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 that is 

required to file reports 

under the Federal 

Election Campaign Act 

(die Act). The 

Commission generally 

conducts such audits 

when a committee 

appears not to have met 

the direshold 

requirements for 

substantial compliant 

widi the Act.'The 

determines whether the 

conunittee •• ',th 

the limita|L.:c, 

prohibjMns and 

discJiM[:l::..--,uirements 

ofdieA. \ 

Future Actibn 

The Commission 

initiate an enforcemei 

action, at a later timi 

with respect to any of the 

matters discussed in this 

report. 

About the Committee (p. 2) 

The Califomia Republican Partv/VSAflstate party committee 

headquartered in Burbank, CalifojmaLZtfk more information, 

see the chart on die CommitteaMnnization, p. 2. 

Financial Activi 

• Receipts 

o Contribution|^i?bm Individuals 

o Contribudji^' m OtK^^olitical 

Committees 

o Transfers fron: ". : ..-s.-ff PaiJy Committee^ 

o Transfers from N<-: I... .1 and Levin 

Its 

o C 

Total Klllipl^ 

xpenditui 

Afflliated/Other Party 

Disburse! 

o Operati 

Transfei 

Committ 

Contributid^P^ Federal Candidates 

Party Expenditures 

lection Activity 

Contribution Refunds 

bursements 

• cevin 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) 

• Misstatement of Levin Financial Activity (Finding 1) 

• Reporting of Debts & Obligations (Finding 2) 

• Extension of Credit by a Commercial Vendor (Finding 3) 

2 US.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 

Authority for Audit 1 

Scope of Audit 1 

Part II. Overview of Conmiittee 

Committee Organization 2 

Overview of Financial Activity ' ^ 2 

Part III. Summaries 

Findings and Recommendations 

Part tv. Findings and Reconrniei 

Finding 1. Misstatement of Levin Financial 

Finding 2. Reporting of Debts & Obligations " . H 

Finding 3. Extension of Credit by a Commercial \ ^ .i.ir 7 

r 
Part I 

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), viibich permits die 

Commission to conduct audits and field investigations of any p^ ' -•• .^Qommittee diat is 

required to file a report under 2 U.S.C. §434. Prior to condu." .• any audit under this 

subsection, the Commission must perform an intemal rev", -v - -rts filed by selected 

committees to determine if the reports filed by a particulf'": omi :• .•- • the threshold 

requirements for substantial compliance widi die A. • ^ T'TlC. §4?*• 

Scope of Audit > w V 

Following Commission-approved procedure^'jlfctfit stawyaluated vario|||pfisk 

factors and as a result, this audit examined: W ^ 

1. die disclosure of individual contributors' occupati.-'; :iame of employer; 

2. the disclosure of disbursements, c^ - -> id obligatioi. -' 

3. the disclosure of expenses allocate '• "ederal, nc -:..'. pd, and Levin 

accounts; ^ jp4. the consistency between reported figims an* • » • 

5. the completeness c":.\";» •- and ^ 

6. other committee^ej'. " " •-cessary toT^review.^ 
Part II 

Overview of Committee 

Committee Organization 

Important Dates 

• Date of Registration March 5,1981'' 

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

Headquarters Burbank, Califij|||||[ 

Bank Information / "" ^ 

• Bank Depositories One ^ 

• Bank Accounts Four i-.-i'eral.'ir- ' evin & Ten Nonf e ^ ' Accoun 

Treasurer 

• Treasurer When Audit Was Conducted 

• Treasurer During Period Covered by Audit ^ 

Management Information 

• Attended Commission Campaign Finance Seminar 

• Who Handled Accounting and Recordkeeping Tasks 

Carlson 

A3ithc5dson" 

p : 

Overview of 

. T (Audite 

Cash-on-hand @ JanutfS^ 1,2nir 

luals___" 

c 

ancial Ac):ivity 

ounts) 

Total Disbursements 

Cash-on-hand @ December 31,2008 

Levin Cash-on-hand @ January 1,2007 

Total Levin Receipts 

Total Levin Disbursements 

Levin Cash-on-hand @ December 31,2008 

66,827 

$ 17,577,395 

80,701 

$ 11321 

$ 620,349 

$ 624,378 

$ 7,292 

^ CRP originally registered with the Secretary of the Senate on August 7,1974, as the Republican State Central 

Committee of California Federal Election Account, under a different identification number. This previous 

committee terminated on August 5,1981, shortly after the formation of the current Conunittee. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Levin Financial Activity 

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

revealed a material misstatement of receipts and disbursements j^Rft ^ CRP 

understated receipts and disbursements by $50,071 and $54 - .•spectively. 

In response to the Interim Audit Report recommendation. C':<P 1 ; .• -' reports to 

correct the misstatements. (For more detail, see p. 4 • • 

Finding 2. Reporting of Debts ^^bligiutions / 

Audit fieldwork indicated diat CRP did not accufSCjT^ .lisgj^ki^ebts and obi.;-..'ions for 

28 vendors totaling $2,188,950 on Schedule D(De - -..i ^)bligations). ^ 

In response to the Interim Audit Rep^- .\. mmendation,lSri<r : led amended reports to 

correct die debt reporting. (For more i .•• •! wi- 5) 

Finding 3. Extension of C^ki^by a |hpiAmercial Vendor 

After reviewing and.;..'' vTT « ibursemenMcords du^lg audit fieldwork, the Audit 

staff noted that an '.!/t-pon - - idor append to make a prohibited contribution to 

CRP by extending :-y "* **eyo:. i's normal comsex)f business and by failing to make 

conunercially reasoni \ •. : •• -s v\-. •">ct $1 Sri,002 for services rendered. 

In respofm *^ .. i A. ' Xeport reccimmendation, CRP and the vendor presented 

a de*..'50 analysis Zrc - / :.^that led to die incurred debt, their attempts to 

d^<v \.\ ment plans * - *flve ^'Jiot, and why the extension of credit was beneficial 

to hot.. 1,Howeve-. -^.-.ither^iRP nor the vendor provided any documents or 

examplesM-J :u-i-strating' '. die extension of credit was in the vendor's ordinary course 

of business f\ Zu- jommql^ally reasonable attempts had been made to collect the debts. 

(For more deta ". * 

nm^Rs 
Part IV 

Findings and Recommendations 

Finding 1. Misstatement of Levin Financial Activity 

Summary 

During audit fieldwork, a comparison of CRP's reported Levin act||itv widi bank records 

revealed a material misstatement of receipts and disbursements^^wS^ CRP 

understated receipts and disbursements by $50,071 and $54^QC^ .spectively. 

In response to die Interim Audit Report recommendationt CRP fiWit. ;...',nded reports to 

correct the misstatements. 

Legal Standard V 

A. Reporting. If a state, district or local pai^y :::< ttee'^- ^-^bined annu^pPBceipts 

and disbursements for federal election activity (FI •. . ^^'.OOuor more dumig the 

calendar year, then it must disclose rg;eipts and disbu -.. K-its of Federal funds and 

Levin funds used for FEA. 11 CFR J*:... •)(2). 

B. Contents of Levin Reports. Eachr'&p . d.<dose: jpr 

• The amount of cash-on-hand for Lcvulfimdk :r 'iii; \-i '.#img and end of die 

reporting period; W 

• The total amoui ^ "!.••.•: s.d receipts a d disbursements (including allocation 

transfers) forJjf. .:; -orting :• J riod and for tiecalendar year; and, 

• Certain transact f * ^- ri-.'/ns itemizatioqpSfSchedule L-A (Itemized Receipts of 

Levin Funds^ or Sc -' "5 " D -bursements of Levin Funds). 

llCHt?--V'v(2 ) ;*. • 

Fa0t< nnd Analysis 

A. Facis ^ 

As part of 1 .'.Mw rk, die Ayiit staff reconciled CRP's reported Levin activity with bank 

records for 2(1 . I fo^i-.-.-ing chart outiines die discrepancies for die beginning cashon-hand balance. *\ .•.;if; disbursements and die ending cash-on-hand balance. The 

succeeding paragra:*l'.Idresses die reasons for the misstatements. 
2008 Committee Activity 

Reported Bank Records Discrepancy 

Beginning 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 $J|^ i-> unexplained, but 

likely resulted from prior period discrepancies. The $50,M1 un(..-i o::iii-.'nent of receipts 

resulted mostiy from contributions from individuals^^^we^ not rc|n<:!.\ die 

understatement of disbursements by $54,000 resu|^Rrfrom a vendor p::: . •' ' diat was 

not reported, and the $4,474 overstatement of i «- '.ing ct^h-on-hand ba - . :• > as die 

result of the misstatements previously descri^ 

s 

B. Interim Audit Report & Audit ^vision Recommeiiihiiion 

The Audit staff discussed the reponin9n||sand present-' -'ant work papers to die 

CRP representative at the exit conferenl®.TM •.•:•-• 3ntati\. * |gfl diat he would 

review the matter. 

The Interim Audit Regp: : 

misstatement for 2 --^ and 

.mended disMRF amends reports to correct the 

its most remtiy filed report to correct the cash-onhand balance witli;-\,-lanatiVthat the chaAs resulted from a prior period audit 

adjustment. Furdier, ( L<I' c '..' . reconciflPthe cash balance of its most recent 

report to irinfi'y r-y si -". j".j^at may have impacted the $4,474 

adjusti.-i . d. 

C ^ iiigmittee Respiiii*>i- lo Inicr^pi^udit Report 

In respixr--^.. o the Interii - X.idit I^^port recommendation, CRP amended its reports to 

correct t .V :- ^statements Specifically, CRP amended Schedule A to disclose receipt of 

$50,000 fr-: • Individ.! .'s and payment to a vendor on Schedule B for $54,000. Prior 

to the issuana- ••i^:!iis rep>\'. CRP transferred the remaining funds in its Levin account to 

a non-federal a.. t.--olvin g the remaining discrepancies. 

Finding 2. Reporting of Debts & Obligations 

Summary 

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

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

correct die debt reporting. 

Legal Standard 

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

and nature of outstanding debts and obligations until those debts are extinguished. 

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

B. Separate Schedules. A political conunittee must file separate schedules for debts 

owed by the committee and debts owed to the committee, togeth( - - h a statement 

explaining die circumstances and conditions under which each J^ t aii!l'obligation was 

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

C. Itemizing Debts and Obligations. - ^ 

• A debt of $500 or less must be reported on^|^ ixJI^oben ou^' s^:60 days from 

die date incurred (the date of the transac' -f4^ the committee rej "* ' on the next 

regularly scheduled report. ^ ^ ^ ^ 

• A debt exceeding $500 must be disclosed - repf !|^at covers th^|l^te on 

which the debt was incurred. 11 CFR §104.. -

Facts and Analysis 

A. Facts % /r 

During fieldwork, the Audit staff reviewe&iislyrse-. v.':- Js and disclosure reports 

for proper reporting ofi..--^ .•:..: obligation^^iis reviejpidentified debts owed to 28 

vendors totaling $r J'^,950 -...i : squired dislbsure. Most of the identified debts were 

greater dian $50Ql^: i! •• I remand outstandinadupng the reporting period in which diey 

were incurred. 

B. Int^i^i Xiidil^i-pin-l &Aydit Division Recommendation 

At •yi^it confere: -•'I:.- AudS' ^scussed these debts widi a CRP representative 

ai)^: -I* relevan' o .« )ap ' - . me representative stated that he would review the 

mattei ^ ^ 

The Interiii. Report .-.ommended that CRP amend its reports to disclose these 

debts and obli_ • t\ . o^lShedule D. 

C. Committee Re^nse 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. Some of these debts and 

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

should have been reported." Counsel for die CRP also 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 that several obligations were not 

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

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

cited in this review. 

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

correct the disclosure of debts and obligations on Schedule D. 

Finding 3. Extension of Credit by a Conqi^ci^ Vendor 

Summary 

After reviewing and analyzing disbursement records i":*! -i^udit i -k, the Audit 

staff noted that an incorporated vendor appeared t^i^w It prohibited .\- .jiibution to 

CRP by extending credit beyond its normal coi. •si- of busit^ss and by faiUj^r make 

commercially reasonable attempts to collect $ii I ' I.. )2 foi >«•: vices renderr. 

In response to die Interim Audit Report recommend.':.-.. i RP and the vendor presented 

a detailed analysis of the circumstan6|yjiat led to die i * ." .--1 debt, their attempts to 

devise payment plans to resolve die dnh^wh y the ext.- v:>*^'. .ifcredit was beneficial 

to both parties. However, neither CRP^rl^*^!-. .:-'r provic -i: ly documents or 

examples demonstrating that die extensi^of ( : ^#^.in the^ndor's ordinary course 

of business or that commercially reasonab^atfi^pl > 'i made to collect the debts. 

> IT T 

Legal StandarcK 

A. Corporate Ofiim i^miions liiipermissible^^orporation is prohibited from making 

any contribution in c< •:- J'" •:• u .. iVJeral ellRon. 2 U.S.C. §441b(a). 

— / • » 

B. De^Miiii III' ( iiiiiiiieri-isil Vi-ndor. AT^mmercial vendor is any person who 

pro^ !..vTgoods or - -.-..- - to i .' M. ia^e or political cominittee and whose usual and 

nc^-. siness invol .-'^". sab, ^tal, lease or provision of those goods or services. 

llCFi ^ ? -' l(c). <r 

C. Extensiiiii ul' Oedit h'\ Commerdai Vendor. A commercial vendor, whether or not 

it is a corporal, M;.'::. yeJknd credit to a candidate or political committee provided diat: 

• The credii ^ jfflended in the vendor's ordinary course of business; and 

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

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

Fact Durin cours Aa prohibite . Fact egs o an fieldwork 1s f1busines CFdd contributio Analsrsi R § 116.3(a ,s th aned Audi bs ny t) noo an CRt staf td providin (b) Pf b identifie . y impermissibl g documentatio d an incorporate y extendin n demonstratin dg vendo credirt beyonthag tha appeare dt th itse norma vendo d to mak r le 
8 

made commercially reasonable attempts to collect the debts. The vendor. Strategic 

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

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

between 121 and 757 days. Several of these invoices, 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 than die initial invoices, CRP made no other documentation available to 

demonstrate diat SFI made furdier attempts to collect these debts. 

B. Interim Audit Report & Audit Division Recommendation ^ 

At die exit conference, die Audit staff discussed diis matter witMa CKl^representative 

and provided relevant work papers for review. The represenM^.- stated that he would 

review the matter. JF ^ "• 

The Audit staff had questions regarding SFI's billin|^.":: ^ga^ment p -.^^i therefore, a 

copy of the SFI vendor contract was requested. JMesponse, CRP proviMbhe contract 

and a letter from SFI addressing the extensioi -. The contract contemKe 

following pertinent provisions: ^ ^ K ^ 

• While SFI was responsible for planning, prep.:: • -fmanaging and conducting all 

telephone fundraising efforts^^ected at both .*: .-• t.* s and prospective donors, 

CRP was responsible for coll9S||^depositing a].., :«.Vi-.iing all contributions 

generated by SFI and providin^^raUyjogular rep--'!^ "-r^tntifying all 

individuals who contributed to t^^onllB^^ • resi^'-T: SFI's efforts, along 

widi the amount and date of each omtriymt-, if 

• SFI shall invo..»' H?;'' v. eekly, and <HP shall pZ\ - i\ invoices within 30 days of 

die invoice I \ t and pl. - 1 prospectus invoices upon receipt. 

• Outstandi^^ ;jes' . .:ays past due%iaR accme interest of\Vi % compounded 

monthly. Z" ^ JP^ 

• Thi- jiio-j-.-.tive \VM\\i y.\ . \ -.•.-'^on included a "Break-Even Guarantee," 

.••'v ..: *'\vJi'.m/." 'Vii-- ;:e rigjit tlTbe CRP's exclusive telephone fundraising 

irm, SFI • ::! -.:. co*. i\ \ v co^ts of all calls to prospective contributors. As 

^ -.. h, CRP was ^ ^pec k-:! il^ay more for prospecting calls dian die sum of all 

'..' contributi I eneralEd by diose calls. The Guarantee included a provision 

in the partie*? .icknowledged that SFI was "acceptmg significant business 

risk'* '-y c.\'ending Guarantee to CRP and provided partial mitigation of die 

risk by -!r..:'..: gMfi- the exclusive right to conduct CRP's fundraising programs 

over die (I' ijsJro an entire year. 

• s n would biepaid for its prospecting services at "an amount equal to the gross 

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

gross proceeds from all Prospecting campaigns performed in a calendar year 

exceeded die total of all prospecting calls.. .the positive difference [would] be 

credited to the Conunittee." 

The letter from 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 sustainable new donor 

acquisition, renewal and reactivation of old donors as a result of die extemal political 

climate at die time. SFI furdier stated diat it believed at all times that this extension of 
credit would furdier 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 that it followed its established 

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

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

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

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

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

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

credit. ^ 

After consideration of all the aspects of diis matter, the AudjjBif suggested diat there 

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

established that SFI's extension of credit was in its or jjna^ courselftfcpsiness. Second, 

if the first provision was met, CRP should have den^m^teti that Sl 

commercially reasonable attempts to collect thedfm. If CRP did not ( -•.:-*.-1 eidier 

provision, a prohibited contribution would haic i .«> .';ed. V f 

Ordinary Course of Business 

In determining whether an extension^credit was in :':lar y course of business, die 

Commission considers whedier die vl^.:. ".-Uowed esta"".i>".!. i" procedures and past 

practices, whether the vendor received w : :nent in f-:". i*- 'tevious extensions of 

credit, and whether the extension of crea|^co .:t«: wi, iie usjpi and normal practice in 

die industry (11 CFR §116^3(c)). 

In considering sim".. -I^n..-' ^l-.i agreemenSj^ Comimssion has sought to determine 

whether an extei^f!i u. credit V-.M in a vendoraso^inary course of business by 

considering die;: j-.-i-y.: i-: ad.-. :.|||e vendor saBuards. The Commission has required 

conmiittees tojiave safc-'i \ 'c*. .< e that cominittees, in fact, pay for all the 

costs ofjj0 .. • . "i" pr5f!v "I"*. Sec MUR"5635 (Conservative Leadership PAC); AO 

1991>9vNew • i S-.:. Di- u^J: j:ic Committee); AO 1976-36 (Conunittee for 

Fam' . Safeguan • :".\'.»se(r'svi|^Commissionhave includedrequfring advance 

depos* s^l'i .1 committee'!o :.-imb^^vendors for potential shortfalls, limiting the term of 

die cont' .' allowmg \>:i*.dors to terminate the contract early and demand full payment 

as a result < fimdraii:!'g performance. 

The terms of the "!i^.v.-.]ll^en Guarantee" and the exclusivity clause in the contract raise 

a question of whetl^ '"^FI's extension of credit to CRP was in its ordinary course of 

business. The Guarantee appears very similar to the type of "no-risk" or "limited-risk" 

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

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

all of the costs of the fundraising programs and (2) the vendor would bear all of the 

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

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

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

contributions were to be sent to CRF, which was supposed to deposit them m its own 

account and then pay the invoiced amounts to SFI. This provision, in combmation with 
10 

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

one in which "die committee retainfed] contribution proceeds while giving up little, or 

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

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

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

sufficient to cover SFI's costs in making them. This raises a question regarding whether 

diis clause provided sufficient financial value to SFI such diat it negated SFI's 

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

absent additional information showing that the value of the exclusivity clause was 

comparable to SFI's financial risk or diat "no-risk" or "limited-risk|^|greements such as 

the Guarantee between CRP and SFI conform to the usual andj»nar|H^actices in the 

telemarketing industry, die Audit staff concludes diat SFI d}^^^ .-xtend credit to CRP in 

its ordinary course of business. 

4 

Commercially Reasonable Debt Collection ^; 

Even where an extension of credit by a commer^^vendor is legally pef!^--^ -le when 

made, it may evolve into a contribution over "i :ough H^lack of com: -.i. ". ^ 

reasonable attempts on the part of the vendor to col^:-;' theJmtihg debt. Tl^ 

Commission determines diat these attempts are con - -fly reasonable if the vendor 

has pursued its remedies as vigorousb; as it would pur^ ^ .• < remedies against a nonpolitical debtor in similar circumstanot^^- : CFR § 116.4I n this matter, it appears 

that many of the debt collection provi>^- ^ itemed in the Cw. '"•« ^ere not fulfilled. 

• As previously mentioned, other l|an^mB|^ices, ny rther documentation was 

made available to demonstrate th^CRfi^aslI,. .•. -^^ekly or diat any further 

attempts were-. ipTT-1. - -llect theseMots. 

• No docum( fion w -c. \.'.sented to w Audit staff to demonstrate that CRP was 

billed th^' # utere-...«: •poimded\iipiUhly, for its debts outstanding more 

than 30 days. J ^ 

In regaidd' 'I::-1;-'.:- • it:i. '-^^ty SFI,1&1 l admits diat credit was extended to CRP and 

otherjdmtical cli.—. . Iso mt nsnegotiated repayment plan; however, this has 

n^< •• I discusse( •'. • le A ff nor presented to die Audit staff for review. 

The Inti .^-.i \ . dit Report Kommended that CRP provide documentation or any other 

comments i > >!.•- i.i-nstrateflat SFI extended credit to CRP in its ordinary course of 

business. Thi ..•JC.:i::enwon should have included, but not have been limited to, 

evidence that (1) '.w "l^ak Even Guarantee" within die SFI contract is common 

industry practice, (Jl^Verification that die value of the exclusivity clause provided 

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

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

credit are similar to the terms SFI observes when extending a similar amoimt of credit to 

a nonpolitical client of similar risk. 

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

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

collect these debts. The documentation should have included, but not been limited 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 the $1,171,002 an 

impermissible contribution from SFI. 

C. Committee Response to Interim Audit Report 

In response to die hiterim Audit Report recommendation, CRP ar .* Chief Financial 

Officer of SFI (CFO) dispute diat the extension of credit by SFkiesuit^ in a corporate 

contribution. ji ' 

CRP discussed die many factors diat led to its incurreTf^f die dei^^i- ^FI. 

Specifically, CRP presented the following: ^'^ 

1. Fundraising is Cyclical - CRP stated th^n curre^^ost of its SFI •i-.-iyftring its 

traditional drought period, die off-electic -• (loA^KP stated'JfBcRP's 

traditional fundraising cycle has peaks and • •-:..'A'>^d ttie valley in 2007 after 

the big Califomia gubematorklelection of 20 '*: ^' he decline of national 

Republican fortunes in the 2()SfT.-: ^ssional el.wa s especially large and 

problematic." 

2. CRP Organizational Changes anS^. P. :. Direcy^ali and TeleFundraising Rates - CRP stated tmk it,^i-. -.'\mpanizations that engage in 

direct mail and^:«.-u~r .:n .aising eiff^^^fferedSecline in fundraising receiptis 

from these • w j7iti • ( also disciS|ed the tumover in key upper management 

positions^ ii.... an ai.: Chief Operat]S|g^ficer) and how diis affected its ability 

to resolve soi -.^i" • ."s < issues. 

3. Natio«?l ?Tid StJ n JL :•. jiih Fortunes - CRP stated "Like other 

.::":• ^ani/= v " - thai ciigagc »*i direct mail and tele-fundraising, the CRP 

30 suffe -"' ^." of • :-:i: .dentification and support that was related to the 

^ -j^clining popi.!:;: :!> of t- .'.^Jlfeial administration and special conditions in 

\'.f^ :;omia, when- - ^.006,^^ublicaiis had suffered a loss of all but two 

ii-v. :tie Republii-... officeholders." CRP furdier added, "die CRP suffered a 

loss X ^riiiiir dolli. c'onors in part because its major statewide officeholder, 

Gover: or^*^«' wai^^aiegger, had declared after his re-election in 2006 that he no 

longer CO >:t:.Ti-crhimself as a partisan Republican govemor, and he described his 

party as a d^aged brand." CRP stated that, beginning in early 2007, Govemor 

Schwarzenegger ceased to assist CRP in fundraising. 

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

As evidence of these attempts, CRP stated that it engaged in good faith discussions and 

negotiations to resolve die debt to SFI. CRP added that many of its officers and key 

employees were in constant, regular conununications 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 in Minnesota to negotiate a strategy to resolve the 

debt. 
12 

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

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

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

widi SFI representatives relating to the 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 set aside of SFI-generated telefimdraising receipts that were dedicated and credited to pay-downAthe CRP debt; and 

(3) extended die SFI-CRP fundraising agreement into 2009-2''-lf^^^ 

CRP contended that the fundraising agreement was in SF^^rdlnKCOurse of business, 

hi response to the concem that the agreement with SFLdiftot provlft* "ur it to cage and 

sequester funds necessary to pay its bills, CRP statei %4tchose to •••jVii. :e caging 

functions from all its fundraising vendors and ih^mhad a separatecag *',,jip^Q^ 

agreement. CRP points out two critical facts ' -E:. CRP v^ifione bf die lar^kj^ot the 

largest, of SFI's client. CRP stated that this bett > red^.A^liance with and 

non-federal campaign reporting requirements. Sec( *\. ('l^'s fmancial situation during 

2007 and 2008 resulted in delayed p^ments to vend - - . i:. separate caging agreement 

allowed for it to balance payments toft'iuio: - with "keep..-: i • I'loors open." 

To supplement its Interim Audit Reportl^por^-j, CKl.'^rovid^'wOmments from the 

CFO to address that credit was extended iKdic sViiil ^•^I'.i-.^of business. The CFO 

contended that extend'-»'~ " 'as in the ra^rmterest i-: ( UP from a prospecting and 

fundraising perspc. ..'.'fe, an best interlk of SFI from die perspective of helping a 

valued, long teri^^ >"'>Lby wc <.-ig out a muAj^ybeneficial payment plan. The CFO 

stated diat it believeJftj^v C\~.'.: uing to prosM!t and fundraise for CRP, in spite of the 

debt, not orW would fuSi ^.I^JI-.J • . .1^ be realized but its donor base would 

not decliaf p- o-.- v :.:i;! ("KP would biy acquire new donors. The CFO stated 

diat d^result o: t \' J .• <. :.-i':''. CRP would be CRP gaming new or lapsed donors 

. /sfT' ingeventi: .i-. •. d. u^^re, SFI extended credit to CRP. The CFO noted 

that ai' - \ lie had SFI i ded t^make a contribution to the CRP by virtue of an 

extensio: ti'"t:.\lit. 

Regarding the " ey^f^giiaiantiee" and the exclusivity provision within die CRP and 

SFI agreement, d..: (M ystatied, "Without disclosing too much of the details of our 

busmess model or c^r .lining how fundraising works, SFI will stress that our standard 

fundraising agreements with all political clients call for exclusivity. As a company, we 

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

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

other tele-fimdraising firms offer the exact or similar 'break-even guarantee*. As pointed 

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

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

contended that besides its normal weekly invoices, SFI also sends out via an e-mail link 

bi-weekly sununaries and open invoice reports which contain die 'aging' for each client. 
13 

He added diat this was done for all SFI clients, political and non-profit. As furdier 

evidence, die CFO stated, "SFI requested and was presented with several informal 

payment plans in die fall/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 with 

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

in early 2009. 

Assessment bv the Audit Staff 

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

following observations regarding CRP's adherence to die InterimAudit Report 

reconunendation: J^^^ 

1. Other than providing written comments, no docu . - wv. .-• .is submitted to 

demonstrate diat SFI extended credit to CRP ini -1 rdina ^ ..c -se of business. 

The CFO stated diat die "Break Even Guarai^Pli^^ die ex. >\'' y clause 

within the SFI contract is common industg^actice, but no exi • "'M of other 

client contracts or any supporting doc • tion Wi^provided to v^Tx .ids 

statement. The CFO cites confidently.:^ -.ts ii racts with its . r -profit 

clients that do not fall under the purview of ".^ ( tvflmiis^on. In addi^on^ neither 

CRP nor the CFO provided cgifirmation di{ .- .-: - is of the credit issued to 

CRP are similar to the terms sfl i '--erves when \\.- it", ig a similar amount of 

credit to a nonpolitical client o- :'-k. 

Furdier research by the Audit starabdi. • '.it "I*., .."^fEven Guarantee" and the 

exclusivity cl .>J .•. t unusual iratyffunaraisipg'industry. SFI does not 

"cage" the COj.' - •• • .-suiting fr^Ethe fundraising activity. Under its 

contract,. itions e to be sentwectiy to CRP which was to deposit die 

contributions iow- count and thOTpJy the invoiced amounts to SFI. This 

provision, in coiHTil^ it*' - " , aatee, raises questions as to whether the 

, IW..- •.•etw.-.'i i 1«P anil Sl I > "s one in which CRP retained contribution 

jffoceeds \ \ • -.'•fin^ ii'i.e, or assuming littie to no risk with the SFI bearing 

^ ...I, or nearly ' I'-c :isk. 1 i'.-j i^dit staffs research also indicates diis provision 

• 'unusual. ^ 

Di ^ .-..-: tation wi«i ot provided to demonstrate any particular financial value of 

the e>*• :ty claj:?.- If the exclusivity clause provided value to SFI sufficient to 

negate SI 'r*^\-.-i£ption of the risk that it would lose money on the prospecting 

calls, the ex':-:-«:on pf credit would result in no contribution. Further research by 

the Audit st^ indicates that when a contract contained an exclusivity clause as a 

safeguard against losses by the vendor; it was not the only safeguard, as it is in CRP's 

contract with SH. 

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, the bi-weekly summaries or open invoice reports, the meetings 

between CRP and SFI officials, die hundreds of communications between the two 

parties, etc. In addition, neither CRF 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. 

SITs effort to convince the 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 that may be regarded as evidence of 

commercial 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 tieM^ of services from 

SFI, and it was SFI diat convinced CRP diat die only vi^KwIy for CRP to get 

out of debt to SFI was for it to continue die fundraish^Kogram. If diis is 

correct, it may be that SFI's decision to give CRP^auM^ i -ne to pay and SFI's 

decision to continue providing services was cojjpirf^cially V.v - able. However, 

the Audit staff believes diat additional informMl^i^necessa: -•':-.. ch diis 

conclusion. SFI asserted in its response t^^KTas part of its effort- convince the 

CRP, it met with CRP and presented . nd hou'S^ile analysis JIH^^cluded 

details on historical fundraising trends a::.v .- valA^. In additionjinri 

contended that diis meeting led to a better ii-....- nding of die need To prospect 

and fundraise to help CRP oqlof the situation : I itself in. Information 

supporting this contention by^tl v. nuld be precisei< type of information that 

would demonstrate the commei'^:):.'. jij|^iableness L..>.'. I -bourse. In addition, 

the specifics of die negotiated pa!Jb^emfP\«. ' how ^. plans compare to the 

terms SFI has provided to sunilarl3|situki-.: .utal clients may also 

demonstrate th.- i-.'f^ cial reason%ffiness ana mrasonable debt collection efforts 

by SFI. H< KifFer 'Zv^ ':.: i--)di CRP alS SFI say that SFI provided such 

informati^. .•- C \<P ii .-i" neither hl^rovided a copy of die detailed house file 

analysis or th • -. :\ict\\. il e negotiat«^yment plans to the Audit staff 

After re^.v:\\'. !v^»oi " .e inierinwvudit Report submitted by CRP and the 

CFO TMi\udit s!-i":" coiu. lud.- ^I"TI: CRP has not demonstrated that SH extended credit 

wi|^-. ;- ijg ordinary co ^:r«. \ ' bus::.Vaj|i^ that commercially reasonable attempts were 

made CsTicviect die CRI' i-:*". Uqpffmrdier documentation is provided by CRP, the 

Audit St..: 'y.- considers ^>: ^ matter an impermissible contribution of $1,171,002 to 

CRP.