FEDERAL ELECTION COMMISSION

WASHINGTON. D.c 204&3

December 6, 1999

MEMORANDUM

Attached please find a copy ofthe final audit report and related documents on Eva Clayton

Committee for Congress which was approved by the Commission on November 23, 1999.

Informational copies ofthe report have been received by all parties involved and the report may be

released to the public.

PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

EVA CLAYTON COMMITTEE FOR CONGRESS

RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

.. ROBERTlCOSTA .

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

SUBJECT:

FROM:

TO:

•

Attachment as stated

cc: Office of General Counsel

•...office ofPublic Disclosure

Reports Analysis Division

FEC Library
REPORT OF THE AUDIT DMSION

ON

EVA CLAYTON COMMITTEE FOR CONGRESS

Approved November 23, 1999

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
TABLE OF CONTENTS

EYA CLAYTON COMMITTEE FOR CONGRESS

PAGE

Executive Summary

Final Audit Report 3

Background 3

Findings 5

Transmittal to Committee 13

Chronology 15
A99-16

FEDERAL ELECTION COMMISSION

Washington, DC 20463

EVA CLAYTON COMMITTEE FOR CONGRESS

EXECUTIVE SUMMARY

Eva Clayton Committee for Congress;.(the Committee) registered with the

Commission on December 26, 1991. On October 31, 1997, the Candidate filed a

Statement of Candidacy designating the Committee as the principal campaign committee

ofEva McPherson Clayton, Democratic candidate for the U.S. House ofRepresentatives

from the state ofNorth Carolina, First District, for the 1998 election. The audit was

conducted pursuant to 2 U.S.c. §438(b), which states that the Commission may conduct

audits of any political committee whose reports fail to meet the threshold level of

compliance set by the Commission.

The findings ofthe audit were presented to the Committee at an exit conference

held at the completion offieldwork on May 20,1999 and later in the interim audit report.

The relevant parts ofthe Committee's response to those findings are included in this

audit report.

The following is an overview ofthe findings contained in the audit report.

\{y_cs:ipj ofLQ~lljnExcess ofthe Limitation - 2 U.S.c. §44Ia(a)(l)(A), II CFR

§100.7(a)(I). The Candidate obtained a $20,000 loan from a bank; $12,000 ofthe

proceeds was in tum loaned to the Committee. The Candidate's spouse signed as an

additional co-maker on the loan. Accordingly, when the $12,000 loan was made to the

Committee on December 24, 1997, the Candidate's spouse made a contribution in excess

ofthe 2 U.S.C. §441a contribution limit by $6,000 (a $1,000 contribution was made by

check on December 22,1997). The Candidate's spouse was released from this obligation

on June 21, 1999.

Itemization ofReceipts From Individuals - 2 U.S.c. §434(b)(3)(A).

Contributions deposited inMay and June, 1998 were not itemized on the Committee's

disclosure reports, as required. During this period the Treasurer had been ill. In response

to the interim audit report, amended Schedules A were filed which corrected the public

record.

Page I of 16 Approved 11/23/99
Misstatement of Financial Activity - 2 U.S.c. §434(b)( 1),(2) and (4).

Disclosure reports filed for the period January I, 1997 through October 15, 1998

contained material misstatements. For 1997, reported receipts were overstated by

$10,020 while disbursements were understated by about $12,800; cash at December 31,

1997 was overstated by some $21,700. As to calendar 1998, reported receipts were

overstated by about $12,100 and disbursements were understated by $1,688. As a result

of errors on reports filed for calendar years 1997 and 1998, cash at December 31,1998

was overstated by approximately $35,500. The Committee filed amended reports which

materially corrected these misstatements.

Filing of Disclosure Reports - 2 U.S.c. §434(a)(2). Disclosure reports,

covering activity from October 16, 1998 thro,ugh December 31, 1998, were not filed until

May 27, 1999, approximately one week after'"the close of audit fieldwork. Financial

activity for this period consisted of $56,423 in receipts and $69,765 in disbursements.

The Candidate infon11Cd the Audit staff at the entrance conference that the Treasurer

bccame ill during the summer of 1998 and that they had a hard time catching up with the

campaign's bookkeeping as a result of her absence. Shortly after the conclusion of audit

tieldwork, the Committee filed a 1998 Post General report and a 1998 Year End report

which materially completed the public record.

Page 2 of 16 Approved 11/23/99
A99-16

FEDERAL ELECTION COMMISSION

WASHINGTON, DC 2046:<

REPORT OF THE A UDIT DIVISION

,ON THE

EVA CLA YTON COMMITTEE FOR CONGRESS

BACKGROUND

•

I.

A. AUDIT AUTHORITY

This report is based on an audit ofthe Eva Clayton Committee for

Congress (the Committee), undertaken by the Audit Division ofthe Federal Election

Commission (the Commission) in accordance with the provisions of the Federal Election

Campaign Act of 1971, as amended (the Act). The audit was conducted pursuant to

Section 438(b) ofTitle 2 ofthe United States Code which states, in part, that the

Commission may conduct audits and field investigations of any political committee

required to file a report under section 434 ofthis title. Prior to conducting any audit

under this subsection, the Commission shall perform an internal review ofreports filed

by selected committees to determine ifthe reports filed by a particular committee meet

the threshold requirements for substantial compliance with the Act.

B. AUDIT COVERAGE

The audit covered the period from January 1, 1997 through December 31,

1998.1 The Committee filed disclosure reports which covered activity from January 1,

1997 through October 15, 1998. During this period, the Committee reported a beginning

cash balance of$6,988; total receipts of $698,753; total disbursements of$644,160; and

a closing cash balance of$61,581. 2

1 Subsequent to the audit fieldwork, the Committee filed disclosure reports covering activity from October

16,1998 through December 31,1998 (see Finding II.D.).

2 All figures in this report have been rounded to the nearest dollar,

Page 3 of 16 Approved 11123/99
2

C. COMMITTEE ORGANIZATION

The Committee registered with the Federal Election Commission on

December 26, 199] and on October 31, 1997, the Candidate filed a Statement of

Candidacy designating the Committee as the principal campaign committee for Eva

McPherson Clayton, Democratic candidate for the U.S. House ofRepresentatives from

the state of North Carolina, First district, for the 1998 election. The Committee

maintains its headquarters in Warrenton, North Carolina. The Treasurer ofthe

Committee is Patsy T. Hargrove, who was also the Treasurer during the period covered

by the audit.

To manage its financial activity, the Committee maintained three bank

accounts. From these accounts, it made approximately 1,1 00 disbursements. The

Committee's receipts were composed of approximately 1,820 contributions from

individuals, totaling $238,000; and, approximately 390 contributions from political

committees, totaling $397,000.

D. AUDIT SCOPE AND PROCEDURES

The audit included such tests as verification oftotal reported receipts and

disbursements; the review of the required supporting documentation; and such other

audit procedures as deemed necessary under the circumstances. Although the Committee

satisfied the minimum recordkeeping requirements of II CFR §102.9 relating to its

contribution records, the Audit staff was unable to perform the substantive testing

normally undertaken when reviewing contributions from individuals because the

computerized contributions file and the cash receipts journal provided by the Committee

were incomplete.

The audit included testing ofthe following general categories:

1. The receipt of contributions or loans in excess ofthe statutory limitations

(see Finding lI.A.);

2. the receipt of contributions from prohibited sources, such as those from

corporations or labor organizations;

3. proper disclosure of contributions from individuals, political committees

and other entities, to include the itemization of contributions when

required, as well as, the completeness and accuracy ofthe information

disclosed (see Finding II.B.);

4. proper disclosure of disbursements including the itemization of

disbursements when required, as well as, the completeness and accuracy

ofthe information disclosed;

Page 4 of 16 Approved 11/23/99
•

3

5. proper disclosure of debts and obligations;

6. the accuracy oftotal reported receipts, disbursements and cash balances as

compared to bank records (see Finding II.C.);

7. adequate recordkeeping for transactions;

8. other audit procedures that were deemed necessary in the situation.

Unless specifically discussed below, (I0 material non-compliance was detected. It

should be noted that the Commission may pursue any ofthe matters discussed in this

report in an enforcement action.

II. AUDIT FINDINGS AND RECOMMENDATIONS

A. RECEIPT OF LOAN IN EXCESS OF THE LIMITAnON

Section 44Ia(a)(I)(A) ofTi~le 2 ofthe United States Code states that no

person shall make contributions to any candidate and his authorized political committees

with respect to any election for Federal office which, in the aggregate, exceed $1,000.

Section I00.7(a)(I) ofTitle II ofthe Code ofFederal Regulations states,

in part, that the term contribution includes loans (except for a loan made in accordance

with II CFR 100.7(b)(Il) and that the term loan includes a guarantee, endorsement, and

any other form ofsecurity. This section further states: a loan which exceeds the

contribution limitations of2 U.S.C. 441a and II CFR part 110 shall be unlawful whether

or not it is repaid; a loan is a contribution at the time it is made and is a contribution to

the extent that it remains unpaid; that the aggregate amount loaned to a candidate or

committee by a contributor, when added to other contributions from that individual to

that candidate or committee, shall not exceed the contribution limitations set forth at 11

CFR part 110; and, each endorser or guarantor ofa loan shall be deemed to have

contributed that portion ofthe total amount ofthe loan for which he or she agreed to be

liable in a written agreement and in the absence ofsuch written stipulation, the loan shall

be considered a loan by each endorser or guarantor in the proportion to the unpaid

balance that each endorser or guarantor bears to the total number of endorsers or

guarantors.3

J Pursuant to 11 CFR §1OO.7(a)(1)(i)(D), a candidate may obtain a loan on which his or her spouse's

signature is required when jointly owned assets are used as collateral or security for the loan and the

spouse shall not be considered a contributor to the candidate's campaign ifthe value ofthe candidate's

share ofthe property used as collateral equals or exceeds the amount ofthe loan which is used for the

candidate's campaign. Similarly, when the loan is unsecured, the spouse will not be considered to have

Page 5 of 16 Approved 11/23/99
4

On December 24, 1997, the Candidate signed a B8&1' (Branch Banking

& Trust Company) Promissory Note as the borrower of$20,000 and then loaned $12,000

to the Committee. The Committee filed a Schedule C (Loans) with its 1997 Year End

report which listed a $12,000 loan from BB&T, with the Candidate and her spouse as

endorsers/guarantors. 4 A Schedule C-l (Loans and Lines ofCredit from Lending

Institutions) was also filed which listed the $20,000 loan from B8&T and noted that the

endorsers/guarantors disclosed on Schedule C were secondarily liable for the debt

incurred. In response to a Request for Additional Information sent to the Committee

from the Commission's Reports Analysis Division, the Committee filed an amendment to

Schedules C and Col which stated that the Candidate borrowed $20,000 from BB&T and

then loaned $12,000 to the Committee on that same date. A $12,000 counter deposit on

December 24, 1997 was noted on the Committee's bank statement. The $20,000 loaned

by BB&T was at a fixed rate of 12.50% and the principal plus accrued interest was due in

full at maturity on March 23,1998. The Candidate's spouse signed as an additional comaker on the $20,000 loan. In a letter from the Vice-President ofthe BB&T bank which

made the loan, this note was described as "unsecured."

The Committee made a $4,000 payment relative to this note on March 20,

1998 and the Candidate apparently made a $2,000 payment on the same date. A

modification to this Promissory Note was signed by the Candidate and her spouse on

March 24, 1998. This modification extended the final due date for repayment of this

note to March 24, 2000 and required 23 monthly payments of$700 each, with one final

payment of all remaining principal and interest on the due date. The adjusted balance for

this modification was noted as $14,618 (the $20,000 originally loaned to the Candidate,

less principal paid through March 24, J998 of$5,382).

According to a loan transaction history from 8B&T, thirteen payments, in

the amount of $700 each, were made between April 1998 and May 1999. These

payments were apparently made by the Candidate.

The Candidate provided a statement to the Audit staff which explained

that this $20,000 loan" ... was not secured by a Deed ofTmst and did not require a

signature from my husband." She added that "[t]he Bank's tradition of having the

husband to sign an unsecured loan is negative and disadvantageous toward women and

married women. I can't imagine any man, including my husband, being required to sign

made a contribution ifthe bank relied upon the candidate's assets in making the loan. See Explanation and

Justification for I I eFR §100.7(a)(1 )(i)(D), 48 Fed. Reg. 19020 (April 27, 1983) ("a signatory spouse

will not be considered a contributor ifthe value ofthe candidate's share ofthe property used as collateral

or as the basis/Dr the loan equals or exceeds the amount ofthe loan to be used for the candidate's

campaign") (emphasis added).

4 The Committee had also secured a loan from BB&T in the amount of$35,000 in 1996. Security for this

loan was a second deed oftrusl on the personal residence ofthe Candidate and her spouse. The Audit

staff determined that the Candidate's equity value in this property was sufficient.

Page 6 of 16 Approved J 1/23/99
5

for a loan ofthis amount with a [my] comparable salary and the clear ability to repay the

loan."

Subsequent to the exit conference, the Committee provided three letters

from the Vice President ofthe bank which made the loan. These letters were addressed

to the Candidate. The first letter stated that "[t]his unsecured note was made to you and

co-signed by Mr. Clayton. This was done as a matter oftradition and was not actually

required for Mr. Clayton to sign. You certainly needed no help to qualify for the loan.

The loan was made to be used for your purposes and is being repaid by you."

The second letter stated that the Candidate was the primary borrower but

that the note was also signed by the Candidate's spouse and

\

"[t]o clarify any misunderstanding, please consider that when

extending unsecured credit it is important to the financial

institution to consider not only income but also financial net

worth. Net worth, in the case ofmarried partners, is considered to

be, for the most part, equity in jointly owned assets. If an

institution had to look at liquidation of assets for repayment of

debt, it would only be possible if both partners had signed the note.

For this reason, it is preferred to have both partners in a marriage

to sign unsecured debt, regardless of which is the primary

borrower-It is preferred but not required and certainly, in your

case, it is not necessary for Mr. Clayton to sign. Today [6/9/99],1

am completing the necessary documentation to release Mr.

Clayton form [sic] both notes."

The second letter further stated that to the best ofthis bank official's

knowledge, all repayments made, to date, have been made by the Candidate or the

Committee.

The third letter, dated July 13, 1999, stated the following: "[p]lease accept

this correspondence as certification that Mr. Theaoseus T. Clayton [the Candidate's

spouse] has no financial obligation relating to the above stated loans. It is also intended

to assure any interested parties, with whom you may share this information, that this is a

true and accurate statement." The loans referred to are the $20,000 loan discussed in this

finding and the $35,000 loan noted in Footnote 3.

The Audit staff notes that on the original Promissory Note (dated

December 24, 1997), the Candidate's spouse signed as an additional co-maker and on the

Note Modification Agreement (dated March 24, 1998), he signed as an additional

borrower/guarantor. Since the Candidate loaned $12,000 ofthe $20,000 loan to the

Committee on December 24, 1997, the Audit staff considers the Candidate's spouse to

have been obligated for 50% ofthe value ofthis loan and thus, to have made a $6,000

contribution to the Committee, pursuant to II CFR § 100.7(a)(I). On December 22,

Page 7 of 16 Approved 11123/99
(,

1997, he also made a contribution by check to the Committee in the amount of$I,OOO.

Accordingly, when the $12,000 loan was made to the Committee on December 24, 1997,

the Candidate's spouse made a contribution in excess of the 2 USc. §441a contribution

limit by $6,000 ($7,000 - $1,000). As noted above, the Candidate's spouse was released

from his obligation relative to this loan per a letter dated July 13, 1999. A modification

to the loan agreement or other document evidencing that the Candidate's spouse is no

longer a guarantor was not provided with the July 13, 1999 letter.

In the interim audit report, the Audit staff recommended that the

Committee provide evidence that the Candidate's spouse did not make a contribution to

the Committee in excess ofthe 2 U.S.c. §441a limit in the amount of$6,000, and

provide any additional information or explanation relative to this matter. The Audit staff

further recommended that the Committee provide a copy ofthe modification to the loan

agreement or other document evidencing that the Candidate's spouse was no longer a

guarantor relative to this loan and that any change in the terms of this loan should be

reflected on Schedule C and C-1 of the Committee's Mid-Year 1999 report or an

amendment thereto.

In its response to the interim audit report, the Committee provided a

document from the Vice President ofBB&T bank which released the Candidate's spouse

as co-maker on the loan. This document incl uded the si gnatures of the Candidate and her

spouse dated June 21, 1999. In its response, the Committee stated that it appeared

"...that this document was never submitted to the Audit Division."

The Committee also provided a letter from BB&T, dated October 28,

1999, which stated th1l.t the loan in question was made jointly by the Candidate and her

spouse in the amount of$20,000 and that this loan was paid offon August 9,1999. It

further stated that "[t]his loan has been satisfied in full and thus no modifications can be

made to either term, conditions or obligations."

In addition, the Committee filed an amended Schedule C and C-1 relative

to the 1999 Mid Year report, which covered the reporting period January 1, 1999 through

June 30, 1999, that removed the Candidate's spouse as a guarantor for this loan.

No evidence, additional information or explanation was provided by the

Committee refuting that the Candidate's spouse made a contribution to the Committee in

excess of the 2 U.S.C. §441 a limit in the amount of $6,000 as a result of contributing

$1,000 to the Committee on December 22, 1997 and guaranteeing 50% ofthe $12,000

loan from the Candidate to the Committee on December 24, 1997 [$1,000 + $6,000 -

$1,000 (2 U.S.c. §441a limit)l- As noted above, the Candidate's spouse was released

from this obligation on June 21, 1999 and the obligation was paid off on August 9, 1999.

Page 8 of 16 Approved 11/23/99
7

B. ITEMIZATION OF RECEIPTS FROM INDIVIDUALS

Section 434(b)(3)(A) ofTitle 2 ofthe United States Code states, in part,

that each report shall disclose the identification of each person (other than a political

committee) who makes a contribution to the reporting committee during the reporting

period, whose contribution or contributions have an aggregate amount or value in excess

of$200 within the calendar year, together with the date and amount ofany such

contribution.

Section 431(13)(A) ofTitle 2 ofthe United States Code defines the term

"identification" to be, in the case of any individual, the name, the mailing address, and

the occupation ofsuch individual, as well as the name of his or her employer.

The Committee did not itemize 62 contributions from individuals

($23,951), deposited in May and June of 1998, on Schedules A (Itemized Receipts) ofits

2nd Quarter 1998 report, as required. The Candidate informed the Audit staff at the

entrance conference that the Treasurer became ill during the summer of 1998 and that

they had a hard time catching up with the campai.~'11's bookkeeping as a result of her

absence.

At the exit conference, the Audit staff provided a schedule ofthese

contributions to the Committee. Committee officials agreed to file the necessary

Schedules A.

In the interim audit report, the Audit staff recommended that the

Committee file amended Schedules A for the 2nd quarter 1998 report correcting these

omissions. Amended Schedules A for the 2nd quarter 1998 report were filed which

corrected the public record.

C. MISSTATEMENT OF FINANCIAL ACTIVITY

Sections 434(b)(l), (2), and (4) ofTitle 2 ofthe United States Code

require a political committee to disclose the amount of cash on hand at the beginning of

each reporting period and the total amount ofall receipts and disbursements for each

reporting period and the calendar year.

The Audit staff reconciled the Committee's reported financial activity to

its bank activity for the period January 1, 1997 through October 15, 1998 and

determined that material misstatements occurred. The Committee did not file disclosure

reports covering the activity from October 16, 1998 through December 31, 1998 until

after the audit fieldwork had concluded (see Finding II.D.).

Page 9 of 16 Approved 11/23/99
8

The Committee overstated its 1997 reported receipts by $10,020 primarily

due to the apparent over-reporting of its total unitemized contributions from individuals

in the amount of $12,422 and not reporting three contributions from political committees

(PACs), totaling $2,000. The Committee understated its 1997 reported disbursements by

$12,782, primarily due to not reporting three wire transfers to vendors, totaling $13,729,

and not adjusting for four voided checks, totaling $1,000. The reported beginning cash

on hand balance at January 1, 1997 was understated by $1,097 and the reported ending

cash on hand balance at December 31, 1997 was overstated by $21,705 due to these

misstatements.

The Committee overstated its 1998 reported receipts by $12,130. This net

overstatement was primarily due to the apparent over-reporting ofits total unitemized

contributions from individuals in the amount of $15 ,391. The Committee understated its

1998 reported disbursements by $1,688. The reported beginning cash on hand balance at

January 1, 1998 was overstated by $2 I,705 and ending cash on hand balance at

December 31, 1998 was overstated by $35,523 due to these misstatements.

At the exit conference, Committee officials agreed to file the necessary

amended reports. Three weeks later, amended reports were filed which materiaHy

corrected these misstatements.

In the interim audit report, the Audit staff recommended no further action

and stated that the Committee could provide any additional information or explanation if

it wished to do so. No additional information was provided.

D. FILING OF DISCLOSURE REPORTS

Section 434(a)(2) of Title 2 ofthe United States Code provides, in part,

that in a calendar year during which there is a regularly scheduled election for which a

candidate is seeking election for the House of Representatives, the treasurer ofthe

principal campaign committee ofsuch candidate is required to file reports which include:

a post-general election report, which shaH be filed no later than the 30th day after any

general election in which such candidate has sought election, and which shall be

complete as ofthe 20tl1 day after such general election; and, a quarterly report, which

shall be complete as ofthe last day of each quarter and that for the quarter ending

December 31 shall be filed no later than January 31 ofthe following calendar year.

Disclosure reports, covering activity from October 16, 1998 through

December 31, 1998, were not filed until May 27, 1999, approximately one week after the

close of audit fieldwork. Financial activity for this period consisted of $56,423 in total

receipts, $69,765 in total disbursements, with beginning and ending cash balances of

$26,057 and $12,715 respectively. The Candidate informed the Audit staff at the

entrance conference that the Treasurer became ill during the summer of 1998 and that

Page 10 of 16 Approved 11/23/99
•

9

they had a hard time catching up with the campaign's bookkeeping as a result of her

absence.

At the exit conference, Committee officials agreed to file the necessary

disclosure reports. A few days later, the Committee filed a 1998 Post General report and

a 1998 Year End report which materially completed the public record.

In the interim audit report, the Audit staffrecommended no further action

and stated that the Committee could provide any additional infonnation or explanation if

it wished to do so. No additional infonnation was provided.

Page 11 of 16 Approved 11/23/99
•

Page 12 of 16 Approved 11/23/99
FEDERAL ELECTION COMMISSION

WASH INCTON, DC. 2041>3

December I, 1999

Ms, Patsy T. Hargrove, Treasurer

Eva Clayton Committee for Congress

307 W. Franklin Street

Warrenton, NC 27589

Dear Ms. Hargrove:

Attached please find the Report ofthe Audit Division on the Eva Clayton

Committee for Congress. The Commission approved the report on November 23, 1999.

The Commission approved Final Audit Report will be placed on the public record

on December 6, 1999. Should you have any questions regarding the public release of the

report, please contact the Commission's Press Office at (202) 694-1220. Any questions

you have related to matters covered during the audit or in the report should be directed to

James Miller or Marty Favin of the Audit Division at (202) 694-1200 or toll free at (800)

424-9530.

Sincerely, /)

(/)/ .',.~, , I /' ",

-tt2~/>· I "'-(-~,,~ Robert 1. Costa

Assistant StaffDirector

Audit Division

Attachment as stated

Page 13 of 16 Approved 11/23/99
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Page 14 of 16 Approved 11123/99
CHRONOLOGY

EVA CLAYTON COMMITTEE FOR CONGRESS

•

Audit Fieldwork

Interim Audit Report to

the Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

5/3/99--5/20/99

9/14/99

11/2/99

11/23/99

Page 15 of 16 Approved 1l/23/99
Page 16 of 16 Approved 11/23/99