FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

December 8, 2009 

MEMORANDUM 

TO: Jofan D. Gibson 

Cfaief Compliance Officer 

Josepfa F. Stoltz 

Assistant Staff Director 

FROM: Cfaristopfaer Hughey 

Deputy General Counsel / 

Lawrence L. Calvert, Jr. O^- ^ ^ 

Associate General Counsel 

Lorenzo Holloway ./- ^ _ 

Assistant General Counsel 

For Public Finance and Audit Advice 

Albert Veldhuyzen ^/jf-I/ l 

Attomey 

SUBJECT: Preliminaiy Audit Report on Nader for President (LRA # 755) 

I. Introduction. 

The Ofiice of General Counsel has reviewed the Preliminary Audit Report ("Proposed 

Report") on Nader for President ("Committee"). We concur with the findings in tfae Proposed 

Report and offer tfae following comments regarding Finding 1 (Net Outstanding Campaign 

Obligations), and Finding 2 (Misstatement of Financial Activity). If you faave any questions, 

please contact Albert R. Veldfauyzen, tfae attomey assigned to tfais audit.' 

' The Office of General Counsel recommends that the Commission consider this document in Executive 

Session because the Commission may eventually decide to pursue an investigation of matters contamed in the 

proposed Report. 11 C.F.R. §§ 2.4(a) and (b)(6). 
Memorandum to Joseph F. Stoltz 

Nader for President Preliminaiy Audit Report 

LRA #755 

Page 2 

II. Our Regulations Do Not AUow the Committee to Use Primary Matching Funds for 

Primary Winding Down Activities Until 31 Days After the General Election (Finding 1). 

The Proposed Report recommends tfaat tfae Committee repay $57,591 to tfae United States 

Treasury for receiving fimds in excess of entidement This repayment is based on the Audit 

Division's calculation of the Statement of Net Outstanding Campaign Obligations ('"NOCO 

Statement"). As a general matter, a committee's net outstanding campaign obligations 

("NOCOs") are die difference between its assets and its liabilities. 11 CF.R. § 9034.5(a). 

Winding down expenses are included as a liability on the NOCO Statement, 11 C.F.R. 

§ 9034.5(b)(2), but candidates wfao run in the general election caimot include winding down 

expenses unless those expenses were incurred 31 days after the general election. 11 C.F.R. 

§ 9034.11(d). Thus, under this regulation, Nader, who participated in the general election, could 

only include on his NOCO statement those winding down expenses that were incurred after 

December 5,2008. However, the Committee argues that notwithstanding the regulation, tfae 

liabilities on the NOCO Statement sfaould also include primary winding down expenses incurred 

between tfae candidate's date of ineligibility ("DOI")* wfaich was September 5,2008, and 

December 5,2008. If the Commission accepts the Committee's argument that its purported 

primaiy winding down expenditures during the period from DOI to 31 days after die election 

should be counted as liabilities in its NOCO Statement, this increased liability for tfae winding 

down expenses would eliminate the finding that the Committee received federal fimds in excess 

of entidement. See 11 C.F.R. § 9038.2(b)(l)(i). 

The Committee's specific arguments address three distinct time periods: 1) Date of 

Ineligibility (September 5,2008) to November 4,2008; 2) November 5 until December 5,2008, 

and 3) the period after December 5,2008. With respect to the first two time periods, the 

Committee makes two related arguments. First, the committee argues, the regulation is arbitrary 

in its application to candidates like Nader wfao successfiilly receive the nomination of minor 

parties but do not receive federal fimds for the general election. Because such a candidate's DOI 

is the date of tfae last major party convention, tfae Committee appears to argue, tfae rules 

effectively apply an arbitrary date that has nothing to do with die candidate's actual campaign. 

Second, the Committee argues tfaat between September 5 and December 5,2008, it incurred 

actual primaiy winding down costs tfaat were clearly identifiable as sucfa, and so it ought to be 

able to receive partial public fimding for tfaose expenses. Witfa respect to tfae last time period, the 

Committee argues that it sfaould be allowed to allocate 100% of its expenses after December 5 as 

primary winding down costs if tfae Commission fails to agree with its arguments about tfae period 

between September 5 and December 5,2008. 

In effect, the Committee is explicitiy asking the Commission to ignore its own regulation 

and to use this audit to fashion a special rule for itself and other publicly funded minor party 

primary committees that subsequently participate in a general election without public funds. 

However, there is simply no basis for the Commission consciously to ignore its own regulation. 

Moreover, the Committee's argument ignores the purpose of the regulation. Section 

9034.11(d) was designed to prevent *^e use of primary matching fimds for non-qualified 

expenses related to the general election" by any candidate, whether the nominee of a major or 
Memorandum to Joseph F. Stoltz 

Nader for President Preliminary Audit Report 

LRA # 755 

Page 3 

minor party, and whether receiving public fimds for the general election or not. See Explanation 

and Justification for II CF.R. § 9034.11(d), 68 Fed. Reg. 47,409-10 (Aug. 8,2003). In 

promulgating the regulation, the Cominission explained that expenditures incurred during the 

period after the primary election are almost always going to be general election expenses, rather 

tfaan primary winding down costs. It acknowledged tfaat the rule "may result in general election 

campaigns incurring a small amount of administrative costs related to terminating tfae primary 

campaign during tfae general election period," but determined tfaat "in practice, tfaese expenses 

are offset by general election start up costs that are mcurred and paid by the primary committee 

prior to the candidate's DOI." Id at 47,409. Consequentiy, the Commission has imposed a 

bright-line rule for the sake of administrative efficiency and to avoid consuming time and 

resources to delineate between primaiy and general expenses - precisely the sort of delineation 

the Conmiittee asks it to undertake here. Additionally, the provision applies explicitiy 

'^regardless of whether the candidates receive public fimds for the general election." 11 C.F.R. 

§ 9034.11(d). 

Regarding tfae period from DOI until November 4,2009, tfae auditors note tfaat the 

Committee in frict could include on its NOCO statement obligations for 99% of the primary 

election expenses paid during the period in question because those expenses were incurred prior 

toDOL Consequentiy, the Committee was credited $101,513. The auditors estimate that only 

1% of expenditures related to the primaiy were mcurred after DOI. For tfae period of November 

4 to December 5, the auditors identified to tfais Office expenditures totalmg $5,758 tfaat were 

related to tfae Primary. Tfae amount of $5,758 represents 0.02% of tfae total amount spent on the 

primary and general campaigns.^ Such an insignificant amount is wfaat tfae Commission clearly 

contemplated as an amount that could be offset by expenses paid from the primary that were 

related to tfae general election start-up cost. Absent tfae presentation of additional compelling 

evidence tfaat the bright line rule should not apply, tfae Committee has not met its factual nor 

legal burden. See Explanation and Justification fi>r II C.F.R § 9034.11(d), 68 Fed. Reg. 47,409 

(Aug. 8,2003). 

Finally, the Committee's altemative argument to the above is to request a 100% 

allocation of expenses after December 5 as primary winding down expenses, arguing that tfae 

timing of tfae audit in November 2008 justifies an allocation of 100% to the primary. The 

Committee argues that our regulations permit the expenditure of all general election winding 

down costs within 31 days of the general election and that it would be reasonable to credit any 

expenses mcurred after December 5,2008 as 100% primary related. See Letter fiom Nathan 

Coppemoll to Sheraline Thomas, at 7 (Jan. 5,2009). Altfaough the Committee is correct that it 

may be able to allocate 100% of expenditures to the primary after December 5, it will have to 

demonstrate tfaat its allocation is reasonable. Reasonableness is presumed wfaen tfae total 

winding down costs between tfae primary and general election committees "results in no less than 

one third of total winding down costs allocated to each committee." 11 C.F.R. § 9004.11(c). As 

a result, it may be possible for the Committee to allocate 100% of expenditures to the primary 

^ The Committee spent a total of $2,561,190 for tfie primary election and $ 129,481.38 ibr the general 

election for a total of $2,690,671.38. 
Memorandum to Joseph F. Stoltz 

Nader for President I^liminaiy Audit Report 

LRA #755 

Page 4 

election if it can show that its allocation method is reasonable and warranted by its actions.^ The 

auditors have not been provided with specific evidence sfaowing that incurred winding down 

expenditures during tfae period in question are all related to the primary. Consequentiy, it would 

not be reasonable to allocate 100% of Committee wind down expenditures to the Primary 

election at this time. 

m. More Information Needed To Precisely Determine the Nature of the Relationship 

Between the Committee and the Progressive Store (Finding 2) 

In its cover memo to tfae Report, tfae Audit Division seeks guidance on an issue arising 

from tfae audit and exit conference of Nader for President 2008 ("Committee"). The issue 

concems the Committee's relationship with tfae Progressive Store, a business tfaat produces 

campaign materials for political campaigns. 

The Progressive Store ("PS"), which is a for-profit unincorporated sole proprietorship, 

financed, produced, and marketed promotional products as a vendor to the Committee. The 

items, such as T-sfairts, signs, and headwear, were sold online at **naderstore.com" as fimdraising 

premiums. The Committee would contact PS whenever it wanted to introduce a new design or 

product and PS would tfaen finance tfae associated costs. Once PS produced the products for the 

Committee, PS sold the items on a website created for tfae Committee. This website was linked 

to the Committee's own page and PS handled all operations to include obtaiiung the goods, 

maintaining the website, filling orders and processing all the transactions. It treated the 

purchasers as contributors, and transferred tfae contributor information (including their names, 

addresses, telephone numbers and email addresses) to the Committee. The information was 

uploaded onto the Committee's main database. The Committee reported the sales as both 

receipts from the purchasers (in the form of contributions) and disbursements to the Progressive 

Store (reflectmg that tfae Progressive Store retained tfae proceeds) on its Commission reports. 

According to an unsigned Agreement between tfae parties, PS proposed to transfer to tfae 

Committee a percentage of the net sales of items sold by PS on behalf of the Committee. 

However, the Committee has represented to tfae Audit Division tfaat it subsequentiy verbally 

agreed to receive 15% of tfae profit from sales made by PS. Documentation provided by PS to 

tfae Committee mdicates tfaat, between April 2008, when the venture began, and August 21, 

2008, the venture made no net profit; instead, it incurred a net loss of $507.17. There was 

apparently an additional $10,000 in sales between August 22 and August 31, but there is no 

infonnation regarding whether these sales moved the venture into a profit-making position, nor is 

there any information stating whether there were any sales at all after August 31,2008. PS never 

provided any actual funds to the Committee and the Committee apparently never sought any 

transmittal of funds from PS. 

^ Whereas the Committee Treasurer proposed a 70% primaiy/30% general split which the auditors accepted 

as a reasonable allocation. Committee Counsel now argues for a 100% allocation to primaiy wind down. See Letter 

from Nathan Coppernoli to Sheraline Thomas, at 6 (Jan. 5,2009). 
Memorandum to Joseph F. Stoltz 

Nader for President Preliminary Audit Report 

LRA #755 

Page 5 

The issues raised by PS' relationship witfa the Committee are: 1) whether tfae amounts 

collected from individuals for tfae merchandise were contributions to tfae Committee, and if so, 

by whom; 2) did the financing of costs for the production of the merchandise result in a 

contribution torn PS to die Committee; and 3) was the oral agreement allocating 15% of profits 

to the Committee properly reported to die Commission? 

We conclude tfaat tfae amounts collected for tfae mercfaandise were contributions to the 

Committee from the individual purchasers. PS faad the actual authority to create, produce, and 

distribute fimdraising items for the Conunittee; its relationship to the Committee was that of a 

vendor. As such, the fiill purchase price of the fundraising items sold on behalf of the 

Committee was a contribution. 11 C.F.R. § 100.53. The amounts received for tfae purcfaased 

fundraising items were contributions from individual purcfaasers, ratfaer tfaan contributions from 

PS. Tfaus, tfae Committee correctly reported tfae gross receipts fix)m sales tfarougfa 

"naderstore.com" - receipts tfaat were retained by PS - as contributions from tfae purcfaasers of 

tfae items. 

As to tfae second issue, PS' financing of the costs for the production of merchandise is an 

extension of credit to the Committee. Tfae Committee faired PS to produce mercfaandise for the 

Committee to be sold as fimdraising premiums. PS bore all initial costs, and the agreement 

between PS and the Committee apparentiy was tfaat PS would retain all proceeds until tfaose 

initial costs were recovered and would retain 15 percent of tfae proceeds tfaereafter. An extension 

of credit "will not be considered a contribution to the candidate or political committee provided 

that tfae credit is extended in tfae ordinary course ofthe commercial vendor's business and the 

terms are substantially similar to extensions of credit to nonpolitical debtors that are of similar 

risk and size of obligation." 11 CF.R. § 116.3(a). 

A vendor engaged in the "ordinary course of business" is one that 1) follows its 

establisfaed procedures and past practice; 2) receives prompt payment in full &om tfae same 

candidate or conimittee if it extended credit in the past; and 3) conforms to the usual and normal 

practice in the trade or industry. 11 CF.R. § 116.3(c). 

The Committee has relayed to the Audit Division tfaat PS confirmed tfaat tfae financing of 

tfae production costs is witfain its ordinary course of business. Tfae Audit Division believes tfaat 

PS' arrangement witfa tfae Committee was an arms-lengtfa arrangement and tfaat PS was normally 

involved in fronting production costs for its clients. PS apparently confirmed to the Conunittee 

that it worked with other campaigns and was acting in the ordinary course of business in 

financing the production costs of the merchandise. PS' production and distribution of political 

literature was not an isolated incident; rather PS provided tfaese types of political services to 

* The Progressive Store appears active in marketing its political merchandise to political committees as well 

as odier organizations that wish to project a "progressive" message. According to its website, its "pinback business 

has been called 'The Best In LA' by the LA. Weekly, has been praised in the L.A. Business Journal, and has been 

mentioned in the Wall Street Joumal, tfae Dow Jones News Service and his political pinbacks have been touted on 

numerous progressive web sites." See The Progressive Store (visited June 12, 2009) 

<httD://Dropressive2008.com/html/about.html>. 
Memorandum to Joseph F. Stoltz 

Nader for President Preliminary Audit Report 

LRA # 755 

Page 6 

different campaigns as a matter of course in tfae pursuit of business. Furthermore, there is no 

indication that PS' practice of paying for the production costs of political mercfaandise does not 

conform to tfae usual and normal practice in the industry. For tfaese reasons, tfais Office believes 

tfaat PS' payment of production costs was in tfae ordinary course of business. 

Altfaough PS' up-fh)nt payment of production costs was legitunate, the vendor's possible 

sustaining of a loss may be considered a reportable in-kind contribution to the Committee. In 

AO 1989-21, the Commission addressed tfae issue of wfaetfaer tfae financing of costs for tfae 

production of mercfaandise on befaalf of a political committee resulted in a contribution. Tfae AO 

Requestor proposed a fimdraising plan whereby each campaign would be guaranteed 10 percent 

of the retail price of goods sold, llie Commission found that an arrangement in which a 

committee was guaranteed a percentage of proceeds from each sale regardless of wfaetfaer tfae 

vendor's costs were covered would result in a contribution. AO 1989-21, at 3. In AO 1991-18, 

tfae Commission did not approve a particular prospecting program tfaat placed tfae risk of 

financial sfaortfall solely on tfae vendor wfaile tfaere was a payment guarantee for tfae Committee. 

AO 1991 -18 at 6. Tfaese Advisory Opinions suggest tfaat PS should not bear the fiill risk of loss 

and that any shortfall not repaid by tfae Committee to PS could result m an in-kind contribution 

from PS' sole proprietor to the Committee. If tfae venture's profitability remained uncfaanged 

after August 21,2008, the amount of the in-kind contribution would be $507.17, which is within 

the limitation of 2 U.S.C. § 441a(a)(l)(A). However, any loss also sfaould faave been reported as 

eitfaer an in-kind contribution received fixim PS' sole proprietor or, altematively, as a net debt 

owed by tfae Committee to PS. 

Conversely, if tfae post-August 22,2008 sales/expenses data revealed a net PS profit, as 

subsequentiy alleged, a question arises as to wfay the Committee did not receive any actual fimds 

fit)m PS, much less the 15% of profits it bargained for, or why, if PS wrongly retained proceeds 

owed to the Committee, the Committee did not report a debt owed to it by PS. Our regidations 

provide tfaat, "a debt or obligation... shall be reported as of the date on which tfae debt or 

obligation is incurred." 11 C.F.R. § 104.11(b). In tfae past, tfae Commission has found tfaat even 

oral agreements to provide advertising and related services producmg a debt sfaould be recorded 

on Commission reports. See MUR 4621, Factual and Legal Analysis at 4 & 17. Altfaougfa an 

oral agreement was made tfaat the Committee was to receive 15% of profits, this never 

materialized as PS kept all monies received. 

At any rate, whetfaer a profit or loss was sustamed in this venture, either a debt owed, an 

account receivable, or a contribution should arguably have been reported. It is only if the 

venture neither made a profit nor a loss that it would be unnecessary to amend the Committee's 

reports. 

Given that there is missing information and that tfae Conunission cannot possibly 

detennine tfae facts until clarifying information is obtained, tfais Office recommends a finding 

tfaat tfae Committee needs to amend its reports in tfais regard to fiilly reflect tfae profitability of tfae 
Memorandum to Joseph F. Stoltz 

Nader for President I^eliminary Audit Report 

LRA # 755 

Page 7 

venture including post-August 22,2008 transactions, and provide infonnation that will clarify 

whether there was a loss, a profit, or neither.