FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

RLi::.!vr.o 

FEOER/..'. ELLCTIOM 

COrMISSIOH 

SECKETARIAT 

2013Kf.R-5 PH3:I2 

March 5,2013 

MEMORANDUM 

To: The Commission 

Through: 

From: 

Alec Palmer 

StaffDirector IT 

Patricia C. Orrock 

Chief Compliance Officer 

Tom Hintermistei—\>K 

Assistant Staff Director 

Audit Division 

Kendrick Smi 

Audit Manager 

By: 

Subject: 

Brenda E. Wheeler 

Lead Auditor 

Audit Division Recommendation Memorandum on the Califomia 

Republican Party/V8 (CRP) (A09-15) 

Pursuant to Commission Directive No. 70 (FEC Directive on Processing Audit Reports), 

the Audit staff presents its recommendations below and discusses the findings in the 

attached Draft Fmal Audit Report (DFAR). The Office of General Counsel reviewed diis 

memorandum and concurs with our recommendations. 

Finding 1. Misstatement of Levin Activity 

CRP filed amendments that materially complied with the Interim Audit Report 

reconunendation. There were no new or significant issues raised in response to the 

DFAR. 

The Audit staff reconunends diat the Commission find diat CRP misstated its 

Levin fimd activity for calendar year 2008. 

Finding 2. Reporting of Debts and Obligations 

CRP filed amendments that materially complied with the Interim Audit Report 

reconunendation. There were no new or significant issues raised m response to the 

DFAR. 
The Audit staff recommends diat die Commission find diat CRP failed to disclose 

debts and obligations totaling $2,188,950 on Schedule D (Debts and Obligations) 

of its reports. 

Finding 3. Extension of Credit by a Commercial Vendor 

In response to die DFAR, Counsel for CRP (Counsel) and die Chief Financial 

Officer (CFO) of Strategic Fundraising, Inc. (SFI) submitted letters disputing die 

Audit staffs contention that CRP has not demonstrated that SFI extended credit 

within its ordinary course of business or that commercially reasonable attempts 

were made to collect die CRP debt. 

CRP Response to DFAR 

In CRP's response. Counsel responded to some questions raised by the Audit staff 

in die DFAR and die Office of General Counsel (OGC) in its DFAR legal analysis. 

Counsel stated: 

1. ".. .the CRP believes that SFI did not suffer actual financial losses from die 

'no risk guarantee.'" 

2. ".. .SFI was paid nearly in full for the amounts it had initially billed for 

services." 

3. "Based upon its additional submission, SFI believes that it made a profit, 

and continues to make a profit on its fundraising relationship with the 

CRP." Counsel asserts that the best evidence of tiiis is that tiie relationship 

with SFI has continued for another four years. 

In addition. Counsel suggested that die Conunission should consider revising its 

debt settiement provisions for ongoing conunittees such as CRP since its debt 

situations are so different than diose for termmating conunittees. Counsel 

contended that, unlike a candidate conunittee, a party conunittee is an ongoing 

entity diat must fundraise to remain in existence, and often times, its ability to 

fundraise is affected by extemal conditions. As such, party conunittees must enter 

mto contractual obligations with fundraising entities in a maimer that will ensure 

its existence. 

Counsel also included a memorandum to SFI (dated July 3,2008) which discussed 

a partial payment of $250,000 to SFI".. .on a currentiy unresolved account 

payable..." The memorandum also stated that CRP is currentiy undertaking a 

comprehensive review of the SFI bills, firom an accuracy and performance 

standpoint. In addition, the memorandum stated, "[the enclosed payment] shpuld 

be viewed solely as a good faith effort on CRP's part to reduce the outstanding 

balances subject to the completion of the comprehensive review and a 

detennination of what is the appropriate amount due under these contracts." 

Counsel provided more details of the 2008 negotiated settiement between SFI and 

CRP. In one of the provisions, which was previously unknown by the Audit staff, 

SFI agreed to waive accmed mterest on unpaid balances if CRP agreed to meet its 

obligations to pay the balance of amounts outstanding or that which would be 

accmed in the fimdraising efforts that SFI and CRP undertook from the late 

sununer of 2008 through the begmning of 2009 to extmguish the past debt, hi 

addition, CRP and SFI were to negotiate an extension of the fundraising agreement 
for the 2009-2010 cycle. Payment agreements were also made for future 

fundraising. However, the formal agreements were not presented to the Audit 

staff 

Information Provided bv SFI 

Counsel also provided the following information from the CFO. 

1. Regarding some of die safeguards proposed by the Commission, the CFO 

stated that "[t]he CRP has bylaws that forbid it from entering into 

agreements that span across two board terms essentially limiting the 

contract to approximately two years." The CFO also contended that all of 

its contracts, with both political and non-profit clients, contain a 

termination clause that either party can execute for any reason. 

2. Regarding the caging of contributions by CRP, the CFO stated diat SFI has 

control over "risk" in all of its fundraising agreements. The CFO 

contended that, as part of the fundraising agreement with CRP, SFI 

routinely audits die "caged" data to verify every donation is being 

accurately and timely reported to SFI. The CFO also added diat "[w]hile 

some fundraising/donor acquisition is low margin work, it goes without 

saying that through our 20 years of experience we are able to avoid 'losing 

money.' " The CFO stated diat die fact diat CRP was able to fiindraise out 

of the financial situation and pay off its balance owed to SFI contradicts the 

DFAR conclusion and demonstrates it is without basis. 

3. Regarding its commercially reasonable debt collection efforts, die CFO 

stated diat SFI has had other clients diat found themselves in similar debt 

situations, which were resolved under similar verbal agreements. In 

addition, the CFO stated that "[o]ther documentation to demonstrate SFI's 

full efforts to collect die debt is difficult to come by as this occurred 4-5 

years ago, die CRP staff and treasurer involved have moved on and our 

CEO at the time has since retured." 

The CFO mamtained diat die debt settiement agreement "worked as planned" and 

".. .diat die CRP paid off die debt and is a continued partner of SFI's to diis day." 

The CFO furdier stated that "[o]ur experience tells us diat 'withholdmg of 

additional services until overdue debts are satisfied' doesn't work. I have been 

made aware of several state parties having their vendors stop doing work for them 

only to 1) not get paid, 2) get paid more slowly or 3) end the relationship 

permanentiy. We sought a wm-win solution and achieved it." The CFO expressed 

a concem regardmg the provision of additional documentation to the Audit staff. 

He stated that "[i]t does not seem appropriate however to disclose private (to die 

CRP) and proprietary (to SFI) mformation diat could/would end up on the public 

record. Sharing LifeTime Value data, mception donor counts, renewal rates, 

fundraising plans, etc [sic] does not appear to be in die purview of the 

Conimission." 

In response to the memorandum sent to SFI by CRP (previously discussed on page 

2), die CFO sent a letter to Counsel dated July 9,2008. The letter mdicated tiiat 
CRP had nearly a $900,000 balance diat had accmed over die last 12-14 mondis. 

The CFO also wrote tiiat communication between CRP and SFI never mentioned 

any "unresolved payables" and diat during a meeting held in Minnesota between 

CRP and SFI, diere was no mention of CRP undertaking a comprehensive review 

from an accuracy and performance standpoint. However, die CFO did indicate 

that CRP was going to provide a list of questions regarding small billing issues, 

but the CFO never received die list. 

Audit Staffs Assessment 

Initial Extension of Credit - Inadequate Safeguards 

In the DFAR, the Audit staff highlighted information diat should be provided to 

demonstrate the agreement between SFI and CRP was commercially reasonable. 

11 CFR 116.4(b) and (d). However, neither provided confirmation that die terms 

of die credit issued to CRP are similar to the terms SFI applies when extending a 

similar amount of credit to a nonpolitical client of similar risk.' In addition, 

neither party provided documentation to demonstrate any particular financial value 

of die exclusivity clause in die SFI contract. 

Without further information, questions still remain about the initial extension of 

credit from SFI to CRP and whether there were adequate safeguards to ensure that 

CRP bore a sufficient amoimt of die cost or the risk of the fundraising program. 

CRP failed to provide a valuation of the exclusivity clause as requested by the 

Audit staff, or other pertinent information showing diat the exclusive nature of the 

contract was of sufficient value to offset die risk to SFI. Thus, in the absence of 

information regardmg the value of die exclusivity clause, the Audit staff still 

concurs with die DFAR and does not believe die contract's term and at-will 

termination provisions are in the aggregate sufficient to support a conclusion that 

SFI's initial extension of credit to CRP was m die ordinary course of business. 

The Audit staff concludes that CRP has not demonstrated that SFI's initial 

extension of credit to CRP was in its ordinary course of business. 

Debt Collection Efforts - Waiver of Debt Not Within Commission's Debt 

Settlement Framework 

In die DFAR, die Audit staff highlighted information diat should be provided to 

demonstrate that SFI made commercially reasonable attempts to collect the CRP 

debt. However, neither SFI nor CRP provided such documentation. 

The fimdraising contract between CRP and SFI provided that "outstandmg 

bdances 30 days past due shall accme interest m die amount of 1 percent, 

compounded monthly." However, under its debt settiement agreement, SH agreed 

to waive the accmed interest, which may have been significant as CRP had 

The RIGHTMARCH.COM PAC INC (RMC) audit presented nearly identical issues. Hbwever, in that 

audit, the vendor agreement had several safeguards built in to ensure payment firom RMC. In addition, 

RMC had its vendor submit 32 contracts from different vendors for both political and non-political clients 

to substantiate its position. Ultimately, the Commission did not approve the recommended finding by the 

required four votes, and the matter was moved to the "Additional Issues" section. 
outstanding invoices for periods ranging from approximately four months to two 

years^ (DFAR, p. 8). This waiver raises a question as to whether CRP fully paid 

SFI for its telemarketing services, pursuant to die terms of the fundraising contract. 

Through the debt settlement agreement, CRP and SFI may have settied die debt, 

but it was done so without Conunission approval. Furdier, CRP is an ongoing 

committee, and ongoing committees cannot settle any outstanding debts for less 

than the entire amount owed. 11 CFR § 116.2(b). In tiiis case, CRP continued to 

fundraise under its telemarketing contract with SFI and had the ability to work its 

way out of debt including paying die interest that had accmed pursuant to the 

contract. Instead, CRP settled its obligations, in part, tiurough an agreement not to 

pay die accmed interest on the debt contrary to Commission regulations. 

The Audit staff concludes that the waiver of accmed interest, through the debt 

settiement agreement, was in violation of 11 CFR §116.2(b), and CRP and SFI 

engaged in a debt settiement agreement that was not approved by die Commission, 

as required. 

Audit Staff Recommendation- Finding 3 

The Audit staff reconunends that die Commission find that SFI's initial extension 

of credit to CRP was not in its ordinary course of business, and, as a result, CRP 

accepted a prohibited contribution from SFI totaling $1,171,002, plus any accmed 

interest die Commission finds was improperly waived by SFI. 

If the Conmiission finds that SFI's initial extension of credit to CRP was in the 

ordinary course of business, the Audit staff recommends that the Conimission find 

that SFI did not engage, in conunercially reasonable debt collection efforts m 

seeking payment from CRP. As a result, CRP accepted a prohibited contribution 

from SFI totaling $1,171,002, plus any accmed mterest die Conimission fmds was 

improperly waived by SFI. 

CRP waived die opportunity for an audit hearing before die Conunission. 

If diis memorandum is approved, a Proposed Final Audit Report will be prepared widim 

30 days of the Commission's vote. 

In case of an objection. Directive No. 70 states that the Audit Division Reconunendation 

Memorandum will be placed on the next regularly scheduled open session agenda. 

Documents related to this audit report can be viewed m the Voting Ballot Matters folder. 

Should you have any questions, please contact Brenda Wheeler or Kendrick Smith at 694-

1200. 

Attachments: 

Draft Final Audit Report of die Audit Division on the Califomia Republican Party/V8 

Office of General Counsel's Legal Conunents on Conimittee Response 

cc: Office of General Counsel 

The Audit staff estimates the accrued interest to be approximately $138,000. 
Draft Final Audit Report of the 

Audit Division on the 

Califomia Republican Party/V8 

January 1, 2007 - December 31. 2008 

Why the Audit 

Was Done 

Federal law permits the 

Commission to conduct 

audits and field 

investigations of any 

political committee diat is 

required to file reports 

under the Federal 

Election Campaign Act 

(die Act). The 

Commission generally 

conducts such audits 

when a coinmittee 

appears not to have met 

the direshold 

requirements for 

substantid compliant 

widi the Act.'The4 

determines whether the 

committee comUicLwith 

the lunit 

prohib^flhs and 

discdi^Mjpquirements 

of the AcE 

Future Aci 

The Commission 

initiate an enforcemc 

action, at a later time 

widi respect to any of die 

matters discussed in this 

report. 

About the Committee (p. 2) 

The Cdifomia RepublicanParty/V^||astate party committee 

headquartered m Burbank, CalifrnKuFor more information, 

see the chart on the Committefl^Auiization, p. 2. 

Fimuicial Activi 

Receipts 

o Contributio 

Contribui 

Conunittees 

Transfers from 

Transfers firom 

jnts 

»pts 

m Individuals 

Olitical 

Committees 

and Levin 

xpenditui 

Transfei^ Affiliated/Odier Party 

Conunitt 

ConttibutioVEb Federal Candidates 

Party Expenditures 

lection Activity 

Contribution Refunds 

sbursements 

ivin Receipts 

• Levin Disbursements 

$ 6.367.753 

87.646 

7.557.282 

3.389.660 

188.928 

$ 17,591,269 

$11,110,199 

3.968.892 

30.000 

41,660 

2.392,956 

33,688 

$ 17,577,395 

$620,349 

$624,378 

Findings and Recommendations (p. 3) 

e Misstatement of Levin Financial Activity (Fmding 1) 

e Reporting of Debts & Obligations (Finding 2) 

e Extension of Credit by a Commercial Vendor (Fmding 3) 

2U.S.C. §438(b). 
Draft Final Audit Report of the 

Audit Division on the 

Califomia Republican Party/V8 

January 1, 2007 - December 31, 2008 
Table of Contents 

Page 

Part I. Background 

Audiority for Audit 1 

Scope of Audit 1 

Part II. Overview of Committee 

Committee Organization 

Overview of Financial Activity 

Part III. Summaries 

Findings and Recommendations 

Part IV. Findings and Reconrniei 

Finding 1. Misstatement of Levin Financial 

Finding 2. Reporting of Debts & Obligations 

Finding 3. Extension of Credit by a Commercial 
Parti 

Background 

Authority for Audit 

This report is based on an audit of die Califomia Republican Party/V8 (CRP). undertaken 

by the Audit Division of the Federal Election Commission (die Commission) in 

accordance with the Federal Election Campaign Act of 1971. as amended (the Act). The 

Audit Division conducted die audit pursuant to 2 U.S.C. §438(b).^tich permits die 

Commission to conduct audits and field investigations of any pdflR^ommittee that is 

required to file a report under 2 U.S.C. §434. Prior to conduc^K ^^^i ^ under diis 

subsection, the Commission must perform an intemal rev| 

committees to determine if the reports filed by a particul 

requirements for substantial compliance widi die A 

)rts filed by selected 

)mmn^meet the threshold 

.C. §431 

Scope of Audit 

Following Commission-approved procedun 

factors and as a result, this audit examined: 

1. the disclosure of individual contributors' occupatii 

the disclosure of disbursements, ofett^nd obligatioi 

the disclosure of expenses dlocate^m^gQ^federd, noi 

accounts; 

the consistency between reported figu^ an 

the completeness oCMBlds; and 

other committee.£|ffratffl^ecessary tone review. 

i, and Levin 
Partn 

Overview of Comniittee 

Coinmittee Organization 

Important Dates 

• Date of Registration March 5,1981' 

• Audit Coverage January 1,2007 -- December 31,2008 

Headquarters Burbank, CalifoAja 

Bank Information 

• Bank Depositories One ^Bj^ " 

• Bank Accounts Four Hfleral!^^Levin & Ten Nonfejipa^ccount^^^ 

Treasurer 

• Treasurer When Audit Was Conducted A ^eith Carison 

• Treasurer During Period Covered by Audit /^'V JCeith Obdson ""^1^ ^ 

Management Information ^ 

• Attended Commission Campaign Finance Seminar 

• Who Handled Accounting and RecordkMmng Tasks Pail%|[ 

Overview of 

Luditei 

Cash'On-hand @ Janiid^ It 

Itivity 

Louni 

o Contributions firor 

o Contributions from Otffl 

o Transfers fromAfriliated \ 

luals 

imittees 

Transfer 

:y Committees 

ConUribution Refund; 

Total Disbursements 

Cash-on-hand @ December 31,2008 

Levin Cash-on-hand @ January 1,2007 

Totai Levin Receipts 

Total Levin Disbursements 

Levin Cash-on-hand @ December 31,2008 

66,827 

6.367.753 

87.646 

7.557,282 

3.389.660 

188.928 

$ 17.591,269 

11.110.199 

3.968,892 

30.000 

41.660 

2.392.956 

33.688 

$ 17,577395 

80.701 

1U21 

$ 620.349 

$ 624378 

7;&92 

^ CRP originally registered with the Secretary of the Senate on August 7.1974, as the Republican State Central 

Conunittee of Califomia Federal Election Account, under a different identification number. This previous 

committee terminated on August 5.1981, shortiy afier the formation of die current Committee. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Levin Financial Activity 

During audit fieldwork, a comparison of CRP's reported Levin actmty with bank records 

revealed a material misstatement of receipts and disbursementsj^M^ CRP 

understated receipts and disbursements by $50,071 and $54.Qfl^espectively. 

In response to the Interim Audit Report recommendatioi 

conrect die misstatements. (For more detail, see p. 4 

Finding 2. Reporting of Debts^ADblig* 

Audit fieldwork indicated diat CRP did not accuilMjdisi 

28 vendors totaling $2,188,950 on Schedule D (Deb 

In response to the Interim Audit RepoB|^mmendation,^ 

correct the debt reporting. (For more 5) 

ended reports to 

tions 

lebts and obljSKions for 

)bligations). 

Jiled amended reports to 

Finding 3. Extension of CrmjJl^lM^ppllmercial Vendor 

After reviewmg and aQf|||||^disbursemeimRcords du^fg audit fieldwork, the Audit 

staff noted that an iwq)orateHBBndor appea^ to make a prohibited contribution to 

CRP by extendin^BkbeyoiHts normal col^e^f business and by failing to make 

commercially reasonaB^itteq^^Q^llect $l9fl,002 for services rendered. 

^dm ^ 

analysis^^^curcu: 

lent plans t 

Howevi 

examples 

of business d 

(For more del 

eport reSl^nmendation. CRP and the vendor presented 

diat led to die incmrred debt, their attempts to 

olve tIMibt, and why the extension of credit was beneficial 

ither^ERF nor the vendor provided any documents or 

the extension of credit was in the vendor's ordinary course 

dly reasonable attempts had been made to collect die debts. 
Part IV 

Findings and Recommendations 

Finding 1. Misstatement of Levin Financial Activity 

Summary 

During audit fieldwork, a comparison of CRP's reported Levin act^y with bank records 

revealed a material misstatement of receipts and disbursements»B98k CRP 

understated receipts and disbursements by $50,071 and $54.Qg|^espectively. 

In response to the Interim Audit Report recommendati 

correct the misstatements. 

ended reports to 

Legal Standard 

A. Reporting. If a state, district or local p 

and disbursements for federal election activity (FE 

calendar year, then it must disclose receipts and disbu 

Levin funds used for FEA. 11 CFR ifelfiJ6(b)(2). 

B. Contents of Levin Reports. Eachnapi 

e The amount of cash-on-hand for Levi^uni 

reporting period; 

• The totd amoun|^Xe^7!!Bnd receipts 

transfers) foriK^Mporting^giod and for 

e Certain transactioHhat reflxe itemizatioi 

Levin Bmds)or Sch< 

iicjmK^utm 

bined annuaKceipts 

or more dunng the 

of Federal funds and 

ng and end of die 

disbursements (including allocation 

calendar year; and. 

Schedule L-A (Itemized Receipts of 

ibursements of Levin Fimds). 

A. Fact 

As part of fiS^ork, die ^Ait staff reconciled CRP's reported Levin activity widi bank 

records for 20cRKhe fomMng chart outiines the discrepancies for the begmning cashon-hand balancei^M^f; disbursements and die ending cash-on-hand balance. The 

succeeding paragrapRddresses the reasons for the misstatements. 
2008 Committee Activity 

Reported Bank Records Discrepancy 

Beginnmg Cash-on-Hand 

Balance @ January 1,2008 

$14,988 $14,443 $545 

Overstated 

Receipts $556,470 $606,541 $50,071 

Understated 

Disbursements $559,692 $613,692 $54,000 

Understated 

Ending Cash-on-Hand 

Balance @ December 31,2008 

$11,766 $7,292^ $4,474 

^ Overstated 

The beginning cash-on-hand balance was overstated by $^|^am^unexplained, but 

likely resulted from prior period discrepancies. The $50,^1 und^njtement of receipts 

resulted mostiy firom contributions from individualyjpmne not re^l^^ the 

understatement of disbursements by $54,000 resid^from a vendor pa^^|uthat was 

not reported, and die $4,474 overstatement ofJ|^{iding cHfifa-on-hand bali^ui^ die 

result of the misstatements previously describe 

B. Interim Audit Report & AuditHLvision Recomml 

The Audit staff discussed the reportinHhttjsand presentc 

CRP representative at the exit conferenC^HteDresentativc 

review the matter. 

lon 

^ant work papers to the 

diat he would 

The Interim Audit Ret 

misstatement for 2Qwand 

hand balance witliflBhmlanatil 

adjustment. Further,^^^hoi 

report to id^^^iy suoA^nt 

adjustmndMBMHued. 

lended thdICRP amen^Rs reports to correct the 

its most rewitiy filed report to correct the cash-onIthat thechamerasulted from a prior period audit 

reconciflrdie cash balance of its most recent 

^at may have impacted the $4,474 

^udit Report 

rort recommendation, CRP amended its reports to 

C^^^^nnittee Respl 

In respi^^o the Interii 

correct tnSnfistatements.Vpecifically, CRP amended Schedule A to disclose receipt of 

$50,000 fromHeindividaTs and payment to a vendor on Schedule B for $54,000. Prior 

to the issuanceoBus r&amtt CRP transfenred die remainuig funds in its Levin account to 

a non-federal acc^Hiesolving the remaining discrepancies. 

I Finding 2. Reporting of Debts & Obligations 

Summary 

Audit fieldwork mdicated diat CRP did not accurately disclose debts and obligations for 

28 vendors totalmg $2,188,950 on Schedule D (Debts and Obligations). 
In response to the Interim Audit Report recommendation, CRP filed amended reports to 

correct die debt reporting. 

Legal Standard 

A. Continuous Reporting Required. A political conunittee must disclose die amount 

and nature of outstandmg debts and obligations until diose debts are extinguished. 

2 U.S.C §434(b)(8) and 11 CFR §§104.3(d) and 104.11(a). 

B. Separate Schedules. A politicd committee must file separate schedules for debts 

owed by the committee and debts owed to the committee, togethei^jbath a statement 

explaining die circumstances and conditions under which eachj^otan^ obligation was 

incunred or extinguished. 11 CFR § 104.11(a). 

C. Itemizing Debts and Obligations. 

e A debt of $500 or less must be reported on 

die date incurred (the date of the transact 

regularly scheduled report. 

• A debt exceeding $500 must be disclosed 

which die debt was incurred. 11 CFR §104. 

Facts and Analysis 

A. Facts 

During fieldwork, the Audit staff reviewei 

for proper reporting ofdJBfc^ obligatioi 

vendors totalmg $2J08i95ODArequired disi 

greater dian $50Q^iAyi rem^Bd outstanding 

were incurred. 

60 days from 

on the next 

teon 

rseffWMBBgfrds and disclosure reports 

lis revie^dentified debts owed to 28 

>sure. Most of die identified debts were 

dug the reporting period in which they 

B. 

At 

Inl ^ortTBydit DmSRB Recommendation 

lit confer^IiBj^ AiuA^f^scussed these debts with a CRP representative 

dded relevant^lBL pap^Bne representative stated that he would review the 

matter? 

The Interim 

debts and obligl 

)mmended that CRP amend its reports to disclose these 

ledule D. 

C. Committee RejPbnse to Interim Audit Report 

In response to the Interim Audit Report, Counsel for the CRP commented,".. .Finding 

No. 2 does not conclude that die CRP failed to report debts and obligations; rather that 

the reported debts and obligations by period were inaccurate. Soiiie of these debts and 

obligations were reported on a later monthly report than the one the FEC auditor found it 

should have been reported." Counsel for the CRP dso commented, "We would like to 

point out diat CRP's largest vendor (Strategic Fundraising (SFI)) was disclosed properly 

every month." 
Commission regulations require continuous reporting of debt and obligations until the 

debt is extinguished. Our review concluded diat severd obligations were not 

continuously disclosed as required on Schedule D; while other obligations were never 

disclosed on Schedule D. The Audit staff agrees that SFI was not one of die vendors 

cited in this review. 

In response to the Interim Audit Report recommendation, CRP amended its reports to 

correct die disclosure of debts and obligations on Schedule D. 

I Finding 3. Extension of Credit by a Coi Vendor 

Summary 

After reviewing and analyzing disbursement records dadngi^udit finB[ork, the Audit 

staff noted that an incorporated vendor appeared t^Rk?^ prohibited^Hibution to 

CRP by extending credit beyond its normal cougrof business and by fan 

commercially reasonable attempts to collect $^^nb002 for^vices rendered 

In response to the Interim Audit Report recommendallHERP and the vendor presented 

a detailed andysis of the circumstanft^^at led to the inlm|d debt, their attempts to 

devise payment plans to resolve the d9B|^^hy the ext^HLofcredit was beneficial 

to both parties. However, neidier CRP^^I^^Bdor provideBly documents or 

examples demonstrating that the extensio^of ^9B|iyndu^ndor's ordinary course 

of business or that commeEcially reasonab%attmptsfllKi made to collect the debts. 

Legal Standi 

A. Corporate 

any contribution in co^ 

B. Defi 

proyjffs goods or s< 

n 

11 C 

smess invoh 

.1(c). 

itions Bpermissible^^orporation is prohibited from making 

lord elKon. 2 U.S.C. §441b(a). 

lerei^^endor. ^^Tbmmerciai vendor is any person who 

to ]^^^da(e or politicd cominittee and whose usud and 

e sde^pSl, lease or provision of those goods or services. 

C. Extensian||€redit MCommerdal Vendor. A conunercid vendor, whether or not 

it is a corporati^B|ay^Rnd credit to a candidate or politicd committee provided that: 

e The creditlBflSided in the vendor's ordmary course of business; and 

e The terms q^e credit are similar to the terms the vendor observes when 

extending a similar amount of credit to a nonpoliticd client of similar risk. 

11 CFR § 116.3(a) and (b). 

Facts and Analjrsis 

A. Facts 

During fieldwork, the Audit staff identified an mcorporated vendor that appeared to make 

a prohibited contribution to CRP by impermissibly extending credit beyond its normd 

course of busuiess and by not providing documentation demonstrating that the vendor 
made commercially reasonable attempts to collect die debts. The vendor, Strategic 

Fimdraising, Inc. (SFI), performed voter/donor file prospecting and telephone fundraising 

services for CRP. There are 297 invoices, totdmg $1,171,002, which were outstanding 

between 121 and 757 days. Severd of diese mvoices, dated between October and 

December 2006, were outstanding for services rendered during the 2006 election cycle. 

CRP paid all invoices between March and October 2007 and also in November 2008. 

Other dian die initial invoices, CRP made no odier documentation available to 

demonstrate that SFI made fiirther attempts to collect diese debts. 

B. Interim Audit Report & Audit Division Recommendation 

At the exit conference, the Audit staff discussed this matter widsTCR^representative 

and provided relevant work papers for review. The represeql^Bfi stated that he would 

review the matter. 

The Audit staff had questions regarding SFI's billi 

copy of die SFI vendor contract was requested. 

and a letter from SFI addressing the extensio 

following pertinent provisions: 

• While SFI was responsible for plannmg, prej 

telephone fundraising efforts^hected at both pi 

CRP was responsible for coU^n^epositmg an 

dyment prSO^; therefore, a 

ponse, CRP provicMfce contract 

it. Th& contract contSoyite 

gular repoi 

rest 

managing and conducting all 

s and prospective donors, 

irding all contributions 

generated by SFI and providinj 

individuals who contributed to 

widi the amount and date of each 

SFI shall invoij 

die invoice 

Outstand 

monthly. 

The 

itifying all 

)f SFI's efforts, along 

invoices within 30 days of 

invoices upon receipt. 

accme interest of 1 % compounded 

risk 

risk by 

overdi 

SH would 

mcluded a "Break-Even Guarantee," 

CRP's exclusive telephone fimdraising 

ts of dl cdls to prospective contributors. As 

pay more for prospecting cdls than the sum of dl 

by those cdls. The Guarantee uiduded a provision 

owledged diat SFI was "acceptmg significant business 

'e Guarantee to CRP and provided partid mitigation of die 

the exclusive rig|ht to conduct CRP's fundrdsing programs 

an entire year. 

pdd for its prospectmg services at "an amount equd to the gross 

receipts generated by each prospectmg project." In addition, if die "cumulative 

gross proceeds from all Prospectmg campdgns performed in a cdendar year 

exceeded the totd of all prospectmg calls.. .the positive difference [would] be 

credited to the Committee." 

The letter firom SFI stated diat credit was extended to CRP because it, as well as many of 

SFI's other Republican Party clients, was unable to engage in sustauiable new donor 

acquisition, renewd and reactivation of old donors as a result of die extemd political 

climate at die tune. SFI furdier stated that it believed at dl times that diis extension of 
9 

credit would fiirther CRP's receipt of new funding, and that at no time did it intend to 

make a contribution by virtue of its extension of credit. SFI contended diat the extension 

of credit was in its ordinary course of business, and diat it followed its established 

procedures and its past practice with other telephone fundraising clients in the political 

arena in approving die extension of credit. SFI fiirther added diat CRP and SFI 

negotiated a resolution of disputed billing items by devising a payment plan diat involved 

its continued telephone fundraising for CRP and retention against die outstanding but 

unpaid balances of receipts until the obligation was satisfied in 2009. SFI contended diat 

it received reasonable, prompt payment in full from CRP based on this extension of 

credit. 

After consideration of dl die aspects of this matter, the AudUM£f suggested that there 

were two separate and distinct issues to be considered. FwfcNMipuld have 

established that SFI's extension of credit was m its or^naft cours^Bhusiness. Second, 

if the first provision was met, CRP should faave dem^m^ted diat SF^^e 

commercially reasonable attempts to collect the If CRP did not eSUish either 

provision, a prohibited contribution would faayAuilted. 

Ordinary Course of Business 

In determining whether an extension^credit was in tfllA|hnary course of business, the 

Commission considers whedier die vnb||iollowed estab^^^procedures and past 

practices, whedier die vendor receivedwBb^yment ui funtaMffl^evious extensions of 

credit, and whedier die extension of crea^conRI|^|^ the u^pH and normal practice in 

die industry (11 CFR §116.3(c)). 

In considering simi] 

whedier an extc 

considering the presel 

committees toJi&ve safe) 

costs ofl 

199l2i#mewY( 

Safeguard] 

..a committee^ 

diowing 

as a result ol fundrais 

agreemenc^the Commission has sought to determine 

Is in a vendoraBOTdinary course of business by 

Le vendor sa^pur^^s. The Commission has requured 

that committees, m fact, pay for all die 

See MW5635 (Conservative Leadership PAC); AO 

2tic Committee); AO 1976-36 (Conunittee for 

^Commission have included requiring advance 

IE vendors for potential shoitfdls, linuting die term of 

iors to termmate die contract early and demand full payment 

Ig perfonnance. 

The terms of the '^Iffi^Even Guarantee" and the exclusivity clause in the contract rdse 

a question of whethVSFI's extension of credit to CRP was m its ordmary course of 

busmess. The Guarantee appears very similar to die type of "no-risk" or "limited-risk" 

provisions diat, m previous matters, the Commission has found could constitute m-kmd 

contributions in the absence of safeguards ensuring that (1) the committee would pay fbr 

dl of die costs of the fundrdsmg programs and (2) the vendor would bear dl of die 

fmancial risk of programs not paying for themselves (MUR 5635; AO 1991-18; AO 

1979-36). However, unlike die previous cases. SFI was not responsible for die "caging" 

of contributions resulting from its fundraising activity. The contract outiines that 

contributions were to be sent to CRP, which was supposed to deposit them in its own 

account and dien pay the invoiced amounts to SFI. This provision, m combmation with 
10 

die Guarantee, raises questions as to whether the arrangement between CRP and SFI was 

one in which "the committee retain[ed] contribution proceeds while givmg up little, or 

assum[ing] litde to no risk widi die vendor bearing dl, or nearly dl die risk." See AO 

1991-18 (New York State Democratic Party). It appears diat the exclusivity clause was 

included to offset any risk diat prospecting calls would not generate contributions 

sufficient to cover SFI's costs in making diem. This raises a question regarding whedier 

this clause provided sufficient financial value to SFI such that it negated SFI's 

assumption of the risk that it would lose money on the prospecting calls. However, 

absent additional information showing diat the value of die exclusivity clause was 

comparable to SFI's financid risk or diat "no-risk" or ''limited-ridAagreements such as 

die Guarantee between CRP and SFI conform to the usud and jnia^actices in the 

telemarketing industry, die Audit staff concludes diat SFI didiKextend credit to CRP in 

its ordinary course of business. 

when 

Commercidlv Reasonable Debt Collection 

Even where an extension of credit by a commer^Pvendor is legally 

made, it may evolve into a contribution over ti|Mhrough K^lack of coi 

reasonable attempts on the part of the vendor to (Su^theJ(bi|Uing debt. 

Commission determines that these attempts are conrnMrary reasonable if the vendor 

has pursued its remedies as vigorousbas it would puisH|sremedies against a nonpolitical debtor in similar circumstan1|HU^CFR §116.4(aM^. hi this matter, it appears 

that many of the debt collection provisl 

e As previously mentioned, other 

made avdlable to demonstrate thf 

attempts werej^Bj^^oUect dies( 

• No docum^ipon wliBesented to 

billed th^n^yntere9x>mpounded^ 

dian 30 days. 

led in the cdl 

>ices, nc 

^ere not fiilfilled. 

Sther documentation was 

ly or diat any further 

Audit staff to demonstrate that CRP was 

Lootfily, for its debts outstanding more 

Inregan 

otherjffiitical clieni 

nes^lKen discussed 

)y SFI.^5Fnldnuts diat credit was extended to CRP and 

ISO nn^onsa negotiated repayment plan; however, diis has 

le AiSfemf nor presented to die Audit staff for review. 

The InterllH^it Report Bommended diat CRP provide documentation or any other 

conunents t^^|onstrate Kt SFI extended credit to CRP m its ordmary course of 

busmess. The^wn^non should have mcluded. but not have been lunited to. 

evidence diat (1) tnl|tiKak Even Guarantee" widiui die SFI contract is conunon 

mdustry practice. (^Verification diat die vdue of die exclusivity clause provided 

sufficient fmancial vdue to SFI such that it negated SFI's assumption of the risk that it 

would lose money on the prospectmg calls, and (3) confirmation that the terms of the 

credit are similar to the terms SFI observes when extendmg a similar amount of credit to 

a nonpoliticd client of similar risk. 

In addition, die Interim Audit Report recommended diat CRP provide documentation or 

any other comments to demonstrate that SFI made commercidly reasonable attempts to 

collect diese debts. The documentation should have uiduded, but not been linuted to. 

evidence supporting the negotiated payment plan and examples of other SFI customers or 
11 

clients of similar risk for which similar services had been provided and similar billing 

arrangements had been utilized. CRP should have also provided documentation 

conceming SFI's billing policies for similar clients and work, advance payment policies, 

debt collection policies, and billing cycles. 

Absent such a demonstration, die Audit staff would consider die $1,171,002 an 

impermissible contribution from SFI. 

C. Committee Response to Interim Audit Report 

In response to die Interim Audit Report recommendation, CRP 

Officer of SFI (CFO) dispute diat die extension of credit by S 

contribution. 

CRP discussed the many factors diat led to its incurrei; 

Specifically. CRP presented die following: 

e Chief Financial 

in a corporate 

1. 

(2 

2. 

Fundraising is Cyclical - CRP stated 

traditional drought period, die off-electio: 

traditional fundraising cycle has peaks and ^ 

die big Cdifomia gubemator^election of 200i 

Republican fortunes in the 2()QDfifiDsressiond eld 

problematic." 

CRP Organizational Changes anSdieUB^^ynpirectWTail and Tele 

Fundraising Rates - CRP stated dnk it, Uaemi^touanizations that engage in 

iost of its SFnm||^ing its 

CRP stated'IRCRF'S 

d ihe valley in 2007 after 

the decline of nationd 

, was especially large and 

3. 

direct mail and 

from these aomtiesT 

positions JidHkman ani 

to resolve so^Kits d\ 

NatiooaLand Stal 

^fanm 

fso suffereo^k^s of 

[^lining popvi 

fomia, whi 

dde Republi 

lossTnceer dolli 

Governo^Bhwi 

longer co: 

[rdsing effc 

also disci 

'hief Operat 

issues. 

suffered necline in fimdraising receipts 

|ed the tumover ui key upper management 

Officer) and how diis affected its ability 

Fortunes - CRP stated "Like odier 

that enjl^in durect mdl and tele-fundraising, the CRP 

identification and support that was related to the 

of diflHyiltfnd administration and special conditions m 

006,/l^ublicans had suffered a loss of dl but two 

officeholders." CRP fiirdier added, "die CRP suffered a 

[onora in part because its major statewide officeholder, 

egger, had dedared after his re-election in 2006 that he no 

himself as a partisan Republican govemor, and he described his 

party as a dj^ged brand." CRP stated diat. beguming m early 2007, Govemor 

Schwarzenegger ceased to assist CRP in fundrdsmg. 

CRP contended that SFI made commercidly reasonable efforts to collect the CRP debt. 

As evidence of diese attempts, CRP stated that it engaged m good fdth discussions and 

negotiations to resolve the debt to SFI. CRP added dmt many of its officers and key 

employees were in constant, regular communications with SFI. In addition, CRP's Board 

of Directors received regular briefings at each board meeting regarding the growing debt, 

and CRP key staff visited SFI offices m Minnesota to negotiate a strategy to resolve the 

debt. 
12 

As furdier evidence diat SFI made commercially reasonable efforts to collect die CRP 

debt, CRP stated that it was billed mondily on all telemarketing and direct mail matters, 

that it had hundreds of separate communications by telephone, email and face-to-face 

widi SFI representatives relating to die debt matter, and diat SFI's invoices included 

finance charges. 

Counsel for die CRP commented diat in July 2008 a negotiated agreement widi SFI "(1) 

resolved disputes about billing items; (2) negotiated a iset aside of SFI-generated telefimdraising receipts diat were dedicated and credited to pay-dowqj^e CRP debt; and 

(3) extended die SFI-CRP fundraising agreement into 2009-20J 

CRP contended that die fundraising agreement was in S 

In response to die concem diat die agreement with SFi 

sequester funds necessary to pay its bills, CRP 

functions from all its fundraising vendors and 

agreement. CRP points out two criticd facts[ 

largest, of SFI's client. CRP stated diat diis 

non-federal campaign reporting requirements. 

2007 and 2008 resulted in delayed pavments to vendo 

allowed for it to balance payments to^feidars with "! 

To supplement its Interim Audit Report 

CFO to address that credit was extended 

contended that extendi] 

fundraising perspec] 

valued, long tei 

stated that it believi 

debt, not onl^would 

not declijifBHI^^^e 

that d^result of e: 

anddl^Uemg evenmaH^d. 

diatatnmie had SFI iAded t< 

extensioi^ncedit. 

raiHKCOurse of business, 

ot pro^^^r it to cage and 

ose to^B^te caging 

a separate cagin|widor and 

one of the lar^B^^ot die 

liance with and 

hancial situation during 

separate caging agreement 

doors open." 

comments firom the 

of business. The CFO 

from a prospecting and 

the perspective of helping a 

})eneficial payment plan. The CFO 

and fundraise for CRP, m spite of the 

be redized but its donor base would 

ibly acquure new donors. The CFO stated 

would be CRP gaining new or lapsed donors 

, SFI extended credit to CRP. The CFO noted 

a contribution to the CRP by virtue of an 

Regardmg the^ndcevo^guarantee" and the exclusivity provision withm die CRP and 

SFI agreement; tnoH^tated, "Widiout disdosmg too much of die detdls of our 

business model or nplammg how fundrdsmg works, SFI will stress that our standard 

fundraising agreements widi dl politicd clients call fbr exdusivity. As a company, we 

understand die need to acquire new donors for the long-term healdi of our partners like 

the CRP and we have a 20 year history which allows us to mitigate our mtemal 'risk*. All 

other tele-fundrdsmg fmns offer the exact or similar "break-even guarantee*. As pointed 

out above, we issue credit to non-political clients as wdl in the exact same fashion." 

Regarding SFI's commercidly reasonable attempts to collect die CRP debt, the CFO 

contended that besides its nonnal weekly invoices, SFI dso sends out via an e-mdl link 

bi-weekly summaries and open invoice reports which contain the 'aging' for eadi dient. 
13 

He added diat diis was done for all SFI clients, politicd and non-profit. As further 

evidence, die CFO stated, "SFI requested and was presented widi severd informal 

payment plans in die fdl/winter of 2007. They would be adhered to for a while, and dien 

die CRP would be unable to keep up widi die payments..." The CFO concurs widi 

Counsel diat a new agreement was created in 2008 diat resulted in die debt being paid off 

in early 2009. 

Assessment bv die Audit Staff 

After reviewing die responses submitted by CRP and die CFO, die Audit staff made die 

following observations regarding CRP's adherence to die hiterim Jj^^it Report 

recommendation: 

1. Other dian providing written comments, no docu; 

demonstrate diat SFI extended credit to CRP i 

The CFO stated diat die "Break Even Guara 

widiin die SFI contract is common industa^ractice, but no exi 

client contracts or any supporting doc 

statement. The CFO cites confidenti^ity 

clients that do not fdl under die purview of 

CRP nor die CFO provided confirmation diat 

CRP are similar to die terms Sfebobserves when e! 

credit to a nonpolitical client oflHululsk. 

submitted to 

se of business, 

clause 

of other 

provided to VBBOins 

itracts with itsWn-profit 

imis^on. In addition, neither 

is of the credit issued to 

ting a similar amount of 

Further research by the Audit stafl^dic 

exclusivity clausMBULOt unusual iAd^undrai 

"cage" die ca^BbH 

contract, cf^unitions 

contributionsi^fi: o\ 

provision, m coi 

^letwc 

)ceeds ^|Hiymg^ 

^11, or nearly aflm risk.^ 

LOt unusud. 

Even Guarantee" and the 

mdustry. SFI does not 

ulting frolkthe fundrSsing activity. Under its 

e to be sent%irecdy to CRP which was to deposit the 

ount and th ApfSy the invoiced amoimts to SFI. This 

tee. raises questions as to whether the 

ana jiwiis one ui which CRP retdned contribution 

{{tie, or assummg littie to no risk widi the SFI bearing 

dit staffs research dso mdicates diis provision 

DoSBmtation waAot provided to demonstrate any particular financial value of 

the exoH^ty dame. If die exclusivity clause provided vdue to SFI sufficient to 

negate SnB^^ption of the risk that it would lose money on the prospectmg 

cdls, die exflBion of credit would result in no contribution. Further researdi by 

the Audit stSrf indicates that when a contract contamed an exclusivity clause as a 

safeguard agamst losses by die vendor; it was not die only safeguard, as it is m CRP's 

contract with SFI. 

2. CRP and die CFO bodi detail SFI's attempts at collectmg die CRP debt. 

However, neither provided any evidence to support the various negotiated 

payment plans, die bi-weddy summaries or open invoice reports, the meetings 

between CRP and SFI officids, die hundreds of conununications between the two 

parties, etc. In addition, neither CRP nor the CFO provided any examples of 
14 

odier SFI customers or clients of similar risk for which similar services had been 

provided and similar billing arrangements had been utilized. 

SFI's effort to convince die CRP to resume die fundraising program and SFI's 

continued provision of services when CRP had repeatedly failed to pay raises the 

question of whether SFI's debt collection efforts were commercially reasonable. 

Among die debt collection practices diat may be regarded as evidence of 

commercid reasonableness is the withholding of additional services until overdue 

debts are satisfied. Here, it appears the opposite happened; CRP, concemed about 

the level of debt it had accumulated, sou^t to suspend denary of services from 

SFI, and it was SFI diat convinced CRP that die only vid^Rway for CRP to get 

out of debt to SFI was for it to continue die fundraisigftogram. If diis is 

correct, it may be diat SH's decision to give CRPjnltKH^ime to pay and SFI's 

decision to continue providing services was comiXcially^Auiable. However, 

die Audit staff believes diat additional infonnMk^is^necessa^^^ach diis 

conclusion. SFI asserted in its response thfRTas part of its efforts^^nvince die 

CRP, it met widi CRP and presented ^i/jm^ed hou^file analysis ^BuHcluded 

details on historical fundraising Urends ano^ewaljPte. In addition, 

contended diat diis meeting led to a better umMpding of the need to prospect 

and fundraise to help CRP outpf die situation i^wid itself in. Information 

supporting this contention by Sh^l d be precisein|e type of information diat 

would demonstrate the commeffiR|^|finableness o^nlpi^^urse. In addition, 

die specifics of the negotiated prai^^K^nd how K plans compare to the 

terms SFI has provided to sunilarwitiusnB^^ed clients may also 

demonstrate tb^gB|^cid reasonasness andVsonable debt collection efforts 

by SFI. Hovy^PS/^Bbodi CRP aM SFI say that SFI provided such 

informati^^iBCRP inlB8, neither hturovided a copy of the detdled house file 

analysis or tfa^^^ific§K^ negotiateppayment plans to the Audit staff. 

die Int^nPRudit Report submitted by CRP and die 

CRP has not demonstrated diat SFI extended credit 

if busil^ptf duit commercidly reasonable attempts were 

t. Ui^^rnurdier documentation is provided by CRP, the 

considers B matter an impermissible contribution of $1,171,002 to 
FEDERAL ELECTION COMMISSION 

WA.SHINGTON, D.C. 20463 

MEMORANDUM 

January 14,2013 

TO: 

FROM: 

SUBJECT: 

Thomas Hintermister 

Assistant StaffDirector 

Audit Division 

Lisa J. Stevenson 

Deputy General Cout^sd - Law 

Loren2x> Holloway "f ^ 

Assistant General Counsel 

Public Finance and Audit Advice 

Danita C.Alberico -X* ^ ^ 

Attomey 

Drafi Find Audit Report - California Republican Party/V8 

Legal Comments on Committee Response 

(LRA 829) 

I. INTRODUCTION 

The Office of Generd Counsel ("OGC") has reviewed the proposed Drafi Final 

Audit Report ("DFAR") on the Califomia Republican Party/V8 ("Committee"), as well 

as the responses to the DFAR submitted by the Committee and Strategic Fundrdsing, 

Inc. ("SFI"). We concur with the Audit Division's findings in the DFAR. In this 

memorandum, we evduate the Committee's contention with respect to Finding 3 

(Extension of Credit by a Commercial Vendor) that its fundrdsing contract with SFI 

contained adequate safeguards. We also conclude that SFI's waiver ofthe Committee's 

accmed interest obligations was inconsistent with the Commission's legd framework for 

debt settlement and/or forgiveness. The debt seUlement issue is not addressed in the 

DFAR as neither the Audit Division ndr OGC had sufficient information, prior to the 

responses of the Committee and SFI, to discem whether the debt was, in fact, settled or 

partially forgiven. We recommend that the auditors address the debt settlement issue in 

the Audit Division Recommendation Memorandum. Ifyou have any questions, please 

contact Danita C. Alberico, the attomey assigned to this audit. 
Memorandum to Thomas Hintermister 

California Republican PartyA^S (LRA 829) 

Audit Division Recommendation Memorandum - Legal Comments on Committee Response 

Page 2 of4 

II. INITIAL EXTENSION OF CREDIT: SFI ASSERTS THAT THE 

FUNDRAISING CONTRACT CONTAINED ADEQUATE 

SAFEGUARDS TO ASSURE THAT ALL COSTS WERE PAID 

SFI asserts that its initial extension of credit to the Conimittee was in the ordinary 

course of business because, in addition to the exdusivity clause, its contract contained 

two additional safeguards to ensure diat the Committee paid for the costs of the 

fimdrdsing program. Response to Draft Final Audit of2007-2008 Election Cycle fbr 

Cdifomia Republican Party, C#000014590, (Dec. 6,2012) ("SFI Response"). 

Specifically, SFI firat points to the purported "short-term" nature of its contract which 

was mandated by the Committee's "bylaws foibid[ding] it [the Committee] fiom entering 

into agreements that span across two board terms [and] essentidly limiting the contract to 

approximately two yeans." Id. Second, SFI noted diat die contract contdned "a 

termination clause diat either party could execute fbr any reason." Id. 

The safeguards that SFI highlights are examples ofthe potential types of protections 

that the Commission has focused on in the past in determining whether a fimdrdsing 

program may have resulted in a prohibited in-kind contribution to a conunittee. See 

MUR 5635 (Commission concluded that contract resulted in contributions from 

fimdraising firm because the arrangement was not in the ordinary course of business 

given the size ofthe disbursements and short-term nature of the program); Advisory 

Opinion 1991-18 (safeguards proposed by die Commission included requiring advance 

deposits by a committee to rdmburae vendora for potential shortfalls, limiting the term of 

the contract, or allowing vendors to terminate the contract early and demand full payment 

as a result of poor fundraising performance); Advisory Opinion 1979-36 (addressing a 

"limited risk" fimdraising contract where the committee was only required to pay threefourths of the total amount of contributions recdved irrespective of the actual amount of 

fees and expenses). In our conunents on the DFAR, we had not previously evaluated 

either die term of die contract or its termination clause as potential safeguards but rather 

focused on the exclusivity clause in evduating whedier the contract may have resulted in 

a contribution to the Conunittee. 

Looking at the contract as a whole, questions still remain about the initid extension 

of credit firom SFI to the Committee and whether there were adequate safeguards to 

ensure that the Committee bore a suffident amount ofthe cost or the risk of the 

fundrdsing program. The Committee fdled to provide a vduation of the exclusivity 

clause as requested by die auditora, or other pertinent information, showing that the 

exclusive nature of the contract was of sufficient value to offset the risk to SFI. Thus, in 

the absence of information regarding the vdue of the exclusivity clause, we still concur 

with the DFAR and do not believe the contract's term and at-will termination provisions 

are in the aggregate sufficient to support a conclusion that SFI's initid extension of credit 

to the Conimittee was in the ordinary course of business.' 

The Audit Division may need to revisit the issue ofthe adequacy of the safeguards in the SFI 

contract pending the Commission's fuial decision on a similar issue in the Proposed Find Audit Repoit 
Memorandum to Thomas Hintermister 

Califomia Republican PartyA^S (LRA 829) 

Audit Division Recommendation Memorandum - Legal Comments on Committee Response 

Page 3 of4 

Further, SFI's 'Vaiver'* of accmed interest on die Committee's outstanding debt 

resulted in some of die costs arising out of the SFI fundraising program bdng left unpdd 

by die Committee. "Widi respect to die payment or non-payment of an extension of 

credit, the Commission has made plain diat in politicd committee fundraising, 'none of 

the costs of the program [may] be left unpdd by the Committee." Generd Counsel's 

Report #2, MUR 5635, at 8 (quoting Advisory Opinion 1990-14). As discussed in 

Section III bdow, the Committee resolved payment of its outstanding debt with SFI in a 

manner that is inconsistent the Commission's legal framework for addressing debts owed 

by oommittees. 

HI. WAIVER OF DEBT ARISING OUT OF INIFLiL EXTENSION OF 

CREDIT: THE COMMITTEE AND SFI NEGOTIATED A WAIVER 

OF ACCRUED INTEREST THAT IS INCONSISTENT WFFH THE 

COMMISSION'S LEGAL FRAMEWORK FOR RESOLVING DEBT 

The other issue that must be addressed is whether SFI's waiver of interest, which was 

accmed pursuant to the provisions of the fimdraising contract, results in a contribution. 

The DFAR found that the Committee failed to pay severd invoices for SFI voter/donor 

file prospecting, caging, fundraising and mdling services for periods ranging from 

approximatdy four months to two years. DFAR at 8. The SFI invoices totaled 

$1,171,002. Id. Initially, SFI contended that it continued to provide services to the 

Committee to help the Conunittee satisfy the debt, but ndther SFI nor the Committee 

submitted information in response to the DFAR to indicate that such an approach was 

commercidly reasonable. 11 C.F.R. §§ 116.4(b) and (d). 

Instead, in its response to the DFAR, the Committee states that it negotiated a 

settiement of its debt to SFI and diat "SFI [was] effectively pdd in fiill" for its 

telemarketing services. Further Response to [Draft] Find Audit Report for die 2007-

2008 Election Cycle for Califomia Republican Party, C#000014590 at 2 (Dec. 9,2012) 

("Committee Response"). The Committee expldns diat SFI wdved the accmed interest 

on the unpdd bdances owed to SFI subject to die Committee's "agreement (a) that it 

would meet its obligations to pay the balance of amounts outstanding... and (b) the 

[Committee] and SFI were to negotiate an extension of the fundrdsing agreement for the 

2009 and 2010 cycle."^ Id. at 3. 

('TFAR") on Rightmarch.com PAC. In Rightmarch, tiie safeguards included tiie right of tbe vendor to 

tenninate the contract early and demand full payment and to slow the pace of fundraising if tiie contract 

was not profitable. During the Commission's consideration of tiie Audit Division Recommendation 

Memorandum in Rightmarch, the Commission split 3-3 on the issues ofwhether credit was extended to 

Rightmarch in the ordinary course of a commercial vendor's business and wdiether Rif^tmarch incurred 

reportable debt as a result of its fundraising contract with the commercial vendor. In accordance witii 

Directive 70, tiie Audit Division will present these issues in tiie **Additional Issues" section in the 

Rightmarch PFAR. 

^ The contract between the Committee and SFI provides tiiat **outstanding balances 30 days past due 

shall accrue interest in.the amouiit of 1 !4 percent, compounded montiily.*' Fundraisuijg Services Drntract 

dated November 1,2006 between Strategic Fundraising Services, Inc. and the California Republican Party. 
Memorandum to Thomas Hintermister 

Califomia Republican Paity/V8 (LRA 829) 

Audit Division Recommendation Memorandum - Legal Comments on Committee Response 

Page 4 of 4 

The Committee and SFI may have settied the dd)t, but they did so widiout die 

Commission's approval. The Committee is an ongoing conunittee, and ongoing 

committees cannot settie any outstanding debts for less than die entire amount owed. 11 

CF.R. § 116.2(b). 

Although the Committee claims that the settiement with SFI was necessary for it to 

"keep its doora open," the Commission has previously considered and rejected allowing 

debt settiements by ongoing oommittees. The Commission prohibits settlements by 

ongoing conunittees because "these committees have the intention to continue to soiidt 

fiinds and engage in election related activity." Explanation and Justification for Debts 

Owed by Terminating Committees, Ongoing Coinmittees and Authorized Committees, 

55 Fed. Reg. 26,379 (June 27,1989). Under diese drcumstances, "die settiement of an 

ongoing committee's debt cannot be considered to be commercially reasonable given that 

the coinmittee is continuing to recdve funds that could be used to pay its past debts." Id. 

The Commission notes diat "by freeing additional funds for future electoral activity, such 

a practice could result in direct subsidization of a political committee's speech beyond 

the conunittee's ordinary capadty." Id. Here, the Committee continued to fundraise 

under its telemarketing contract with SFI and had the ability to work its way out of debt -

including paying the interest that had accmed purauant to the contract. Instead, the 

Committee settled its obligations, in part, through an agreement not to pay the accmed 

interest on the debt contrary to Commission regulations.^ 

Creditors may, in certdn limited circumstances, forgive debts of ongoing committees 

as prescribed in 11 C.F.R. § 116.8. See 11 C.F.R. § 116.2(b). This settlement does not 

qualify for creditor forgiveness under section 116.8 because, among other factora, the 

Committee's whereabouts were known to SFI and die Committee had receipts of at least 

$ 1,000 and disburaements of at least $1,000 during the 24 months prior to when die debt 

was settied. 11 C.F.R. § 116.8(a)(1) and (2). A creditor tiiat intends to forgive a debt 

must, in addition to satisfying die requirements of section 116.8, follow the procedures 

outiined for notifying and obtaining approvd firom the Commission, which also were not 

followed here. 

Since the settlement of the Committee's obligation to pay the accmed interest is a part 

of die andysis of whedier the Committee satisfied its debt to SFI, we recommend that the 

auditors address this debt settlement issue in the Audit Division Recoinmendation 

Memorandum. 

' Even if the Committee was a terminating committee and could therefore sede its debt, it did not 

follow tiie Conunission's procedures for doing so. In particular, the committee must submit, and the 

Commission will consider, the committee's plan to terminate, its cash on hand, expenditures and receipts, 

the total amount of debts and numbeir of creditors owed, the totd dollar amount and percentage of debt 

proposed to be settled or forgiven and the lengtii of tune tiie debt has been overdue. 11 C.F.R. § 116.7(f). 

None of those steps were followed here.