Draft Final Audit Report of the 

Audit Division on The Legacy 

Committee Political Action 

Committee 

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 that is 

required to file reports 

under the Federal 

Election Campaign Act 

(the Act). The 

Commission generally 

conducts such audits ....... 

About the CominJ||pe (p. 2) 

The Legacy Committer||0tical Action Committee is a 

nonconnected, muUi>:||^di||^^ committee headquartered in 

Laguna Niguel, jC^afil^rnia. F||ij(nore information, see the chart 

on Committe^^^Hanization, p^^'^lx. 

Financiia^ptivity;, (p. 2) '"^^ 

• Receipts ^18^ 

•i^^cr.. Contributibi^^fi^i^Tndividuals 

•^^jl^^^Hqians Receiv^i;||jj. 

%)JaS^^ipts 

siniirsemeii^t'S^^-. 

$ 1,544,747 

5.000 

$ 1,549,747 

when a committee^5|^pis^. o i^pend(||E!|je ^ 

appears not to ha^Jnet "^lli^^ o Oi3^g|i|s6xpenSt^s 

"W^ o CoiiiiSiStions to Federal Candidate 

$ 1,162,464 

217,889 

the threshold 

requirements fbr -"^^^ .<:|fl>; :..... Comities and Other Political 

substai|^d^pi|n|^iance''^^l^^ 

with;^|pcf?'^^^it o ''^i||p]flier^sbursements 

detWmes whetheif^life^ij '-l^^ ^ Total Di^rsements 

coir^Hee complied 

Fin^^l^gs and Recommendations (p. 3) 

47,250 

36,992 

$ 1,464,595 

the limilsfi;0.ns, 

prohibition^^.d 

disclosure req^i;e^ents 

ofthe Act. '^^^^^ 

Future Action'-^iii^ 

The Commission may 

initiate an enforcement 

action, at a later time, 

with respect to any of the 

matters discussed in this 

report. 

Misstatement of Financial Activity (Finding 1) 

Failure to File Notices and Properly Disclose Independent 

Expenditures (Finding 2) 

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

Audit Division on The Legacy 

Committee Political Action 

Committee 

January 1, 2007 - D|pgmber 31, 2008 

•••W>Kfr 
Table of Contents 

Part I. Background 

Authority for Audit 

Scope of Audit 

Part II. Overview of Committee 

Committee Organization 

Overview of Financial Activity 

Page 

Part III. Summaries 

Findings and Recommendations 

Part IV. Findings and Recommii|ndatj|^c>|LS 

Finding 1. Misstatement of j^pancial Activii|^jv^|^'"^ 

Finding 2. Failure to File N^^i ^ Properly^r^&se Independent 

Expenditures '^^'^^S^ir^s. "^^^t^. 
Part I 

Background 

Authority for Audit 

This report is based on an audit of The Legacy Committee Political Action Committee 

(LCP) undertaken by the Audit Division ofthe Federal Election Commission (the 

Commission) in accordance with the Federal Election Campaign Act of 1971, as 

amended (the Act). The Audit Division conducted the audit pursuant to 2 U.S.C. 

§438(b), which permits the Commission to conduct audits .a|tl; field investigations ofany 

political committee that is required to file a report under^^^pS.C. §434. Prior to 

conducting any audit under this subsection, the Comn34|^'|iin must perform an internal 

review of reports filed by selected committees to detJMitYft^if t^ reports filed by a 

particular committee meet the threshold requirements for substantial compliance with the 

Act. 2 U.S.C. §438(b). Js F "^^v, 

Scope of Audit '^V^}::, 

Following Commission-approved proceduresi tfeft Audit sjtaff evaluated risk 

factors and, as a result, this audit:^!^amined: 

1. the consistency between repoift^^'-figures and bdiiik^cords; 

2. the disclosure of individual coii|ri6iSi9ts', occupatidip£(hame of employer; 

3. the disclosure of independent exij^nditti^reSj-ai^^^ '^ft;.. 

4. other committee operations necesis^ty to the^i^View. § :. 
Part II 

Overview of Committee 

Committee Organization 

Important Dates 

• Date of Registration September 19,2006 

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

Headquarters Laguna Niguel, California 

Bank Information . ^4 ' 

• Bank Depositories 

• Bank Accounts i l^i ^ Twd^Checking Accounts 

Treasurer ^r. 

• Treasurer When Audit Was Conducted 1:^%,. i^l F James V. Liffcj^^ 

• Treasurer During Period Covjejr&ctiby Audit ^^(^ip James V. Lacy 

Management Information "-^h ""^' ^v. , " i 

• Attended CommissiQn Campaign'Einance'Sehi;iQar 

• Who Handled Aclip\ih^ng^^ Recoirldkeeping'Task^^^^^ Paid Staff 

GhiN|^ of Fiiii^ncial Activity 

^^%>.-#^S^ited Anftounts) 

Cas^Ki^h-hand (^Jiimiary 1^:^ •^•=v^-^ $ 0 

Recieiiipits ' '^ii^.^ 

o Conifeifeutions from liri«lliyiduals^|^y;v. 1,544,747 

o Loans^'I^Cieived '"^^ 5,000 

Total Receip^li $ 1,549,747 

Disbursements^:^^/, .^^^ 

o Independent Ei^^ts^nditui^si-' 1,162.464^ 

o Operati ng ExpendiMMis'' 217,889 

o Contributions to Federal Candidate 

Committees and Other Political Committees 47,250 

o All Other Disbursements 36,992 

Total Disbursements $ 1,464,595 

Cash-on-hand @ December 31,2008 $ 85,152 

^ This amount, as well as the amount for operating expenditures, may change as a result ofthe finding on 

page 5. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

During audit fieldwork, a comparison of LCP's reported financial activity with its bank 

records revealed that, for 2008, LCP understated its reportQi^receipts and disbursements 

by $32,411 and $25,529, respectively. In response to the|[Tprim Audit Report, LCP 

amended its reports to materially correct the misstatem&ntsf (For more detail, see p. 4) 

Finding 2. Failure to File Notices dlhd Pi^erl y Disclose 

Independent Expenditures .^00'' '%:x 

LCP disclosed independent expenditures tdtkiihg $1,159,647 on Scii'e<iule E (Itemized 

Independent Expenditures). During audit fieidvyprk, the Audit staff no^M^that only 

$412,891 ofthese expenditures appeared to me^Sthe definition of independent 

expenditures and contained language expressly ad^^^<^atmgl^ election or d6f(^at of a 

clearly identified candidate. Of f%|^1ij^dependen^ eii^|i^nditures ($412,891): 

• LCP did not timely file 24/^hoiffl ^ for ife^>327 and did not file any 24-

hour notices for $ 17,491; anS||^ ^^'^S^:;., "^S|i\ 

• LCP did not pi^gp^rly disclose irt|lependen$^^^^^ $294,570 made 

(i.e., publk^ldilsliTi^ted) prior^O^ p^n^ t li^i^en^ on Schedule E 

and as a reprtable deb|^ Scheduii^£^p)ebts and^Bligations). 

In response^to the Intenmi. Aud:i^^Rep^^ LCF|i%vided information supporting its 

positioii^M^i^jlll^^p^^ fundraising and did not require 

repo^irfg as ind^enidjent ekpej^ditures. F^^g^rd.ing the Audit staffs recommendation that 

they^|ubmit and impte|Aejit rev1s|^.procedure^^'for reporting independent expenditures, 

LCP lri|tpated that they^kn to teFf^inate after the audit is completed. (For more detail, 

seep. 5y''^V ^^i^^i 
Part IV 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

Summary 

During audit fieldwork, a comparison of LCP's reported financial activity with its bank 

records revealed that, for 2008, LCP understated its reported receipts and disbursements 

by $32,411 and $25,529, respectively. In response to the Intepm Audit Report, LCP 

amended its reports to materially correct the misstatementSi;.^-^ 

Legal Standard ^ fl^r^''" "^^ v. 

Contents of Reports. Each report must disclpseji; ' 

• The amount of cash-on-hand at the beginnlfig and end of the'reporting period; 

• The total amount of receipts for the rejpllting period and for the'catendar year; 

• The total amount of disbursements for tKe^r^porting perjod and for M^^calendar year; 

and -^j^^,, ^.^4;:?= "^^..^ 

• Certain transactions that reqii||e^it^emization ori ScFfedule A (Itemized Reiceipts) or 

Schedule B (Itemized DisbuI^Seif^(s)^^2 U.S.c! P(il(b)(l), (2), (3), (4) and (5). 

Facts aiid Analysis "'•^v^s^.^rA. Facts ;-.^f> ^./V /^/ i ' ^^'^^^Wis:;^^ 

During audit fieldwork, the Auidit staff recbribiled reportedTlhancial activity with bank 

records for calendar y^ars lOOlf^sind 2008. A^misstatement of receipts and disbursements 

was identified for 2008^:;^^e fdl lowing chart Outlines the discrepancies. 

O. -v-.^-X;:."-. •. ^ i--.-.0.". • ^ .^v:.^ 

46li8 Activity " • ^:i;^iv,. ^^'•• ^.^^' 

'Reported Bank Records Discrepancy 

Openirt||2|ash Balance^|?^h. 

® Januari^fe2008 \l i 

$19,508 $19,365 $143 

Overstated 

Receipts '^^Bii^ jSS $1,066,076 $1,098,487 $32,411 

Understated 

Disbursements '^^^ $1,007,171 $1,032,700 $25,529 

Understated 

Ending Cash Balance 

December 31,2008 

$78,413 $85,152 $6,739 

Understated 

The understatement of receipts resulted from unidentified differences that occurred 

primarily in the second half of the year. Based on a limited review of available records, it 

appeared that ali contributor information received by the vendor that processed deposits 
of contributions may not have been forwarded to the vendor responsible for the data 

entry. 

The understatement of disbursements resulted from the following: 

• Refunds of contributions not reported $ 18,152 

• Bank and credit card fees not reported 4,560 

• Independent expenditures not reported 2.817 

Understatement of disbursements $ 25.529 

B. Interim Audit Report & Audit Division Recommen(||ftiipn 

At the exit conference, the Audit staff explained the missjiiiments and provided 

schedules to LCP's Treasurer and Assistant Treasurei^|ip$j/ agreed to amend their 

reports as necessary. 

The Audit staff recommended that LCP: ^^ f^/"^ "^11^;^. 

• Amend its reports to correct the mjil^t^ments noted abovei;^;$nd 

• Amend its most recently filed repdrt^tp correct the cash-on-hanj-balance with an 

explanation that the change resulted from a prior pjsriod audit aqiiciltment. 

Further, LCP should have reconciled the'ca$.h.balance of its most r€^c<ent report to 

identify any subsequent diicrdpancies that ma^iaffect the adjustment^ 

recommended by the Auditisijiff^:; ^^^h 

C. Committee RespQnsei,.to Interim Audit Rej^drrt^., 

In response to the lift^iml^Mdit Report^JgCP filedW[§id^^^ re^brts for 2008 that 

materially correcjtptthe misstatements. Iri^iadditiph, LCP^provided supporting 

documentation that^demonstrated^that amehtlrni^nts to its most recently filed report were 

not necessary. -^^^i;, i^-^. 

Fiii^di^g 2. iFiilure'tbxF Notices and Properly Disclose 

Indcjli^endent E^pjendituj:,^ 

Summarji^^;^,^ ^jp^^ 

LCP disclose<il;|ndependent|^|enditures totaling $1,159,647 on Schedule E (Itemized 

Independent Expend audit fieldwork, the Audit staff noted that only 

$412,891 of these ex|0ndl^{^s appeared to meet the definition of independent 

expenditures and con^ain^d-language expressly advocating the election or defeat of a 

clearly identified candidate. Of these independent expenditures ($412,891): 

• LCP did not timely file 24/48-hour notices for $374,327 and did not file any 24-

hour notices for $17,491; and 

• LCP did not properly disclose independent expenditures totaling $294,570 made 

(i.e., publicly disseminated) prior to payment as "memo" entries on Schedule E 

and as a reportable debt on Schedule D (Debts and Obligations). 

In response to the Interim Audit Report, LCP provided information supporting its 

position that the purpose of its direct-mail letters was fundraising and did not require 
reporting as independent expenditures. Regarding the Audit staffs recommendation that 

they submit and implement revised procedures for reporting independent expenditures, 

LCP indicated that they plan to terminate after the audit is completed. 

Legal Standard 

A. Definition oflndependent Expenditures. The term "independent expenditure" 

means an expenditure by a person for a communication expressly advocating the election 

or defeat of a clearly identified candidate that is not made in coordination with any 

candidate or authorized committee or agent of a candidate. 11 CFR § 100.16. 

B. Disclosure Requirements - General Guidelines. Animdiependent expenditure shall 

be reported on Schedule E if, when added to other independent expenditures made to the 

same payee during the same calendar year, it exceedi^|2b%Tndependent expenditures 

made (i.e., publicly disseminated) prior to payment-j^hould Be!^isclo as "memo" 

entries on Schedule E and as a reportable debtjdnfSchedule D."%d.9pendent expenditures 

of $200 or less do not need to be itemized.rfdtigfi the committee ^ftust report the total of 

those expenditures on line (b) on Schedul^'ife^ll CFR §§104.3(b)(3iilvii), 104.4(a) and 

104.11. ~^iS=;^ 

C. Last-Minute Independent Bx^^nditure Repdrts/(24-Hour Notices). AiHy 

independent expenditures aggregating^$!1^;ppO or more^^)K^i,th respect to any given election, 

and made after the 20'*^ day but mofe^;than24^^^^^ befofeithe day of an election must be 

reported and the report must be receiv^^ by tM^ommissidn!^^M 24 hours after the 

expenditure is made^f ^jl,||b^ noticens^equire^d^^ejat!^^^^^ ai^itional independent 

expenditures agg;^|lte $ii61§|or more. ^!he fU(tf t^at k^^^^ is publicly 

disseminated serve^t^s the daM^hat the coirnitiFfUtee must use% determine whether the 

total amount of inddpiiident ex^hditures has^n the aggregate, reached or exceeded the 

' 04.4(0 and 104.5(g)(2). 

Any independent 

exp^irilltiture aggregatiig^$lO,bb6::0i: more witti respect to any given election, at any time 

during a^ealendar year, ii^^tp. and iitiilu.ding the 20th day before an election, must be 

disclosed-^Vi^ithin 48 hours eiijsh time tfijfexpenditures aggregate $10,000 or more. The 

notices mu^i^i^filed with tfi^ommission within 48 hours after the expenditure is made. 

11 CFR§§l04v%.and 104i?^(l). 

Facts and Analyiii^:'^:^^];^^' 

A. Facts 

Initially, LCP disclosed all expenditures as operating expenditures (Schedule B, Line 

21(b)). During 2008, LCP received notices from the Commission's Reports Analysis 

Division (RAD) questioning whether any of the expenditures, e.g., "Printing," were for 

public communications containing express advocacy. LCP's Treasurer acknowledged 

that some ofthe communications contained express advocacy but contended that the 

purpose of the communication was fundraising. RAD advised LCP that if the 

communication contained express advocacy, LCP should amend its reports to disclose the 
expenditures as independent expenditures. Subsequently, LCP filed the requested 

amended reports. 

LCP disclosed independent expenditures totaling $1,159,647 on Schedule E. During 

audit fieldwork, it was noted that most of these disbursements were for the printing and 

postage of direct mail solicitation letters and were disclosed as either in support of John 

McCain for President or in opposition to Hillary Clinton or Barack Obama for President. 

The Audit staff reviewed these expenditures to determine if they were properly reported 

on Schedule E and to determine if LCP filed the required 24/48-hour notices. The review 

noted that only $412,891 of these expenditures appeared to .meet the definition of an 

independent expenditure and contained language express|j|§tci\^ocating the election or 

defeat of a clearly identified candidate. A review of th^]^irect mail pieces and invoices 

for those expenditures ($412,891) revealed the foll^|i|:%|- . 

• LCP did not timely file 24/48-hour ng|ic#of its indepefitlejit expenditures for 

$374,327. In addition, LCP did naei#Sny 24-hour notic^lfeT $17,491 ofthese 

expenditures. ^'©o-^ 

• LCP reported the indeperid^ent expendituresi\yh<Jnv|S^^ invoices were piikid. 

However, most of these jpil^injents were weei^;:of months after the dissemination 

date of the printed materialt^fdrJeXpenditures toi^ling $294,570, LCP should 

have disclosed independent elxpendittir^^^^^^ memb^entries on Schedule E, filed 

with reports covering the dates;L|i;hen t]Be^i|i|iteTials w^i^^disseminated, and 

included a c(^fsj|^nding debt dn^chedjiri|||j^ "'-^ 

B. Interim Audit'I^eport & >^ii:dit Divisi6n|Recommendation 

The Audit staff addr^^s^e^ thesi^niatters at the^ibxit conference and provided appropriate 

schedules^tQ:;L;CP repres^htativ^k^^^^^^^^^^^ s^ff. indicated that, at this time, no 

amend^d^r^I)di^Si^)s.re neceissaty to corf^tf ^he reporting of the independent expenditures 

or tdlaificlress the 24i^8s!hour notices that w^iriernot filed or not filed timely. LCP 

representatives stated ma^they wi^|i;|d review these schedules. 

The Audit^ff recommeni^ that LdFtake the following action: 

• Provi^^];ajiiy documdni|lry evidence that would demonstrate that these 

disburseM^its were,n|| independent expenditures and therefore did not require 

24/48-hoirfteti;^e§^n3 

• Submit and irnp^itfeht revised procedures for reporting independent expenditures, 

as well as for tracking dissemination dates for such expenditures, in order to allow 

for timely filing of 24/48-hour reporting notices. 

C. Committee Response to Interim Audit Report 

In response to the Interim Audit Report, LCP offered background information for why 

they were created and the purpose of its direct-mail fundraising letters. LCP explained 

that it was formed in 2007 as a non-connected Political Action Committee (PAC) that 

was not supported by any sponsoring organization such as a labor union or corporation. 

There was no permanent staff, office or office equipment. It was formed with the 
intention of raising funds to allow it to participate in the 2008 General Election by 

making direct contributions to candidates for Federal office. LCP indicated that the 

committee was the epitome of a "grass roots" attempt to participate in the 2008 Federal 

elections. 

LCP explained that its direct-mail advisors obtained lists of proven donors to Republican 

and conservative causes and tested various content appeals in the letters to these donors. 

The various tests included content with references to elected officials and Presidential 

candidates to clue the recipient audience that LCP was a conservative Republican PAC 

worthy of their support. LCP stated that the purpose of these^mailings was not to 

intervene in any election. LCP indicated that the facts de£i(iditistrated that: the timing of all 

of its mailings had no reference to the timing of primarj^^eldctions during 2008; the 

content ofthe letters, other than sometimes incjudirtglsdriifew^ considered "express 

advocacy" by the Commission, did not urge the recij^rent aiid^Ji^ce to vote for any 

particular candidate; and the audience was seJtec:til(i for its ftindM^ing value, with no 

consideration for its electoral value. Thus.:t||^^xpenditures' conterit||t.iming and 

distribution, and audience served a fundraiMngxpurpose but not an eletl^r^l purpose. 

LCP stated that they disagreed that any of its di^trmaltip^ lettei^if^Ostituted 

independent expenditures. LCP^npted that the Cotfimissibn defines an independent 

expenditure at 11 CFR §100.16 a^%cdim|riunication ek^ressly advocating the ejection or 

defeat of a clearly identified candidii^. C^lf^acknowledg^^^^^ some of its mailings did 

independent expfnittiires arild::|hat the sp6^;ial;j|p0rting^Ft^ to independent 

expenditures (suciii%1:he 24/48|f|pur notic^^sjgiF^memo entri&) should not apply. LCP 

stated that they belilvil^^tiiat dit#|%-mail fund$||ing letters should be excluded from the 

definitipni^)f\independ^^ t^i^flfl® '"^nt ofthe regulation was not to 

includ||Sife&m^ii^^^^ iriifependent expenditures. LCP urged the 

CoTOfpssion to refcffii^its reppSing requirements for grass-roots organizations that 

engag(ej?in direct-mail ifuni^raising'^^^^^^ they believe that these letters are not independent 

expenditiires. LCP indicfeecl that tHey::;have made the decision that the time requirements, 

coordinattdft-and record kee|iing are hot worth the effort of continuing to participate and 

as such, planlb;terminate the^ommittee after the audit is completed. 

The Audit staff ddeSihpt diSfliLfte that LCP's intention was to raise funds via the directmail letters. Howevei^liiij^^cknowledges and the Audit staff agrees that some ofthese 

letters included express Advocacy language such as "Vote for John McCain". Since these 

expenditures meet the definition of an independent expenditure and the regulation does 

not exclude direct-mail fundraising letters from the definition, the Audit staff believes 

that the documentary evidence provided does not support LCP's assertion that none of 

these expenditures are independent expenditures.