $ 17,268


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

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

e Any assets which, under applicable state law, at the time he or she became a
candidate, the candidate had legal right of access to or control over, and with
respect to which the candidate had legal and rightful title or in which the
candidate had an equitable interest.

e Salary and other earned income from bona fide employment and dividends and
proceeds from the sale of the candidate's stock or other investments. 1] CFR
§110.10(b)(2).

Facts and Analysis

During the review of reported debts and obligations, the Audit staff identified a debt
owed to Connie S. McNealy, the Candidate’s wife. The purpose disclosed to the FEC
was “Campaign Credit Card Balance.” During the period October 6, 2002 through
January 24, 2003, Ms. McNealy used her personal credit card to make $59,812 in
campaign related expenditures. The expenditures were made for the general election
resulting in an apparent excessive contribution of $57,812".

The bulk of the expenditures were to the Detroit Legal News ($49,820) for printing. The
remaining amount ($9,992) was paid to various other vendors for transportation, food,
catering, and miscellaneous expenses. It was not known whether there were other
campaign related charges since credit card statements for the period prior to September
27, 2002 were not made available for Audit staff review.

The Audit staff identified payments totaling $22,015 made by KKFC during the period
November 2002 through December 2003, toward the outstanding balance on the account.
These payments were made directly to the credit card company. In addition, $10,000 of
the balance was transferred to another credit card account. The account holder was
unknown.

At the exit conference, Counsel for KKFC stated that the credit card owned by Ms.
McNealy was obtained prior to her marriage to the Candidate. Counsel did not provide
documentation to support that statement. He stated that the Candidate and Ms. McNealy
considered all credit cards to be jointly owned regardless of whose name was imprinted
on the card. Counsel also stated that both Ms. McNealy and the Candidate paid the credit
card bills.

3 $59,812 less a $1,000 general election contribution and $1,000 for voluntary unreimbursed travel
expenses.


FEDERAL ELECTION COMMISSION
WASHINGTON, D.C 20463

February 2, 2005

MEMORANDUM
TO: PRESS OFFICE
wile
FROM: JOSEPH F. STOLTZ ; >
ASSISTANT STAFF DIRECTOR
AUDIT DIVISION

SUBJECT: | PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON
KEVIN KELLEY FOR CONGRESS A03-17

Attached please find a copy of the final audit report and related documents on
Kevin Kelley for Congress, which was approved by the Commission on January 21, 2005.

Informational copies of the report have been received by all parties involved and
the report may be released to the public.

Attachment as stated

ce: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library
Web Manager


Not included in the response was evidence that the Candidate was liable for amounts.
owed to the credit card accounts to which the transfers totaling $23,999 were made, thus
demonstrating that the payments to his wife’s credit card account were made using his
personal funds. Also, requested credit card statements for Ms. McNealy’s account were
not provided in order to confirm that there were no other campaign-related expenditures.

The Commission issued subpoenas to three credit card companies seeking the identities
of the individual(s) responsible for paying the account balances and the identities of the
individual(s) to whom the credit cards were issued. Also subpoenaed were copies of
credit card statements.

Responses to the subpoenas identify the Candidate as the individual liable for payment
for all three accounts to which transfers were made. According to the credit card
statements provided for these accounts, $15,599 of the amount transferred was paid in
full by July 11, 2003. Statements showing payment of the remaining $8,400 were not
provided. In addition, credit card statements provided for Ms. McNealy’s account
included the period May 10, 2002 through September 19, 2002. A review of these
statements found no additional expenditures that appeared to be campaign-related.

Based on the information provided, the Audit staff concludes that the excessive
contributions totaling $57,812 resulting from the use of Ms. McNealy’s credit card have
been resolved, albeit untimely. Kevin Kelly for Congress still must file amended reports
to disclose correctly the payments and transfers made to discharge the debts.


Part IV
Finding and Recommendation

| Finding 1. Receipt of Contributions that Exceed the Limit

Summary

A credit card held in the Candidate’s spouse’s name was used to make campaign related
expenditures totaling $59,812. These charges exceed the contribution limitation by
$57,812. In the interim audit report, the Audit staff recommended that KKFC provide
evidence that the contributions were made using the Candidate’s personal funds or refund
the outstanding amount to the Candidate’s spouse. Evidence provided by KKFC and
information obtained by subpoena verify that the amount owed to the spouse’s credit card
account was paid, albeit untimely.

Legal Standard

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

B. Advances by Individuals from Personal Funds. When an individual uses his or her
personal funds, including a personal credit card, to pay for goods or services used by or
on behalf of a candidate or political committee, that payment is a contribution unless the
payment falls under certain exceptions for travel (see below). 11 CFR §100.7(b)(8) and
116.5(b).

C. $1,000 Travel Exemption. An individual may voluntarily spend up to $1,000 per
candidate, per election, for unreimbursed travel expenses on behalf of the candidate
without making a contribution. 11 CFR §100.7(b)(8).

D. Travel Expenses Exceeding $1,000 Exemption. Payments for transportation
expenses” that exceed the $1,000 travel exemption (above) are considered contributions
unless the committee reimburses them:
e Within 60 days of the closing date on the credit card billing statement where the
charge first appeared if the payments were made on a credit card; or
e Within 30 days, if the payments were made with cash or acheck. 11 CFR
§116.5(b).

E. Treatment as Debt. A political committee shall treat the obligation arising from a
payment as an outstanding debt until reimbursed. 11 CFR §116.5(c)

? Including usual and normal subsistence expenses (such as food and lodging) incurred while traveling on
behalf of the candidate.


Table of Contents

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

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

Part III. Summary

Finding and Recommendation

Part IV. Finding and Recommendation
Receipt of Contributions that Exceed the Limit

Page

wry


Report of the
Audit Division on
Kevin Kelley For Congress

May 9, 2002 - December 31, 2002



Report of the
Audit Division on

Kevin Kelley For Congress
May 9, 2002 - December 31, 2002

Why the Audit About the Committee (p. 2)

Was Done Kevin Kelley For Congress (KKFC) is the principal campaign
Federal law permits the committee for Kevin Kelley, Democratic candidate for the
Commission to conduct U.S. House of Representatives from the state of Michigan, | "
audits and field District. KKFC maintains its headquarters in Redford, MI.
investigations of any For more information see the chart on the Campaign

political committee that is Organization, p.2.

required to file reports

under the Federal Financial Activity (p. 2)

Election Campaign Act « Receipts

(the Act). The © Individual Contributions $289,615
Commission generally o Political Committee Contributions 366,872
conducts such audits o Other Receipts 7,374
when a committee o Total Receipts $663,861
appears not to have met

the threshold

requirements for ¢ Disbursements

substantial compliance o Total Disbursements $646,593
with the Act.' The audit

determines whether the

committee complied with

the limitations,

prohibitions and Finding and Recommendation (p. 3)
disclosure requirements Receipt of Contributions that Exceed the Limit

of the Act.

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

' 2 U.S.C. §438(b).