FEDJ:~:\L ELECTION COf\\MISSION

AK006303

May 8, 1995

MEMORANDUM

TO:

FROM:

RON M. HARRIS, PRESS OFFICER

PRESS OFFICE

ROBERT J. COSTA - /fP.,,-

ASSISTANT STAFF DI~~ AUDIT DIVISION

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SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

BENNETT FOR SENATE

Attached please find a copy of the final audit report

and related documents on Bennett for Senate which was

approved by the Commission on April 27, 1995.

Informational copies of the report have been received by

all parties involved and the report may be released to the

public.

Attachment as stated

cc: Office of General Counsel

Office of Public Disclosure

Reports Analysis Division

FEC Library

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REPORT OF THE AUDIT DIVISION

ON

Bennettfor Senate

ApproftClApril 1.7, 1995

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASIDNGTON, D.C.

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TABLE OF CON'l'ENTS

BENNETT FOR SENATE

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Executive Snmmary

Final Audit Report

Background

Findings

Legal Analysis

Letter from CoulUIel Re:

Proposed Pinal Andit Report

Transmittal to C~ttee

Chronology

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FINAL AUDIT ."'EPORT

ON

BENNETT FOR SENATE

EXECUTIVE SUMMARY

Bennett For Senate (the Committee) registered with the

Secretary of the Senate on OCtober 3, 1991, as the principal

campaign committee for Robert F. Bennett, Republican candidate

for the u.s. Senate from the state of Utah.

The audit was conducted pursuant to 2 U.S.C. Section

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 findings of the audit were presented to the Committee

at an exit conference held after the fieldwork and later in an

interim audit report. The Committee's responses to those

findings are included in the final audit report.

~sstatement of Financial Activity 2 u.s.c. S434(b)(1),

(2), and (4). The audit dete~ined that the Committee's

disclosure reports had overstated receipts by $281,397 and

overstated disbursements by $254,403. In response to the

interim audit report the Committee filed amended disclosure

reports correcting the errors.

Apparent Prohibited Contributions 11 CFR 110.10(a) and

(b); 2 U.S.C. 441b(a) and (b)(2); 2 U.S.C. 441a(a)(1)(A); and 11

CFR 100.7(a)(1). This section of the report addresses the

Candidate's relationship with Franklin Quest, a corporation with

which he was affiliated. The report questions a number of

transactions that occurred during the campaign period. Each is

noted below.

°Candidate's Consulting Fee from Franklin Quest Co.

The Candidate, a former president and CEO of Franklin Quest,

left the company and founded a consulting firm in July of 1991.

The firm's only client was Franklin Quest, which paid a fee of

$43,750 per month for one year. The interim audit report

requested information to establish that the payments to the

Candidate pursuant to the consulting agreement represented

salary or other earned income from bona fide employment and were

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independent of Senator Bennett's candidacy. Otherwise the

payments would be considered prohibited contributions to his

campaign. The Committee's response provides some additional

information. However, the audit report concluded that the

response fell short of demonstrating that the consulting

payments were earned income.

°Consulting Fee Advance In January of 1992, the

Candidate received an advance of $131,250 on the monthly

consulting fee, an amount representing 3 months at $43,750 per

month. Of that amount, $80,000 was transferred to the

Committee. The interim audit report requested that the

Committee demonstrate that the advance did not constitute, in

part, a prohibited contribution form Franklin Quest. The

Committee offered a n~l~er of arquments and explanations for the

advance to support its claim that the advance was paid in the

ordinary course of business and was driven by financial and

business events completely independent of Senator Bennett's

candidacy. The audit report concluded that the Committee's

arguments were flawed, thus leaving unresolved the questions surrounding the advance payment.

°Corporate Stock Repurchase Agreement Used to

Guarantee a Bank Loan A prohibited contribution also results

when a corporation guarantees a bank loan used for a campaign.

In February of 1992 the Candidate obtained a $385,000 line of credi~ from a bank. Of that amount, $185,000 was used to pay an

obligation of the Candidate to Franklin Quest. The remaining $200,000 was used for the campaign. The loan was collateralized

by the Candidate's Franklin Quest stock. In order for the loan

to be made, Franklin Quest agreed to purchase the collateral in

case of default. At the time, Franklin Quest was a closely held

Subchapter S corporation, and there was no other market for the

stock. The interim audit report concluded that the agreement

with Franklin Quest constituted "any other fo~ of security·

within the meaning of 11 CFR 100.7(a)(1)(i). The Comaittee

argued that the repurchase agreement did not represent any sort

of loan guarantee because Franklin stood to make a profit on the

stock if the default occurred. The Committee also submitted

evidence that such agreements are common practice. The audit

report, however, concluded that the Committee failed to

demonstrate that the stock repurchase agreement was not a form

of security provided for the lean.

°Guarantee of Bank Loan by Candidate's Spouse In

addition to the Franklin Quest stock that was pledged to secure

the line of credit, the Candidate's wife also signed the loan

agreement as a guarantor. In response to the interim audit

report, the Committee demonstrated that the sole collateral for

the loan was the Candidate's Franklin Stock and that the bank

requiring Mrs. Bennett to sign as a guarantor did not constitute

a contribution by Mrs. Bennett.

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°Franklin Quest Distribution Used to Repay Bank Loan

On June 1, 1992, the Candidate received a $795,000 earnings

distribution from Franklin Quest. Nearly half of that amount

was used to benefit the campaign in the form of loan repayments

and contributions made by t- Candidate. The interim audit

report asked the Committee to demonstrate that the distribution

was in the ordinary course of Franklin Quest's business. In

response, the Committee demonstrated that each Franklin Quest

shareholder had received a proportionate share of the total

distribution and that no special treatment had been afforded the

Candidate.

Disclosure of Loan Receipts and Repayments 2 U.S.C.

S434(b)(3)(E) and (5)(0); 2 U.S.C. S431(11); and 11 CFR

§104.11(a). The Committee received bank loans totaling $210,441

and loans from the Candidate totaling $1,310,000. The audit

discovered numerous reporting errors with respect to these

loans, and the interim audit report requested that the Committee

correct these errors in amended disclosure reports. The

Committee filed the requested amended reports.

Apparent Excessive Contributions 2 U.S.C. 5441a(a); 2

U.S.C. S441f; 11 CFR 5100.7(a)(1); 11 CFR 5110.1(k); and 11 CFR

SI03.3(b)(3)and (4). The audit discovered that the Committee

had received 17 contributions that exceeded the contribution

limitations by $19,450. In r~sponse to an interim audit report

recommendation, the Committee submitted copies of refund checks

for each of the questioned contrib\'P~ions.

Apparent Excessive Contributions from Staff Advances

2 U.S.C. S441a(a)(I)(A) and 11 CPR SI16.S(b). A review of

expense reLmburs~ments showed that one individual had made

excessive contributions by using his personal credit card to pay

Committee expenses. The Committee attempted to justify the

advances but misapplied the Commission's regulations by cla~in9

that the expenses did not result in contributions because they

were reimbursed within 60 days. However, the 60 day grace

period applies only to an individual's payment of his own travel

expenses. Non-travel expenses result in contributions on the

date incurred regardless of when they are re~ursed.

Contributions Subject to 48 Hour Disclosure Notices

2 u.s.c. S434(a)(6). Authorized committees receiving

contributions of $1,000 or more between 20 days and 48 hours

before an election must disclose such contributions within 48

hours of their receipt. The audit concluded that the Committee

failed to file the required 48 hour notices for 37 contributions

totaling $649,001, including six from the Candidate totaling $600,000. The Committee suggested that some of the

contributions may have been included in missing Fac8~ile

transmissions to the Office of the Secretary of the Senate. The

evidence suggests that only one of the 37 contributions could

have been contained in those transmissions, assuming that ~hey

were filed on time.

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FEDERAL ELECTION COMMISSION

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REPORT OF THE AUDIT DIVISION

ON

BENHrl'T FOR SENATE

I Background

A. Overview

This report is based on an audit of Bennett for Senate

(the Conunittee), undertaken by the Audit Division of the Federal

Election Commission in accordance with the provisions of the

Federal Election Campaign Act of 1971, as aaended (the Act).

The audit was conducted pur8uant to Section 438(b) of Title 2 of

the United States Code which state., 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 conduetinq any- audit under this

section, the COBaission shall perfora an internal review of

reports filed by selected ca.aittees to deteraine if the reports

filed by a particular cOBaittee Jl88t the thre8hold requlreaents

for substantial compliance with the Act.

The audit covered the period froa 8epte.ber 6, 1991,

the date of the COBaittee'8 first recorded transaction, through

June 30, :, ~93, the closing date for the lat••t report filed at

the time of the audit. The Ca.aittee reported a beginning CAsh

balance of $0; total receipt. for the period of $4,343,331;

total disbursements for the period of $4,314,891J and an ending

cash balance of $28,440.

B. Campaign Organization

The Committee registered with the Secretary of the

Senate on OCtober 3, 1991 as the principal campaiqn committee

for Robert F. Bennett, Republican candidate for the u.S. Senate

from the State of Utah. The COIBittee maintained its

headquarters in Salt Lake City, Utah.

The audit indicated that the Committee was financed

primarily through contributions and loans from the candidate

($3,001,121). Together these contributions and loans

represented 74\ of total receipts. The remaining 26' was

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derived from loans from the First National Bank of Layton ($210,441), contributions from political committees ($500,688),

and contributions from individuals and from political party

committees {$440,044).

This report is based on documents and workpapers which

support each of its factual statements. They fo~ part of the

record upon which the Commission based its decisions on the

matters in the report and were available to the ComLissioners

and appropriate staff for review.

c. Key Personnel

The Treasurer of the COBIlittee during the period

covered by the audit was Mr. John K. Baird.

D. Scope

The audit included testing of the following general

categories:

1. The receipt of contributions or loans in excess of

the statutory liaitatioD8; (see Finding 11.0.)

2. the receipt of contributions froa prohibited

sources, such as those -f-roa corporations or labor

organizations; (see Pinding II.B.)

3. proper disclosure of contributions froa

individuals, political c~ttee. and other

entities, to include the ite.ization of

contributions when required, as well a8, the

ca.pletene88 and accuracy of the info~tion

disclo.edl

4. proper disclosure of di8burae.ents including the

itemization of disbur....nt. when required, as

well as, the cOIBpletenes8 and accuracy of the

information disclosed;

5. proper disclosure of campaiqn debts and

obligations; (see Finding II.C.)

6 . the accuracy of total reported receipts,

disbursements and cash balances as compared to

campaign bank records; (see Finding II.A.)

7 . adequate recordkeeping for campaign tra~sactions;

8. other audit procedures that were deemed necessary

in the situation.

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Unless specifically discussed below, no material

non-compliance was detected. It should be noted that the

Commission may pursue any of thE~! matters discussed in this

report in an enforcement action.

II. Audit Findings and Recommendations

A.. Misstatement of Financial Activity

Sections 434(b)(1), (2) and (4) of Title 2 of the

United States Code state, in relevant part, that each report

shall 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 period and calendar

year.

The Audit staff's reconciliation of the Committee'S

reported activity to amounts reflected in its bank records from

inception through December 31, 1992 revealed the following

misstatements of financial activity. However, the Comaittee did

V) not maintain any record that documented the derivation of

reported amounts. Absent such a record, the Audit staff was not

able to explain all differences between amounts reported and

amounts reflected on the CODDittee's bank records.

1. Receipts

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The SUIB of the C0J8ittee's reported receipts by

period is $4,069,668. The Audit staff's bank reconciliation

determined that the Cam.ittee should have reported $3,788,271 in

receipts for the cOlllbined. years 1991 and 1992. This represents

a net overstatement of $281,397. The ca.ponents of the

misstatement and adju8~nt8 are as follows:

--an in-kind Candidate contribution overstated

in the July 1992 Quarterly report (-$191,124);

--a Candidate contribution/loan not reported

in the Pre-Pr~ report ($1,000);

--a Candidate contribution reported twice, on the

check date and on the deposit date in the PostGeneral report (-S100,000);

--an in-kind contribution not reported ($402);

--Political Committee contribution and refund/

rebate not reported ($2,600);

--net reconciling adjustment ($5,725).

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2. Disbursements

The sum of the Committee's reported disbursements

by period is $3,896,244. The Audit staff's bank reconciliation

determined that the Committee should have reported $3,641,841 in

disbursements for the combined years 1991 and 1992. This

represents a net overstatement of $254,403. The components of

the misstatement and adjustments are as follows:

--loan repayments overstated in the July 1992 Quarterly

report (-$191,124);

--repayment of the loan from the First National Bank

of Layton with a draw on line of credit not

reported in the April 1992 Quarterly report ($10,220);

--in-kind contribution not reported as a disburse.ent

($2,231);

--disbursements reported twice in the Pre-Convention

and Post-General report periods (-$46,550);

--inter-account transfers reported in the Pre-General

and Post-General report periods (-$36,643);

--1992 bank charges not reported ($1,661);

--net reconcil~g adjustment ($5,802).

3. Ending Cash on Hand

The reported ending cash on hand at Decesaber 31,

1992 was $173,424. The correct reportable ending cash OD hand

was $146,507. Primarily, this misstatement was caused. by the

receipt and disbursement misstatements detailed above.

At the exit conference, copies of the schedules

explaining the adjustments were provided to the Cam.ittee.

Committee representatives stated that they would file

comprehensive amended reports to correct the misstat...nts

described above. The Interim Audit Report also requested. that

the Committee file an amended report.

The Committee's Response to the Inter~ Audit

Report (Response) included the requested amended report.

B. Apparent Prohibited Contributions

Sections 110.10(a) and (b) of Title 11 of the Code of

Federal Regulations state, in part, that candidates for Federal

office may make unlLmited expenditures from personal funds.

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For purposes of this section, personal funds means HflY

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

either legal and rightful title; an equitable interest; salary

and other earned income from bona fide employment; dividends and

proceeds from the sale of candidate's stocks or other

investments; bequests to the candidate; income from trusts

established before candidacy; income from trusts established by bequest after candidacy of which the candidate is the

beneficiary; gifts of a personal nature which had been

customarily received prior to candidacy; proceeds from lotteries

and similar legal games of chance.

Sections 441b(a) and (b)(2) of Title 2 of the United

States Code state, in part, that it is unlawful for any national

bank, or any corporation organized by authority of any law of

Congress, to make a contribution or expenditure in connection

with any election to any political office, or in connection with

any primary election or political convention or caucus held to

select candidates for any political office.

For purposes of this section, the term "contribution

or expenditure" shall include any direct or indirect payment,

distribution, loan, advance, deposit or gift of money, or any

services, or anything of value (except a loan of money by a

national or State bank made in accordance with the applicable

banking laws and regulations and in the ordinary course of

business) to any candidate, campaign committee, or political

party or orqanization, in connection with any election.

Section 441a(a)(1)(A) of Title 2 of the United States

Code states that no person shall make contributions to any candidate and his authorized political committees with respect

to any election for Federal office which, in the aggregate,

exceed $1,000.

Section lOO.7(a)(1} of Title 11 of the Code of Federal

Regulations, states in relevant part that the term loan includes

a guarantee, endorsement, and any other form of security.

A loan which exceeds the contribution limitations of 2

U.S.C. 441(a) and 11 CFR part 110 shall be unlawful whether or

not it is repaid. A loan is a contribution at the time it is

made and is a contribution to the extent that it remains unpaid.

Further, a loan is a contribution by each endorser or

guarantor. Each endorser or guarantor shall be deemed to have

contributed that portion of the total amount of the loan for

which he or she agreed to be liable in a written agreement.

However, a candidate may obtain a loan on which his or her

spouse's signature is required when jointly owned assets are

used as collateral or security for the loan. The spouse shall

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not be considered a contributor to the candidate's campaign if

the value of the candidate's share of the property used as

collateral equals or exceeds the amount of the loan which was

used in the candidate's campaign.

Backqround

The Candidate contributed/loaned the campaign a total of

$3,001,121. As a result, the auditors made an inquiry concerning the Candidate's financial status. This inquiry was

also prompted by an OCtober 1991 personal financial statement

which shows the Candidate's net worth at $8,622,000 of which

only $17,000 was liquid. The majority of the Candidate's assets

were in "Non-Marketable Restricted Securities", $8,000,000. The

explanatory note on the financial statement explains that this

represents 20,044 shares of Franklin International Institute,

Inc.!1 (Franklin) at $400 per share. The Candidate's

contributions revolve around this stock and the Candidate's

involvement in this corporation.

According to a June 2, 1992 stock prospectus, Franklin was

incorporated in December of 1983. From September 1987 through

June 2, 1992 Franklin operated as a Subchapter S Corporation.

After that date Franklin discontinued its Subchapter S status

and at the same t~e offered stock for public sale. The

associated stock prospectus notes that "{h]istorically, the

Company has never declared or paid any cash dividends on the

Common Stock other than distributions made to shareholders to

cover their individual liability for payment of income taxes

occurring as a result of the Company's status as an S

Corporation or in connection with the capitalization of

affiliated companies."~1 According to the prospectus as of May

26, 1992 Franklin had 29 stockholders. The Candidate owned

11.37\ of Franklin's stock on June 2, 1992.

Also according to the June 2, 1992 stock prospectus,

"Robert F. Bennett has been a director of the COIIlpany since

OCtober 1984, and served as Chairman of the Board froa December

1984 to December 1986." "From November 1990 to April 1991, Mr.

Bennett was Vice Chairman of the Company. Mr. Bennett vas

President of the Company from October 1984 to January 1991 and

served as Chief Executive Officer of the Company from December

1986 to April 1991." According to a June 23, 1993, stock

prospectus Senator Bennett remained on the Board of Directors

and was on the Compensation Committee. His then current term

was due to expire at the 1993 annual meeting.

11

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In April of 1992 Franklin International Institute, Inc.

changed its name to Franklin Quest,Inc.

Similar statements are included in a second prospectus

dated June 23, 1993.

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Candidate's Consulting Fees from Franklin Quest Co.

Senator Bennett l~ft Franklin and established a consulting

firm. In response to an inquiry about the circumstances

surrounding Senator Bennett's departure from Frankli':l, the

Committee states that "The Senator left Franklin to pursue

consulting opportunities, with new clients and former clients of

Franklin Quest." Also the General Counsel of Franklin provided

an affidavit that states:

"In or about April 1991, Franklin and Mr. Bennett began

developing a business plan for starting up a new division

of Franklin to be known as the 'Franklin Consulting Group.'

In April 1991, Mr. Bennett resigned his offices of Vice

Chairman and Chief Executive Officer consistent with his

decision to create and lead the consulting group.

"The Franklin Consulting Group was to be an independent

profit center for Franklin and was to be led by Mr. Bennett

for the purpose of providing 'value-added' consulting to

the corporate accounts and customers of Franklin, as well

as providing consulting services to Franklin.

"On further analysis by Franklin and Mr. Bennett, it became

apparent that the activities of any internal consulting

group would create an unacceptable level of liability for

Franklin.

"Accordingly, Mr. Bennett and Franklin agreed that an

'outside' consulting group would be formed by Mr. Bennett,

which consulting group would provide consulting services to

Franklin as well as other clients.

"R. F. Bennett Associates, Inc., a Utah corporation with

Mr. Bennett as its sole shareholder, was formed for the

purposes originally conceived by Franklin and Mr. Bennett.

Additionally, Franklin understood that Mr. Bennett would,

in his discretion, be at liberty to conduct consulting

activities with parties other than Franklin and/or its

customers and clients.

"Through R. F. Bennett Associates, Inc., Franklin continued

to retain the business expertise and consulting services of

Mr. Bennett."

Included in the materials submitted is a copy of an

agreement between Franklin and Senator Bennett, dated July I,

1991 but unsigned~/. The agreement states in part:

3/ l:.~col:ding to Franklin's General Counsel neither this

agr,?ement nor any follow-up agreement was signed by either

Franklin or Senator Bennett, but the unsigned agreement

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"We have attempted to reflect in our decisions and

conclusions the deep affection we have for you while reaching such conclusions as we have deemed

necessary and appropriate to protect both parties

to this transaction, eliminate any ambiguity or

misunderstandings with respect to the future and

facilitate a smooth transition into the next phase

of our relationship."

"We initially announced to the world that Bob

Bennett would be forming 'Franklin Consulting

Group', which would be an affiliated company of

Franklin International Institute, Inc.

Subsequently, however, the structure, organization

and ownership of that entity has evolved to the

point that Franklin will have no ownership,

control, direction or management of the new entity.

Consequently, the new consulting firm should not

use the Franklin name or logo. We are aware that

you have already procured stationary and business

cards reflecting the name 'Franklin Consulting

Group.' All such business cards and stationary

should be discarded. We strongly recoJDaend that

you name your new company 'Bennett Consulting

Group' or 'Robert F. Bennett and Associates.

Consultants' or such other title that incorporates

your name."

The agreement does not specify the financial arrangeaent

between the consulting firm and Franklin. The stock prospectus

notes that a retainer of $43,750 per month was paid starting in

July of 1991 and ending in June of 1992. The consulting

agreement states that in consideration of the retainer, -Bennett

Consulting agrees to be available, on an as-needed basis, at

times mutually acceptable to both parties, to consult with

senior management of Franklin. You have agreed to provide

certain specific consulting services as outlined in your June

25, 1991, memorandum."

The agreement goes on to provide for Senator Bennett to use

Franklin staff to service third party clients on a reimbursable

basis and contrary to provisions of a stock "Buy/Sell

Agreement"!/, not to require that Senator Bennett sell his stock

(Footnote 3 continued from previous page)

accurately reflects the terms of the agreement which both

parties duly performed.

4/ Corporations may place restrictions on the transferability

of stock under Utah law in order to maintain the the

corporation's status when it is dependent on the number or

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in Franklin "given the fact that you have technically ceased

being an employee of Franklin." FinallYI Franklin was "desirous

of being quite liberal" in allowing Senator Bennett to take

copies of any Franklin files he felt would assist him in his

business.

The Committee provided a copy of the June 25, 1991

memorandum referenced in the unsigned agreement. That

memorandum states that a portion of the budget of the Franklin

Consulting Group would be translated into a retainer to be paid monthly. The memorandum lays out a number of projects to be

undertaken for Franklin as follows:

o Opening new consul~ing opportunities with Franklin's

knowledge and approval.

o A complete market survey and feasibility study of the

retail market for Franklin products to include possibilities,

costs, difficulties and timetables, with no actions taken

without Franklin's direction.

o Consulting with Franklin officers and employees as asked.

o A rewriting of the 'control book', to make it more usable

in the Stress Seminar Kit.

o An examination of various new product po88ibili~ies.

o Such other a8si~nts &s are given frca time to time.

{Footnote 4 continued from previous page)

identity of its share holdersJ to preserve entitle.ents,

benefits, or exemptions under federal, state, or local law;

or, for any other reasonable purpose. Such restrictions

may require a shareholder to offer stock first to the

corporation or other persons; may require the corporation

or other persons to acquire the stock, may require the

corporation or other persons to approve the stock transfer;

may prohibit the transfer of stock to designated persons or

groups of persons; or, may include other restrictions (Utah

Code Ann. $16-10a-627(1993). Franklin was at the ttme of

the loan a Subchapter 5 corporation and was therefore

limited to 3S shareholders all of who were required to be

individuals, estates, or certain trusts (26 u.s.c.

S1361(b». Generally, a Buy-and-Sell Agreement compels a

shareholder to sell his shares to the corporation or to the

other shareholders at the price stated in the agreement.

It also obligates the corporation or the other shareholders

to buy the selling shareholder's shares at that price.

Business Law and the Regulatory Environment; Irwin;

Homewood, Illinois; Sixth Edition 1986.

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Also, the memorandum notes that Senator Bennett would

remain on the Franklin Board and would continue his duties with

Franklin's Japanese subsidiary until a designee was selected.

Finally, Senator Bennett notes that he had located office space

and would be prepared to vacate his space as of July 1, 1991.

No information is available to establish which, if any, of

the projects discu~~ed in the June 25, 1991 memorandum were

accomplished and what if any other projects were undertaken.

A review of the R. F. Bennett Associates records revealed

that the consulting firm apparently had no other paying clients.

The consulting firm's bank account was opened on Jul~· 17, 1991,

little more than seven weeks before the Committee accountS/, with

the first consulting payment. Thereafter there were only-five

deposits that were not Franklin consulting payments. All of

these deposits were transfers from Senator Bennett's personal

account.

The consulting firm's disbursement records indicated that,

other than the Candidate, the firm had only one regular

employee. In addition, one other individual received three

monthly payments of $1,500 each. It is also noted that in April

of 1992, the Senator's personal tax liabilities were apparently

paid from the consulting firm's account.

A review of the records available for the Candidate

indicated that for the latter part of 1991 and until the sale of

some of his Franklin stock in June of 1992 the majority of the

Candidate's income came either from Franklin in the fora of

earnings distributions to cover his tax liability for his share

of the corporation's income, or the consulting fira which in

turn received its revenue from Franklin in the form of

consulting payments.

During the fall of 1991 and January of 1992 there is a

direct correlation between consulting payments to the consulting

firm and some of the Candidate's contributions/loans to the

campaign. Of the $38,000 contributed by the Candidate in 1991

$35,000 came directly from the consulting firm account which was

at the time funded by the consulting payments. The consulting

firm was incorporated on January 8, 1992 and after that date

funds were transferred to the Candidate and his spouse's joint

checking account and then to the campaign. As discussed below,

'J./ The Committee filed FEe Forms 1 and 2 dated September 30,

1991, and opened its bank account with a deposit on

September 6, 1991.

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on January 30, 1992 funds from the consulting payment advance

were deposited into the consulting firm's account, transferred

to the Candidate and his spouse's personal account, and again

transferred to the campaign.!1

In the Inter~ Audit Report it was stated that, in the

opinion of the Audit staff, the following factors demonstrated

that the consulting payments from Franklin may not constitute "sela~y and other earnings from bonafide employment" as required

by 11 CFR 110.10 (b)(2) to be considered personal funds of the

Candidate and are therefore prohibited corporate contributions

to the Candidate's campaign from Franklin:

(1) The t~ing of the Candidate's departure from

Franklin, the creation of the consulting firm and

the beginning of the campaign;

( 4 ) the lack of information concerning the Candidate' 8

departure from Franklin after such a long, and

according to the stock prospectus, successful

relationship with the coapany.

the apparently less than arms length nature of the

agreement between the consulting firm and Franklin,

including the original intent that the consulting

firm be a division of Franklin; the lack of

employees and clients of the consulting firm; the

Candidate's lack of other income during the early

part of the campaign; a statement by the Treasurer

that he believed that the consulting contract vas

part of a "golden parachute" that the Candidate got

upon his departure from Franklin;

(3) the Candidate'S continued presence on the Franklin

Board of Directors;

(2 )

Contributions and loans totaling nearly $1.1 million were

drawn on this joint account. Utah law provides that a

joint account belongs to "the parties in proportion to the

net contributions by each to the sums on deposit" Utah Code

Ann. S 75-6-103(1) (1993). This is the presumed basis of

ownership unless there is clear and convincing evidence of

a different intent. Id. At this time, there is no evidence

that the Candidate and his spouse intended to divide the

assets of this joint account by any manner other than the

net contributions method. An analysis of deposits into

this account shows that with minor exception, the funds

deposited were those of the Candidate. Therefore, pursuant

to the net contributions method of dividing the ownership

of the account, none of the contributions are attributed to

Joyce M. Bennett.

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The Inter~ Audit Report recommendation with respect to the

consulting payments asked the Committee to provide documentation

and explanations that establish that the consulting retainer

paid to R. F. Bennett Associates, Inc. represent salary or other

earned income from bona fide employment and was independent of

Senator Bennett's candidacy. This documentation was to include:

o An explanation of the circumstances surrounding Senator

Bennett's departure from Franklin;

C Lists of other clients of R. F. Bennett Associates, Inc.

during the period July 1991 to December 1992;

o Information concerning attempts to obtain other clients;

o Descriptions of s~ilar contracts that Franklin entered

into with other consultants to include an explanation of

the work to be performed;

o Descriptions of work performed by R. F. Bennett

Associates, Inc. for Franklin including which of the

projects listed in the June 25, 1991 memorandum were

undertaken, as well as any other projects undertaken, the

approxtmate number of hours devoted to each and copies of

any reports or ~randa produced; and

o Any other information that the Commi~tee believes is

relevant to establishing that the contract and retainer

represented compensation in consideration of services, the

amount of the compensation did not exceed the amount that

would be paid to a similarly qualified person, and the

employment was genUinely independent of the candidacy (See

Advisory Opinion 1979-74).

The Response provides some additional background on

Franklin and Senator Bennett's departure. The Committee

explains that Senator Bennett and four other individuals

co-founded Franklin in 1984 and that under Senator Bennett's

leadership Franklin grew from a start up company to a company

with $104 million in sales in 1991. The Committee also notes

that by 1991 Franklin was considering various expansion options

and going public.

The Committee goes on to explain that:

"This dramatic growth in seven short years created

management tensions -- a common business occurrence -- that

were noticeable in the company as early as 1989 and which

came to a head in late 1990. In July 1989, Arlen Crouch

was hired as Franklin's Chief Operating Officer and

Executive Vice President. Mr. Crouch was experienced in

taking private companies public and Franklin needed Mr.

Crouch's expertise because Franklin was considering that

option. Several of the company's founders began to leave

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the company (Richard Winwood, for example, left in 1990) or

to take on less management responsibilities within the

company as the value of their stock increased to the

millions of dollars."

The Committee explains that Senator Bennett and Mr. Crouch

did not always agree on various aspects of the Franklin's

management and future, and that by late 1990 it was mutually

agreed that Mr. Crouch should direct Franklin's affairs.

According to the Committee's response, management control was

amicably passed to Mr. Crouch in January of 1991.

The Response also explains the chain of events surrounding

the creation of R.F. Bennett A&sociates, Inc. ~~9 explanation

mirrors the earlier explanation described arJ~'~ but adds that it

was anticipated that for the first year F:tcs:.·<i.5r would consume

the majority of the consulting firm's time. rtedacted copies of

the minutes of Franklin board meetings and a press release were

provided in support of the explanation. No additional

information is provided concerning the decision to have the

consulting firm operate as an independent company rather than a

division of Franklin.

With respect to Senator Bennett's departure from Franklin

to establish the R.F. Bennett and Associates, Inc., the

Committee states:

"Mr. Bennett's departure was a major event at

Franklin, for Mr. Bennett was an original founder of the

company and former President and Chief Executive Officer

for seven years. Although he would remain, and to this day

remains, on the Board of Directors, Franklin wanted to

ensure his availability to consult on tmportant corporate

matters, especially since he had such a through knowledge

of the company. At the same time, Franklin wanted to

ensure that Mr. Bennett would not compete directly with the

company in his new consulting endeavors. Franklin also

wanted to compensate Mr. Bennett for seven years of

successful leadership and management. Accordingly,

Franklin retained Mr. Bennett to consult with the co~pany

on an as-needed basis from July 1991 to June 1992."

With respect to the amount of the consulting fee ($43,750

per month), the Committee states that sum was determined by

adding Senator Bennett and his secretary's annual salaries, the

associated taxes and benefits, Senator Bennett's car allowance,

and figures for yearly rent, office supplies and telephone. To

this total was added Senator Bennett's est~ated bonus due for

1991. This total was then divided by 12 to reach the monthly

consulting fee. The estimated 1991 bonus amount accounted for

more than 50% of the total.

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The Committee goes on to state that "Franklin's agreement

with Mr. Bennett was consistent with Franklin's standing

corporate policy in dealing with every company founder and other

key employees who have departed active employment at the company -- both before and after Mr. Bennett. This kind of arrangement

is common, if not standard, throughout corporate America, and

thus Franklin did not hesitate to disclose its consulting

arrangements with Mr. Winwood and Mr. Bennett in its June 2,

199'" ~rospectus ... ·· The Committee provides the names and copies of ag.~ements for three other individuals as examples.

With respect to services pr~vided to Franklin under the

consulting agreement the Committee states that:

"In the months following Mr. Bennett's departure,

Franklin's officers indeed called upon Mr. Bennett's

expertise and counsel many times for important management

decisions. For example, in the Fall of 1991, Mr. Bennett

was very involved in assessing the company's options

regarding going public or remaining a private company. He

met with representatives of an investment company and

evaluated their proposals for investing in Franklin. He

presented their proposals to Franklin management and made

important recommendations to management regarding its

decision to go public and its options to adopt an Employee

Stock Ownership Plan or be acquired. Once Franklin decided

to go public, Mr. Bennett often consulted with Franklin

officers regarding management decisions ranging fram the ~portant, such as investment options targeted by Franklin,

to the mundane, such 8S management tensions and

intra-company relationships. Mr. Bennett spent

considerable time assisting with operations in Japan and

helping Franklin with a troublesome licensee in that

country. He assisted in winding down the Franklin Learning

division. He also worked on new curriculum with Franklin'S

research and development team in a consulting capacity.

Franklin deemed all of these services as essential

consulting services in fulfillment of Mr. Bennett's

consulting agreement and more"

The Committee represents that Franklin required less from

other departing officers than was required from Senator Bennett.

The Committee explains that Senator Bennett pursued other

clients independent of the consulting agreement with Franklin.

Two are mentioned in particular, one being Senator Bennett's

accountant and the other being a bank. However, the bank is

also mentioned as a potential client in the June 25, 1991

memorandum discussed above and would appear to predate the

establishment of R.F. Bennett and Associates, Inc. The

Committee states that after he became a Senate candidate,

Senator Bennett decided not to pursue these relationships.

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With respect to work perfo~ed under the consulting

contract, the Committee lists a number of items that appear to

fall under the heading " Consulting with Franklin officers and

employees as asked" in the June 25, 1991 memorandmn. The

Committee also notes work with Franklin's operation in Japan

that is also mentioned in the June 25, 1991 memorandum. It

appears that the other specific projects enumerated in the

memorandum were not undertaken. The documentation of the hours

devoted and copies of work products requested in the Interim

Audit Report are not provided.

The copies of contracts with other departing Franklin

executives are varied in their provisions. The first provides

for a $32,000 per month payment for 60 months. No mention is

made of any annual bonus in the contract. Rather, a sum is paid

for writing services to be performed over the life of the

contract to include curricula and book manuscripts, a sum is

paid for general consulting, a sum is paid for the settlement of

propriety interests in Franklin tangible and intangible

products, and the largest single sum is paid for a 10 year non

competition agreement. This contract was signed by all parties

in September of 1990 and, according to the 1993 stock

prospectus, terminated with a $300,000 lump sum payment in April

of 1992.

The second example submitted calls for the payment of

$100,000 over 12 months and 75' of the discretionary bonus to be

paid at the time when all such bonuses were paid. The 1993

stock prospectus refers to this agreement as severance

payment. No mention is made of any services to be provided in

return for the payments. The documentation provided is in the

form of a siqned letter from Franklin's President. No agreeaent

signed by the recipient is included.

The third example, dated May 17, 1994, provides for

$100,000 to be paid over one year and 50\ of the annual

discretionary bonus. The agreement states that the individual ~agreed to remain employed as a consultant and

merger/acquisition specialist, with responsibility to assist the

Executive Committee in reviewing and processing potential

acquisitions." Further, the agreement includes a three year

non-disclosure and non-competition clause. The agreement is

signed by both the employee and Franklin's General Counsel.

The Committee concludes by stating that "[t]he bottom line

is that the consulting payments served legitimate corporate

purposes and were consistent with Franklin's standing policy of

retaining the counsel of company foun~drs and key officers after

their departure." It is also noted that the consulting

arrangement was part of Senator Bennett's evolving separation

from Franklin and that "[t]hese business events and arrangements

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were totally unconnected to the 1992 campaign for Utah Senator,

a seat which was not open until May 28, 1991, when former

Senator Jake Garn unexpectedly announced his intention not to

seek reelection."

The Committee's Response provides additional background on

Senator Bennett departure from Franklin, but does not provide

any supporting documentation. Documentation is provided that

establishes that the consulting business was originally intended

to be a division of Franklin and that it was subsequently

determined that a separate entity was preferred. The Response

confirms that R.F. Bennett and Associates had no clients other

than Franklin. Two potential clients are mentioned, a bank that

according to the documentation had been contacted while the

consulting operation was still part of Franklin and Senator

Bennett's accountant. The Committee suggests that others were

contacted but provides no specifics or documentation. When the

Senator Bennett became a candidate shortly after establishing

the consulting firm none of these prospects were pursued.

The examples of other agreements prOVided are

significantly different than the contract with R.F. Bennett and

Associates. None provide for the payment of the full

discretionary bonus, and the two that mention the bonus pay it

at the t~e other recipients are paid. Two of the three contain

non-competition clauses while Senator Bennett's does not. The

third is described as a severance payment. One of the contracts

includes a significant sum for the purchase of the individuals

proprietary interests in Franklin's products unlike the

agreement with Senator Bennett. All of the agreements 8~tted

with the Committee's response are signed by a Franklin

representative and, except for the agreement described as

•severance " in the 1993 stock prospectus, each is signed by the

recipient as well. None of the documents surrounding the

agreement with Senator Bennett are signed by either party.

Finally, although the Committee states that Senator Bennett's

departure from Franklin was not related to his candidacy, but

rather the opposite, it is noted that the Committee states that

former Senator Garn announced his intention not to seek

reelection on May 28, 19912/. Senator Bennett's memorandum

outlining the services to be provided came nearly a month later.

The unsigned agreemenL is dated July 1, 1991 and notes that

Senator Bennett was prepared to leave Franklin on that day.

The Committee's Response has not established that the

consulting retainer paid to R.F. Bennett Associates represents

salary or other earned income from bona fide employment and was

independent of Senator Bennett's candidacy.

7/ Franklin's June, 1993 stock prospectus notes that former

Senator Garn joined Franklin's Board of Director's in

January of 1993.

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Consulting Fee Advance

Also related to the consulting agreement with Franklin is a

deposit into the consulting firm bank account on January 30,

1992. The regular deposit of $43,750 was made on January 21st.

The deposit on the 30th was in the amount of $131,250 or 3 x

$43,750. This apparently represents a three-month advance on

the consulting retainer from Franklin given that the next

$43,750 deposit does not occur until three and a half months

later. On the same day of the deposit, January 30, 1992, a

$90,000 check was written from the consulting firm account to

the Candidate's personal account. Also on this date, the

Candidate wrote an $80,000 check to the campaign from his

persondl account. Thus, it appears that the advance was used,

in part, to fund the campaign and constitutes a prohibited

advance from Fr~nklin within the meaning of 2 U.S.C. 441b(b)(2).

In a response to an inquiry about this transaction the Committee

states that "[t]he advance of $131,250 which represented one

quarter of consulting fees was advanced to Robert Bennett

because the stock offering was delayed from January until June.

Since it 'ilfas delayed, both parties agreed to pay the consulting

agreement in quarterly installments rather than monthly installments."

The Inter~ Audit Report recommended that the Committee

demonstrate that the consulting fee advance did not constitute,

in part, a prohibited contribution. The Committee was asked to

provide any written agreements with respect to the advance, and

explanations of the circumstances surrounding the advance from

both the Candidate and Franklin.

In its Response, the Committee argues that the payment of

$131,250 represented funds that the Candidate had earned up to

that point. The Committee contends that the entire 1991 annual

bonus of approxtmately $275,000 had been earned by year end 1991

along with seven months of consulting fees. The total of these

was approximately the amount that was paid up to and includ:ng

the $131,250 payment on January 30, 1992. The Committee goes on

to state that the consulting agreement permitted the lump sum

payment and that Franklin could have paid the entire amount as

severance in July of 1991. Finally the Committee points to

another agreement that was settled for a lump sum payment and

concludes that the $131,250 payment "was paid in the ordinary

course of Franklin'S business, was driven by financial and

business events completely independent of Mr. Bennett's

candidacy, was consistent with Franklin's prior business

dealings with consultants, and simply made him whole on bonus

payments and consulting fees he had already earned."

The Committee's Response is flawed in a number of respects.

First, although the unsigned consulting agreement does not

prohibit the advance payment, neither does it envision it. The

agreement simply states that "Franklin agrees to pay Bennett

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Consulting a retainer in the amount of $ per month for a

period of one year commencing July 1, 1991, and ending June 30,

1992." Nothing in the agreement contemplates an advance

payment. Second, the contention that the entire amoun't could

have been pa"1 as a severance payment may be accurate, however,

the agreement reached did not call for a lump sum payment.

Though the agreement is unsigned, the flow of payments up until

January 30, 1992, indicates that at least with respect to the

payments, it was being followed. Third, assuming that the

agreement as submitted is accurate, the Candidate had not

"earned" the full amount of the bonus at January 30, 1992. The

amount of the bonus and other fees were to be paid monthly

regardless of the derivation of the amount. Fourth, the other

consulting agreement cited by the Committee that was settled for

a lump sum payment was not equivalent to the situation with

Senator Bennett. That contract is discussed in the Franklin

stock prospectus. According to the prospectus if the contract

had run to the end of its 5 year term, Franklin would have

expended approximately $1.3 million. The $300,000 lump sum

payment appears to have saved Pranklin $1 million over the

remaining life of the contract. In the Candidate'S case, at the

end of the 3 months covered by the advance, Franklin resumed the

monthly payments. Finally the Committee has not demonstrated

any "financial and business events" that make the advance

advantageous to Franklin.

Corporate Stock Repurchase Agreement Used to Guarantee a Bank

Loan

The Candidate obtained a $385,000 line of credit at the

First National Bank of Layton in his name. This line of credit w~s used by the Candidate (apparently to repay a personal

obligation to Franklin) and by the campaign. It appears that

Franklin was a guarantor on this loan. The Committee made 9

draws totaling $200,221.

The stock prospectus discloses that "[i]n connection with

bank loans obtained by Messrs. Robert F. Bennett ($385,000),

Robert G. Pederson ($150,000) and Gregory L. Fullerton ($60,000)

in February 1992, the Company agreed, in the event of default,

to redeem part or all of the shares of the Company's Common

Stock pledged by each borrower as collateral for the loans at

the then fair market value of the shares. No such default has

occurred. Messrs. Bennett, Pederson and Fullerton pledged

554,400, 45,000 and 86,400 shares respectively."!1

8/ In comparing the number of shares owned versus the number

pledged, it must be considered that in April of 1992 the

Board of Directors of Franklin approved a 90 to 1 stock

split. The number of shares discussed in the stock

prospectus gives retroactive effect to the split.

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A letter from Franklin's Chief Operating Officer, Arlen B.

Crouch, to Layton Bank describes the repurchase agreement. The

agreement states that:

"Franklin agrees that in the event of any borrower's default in any loan obligation to the

Bank that is secured by Franklin stock, Franklin

will honor the Bank's request to redeem part or all

of the pledged stock at the stock's then current

fair market value as determined by generally accepted closely held corporation valuation

principles, applying such reasonable discounts,

including the minority shareholder discount and the

lack of marketability discount, as appropriate or

at the public market price (if applicable), but not

less than $500 per share.

The foregoing commitment is conditioned on

the Bank's securing from each borrower an agreement

to allow the Pank to convey and transfer to

Franklin all right, title and interest in and to

the stock purchased by Franklin pursuant to the

terms of this letter. This latter provision must

be made part of the loan agreement with each

borrower such that each borrower consents to the

termination and transfer of his interest in the

stock upon the Bank's exercise of its right to have

the stock redeemed under the teaas of thJ.s letter."

The Interim Audit Report noted that the repurchase

agreement was apparently necessary due to the lack of the

marketability of the pledged stock, Franklin's Subchapter S

status, and the Buy-and_Sell Agreement associated with senator

Bennett's stock (Footnote 4 above). As a Subchapter S

Corporation, Franklin was limited to 35 stockholders all of

which are required to be either individuals, estates or certain

trusts (26 u.s.c. S1361(b». Therefore, it appears that the use

of the stock as collateral for the loan, absent the repurchase

aqreement, may have violated the terms of the Subchapter 5

election and the Buy-and-Sell Agreement. Also, the prospectus

states several times that, prior to the public offering in June

of 1992, there had been no public market for the stock. This

conforms to the notes to the OCtober 1991 personal financial

statement regarding the method of valuation of the stock.

Therefore, the Interim Audit Report concluded that the

repurchase agreement constitutes a loan guarantee by Franklin

and, as such, a prohibited contribution from a corporation in

the amount of the campaign draws on the line of credit,

$200,221.

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The Interim Audit Report recommendation asked the Committee

to demonstrate that the stock repurchase agreement provided by

Franklin in connection to the line of credit did not constitute

a contribution by Franklin in the amount of the Committee'.

draws on the line of credit totaling $200,221. The Committe.

was also asked to provide information and documentation showinq

the terms of the Buy-and-Sell Agreement associated with the

Candidate's stock at the time of the loan and any other

restrictions on the transfer of the stock; documentation

generated or relied on by the First National Bank of Layton,

Franklin, or the Candidate in evaluating the stock used as

collateral for the line of credit and how that documentation was

used: and, correspondence and other documentation between

Franklin and the Candidate generated in preparation of the

agreement, particularly documentation indicating whether the

Candidate compensated Franklin for its action on behalf of the

Candidate.

The Committee's Response explains that when Franklin was p~eparing to offer stock for public sale, it was recommended

that several loans to officers be extinguished for the public

offering. In the process of extinguishing these loans the

transactions described above occurred. The Comaittee goes on to

explain that "[T]he Layton Bank was concerned that the stock was

not readily marketable. However, Franklin would not guarantee

the loans because that would establish liabilities for the

company and defeat the objective of having the officer loans

paid off (i.e., a guarantee would have traded an insider loan

for an insider guarantee). Franklin wanted the loans to be

made, however, and it was proposed th'\t Franklin agree to

repurchase the stock -- which WAS extremely valuable -- in the

event of default." The Committee further argues that because of

the increasing value of the stock, Franklin stood to Bake a

profit on the repurchase should it have become nece8s~-y. The

Committee concludes that given the situation the repurchase

agreement was not "a 'guarantee' of any sort."

Included with the Committee's Response are letters from the

First National Bank of Layton and another bank that the

Committee used, attesting to the fact that such repurchase

agreements are common practice when non-publicly traded stock is

used to collateralize a loan. The letter from the First

National Bank of Layton explains that the purpose of the loan

was the repayment of a Franklin debt of $184,317 with the

balance tlplaced in undisbursed" to be issued upon request for

campaign use. With respect to the collateral the letter states

that "it should be noted that many banks do not lend funds based

on security of non-publicly traded stock. This exception to

bank policy was made due to the repurchase agreement from

Franklin International."

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The letter from the second bank was a response to a

hypothetical lending situation. In discussing non-publicly

traded stock as collateral the bank states that "[IJ£ closely

held or non-exchange traded stock is proposed as collateral it

would be altogether comn.~r for a bank to require a repurchase

(by the issuing firm) agreement of the stock collateral. The

repurchase agreement then mitigates the risk (of potentially

illiquid stock collateral) that the bank bears when non-publicly

traded stock collateralizes a loan."

The Committee did not provide any of the other specific

information requested in the Interim Audit Report.

The Committee's Response confirms that the repurchase

agreement was necessary for the loan to be made. The lending

institution states that accepting the stock as collateral was an

exception to bank policy made due to the repurchase agreement.

Franklin guaranteed a market for collateral that otherwise would

not have been acceptable to the bank. This action falls within

the definition of loan at section 100.7(a)(1)(i) of the

Commission's requlations which states that a loan includes any

guarantee, endorsement, and any other form of security. The

fact that the arrangement was an ordinary course of business

transaction for the bank; that at least part of the loan was

beneficial to Franklin; that the repurchase agreement may have

protected Franklin's Subchapter S status; or that Franklin could

have made a profit on any stock that was repurchased under the

agreement, does not change the fact that a campaign loan was

made that, absent the repurchase agreement provided by Franklin,

would not have been made.

Guaranty of Bank Loan by Candidate's Spouse

In addition to the guarantee of the line of credit by the

corporation, the loan was also guaranteed, per the loan

agreement, by the candidate's wife Joyce M. Bennett in the

amount of $385,000. No signed guarantee was available; however

in a December, 1992 letter to the Candidate, the Chief Executive

Officer of the First National Bank of Layton states that the

"bank had no anticipation of looking t.o Joyce for repayment,

inasmuch as the loan was extremely well secured by salable stock

backed by a repurchase agreement from a substantial company."

In another part of the letter the bank notes that the

reason that Joyce Bennett was requested to sign as a guarantor

was that some of the assets on the Candidate's personal

financial statement were jointly owned and that it is the bank's

policy to obtain the signatures of all parties with an interest

in assets shown on financial statements presented for loan

requests. It is not specified which assets were jointly held,

however the only assets listed on the pledge agreement or

elsewhere in the loan agreement is the Franklin stock. No

information has been found in the loan documents or the Franklin

stock prospectuses to indicate that the stock was jointly owned.

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The Interim Audit Report concluded that the guarantee of

the loan by Mrs. Bennett ,appeared to constitute an excessive

contribution in the amount of $200,221, the amount of the

campaign draws on the line of credit. It was recommended that

the Committee provide documentation to demonstrate that Joyce M.

Bennett did not make a $219,221 ($220,221 in campaign draws on

the line of credit less $1,000 contribution limitation)

excessive contribution by guaranteeing the line of credit at the

First National Bank of Layton. The documentation provided

was to include a copy of the loan application and any associated

documents, a copy of an executed guarantee, and information

indicating whether Joyce M. Bennett had assets equal to or

exceeding $219,221, and any documentation from the First

National Bank of Layton showing a release of liability.

The Committee's Response provides all of the specific

documentation requested in the Interim Audit Report. In

addition, another letter from the First National Bank of Layton

is included that explains Mrs. Bennett's role in the loan. The

letter states that "the only reason that Mrs. Bennett signed the

loan documents was that the financial statement provided by

Senator Bennett included jointly held assets. It is our bank's

policy that a borrower must reflect only their individual assets

on their financial statement or that the joint holder.of those

assets also sign on the loan. As I recall, it was an el...nt of

timing which precluded Senator Bennett from going back aDd

restructuring his financial stateaent. Therefore, the ....i ..t

remedy was to have Mrs. Bennett sign, thereby expediting the

loan process."

The documentation submitted also establishes that the only

collateral specified in the loan agreement was the Franklin

stock. Further, a copy of the stock certificate for the pledged

stock shows that the Candidate was sole owner of the stock.

Given the information and documentation provided, it is

concluded that Joyce M. Bennett did not make an exce.sive

contribution to the Committee.

Franklin Quest Distribution Used to Repay Bank Loan

The Candidate received a $795,415 earnings distribution

from Franklin on June 1, 1992. From these funds, the Candidate

contributed/loaned $190,000 to the campaign, and repaid the

First National Bank of Layton $200,000 on the line of credit.!1

See Finding II.C. for a discussion of the reporting of loan

receipts and repayments.

"

9/ The Committee drew $200,221 on the line of credit and the

Candidate drew $184,317. The $200,000 payment was made on

June 1, 1992 and reported as a contribution from the

Page 26, Approved 4/27/95
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~~_~~~~~~",,-~~~~~""'""--""""0,.,...,.,"'""'oL.....-,..,,..........-~~·"""l!,i.~" ~---~--:"'''''''':"'"':''. ,~A€"~Ya;;z;:~~'-~,,."'~,.,.p~,1M'~.'~c~/c.,'r:JP·" X"'ft.~"1~~?i"..F.f!!lA¥'!imI·~;;i'Pi'!-¥Ilil'!ll·"!':ifl~q~,+~<}*~e~¥:*~:~g;..)4~J;;.,f!l)!l!:!W!!l'!:~,P'!$j.#F~:v ''!'.ll'''''I!!!!'!I'''IIIIIIIOIllllllllllllllA!'''""l

I

I

I

According to the stock prospectuses, Franklin historically

did not make profit distributions other than to allow

stockholders to pay income tax liabilities resulting from the

company's Subchapter S status. It is also stated in the

prospectus that as of June 2, 1992, Franklin had ceased

operating as a Subchapter S corporation. If the statements in

the stock prospectus are taken at face value and non-tax

liability distributions were not made by Franklin, the

transaction does not appear to be a customary distribution. In

response to an inquiry about this transaction the Committee

states that:

"This check represents Robert F. Bennett's portion of

the Franklin 2nd quarter dividend distribution which

Franklin, Inc. made to ,;~ll shareholders.

o

c

"Franklin, Inc. distributed 7 million dollars to its

shareholders on May 28, 1992. At that time, Robert F.

Bennett owned about 11% of the Franklin stock, therefore

he received approximately 11% of the total dividend."

In the Interim Audit Report it was requested that the

Committee provide documentation to demonstrate that the $195,415

earnings distribution noted in the Candidate'S records

represents a normal course of business transaction. The

documentation submitted was to include information'concerning

how the total amount to be distributed to shareholders on Kay

28, 1992 was determined by Franklin, whether all shareholders

received a proportionate distrLbution, whether this -.aunt

represented a distribution in excess of the estt.Bted tax

liabilities of the shareholders, and if so, by how auch, whether

Franklin had previously made such distributions, on what dates

and in what amounts.

The Response does not provide much of the info~tion that

was requested. The Committee states that ·one of Franklin's

last financial acts prior to the public offering -- on May 28,

1992 -- was to distribute to each shareholder retained earnings

sufficient to pay each shareholder's estimated tax liability

arising from the company's Subchapter S-status and the

termination of its S-status in June 1992." No information on

(Footnote 9 continueu i~om previous page)

candidate and loan repayment of $203,793. This amount

represents the campaign draws on the line of credit with

accrued interest. On June 15, 1992 the Comaittee reported

a similar entry in the amount of $191,124. This amount

represents the Candidate's personal draw on the line of

credit with accrued interest plus a portion of the

principal and interest reported as paid on June 1, 1992.

The actual amount of this payment was $191,681, the

remaining balance on the line of credit.

Page 27, Approved 4/27/95
24

how the amounts were determined is included. It :;.& noted that

the distributions for Franklin's 1992 fiscal year were more than

four times the previous year, while income for the year rose by

approximately 65\. Also Franklin operated as a Subchapter S

corporation for only three-quaters of its 1992 fiscal year.

However, the Committee litis submitted sufficient information

to show that all stockholders received a pro rata portion of the

distributions made in Franklin's 1992 fiscal year. The total

amount and percentage of ownership of each shareholder for the

May 28, 1992 distribution can be verified to the stock

prospectus and the audited financial statements contained

therein. Therefore, although the Committee has not established

that the May 28, 1992 distribution was an ordinary course of

business transaction, it has demonstrated that the distribution

did not constitute a contribution to the Committee.

Finally, Franklin made its first public stock offering in

early June 1992 and the Candidate was listed as selling at least

235,000 shares at a net of $14.42 per share. The source of

Candidate contributions/loans to the Committee after that point

are not questioned.

Sections 434(b)(3)(E) and 434(b)(5)(D) of Title 2 of

the United States Code state that each report shall disclose the

identification of each person who makes a loan to the reporting

cODDDittee during the reporting period, together with the

identification of any endorser or guarantor of such loan, and

date and amount or value of such loan; as well as, the name and

address of each person who receives a loan repayment frca the

reporting co_ittee during the reporting period, together with

the date and amount of such loan repayment.

c

C. Disclosure of Loan Receipts and Repayments

"

Section 431(11) of Title 2 of the United States Code

states that the term wperson" includes any individual,

partnership, committee, association, corporation, labor

organization, or any other organization or group of persons.

Section 104.11(a) of Title 11 of the Code of Federal

Regulations states, in relevant part, that debts and obligations

owed by a political committee which remain outstanding shall be

continuously reported until extinguished.

The Committee obtained two loans from the First

National Bank of Layton totaling $210,441, a $10,220 loan

obtained in 1991 and nine draws totaling $200,221 fro. a

$385,000 line of credit established in the Candidate's name in

1992; a draw on the line of credit repaid the first loan. In

addition, the Committee obtained fourteen loans from the

Page 28, Approved 4/27/95
If)

25

Candidate totaling $1,310,000. By the close of the audit

period, the $200,221 in draws on the line of credit had been

repaid directly to the bank by the Candidate. However, the

$1,310,000 from the Candidate remains outstanding.

The Audit staff's review of availabl~ records for loan

receipts from the First National Bank of Layton and from the

candidate indicated that none of the loan receipts were itemized

as required on Schedules A. Also, when the $10,220 loan from

the bank was repaid by a draw on the line of credit, the

Committee reported the $10,220 draw on Schedule C but failed to

itemize the repayment of the original loan on Schedule B.

It was also noted that the Committee improperly

disclosed a $190,000 contribution from the Candidate as $189,000

in draws on the line of credit from the First National Bank of

Layton on Schedule C in the Pre-Convention report

(4/1/92-6/7/92). A $191,124 payment made by the Candidate on

the line of credit to repay a draw unrelated to the campaign was

itemized on Schedule B of the July 1992 Quarterly report

(6/8/92-6/30/92). In addition, a $100,000 loan from the

Candidate was itemized as two separate loans on Schedule C, in

the Post-General Election report (10/15/92-11/23/92), once on

the check date and once on the deposit date.

Finally, t~e correct amount of the outstanding

balances of the loans from the Candidate were not reported on

Schedules C or on line 10 of the SUJIIIIlary Page for all reporting

periods beginning with the Pre-General Election report. It

appeared that the Committee reported on Schedules C and line 10

only the amount{s) of loans received in each period; no

Schedules C were filed to continuously report these loans in

subsequent periods.

c.'-

At the exit conference, Committee representatives were

provided schedules of the loans requiring itemization and a

narrative detailing the discrepancies noted above. Committee

representatives stated that they would amend their reports to

properly disclose the above noted obligations.

In the Inter~ Audit Report it was recommended that

the Committee file a comprehensive amended report to correctly

disclose 1991 and 1992 loan activity and an amended Mid-Year

1993 report to correctly disclose loan activity for that period.

In response to the InterLm Audit Report recommendation

the Committee noted that any accounting or reporting errors were

inadvertent and the result of a predominantly volunteer campaign

staff. The Committee also filed amended disclosure reports that

materially correct the public record.

Page 29, Approved 4/27/95
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D. Apparent Excessive Contributions

Section 441a(a) of Title 2 of the United States Code

states, in relevant part, that no person shall make

contributions to any candidate and his authorized political

committees with respect to any election for Federal Office

which, in the aggregate, exceed Sl,OOO.

Section 441f of Title 2 of the United States Code

states that no person shall make a contribution in the name of

another person or knowingly permit his name to be used to effect

such a contribution, and no person shall knowingly accept a

contribution made by one person in the name of another person.

Section 100.1(a)(l) of Title 11 of the Code of Federal

Regulations states that the term "contribution" includes a gift,

subscription, loan, advance, or deposit of money or anything of

value.

Section 110.1(k) of Title 11 of the Code of Federal

Regulations states, in part, that any contribution made by .are

than one person, except for contributions made by a partnership,

shall include the signature of each contributor on the check,

money order, or other negotiable instrument or in a separate

writing. A contribution made by more than one person that does

not indicate the amount to be attributed to each contributor

shall be attributed equally to each contributor.

If a contribution to a candidate on its face or when

aggregated with other contributions from the same contributor

exceeds the limitations on contributions, the treasurer .ay a.k

the contributor whether the contribution was intended to be a

joint contribution by more than one person. A contribution

shall be considered to be reattributed to another contributor if

the treasurer of the recipient political committee asks the

contributor whether the contribution is intended to be a joint

contribution by more than one person, and informs the

contributor that he or she may request the return of the

excessive portion of the contribution if it is not intended to

be a joint contribution; and within sixty days from the date of

the treasurer's receipt of the contribution, the contributors

provide the treasurer with a written reattribution of the

contribution, which is signed by each contributor, and which

indicates the amount to be attributed to each contributor if

equal attribution is not intended.

Section 103.3(b)(3) of Title 11 of the Code of Federal

Regulations states, in part, that contributions which exceed the

contribution l~itation may be deposited into a campaign

depository. If any such contribution is deposited, the

treasurer may request redesignation or reattribution of the

contribution by the contributor in accordance with 11 CFR

Page 30, Approved 4/27/95
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27

SSllO.l(b) and 110.1(k), as appropriate. If a redesignation or

reattribution is not obtained, the treasurer shall, within 60

days of the treasurer's receipt of the contribution, refund the

contribution to the contributor.

Section 103.3(b)(4) of Title 11 of the Code of Federal

Regulations states, in part, that any contribution which appears

to be illegal and which is deposited into a campaign depository

shall not be used for any disbursements by the political committee until the contribution has been determined to be

legal. The political committee must either establish a separate

account in a campaign depository for such contributi,ns or

maintain sufficient funds to make all such refunds.

Sections 110.1(k)(3) and (5) of Title 11 of the Code

of Federal Regulations state, in part, that if a political

committee receives a written reattribution of a contribution to

a different contributor, the treasurer shall retain the written

reattribution signed by each contributor. If a political

committee does not retain the written records concerning

reattribution as required, the reattribution shall-not be

effective, and the original attribution shall control.

A review of contributions from individuals was

conducted to determine if contributions in excess of the

limitations were received. Twenty four such contributions from

17 contributors were identified. The excessive portions of

these contributions total $19,450.

Among the excessive contributions are a number of

instances where checks drawn on joint accounts were attributed

to account holders who had not siqned the contribution check and

for which no signed reattribution had been obtained. St.ilarly,

five of the excessive contributions were reported in IIlOre than

one named account holder, for example John and Susanne

Lindquist, but only one of the individuals signed the check.

Also, some excessive contributions were assigned to more than

one election without the requisite redesignations.

Six of the excessive contributions are associated with

the same individual. That individual made two $1,000

contributions on OCtober 6, 1992, designated for the primary and

general elections. In addition, six other $1,000 contributions

were received on the same date drawn on three other accounts.

Each account listed this individual as account holder with the

addition of the words "Custodian For" another individual. The

other individuals appear to be the contributor's children in

that two of the three have "student" listed as their occupation

on Committee disclosure reports. None of the checks bear the

signatures of these individuals. Three of the checks are

designated for the primary election and three are designated for

the general election.

Page 31, Approved 4/27/95
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A search of the Committee's files did not produce any evidence of written reattributions or redesignations for any of

the excessive contributions noted. Further, neither a separate

account for potential excessive contributions nor any attempt to

monitor amounts required to be held in the Committee's regular

accounts was found. None of the excessive contributions hed

been refunded.

A listing of the excessive contributions was provided

to the Committee at the exit conference with a recommendation

that all of the excessive contributions be refunded or that it

be demonstrated that the contributions are not in excess of the

limitations. In response to the exit conference the Committee

st~ted that refunds had be~n or would be delivered to 11 of the contributor~ and submitted copies of unnegotiated refund checks.

These checks total $5,600. The Committee also stated that

information on the remaining contributions would be forwarded as

soon as possible.

In the Interim Audit Report it was recommended that

the Committee demonstrate that the remaining contributions are

not in excess of the contribution limitations. With respect to

the contributions drawn on the "Custodian" accounts the evidence

was to include statements signed by the recorded contributor to

establish that they voluntarily made the decision to contribute

and that the funds were previously owned and controlled

exclusively by the recorded contributors and were not the

proceeds of a gift intended to be a contribution to the

Candidate. Absent evidence that these contributions are not

excessive, it was recommended that the Comaittee refund the

contributions and submit copies of both sides of the negotiated

refund checks.

With respect to excessive contributions the Respons.

states that the Camaittee had a system in place for checking on

the source cf contributions drawn on joint accounts and seeking

reattributions and redesignations. The Committee qoes on to

describe a three step procedure including telephone calls,

written requests, and follow-up calls. However, during the

audit fieldwork few redesignation or reattribution letters were

found. In addition the Committee submitted copies of refund

checks for each of the contributions questioned in the Inter~

Audit Report. Of the $19,450, copies of refund checks totaling $7,700 are negotiated Committee checks, while the remainder are

cashier's checks. For the cashier's checks there is no evidence

of delivery or negotiation.

Page 32, Approved 4/27/95
IJ)

29

E. Apparent Excessive Contributions from Staff

Advances

Section 441a(8)(1)(A) of Title 2 of the United States

Code states that no person shall make contributions to any

candidate and his authorized political committees with respect

to any election for Federal office which, in the aggregate,

exceed $1,000.

Section 116.S(b) of Title 11 of the Code of Federal

Regulations states, in part, the payment by an individual from

his or her personal funds, including a personal credit card, for

the costs incurred in providing goods or services to, or

obtaining goods or services that are used by or on behalf of, a

candidate or political committee is a contribution unless the

payment is exempted from the definition of contribution under 11

CFR 100. 7 (b) ( 8) ·

If the payment is not exempted, it shall be considered

a contribution unless, it is for the individual's transportation

and normal subsistence expenses incurred by other than 8

volunteer, while travelinq on behalf of a candidate or political

committee of a political party; and the individual is re~rsed

within sixty days after the closing date of the billing

statement on which the charges first appear if the payment vas

made using a parsonal credit card, or within thirty days after

the date on which expenses were incurred if a personal credit

card was not used. "Subsistence expenses" include only

expenditures for personal living expenses related to a

particular individual traveling on ca.aittee business such as

food or lodging.

The Committee'S pa~nt8 of expense re~r8ements

were reviewed to deteraine if contributions fro. staff advances

had been made. As part of the Audit staff's analysis,

contributions resulting from unttm8ly ret.bursement of expenses

were added to direct contributions made by the individual. The

review disclosed that Michael Tullis, the Committee's Custodian

of Records, was the only individual making excessive

contributions from advances he made to the Committee for his own

travel and subsistence, others' travel and subsistence, as well

as, campaign office expenses, media expenses, and other

miscellaneous items. These contributions resulted from

extensive campaign use of Mr. Tullis' personal credit card. The

Audit staff determined that the highest outstanding balance owed

to Mr. Tullis was $22,206 on June 1, 1992. At the t~ of the

audit, no expense reimbursement requests were outstanding.

At the exit conference, the Committee was presented

with a schedule of Mr. Tullis' excessive contributions. Mr.

Tullis acknowledged that he had made an error in judgment in

using his personal credit card to pay Committee expenses and

that he would most likely not be able to demonstrate that no

excessive contributions occurred.

Page 33, Approved 4/27/95
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The Interim Audit Report recommendation with res~~t

to this matter stated that the Committee should either

demonstrate that no contribution occurred with respect to these

expense reimbursements, or offer any other information that is

believed to be relevant to the issue.

The Response states that since the regulation allows

60 days to reimburse expenses paid by credit card, that most of

the charges were reimbursed before becoming contributions. The

Committee also notes that in many cases, the Audit staff

analysis uses the date the expense was incurred rather than the

closing date of the credit card statement on which the charge

first appears as provided in the regulation.

The Committee has not read the regulation correctly.

While it is true that expenses paid by an individual by personal

credit card for his own travel and subsistence do not become a

contribution if reimbursed within 60 days of the cloeing date of

the credit card statement on which the charge first appears, the

same is not true of expenses other than personal travel and

subsistence. Expenses for other than the individuals personal

travel and subsistence are contributions on the date incurred.

In Mr. Tullis' case the majority of the $22,206 cited in the

Interim Audit Report consisted of four charges for newspaper

advertising totaling $21,109 and an amount for the purchase of a

computer.

With respect to using the closing date of Mr. Tullis'

credit card statement, when that information was available and

the expense was for Mr. Tullis' travel and subsistence, the

closing date was used. The Committee states in the Response

that it is attempting to locate additional copies of Mr. Tullis'

credit card statements.

The conclusion reached in the Interim Audit Report is

unchanged.

F. Contributions Subject to 48 Hour Disclosure Notices

Section 434(a)(6) of Title 2 of the United States Code

requires that each treasurer of the principal Campaign committee

of a candidate shall notify the Clerk, the Secretary, or the

Commission, and the Secretary of State, as appropriate, in

writing, of any contribution of $1,000 or more received by any

authorized committee of such candidate after the 20th day, but

more than 48 hours before, any election. This notification

shall be made within 48 hours after the receipt of such

contribution and shall include the name of the candidate and the

office sought by the candidate, the identification of the

contributor, and the date of receipt and the amount of the

contribution. The notification required under this paragraph

shall be in addition to all other reporting requirements under

this Act.

Page 34, Approved 4/27/95
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31

The Audit staff reviewed individual contributions to

determine which contributions required notification within 48

hours of receipt. Contributions requiring the 48 hour notice

were received within two and twenty days of the nominating

Convention (6/26-27/92), and the Primary (9/8/92) and General

(11/3/92) elections. The Interim Audit Report stated that the

review identified a total of 181 contributions which required 48

hour notices. The InterLm Audit Report also concluded that, of

these, the Committee failed to file 'the required notices for 41

contributions totaling $797,001, including 8 from the Candidate

totaling $750,000.

At the exit conference, Committee representatives were

provided with a schedule of items for which the required notices

were not fileL. The Committee did not provide an explanation of

why the notices were not filed.

In the Interim Audit Report it was recommended that

the Committee provide an explanation, including an account of

any mitigating circumstances, as to why these notices were not

filed.

In the Response the Committee states that it exercised

tremendous effort to file every necessary 48-hour notice and was

surprised to l~arn that the audit in~ice~ed 41 omissions. The

Committee goes on to explain that its tolephone records indicate

that on both OCtober 30, and November 3, 1992 two items were

faxed to the Office of the Secretary of the Senate. The

Committee believes that in both cases the doc~nt8 faxed were

48-hour contribution reports. However, in both cases the public

record reflects only one report filed on that day. Although the

Committee has not been able to locate copies of the .aterial

faxed, it believes that a portion of the 41 OIIlissions were

included on those reports.

In reviewing this matter during the preparation of

this report, a number of errors were noted in the original

analysis. After re-examining the workpapers it was determined

that the Committee was required to file 131 contribution

notices, and that 37 had not been filed. These 37 contributions

total $649,001 (See Attachment 1).

With respect to the Committee's discussion of the

documents faxed to the Secretary of the Senate, the explanation

would at best explain only one of the missing notices, assuming

that, the faxed documents were 48-hour notices; were not

re-transmitals of others on the same day; and, were filed

timely. That contribution was a $100,000 receipt from the

Candidate.

Page 35, Approved 4/27/95
o

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32

The 37 contributions for which no notice was filed

include six from the Candidate totaling ~500,OOO; six totaling $10,000 relating to the pre-primary period when no 48-hour

notices were filedl and, twenty-two non-candidate contributions

during the period OCtober 15-20, 1992.

Except for the change in the number and amounts

resulting from the correction of the original analysis, the

conclusion contained in the Interim Audit Report is unchanged.

Page 36, Approved 4/27/95
FEDERAL ELECTION COMMISSION

April 4, 1995

Robert J. Costa

Assistant Staf

Audit Divisio

ble

General Cauns 1

lUll Bright-C leaan IWAssociate Ge eral Counsel

Lorenzo Hollo ay lJ'-lvq Assistant Gen~ral Counael

John C. Sur

Staff Direc 0

By:

TO:

THROUGH:

c

r

-.

c~

SUBJECT:

Peter G. Bluaberg~~

Attorney

Proposed Final Audit Report on Bennett for

Senate (LRA 1459)

I. IIft'RODUC'l'IOR

c. The Office of General Counsel ba. reviewed the proposed

rinal Audit Report on Bennett for senate (-the Co..ittee-)

subaitted to this Office on February 28, 1995.1/ The

following memorandum provides our coaaents on the proposed

report. We concur with the findings in the proposed rinal

Audit Report which are not discussed separately in the

1/ Since the proposed Final Audit Report does not include any

matters exempt from public disclosure under 11 C.F.R. S 2.4, we

recommend that the Commission's discussion of this docuaent be

conducted in open session.

Page 37, Approved 4/27/95
~'c.":-'::~~~~~'-"~"",:,,,:,,-. ':;~·i..-:'.~r<~7J.:r;-c- - $~) \.,..,it..) ~.4....~-aL,

-~••orandu. to Robert J. Costa

Proposed Final Audit Report on

Bennett for Senate

(LRA .459)

Page 2

following memorandum.2/ If you have any questions concerning

our comments, please contact Peter Blumberg, the attorney

assigned to this audit.

II. APPARENT PROHIBITED CONTRIBUTIONS (11.8.)

The proposed Final Audit Report identifies various

transactions between the Committee, Robert F. Bennett ("the

candidate"), Robert F. Bennett' Associates, the candidate's

consulting firm, ("R.F. Bennett") and Franklin Quest, Inc.,

the candidate's former full-time employer, ("Franklin"). The

following transactions were identified by the report as

apparent prohibited contributions: (1) monthly payaents fro.

Franklin to R.F. Bennett for the candidate's consulting

services; (2) advances by Franklin to R.F. Bennett for future

consulting services; and (3) FranKlin's quarantee on the

candidate's bank line of credit.

c

With respect to the consulting aqreement and advances,

the proposed report states that the Coaaittee has not

established that the payments arising out of the agreeaent

for consulting services constitute salary and other earned

income or that the payments were independent of Mr. Bennett's

candidacY.l/ Therefore, the proposed report suggests that

the payments were contributions froa Franklin to the

Co.-ittee.

The Coaaittee states that Mr. Bennett provided aany

services to Franklin pursuant to the consulting a9t~e.eDt,

and implies that the payaents also serve as sev.rance

payaents to the candidate for past service. Th. Co_itt•• states that the candidate's agreeaent vas co.parable to tbe

other agreements executed with other departing Franklin

executives. Finally, the Coaaittee argues that the candidate

and Franklin aade the agree.ent prior to, and independent of,

the candidate's candidacy.

The Coaaission has previously deter.ined that an

employer will not make a contribution to a £or••r ••ployee

running for a federal elective office when: (1) the

compensatioI: ~as in consideration of services; (2) the a.ount

of the compensation did not exceed the amount that would be

~/ We concur with your conclusion that the candidate's spouse

did not make a contribution to the Committee through a loan

guarantee. However, we recommend that your !eport cite to 11

C.F.R. S 100.7(a)(1)(i)(D) for the propositlon that the

candidate's spouse did not make a contribution to the Coaaittee

since the stock pledged as collateral for the loan was in the

candidate's name.

3/ Pursuant to the agreement, Franklin was to pay $43,750 to

R.F. Bennett once a month for 12 months starting in July 1991 and

Page 38, Approved 4/27/95
~'~'~l~?,,~~~,<c,~";n~iii'i(fi.'lt<i\iii" t.O''''tid'oe'r t. 'J. '~;'ccr~"i:a

Proposed Final Audit Report on

.ennett for Senate

(LRA 1459)

Page 3

paid to a similarly qualified person; and (3) the employ.ent

is genuinely independent of the candidacy. Advisory Opinion

("AO") 1979-74. (applying the standard to a candidate who•• consulting business provided services to his former employer,

among other clients). Similarly, in AO 1992-3, the

Commission approved a corporation's plan to provide benefitl

to an employee who to~~ unpaid leave to run for federal

office since the employer had a pre-existing policy providing

benefits to employees on unpaid leave that was generally

applicable to all employees and not created for the benefit

of one specific employee. The Comaission also stated that

the time period for the provision of benefits involved (31

days) was short, and that th~ benefits could be viewed as

"other earned leave time" under 11 C.F.R.

S lOO.7(a)(3)(iii).!/ Id.

We concur with the Audit Division's conclusion that all

the payments to the candidate arisiog under the consulting

agree.ent are contributions to the Coaaittee. The payments

may not have been independent of the candidate's candidacy

and the agreement may have contained terms that were not

available to other employees. The consulting agreeaent,

which was never signed, apparently vent into effect in July

1991- At that time, the candidate had recently resigned fro.

his day-to-day position with Franklin, even leaving behind a

newly created Franklin subsidiary called Franklin Consulting

Group that he was to run.51 In aid-August 1991, after

consulting for a little over a aonth, the candidate announced

(Footnote 3 continued froa previous page)

ending in June 1992.

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4/ The Co..ission has also dealt with siailar situations in the

context of federal candidates who receive payaents fro. their law

partnerships during caapaigns. In the law partnership context,

the Coaaission will consider the basis of the partner's

co.pensation to deteraine whether the pay.ents co.ply with the

FECA. See AO 1978-6 (where partner inco.e is based on

client-billable hours); AO 1979-58 (where partner inco.e is based

on an ownership interest in the partnership); "UR 3435 (Co..ission

found no reason to believe that a law partnership made excessive

contributions in violation of 2 u.s.c. S 441a when it made

payments to a partner who was a federal candidate since the

coapensation reflected his proprietary interest in the fira).

Unlike a partnership, Franklin was a corporation. Therefore, the

candidate benefited from his proprietary interest in the

corporation through earnings distributions for his ownership

share, and on the sale of his stock.

~/ The narrative portion of the Committee's response implies

that the candidate founded R.F. Bennett, his consulting coapany,

after Franklin's Board of Directors decided not to go forward with

Franklin Consulting Group. However, the minutes of the July 8,

Page 39, Approved 4/27/95
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Proposed Final Audit Report on

Bennett for Senate

(LRA 1459)

Page 4

his plan to run for Senate to the media. Ex-Utah Sen.

Bennett's Son Wants Post Dad Held 24 Years, Rocky "tn. News,

Aug. 15, 1991, at 34. The Committee registered with the

Secretary of the Senate on October 3, 1991. The short tim.

frame between the execution of the consulting agreement and

the commencement of the campaign suggests that the

candidate's right to payments under the agreement may have

had some relation to the campaign. Further, Franklin and

R.F. Bennett appear to have contravened the express terms of

the agreement's monthly payment requirement when Franklin

made a three-month advance payment on the agreement on

January 30, 1992. A Committee memorandum to the Audit

Division of March 7, 1994, indicates that the advance was

initiated because the candidate needed the money. A large

portion of thiE advance was transferred to the Committee

through the R.F. Bennett account on the same day Franklin

made the advance. Therefore, it appears that the payments

from the consulting agreement (or at least the three payaents

owed for the period January 1992 through March 1992) may have

been linked to the candidacy.

With respect to the Committee's claim that the

candidate's consulting agreement was similar to other

previous agreements, we note that the candidate's contract

terms appeared more beneficial in some respects than those

offered to other departing executives since the candidate's

agreement did not contain 8 no-competition clause and paid

the candidate 100\ of the 1991 bonus. Finally, little

documentation was provided to indicate that the candidate

engaged in any of the work that was called for in the

agreement.

The proposed report also concludes that Franklin's

agreement to repurchase the candidate's Franklin stock that

was used as collateral for a $385,000 loan fro. Layton Bank

resulted in a quarantee, endorsement or other fora of

security. 11 C.F.R. S 100.7(8)(1)(i).6/ The Coaaittee

states that Franklin's agree.ent with Layton Bank to purchase

Franklin stock in case of the candidate's default on the loan

was not a quarantee because Franklin assumed no risk in this

transaction. Any payment that Franklin would have to .ake to

the bank would result in Franklin ass~ming ownership of the

candidate's pledged stock which Franklin valued at more than

$385,000.

Loans, other than those made in accordance with 11

C.F.R. S lOO.7{b)(11), are contributions. 11 C.F.R.

S 100.7(a)(1). For purposes of 11 C.F.R. S 100.7(a)(1), a

loan includes a guarantee, endorsement, and any other fora of

security. 11 C.F.R. S 100.7(a)(1)(i). Each guarantor of a

loan shall be deemed to have contributed that portion of the

total amount of the loan for which it agreed to be "liable in

a written agreement." 11 C.F.R. S 100.7(a)(1)(i)(C).

Page 40, Approved 4/27/95

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-",i;:;~.,:"1'::~::~~-~ ~U~;~~ -\.. ;:;;-'-~Si.,;v'" '" \Ii • . \wu:i t.ci ...

Proposed Final Audit Report on

Bennett for Senate

(LRA 1459)

Page 5

This Office concurs with the report's conclusion on the

corporate repurchase agreement. Franklin's repurchase

agreement with Layton Bank resulted in a guarantee or another

"form of security" to the candidate. A letter to the Bank

from Franklin's President (~d Chief Operating Officer, Arlen

B. Crouch, dated February 24, 1992, stated that Franklin

"will honor the Bank's request to redeem part or all of the

pledged stock .... " A "secretary's certificate" was

attached to the letter stating that the Franklin executive

Committee directed Mr. Crouch to prepare and execute the

letter and that Franklin is bound by the terms of the letter.

Further, Layton Bank stated that absent the repurchase

agreement, Layton Bank wO~Jld not have made the loan. The

practical effect of these transactions was that if Mr.

Bennett defaulted on his loan, Franklin would have had to pay $385,000 in cash to Layton Bank. Therefore, Franklin agreed

"to be liable in a written agreement." 11 c.r.a.

IIOO.7(a)(1)(i)(C). Additionally, the fact that the loan

was processed only because of Franklin's intervention

demonstrates that Franklin has provided something of value to

the Committee. 11 C.F.R. S 100.7(a)(1). The likelihood that

Franklin would be fully reimbursed by assuming ownership of

the pledged stock does not repudiate the fact that the

repurchase obligation served as security to the loan, and

that Franklin accepted liability on the loan.

(Footnote 5 continued from previous page)

1991 Franklin board meeting indicate that the Franklin Consulting

Group plan was dropped because the candidate left Franklin to

start R.F. Bennett.

6/ ApprOXimately $185,000 of the line of credit was used to

repay an "insider loan- owed to Franklin by Mr. Bennett. The

Committee explained that Kerrill Lynch, a brokerage house

assisting Franklin'S efforts to hold a public offering of stock,

requested that Franklin extinguish certain "insider loans" by

having the loan recipients repay the loans. In order to repay the

loans, the candidate and two other Franklin executives took out

loans at Layton Bank with the Franklin repurchase pro.ise. The

candidate, in addition to receiving enough credit to repay the

"insider loan," received an extra $200,000. The loan application

indicates that the extra money was to "set up c~.pai9n line."

This money was eventually used in the campaign. All the draws on

the line of credit were eventually paid, and no default ever

occurred, therefore, Franklin never had to follow through on the

agreement to purchase the stock.

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WILEY: REIN Be FIELDING

JAN WITO,-O eA"AN

(202) -2.-'330

".,. It a'fWCCr. N.W.

WASMI.,CI1"ON, O. C. aooee

(202) ....7000

April 26, 1915 ~.C.''''L.£ (101) ....704.

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The Hon. Danny Lee IIcDcmald

Chairaan

Federal Election Ca.ai..lon

999 E Stre.t, N.W.

Washington, D.C. 20.63

Re: Pr9PQIwt r!pal Audit; "mrS; AD 1Nmet;1; tAr 1tma1;-

(PEe AcJenda Doc:uaen~ 195-37)

Dear Cbairaan MeDemald:

This offic. repr...m:a t:b. Bennett for senau Cc itt:ee

("Cowaitt••-) in connection with an audit of C itt:ee

undertaken by the AUdi~ DiYi.iOn -ot- tile--.~---.liiCU_-

COWIIIi.sion (-Audit Dlv1aloa·). ...... of t:be PIG'I11ar aDd

fur,daaentally unfair rea: .ad.~iODtl of t:be Audit D1Y181oa, 'the

Co..itt.. wishe. to bring ......-l key 1IIIIa•• U) 'the Ca i_lOB'.

attention prior to ita April 27, 1995-.KiDg.

Th. audit covered 'the .-locl frc. _ I, 1"1 tbrGQCJh

June 30, 1913. Oft JaDe 15, 1994, t:be &ad1t: Dlv1alaa 1..... aD

InteriJI Au,dit 1tep.-r:e aDd _ '=bat 1:11. CC; -t~ Z1IIIJM)DCl to

detailed ••ta of qautlOlUl aDd provide reltIVaR ....ort1D9

docuaentation. on _ 6, 1994, C itt:ee ...ittecl a

cOllprehensiv. 24-pag. r.-ponae, ac:cc.panied by eJd:aDIIlve

supporting docuaentatlon, ad.dreulng ..cb of t:he AlllU.t Division's

que.tiona.

Despite the ca.a1tt..'. detailed ruponae, 1:be Audit

Division i ••ued • Pinal Audit Report dat:ad April 5 alleg1D9 t:bat

senator Bennett, 1:be Cc itt:ee aDd ot:bera bad ,,101a1:ecl mmeroua

provisions of the Federal El.ction C....igD Act of 1971, ..

aaended. On April 24, 1195, the C= :ltt:ee recel"- a copy of the

Final Audit Report and ltaarneel t:bat 1:ll1...t1:.U bad been placed

on the agenda for the ca..i••ion'. April 21, 1995 ...t1n9.

The Co..itte.'. ertr...ly 8hort notice of t:he Call i ..ion'.

April 27 hearinq precludes the preparation of a de1:ailed response

Page 43, Approved 4/27/95
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Chairman Danny Lee McDonald

April 26, 1995

Page 2

to the Final Audit Report. Nevertheless, the committee believe.

that the Commission should keep several important issu.. in a1nd

as it reviews this matter.

First, by the Audit Division's own admi••ion in the Final

Audit Report, many of the allegations in the Initial Audit .eport

were baseless. Specifically, the Audit Division acknowledged

that the allegation that joyce M. Bennett made an illegal

contribution to the Co.-itt.e by quarant••inq a loan fr08 the

First National Bank of Layton lacked foundation. Moreover, the

Audit Division recognized that there va. no basi. for the

allegation that the Senator'. us. for campaign purpoa.. of a

portion of $795,415 in earnings distributed to hia in May, 1992

by Franklin Qu.st, Inc. ("Franklin") va. i.proper.

The fact that the Audit Division va. forced to withdraw the

foregoing finding_ casta con.iderable doubt on the r ...ining

allegations in the Final Audit Report, rev••l. the inca.pleta

nature of the Audit Division's conclusion., and suggeat8 that the

Audit Division charged the Ca.aittee with wrongdoing on tbe ~.i.

of a selective factual record and aisapplied legal .tandarda.

Second, in its Final Audit Report, the Audit Divi.ioD

dismissed aany of the relevant facts that the Caaaittee

highlighted and docu.ented in its Septeaber 6, 1994 a.spoa.a. The Co.-ittee'. Septeaber 6 Response deaonstrated inter Alia that

Senator Bennett'. departure froa Franklin and related

transaction. ware ca.pletely unrelated to hi. later candidacy for

the United States Senate as d.-onstrated by the following facta:

(1) Senator Bennett's decision to .tep down fra. active

manag...nt of Franklin vas an evolutionary procea. that

qrew out of change. in the c:01lpany during ttl. aid- and

late-1980s and accelerated when Arlen crouch joined th.

company in 1989;

(2) Senator Bennett's conSUlting arrangeaent vith Franklin

vas an aras-length transaction vhich vas coft81.tent

with Franklin'. long-standing policy of retaining the

counsel of coapany founders and key officers after

their departure;

( 3) Allot the consultine; payaents that Senator senn.tt

received fro. Franklin were for .erv1c•• duly randered

pursuant to the parties' consulting aqra..-nt;

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Cbairaan Danny Lee McDonald

April 26, 1995

Page 3

(4) The aaount of conaulting .ervic•• rendered by Senator

Bennett exceeded the services rendered by other for.ar

Franklin officers under aiailar consUlting

arrangements;

(5) Senator Bennett did not becoae a candidate for the

United Stat•• Senate until Sept.-ber, 1991;

(6) Senator Sennett'. deci.ion to leave the active

manag•••nt of Franklin and to found and QFerate a

consultinq fir. predated hi. decision to run for the

united State. Senate; and

(7) The event. precipitatin9 Senator Bennett'. vitbdraval

fro. Franklin'. IUlNlg...nt beg'an long before forwar

Senator Garn's May 28, 1991 announc..-nt of his

decision to retire fro. th. United Stat.. Senate.

Despite the•• uncontested facta, th. Audit Division retwIea

to recoqnize that all of the aoni.. that PrankliD paid tor

BeJmett for consulting servic•• were Smuator Be1me~#. paz l

funcls that he was leqally entitled to us. in his ca'lp'l1fJD vJ:tbout

lillitation or qualification and vere not corporate c:onUibaKiOll8.

Likewis., Franklin's agreeaent with the Pirat ••t1011&1 BaDk

of Layton to purcha•• its own stock in connection vi~ • loan

obtained by Senator Bennett does not. COftIItit.ute • corpora'ta

contribution to th. Co..itt... As the Cc-.ittH'. _ , Response d..on.tratecl, the aCJreeaent (1) is CU8~GII.ry 1ft t:ba

banking indUStry when clo••ly-beld stock i. uaecI for collateral,

(2) created no net liability for Franklin, and (3) created. 1:I1e

po8sibility of financial qain for Franklin. Uncler 1:b...

circumstance., the .qr....nt cannot be properly viewed .. a

corporate contribution to the Ca.aitt...N

Finally, the aanner in which the agency ba. handled thi• ..tter haa been fund..entally unfair and is incouiRent with the

V The reaaining allegations in the Final Audit "po~ are

ca-plex coapliance i ••u.. that are bi9hly technical in nature.

In its September 6, 1994 Respon••, the Ca..itt•••tated tbat any

t.chnical oversights resulted fro. inadvertent error...d. by in.xperi8~c.d campaiqn staffars, and the Ca.aitt•• outlined the

steps it has taken to ensure that such oversights do not recur.

Page 45, Approved 4/27/95
Chairman Danny Lee McDonald

April 26, 1995

Page 4

Federal Election Campaign Act. After pur.uing qroundl••• alleqations against the Co.-itt.. and iqnorinq key exculpatory facta, the Audit Divi.ion now •••• fit to bypa•• the 8tatutorily- .andated enforcement proces., 2 U.S.C. S 4379, and have the Pinal

Audit Report, which purports to make conclusions of alleqad

violations, debated in pUblic without affording the Ca.aitt•• an

opportunity to defend it••lf. The Ca.aitt••'. Sept.-ber 6

Response is not even aJlong the agenda aaterials ..de public to

date by the FEe. In addition to violating due proc••• and

denying the committ•• its right ot confidentiality under S

4379(a)(12), the highly irregular nature of th••• proceeding. reflects a disregard for the rights of Senator Bennett and the

Co.-itt.e.

In light of the foregoing and the Ca.aittee'. ca-prebenaive

September 6, 1994 Respons., I re.pectfully requ••t that the

Co.-is.ion not adopt the Final Audit Report in ita current fora,

but rather amend the report in .uch a fashion that it .ccura~.ly

reflects the facts and exonerates the Ca.aitt•• froa wrongdoing with respect to senator Bennett'. personal contr1butio~ to hi.

campaiqn. , ..-,

Sincerely,

c

C. cc: The Han. Lee Ann Elliott

The Hon. Joan D. Aikens ~he Han. John Warren McGarry

The Hon. Trevor Potter

The Hon. Scott E. Tho... Lawrence M. Nobl., Esq.

Mr. Robert J. Costa

Jan Witold Baran

COUJUIel to Bennett for senate c~i1:t..

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FEDERAL ELECTION COMMISSION

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May 3, 1995

Mr. John K. Baird, Treasurer

Bennett for Senate

Corbridge, Baird , Christensen

39 Exchange Place, Suite 100

Salt Lake City, UT 84111

Dear Mr. Baird:

Attached please find the Pinal Audit Report on Bennett for

Senate. The COJIIIIlission approved the report on April 27, 1995.

The Commission approved Pinal Audit Report will be placed on

the public record on May 8, 1995. Should you bave any questions

regarding the public release of the_~~~, please contact the

Commission's Press Office at (202) 219-4155. Any·quest1ons you

have related to matters covered during the audit or in the report

should be directed to Joe Stoltz of the Audit Division at (202)

219-3720 or toll free at (800) 424-9530.

Director

Attachment as stated

"ESTERO,', TOO-\\ ~'D T<)MO~RO\\

Jt ~IC ~TEr> TC) ...HPI'C THE PL Hue l.....fORMED

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CHRONOLOGY

BENNETT FOR SENATE

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Audit Fieldwork

Interim Audit Report to

the Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

11/15/93 - 12/8/93

6/14/94

9/5/94

4/27/95

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