FEDERAL ELECTION COMMISSION

WASHINGTON, D,C <0463

June 16, 1999

MEMORANDUM

Ul.

TO:

FROM:

RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

ROBERT J. COSTA

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

DOLE/KEMP '96, INC. AND DOLE/KEMP '96 COMPLIANCE

COMMITTEE, INC.

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

Dole/Kemp '96, Inc. and Dole/Kemp '96 Compliance Committee, Inc. which was approved

by the Commission on June 3, 1999.

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

the report may be released to the public.

Attachment as stated

cc: Office of General Counsel

Office of Public Disclosure

Reports Analysis Division

FECLibrary
FEDERAL ELECTION COMMISSION

WASHINGTON, D.C 204&3

•

•

•

MEMORANDUM

TO:

FROM:

DATE:

SUBJECT:

Commissioners

Staff Director Pehrkon

General Counsel Noble

Press Officer Harris @)

Mary W.' Dove/Lisa R. Da is

Acting Commission Secre

June 25, 1999

Statement of Reasons for the Audits of

Clinton/Gore '96 and Dole/Kemp '96.

Attached is a copy of the Statement of Reasons in the Audits of

Clinton/Gore '96 and Dole/Kemp '96 signed by Vice-Chairman Darryl R.

Wold, Commissioner Lee Ann Elliott, Commissioner David M. Mason and

Commissioner Karl J. Sandstrom. This was received in the Commission

Secretary's Office on Thursday, June 24. 1999 at 3:47 p.m.

cc: V. Convery

Attachment
FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C 20463

STATEMENT OF REASONS of

VICE CHAIRMAN DARRYL R. WOLD and

COMMISSIONERS LEE ANN ELLIOTT,

DAVID M. MASON and,

KARL J. SANDSTROM

On The Audits Of

"DOLE FOR PRESIDENT COMMITTEE, INC." (PRIMARY),

"CLINTON/GORE '96 PRIMARY COMMITTEE, INC.,"

"DOLEIKEMP '96, INC." (GENERAL),

"DOLE/KEMP '96 COMPLIANCE COMMITTEE, INC." (GENERAL),

"CLINTON/GORE '96 GENERAL COMMITTEE, INC.," and

"CLINTON/GORE '96 GENERAL ELECTION

LEGAL AND COMPLIANCE FUND"

Pursuant to 26 U.S.c. §§ 9038(a) and 9007(a), the Federal Election Commission

("the Commission") audited the "Dole For President Committee, Inc.," the "Clinton/Gore

'96 Primary Committee, Inc.," "DolelKemp '96, Inc.," the "DolelKemp '96 Compliance

Committee, Inc.," the "Clinton/Gore '96 General Committee, Inc." and the "Clinton/Gore

'96 General Election Legal And Compliance Fund." In doing so, our Audit Division and

Office ofGeneral Counsel (collectively the "staff') analyzed media advertisements the

Democratic and Republican National Committees (collectively "the parties") ran during

1995 and 1996. The purpose ofthis analysis was to determine whether the cost ofthese

advertisements constituted in-kind contributions (coordinated expenditures) by the parties

on behalf oftheir respective presidential candidates' committees (which, among other

things, could have caused the presidential committees to exceed their primary or general

election spending limits in violation of2 U.S.C. § 44Ia(b».

In analyzing these advertisements, I the staff examined their content for the

presence oftwo factors to determine whether the advertisement were "for the purpose of

influencing" an election for Federal office, as that phrase is used in 2 U.S.C. § 431 (8)(A)

("contribution") and (9)(A) ("expenditure"): Whether the advertisements referred to a

"clearly identified candidate" and whether they contained an "electioneering message.,,2

I See, e.g., "Report of the Audit Division on the Dole For President Committee, Inc. (Primary)" ("Report

on DFP"), Agenda Document 98-87,11/19/98 at 14 & 50; "Report of the Audit on Clinton/Gore '96

Primary Committee, Inc," ("Report on COP"), Agenda Document 98-85, 11/19/98 at 10, 32-35 & 36-38.

2 The staff cited Advisory Opinions ("AO") 1984-15 and 1985-14 as the authority for using "electioneering

message" as a test of the content of a communication. Only AO 1985-14 used that phrase, and it did so in

erroneously concluding that the Commission had employed the "electioneering message" test in AO 1984-

15, see AO 1985-15 at 7; in fact, those words never appear in AO 1984-15. See footnote eleven, infra, for

a discussion of the problems with the staffs interpretation of these opinions.
Because the staff found that both factors were present/ the staff recommended that the

Commission determine that the costs of the advertisements were in-kind contributions

from the parties to their respective presidential campaign committees! The staff also

recommended that the Commission determine that the applicable spending limits were

exceeded based in part on the cost ofthe advertisements, and that the Commission require

a repayment ofpresidential matching funds. For various reasons, the Commissioners

unanimously rejected the staffs repayment recommendations.

We write here to express our disagreement with the use of "electioneering

message" as a test to determine whether communications are "for the purpose of

influencing" elections and, therefore, constitute expenditures or contributions under the

Federal Election Campaign Act ("FECA"). Specifically, we agree that: (I) The phrase

"electioneering message" cannot serve as a substantive test to describe the content of

~Ij communications that are "for the purpose ofinfluencing" an election because it is derived

only from advisory opinions and is not found either in the FECA or in regulations

promulgated by the Commission in accordance with the rulemaking procedures specified

in the FECA; and (2) The phrase "electioneering message" cannot be used as a shorthand

expression ofthe Commission's interpretation ofthe statutory standard of"for the

purpose ofinfluencing" an election because the advisory opinions from which the phrase

is drawn do not convey a clear and consistent application ofthe statutory standard, and

the phrase, standing alone, is both too vague and too broad to have a sufficiently definite

meaning. Therefore, we conclude that the phrase "electioneering message" should not be

used to describe the content of communications which the Commission would determine

to be "for the purpose ofinfluencing" an election to Federal office.

Procedural Defects With Employing The "Electioneering Message" Standard

Congress included an express prohibition in the FECA against the Commission

using advisory opinions to establish rules ofconduct. Subpart (b) of2 U.S.c. § 437f, the

section governing the use ofsuch opinions, provides that the Commission may employ

rules oflaw that are not set forth in the FECA only ifit complies with the procedures set

forth in 2 U.S.c. § 438(d) in promulgating them.s By necessary implication, subpart (b)

of § 437fprohibits the Commission from using advisory opinions as rules oflaw, for the

3 See, e.g., Report on DFP, Agenda Document 98-87, 11/19/98 at 50; Report on CGP, Agenda Document

98-85, 11/19/98 at 38.

4 See, e.g., Report on DFP, Agenda Document 98-87,11/19/98 at 52; Report on CGP, Agenda Document

98-85, 11/19/98 at 43.

S See id. at § 437f{b) ("Any rule oflaw which is not stated in this Act or in chapter 95 or chapter 96 of title

26 may be initially proposed by the Commission only as a rule or regulation pursuant to procedures

established in section 438(d) of this title."); United States Defense Committee v. Federal Election

Commission, 861 F.2d 765, 771 (2"' CiL 1988) (USDC) (citing 2 V.S.c. § 438(d») ("A rule oflaw may

initially be proposed by the Commission only as a rule or regulation pursuant to very elaborate procedures

involving submission ofthe rule or regulation to the Congress. ").

2
Commission does not follow the requirements of 2 U.S.c. § 438(d) in drafting such

opinions; instead, it follows the requirements of § 437f.'

As a result, the Commission may not use advisory opinions as a substitute for

rulemaking. Rulemaking is not simply the preferred method for filling in gaps in the

FECA. It is the required method. 2 U.S.c. § 437f(b), note five, supra. Where the law is

of uncertain application, advisory opinions cannot be used as a sword of enforcement.

See generally id. The regulated community can, however, use advisory opinions as

shields against Commission enforcement actions in appropriate circumstances. 2 U.S.c.

§ 437f(c).

Advisory opinions are binding only in the sense that they may be relied on

affirmatively by any person involved in the specific transaction or activity

discussed in the opinion or in any materially indistinguishable transaction or

activity.... On the other hand, to the extent that the advisory opinion does

not affirmatively approve a proposed transaction or activity, it is binding on

no one-not the Commission, the requesting party, or third parties. 7

This reading ofthe FECA's rulemaking requirements, of course, does not prevent

the Commission from enforcing the FECA in novel or unforeseen circumstances. It only

requires that, absent controlling regulations or the authoritative interpretations ofthe

courts, the Commission's enforcement standard be the natural dictate ofthe language of

the statute itsele

The threshold problem with the "electioneering message" standard, then, is that it

is not a rule. It is only a shorthand phrase that purports to describe the Commission's

reasoning in two advisory opinions. See note two, supra. The phrase is not defined in

either ofthose opinions. In fact, it does not appear at all in one ofthem. Rather than

being promulgated pursuant to the requirements ofthe FECA (see 2 U.S.C. §§ 438(d) and

6 See 2 U.S.C. § 437f(b) ("... No opinion of an advisory nature may be issued by the Commission or any

of its employees except in accordance with the provision of this section [i.e., § 437f].").

, USDC, 861 F.2d at 771 (emphasis added) (citing 2 U.S.C. §§ 438(d) and 437f(b)&(c»; see also Weber v.

Heaney, 793 F. Supp. 1438, 1452 n. 9 (D. Minn 1992) (" ... Commission advisory opinions are binding in

the sense that they may be relied upon affirmatively by any person involved in the specific transaction or

activity discussed in the opinion or in any materially indistinguishable transaction or opinion."), ajJ'd, 995

F.2d 872 (8th Cir. 1993); Stockman v, Federal Election Commission, 138 F.3d 144, 149 n. 9 (5th Cir. 1998)

(same). Some argue that Orloski v. Federal Election Commission, 795 F.2d 156 (D.C. Cir. 1986), supports

the contrary conclusion. Unlike USDC, however, Orloski did not address the FECA's clear prohibitions on

using advisory opinions as rules of conduct. Instead, Orloski analyzed the advisory opinions implicated

there for purposes of determining whether the Commission's interpretation of the FECA was reasonable

and consistent and thus should be accorded deference. 795 F.2d at 164-167.

• See Sullivan v. Everhart, 494 U.S. 83, 89 (1990) (Scalia, 1.) (quoting Chevron U.S.A., Inc. v. Natural

Resources Defense Council, !tic., 467 U.S. 837, 843 (1984) and National Labor Relations Board v. Food

and Commercial Workers, 484 U.S. 112, 123 (1987)) ("'[I]fthe statute is silent or ambiguous with respect

to the specific issue, the question for the court is whether the agency's answer is based on a permissible

construction of the statute,' that is, whether the agency's construction is 'rational and consistent with the

statute,''').

3
437f(b) & (c», the "electioneering message" standard is an amalgam ofthese advisory

opinions. Even at that, it is not the most natural, let alone the only reasonable, reading of

those opinions. In fact, it is difficult to draw any clear meaning from a comparison or

combination ofADs 1984-15 and 1985-14 (see "Substantive Difficulties," infra).

As a result, the regulated community most likely does not have notice as to how

this standard will govern its conduct, and it certainly did not have an opportunity to

comment on whether it should. Because ofits procedural infirmities, the Commission

may not employ the phrase "electioneering message" as expressing a general rule for

determining whether communications are "for the purpose ofinfluencing" a federal

election.9

Substantive Difficulties With The "Electioneering Message" Standard

Apart from its procedural infirmities, the "electioneering message" standard

suffers from serious problems of vagueness and overbreadth. As presented by the staff, a

communication satisfies this standard ifit includes statements which are "designed to

urge the public to elect a certain candidate or party,IO or which would tend to diminish

support for one candidate and gamer support for another candidate." See, e.g., Report on

DFP, Agenda Document 98-87, 11/19/98 at 14 (citing AD 1984-15); Report on CGP,

Agenda Document 98-87, 1l/19/98 at 10 (citing AD 1984-15)."

9 Democratic Congressional Campaign Committee v. Federal Election Commission, 645 F. Supp. 169

(D.D.C. 1986), aff'd in part and rev 'd in part, 831 F.2d 1131 (D.C. Cir. 1987) (DCCC) and Federal

Election Commission v. Ted Haley Congressional Committee. 852 F.2d 1111 (9'h Cir. 1988) (Haley) do not

affect this conclusion. In DCCC, the Commission dismissed a complaint, contrary to the recommendation

ofits General Counsel, without providing a statement of reasons for doing so when it appeared the

complaint alleged activity that satisfied the "electioneering message" standard. 645 F. Supp. at 170-171.

The Court, in an action brought pursuant to 2 U.S.c. § 437g(a)(8), was faced with the question ofwhether

the Commission had acted "contrary to law" for appearing to disregard its "electioneering message" test

without articulating any reason for doing so, id. at 171-174; the Court was not faced with the issue here:

whether that test, itself, was validly established. In Haley, the Court noted that the Commission's

interpretation ofthe FECA in its regulations and advisory opinions was entitled to due deference. 852 F.2d

at 1115. But all the advisory opinions to which that Court referred interpreted a Commission regulation,

id. at 1114-1115; they did not attempt to circumvent the FECA's clear requirement that for rules of

conduct, the Commission have a regulation. See also Federal Election Commission v. Legi-Tech, 967 F.

Supp. 523, 529-530 (D.D.C. 1997) (Commission advisory opinions interpreted regulation).

10 The staff cites AD 1984-15 as authority for this phrase. This phrase, however, comes from 1985-14. See

id. at 7 (citing United States v. United Auto Workers. 352 U.S. 567, 587 (1957)).

II There is substantial question as to whether the staff's analysis properly characterizes AD 1984-15. While

that opinion uses the phrases "diminish support" and "garner support," id. at 5, it concludes that

advertisements which clearly identify presidential candidates of one party and include exhortations to

"vote" for another party "effectively advocate the defeat of a clearly identified candidate." Id. Whatever

distinction there may be between "effectively" and "expressly" advocating, the facts presented in that

advisory opinion bear similarities to the facts in Federal Election Commission v. Massachusetts Citizensfor

Life. Inc.. 479 U.S. 238 (1986) (MCFL), and the Commission's conclusion in AD 1984-15 and the court's

conclusion in MCFL can be read consistently. The staffsuggests an extremely broad interpretation of AD

1984-15, citing the phrase "dimish [orJ garner support." See Reports on DFP & CGP, supra. That

opinion's facts, however, suggest a mOre narrow, and more natural, construction, similar to MCFL.

4
Such fonnulations, the Supreme Court has held, offend the First Amendment. In

Buckley v. Valeo, 424 U.S. 1,42-44 (1976), the High Court held as impennissibly vague

the "relative to ... advocating the election or defeat of [a clearly identified) candidate"

standard in 18 U.S.C. § 608(e) (1970) ofthe original FECA. The "diminish support for

one candidate" prong-like the "relative to" standard in the original FECA- is especially

problematic because "the distinction between discussion of issues and candidates and

advocacy ofelection or defeat ofcandidates may often dissolve in practical application."

Buckley, 424 U.S. at 42 (emphasis added)."

The factual question of what a particular statement was designed to do also gives

rise to vagueness problems. The fact that the tenn "electioneering" and the phrase

"designed to urge the public to elect a certain candidate or party" were plucked out of

context from a four-decade old Supreme Court opinion (United States v. Auto Workers,

352 U.S. 567 (1957) (UA W») does not resolve the question. 13 First, it is clear that UA W

was not enunciating a constitutionally-pennissible standard for regulating speech, but

describing a particular communication in the course of an opinion explicitly refusing to

reach a ruling on the constitutionality ofregulating the specific speech so described. See

id. at 591 (internal citation omitted) ("Clearly in this case it is not absolutely necessary to

a decision to canvass the constitutional issues."). Second, the speech at issue in UAW

included specific endorsements of candidates. Id. at 584. Third, the per curiam opinion

in Buckley cites the dissent in UAW, see 424 U.S. at 43 (citing UAW, 352 U.S. at 595-596

(Douglas, J., dissenting», which had urged that the FECA's predecessor statute be

declared unconstitutional as applied to the electioneering speech at issue in UA W.

The relationship, if any, ofthe two prongs ofthe "electioneering message" test

underscores the test's vagueness. Read narrowly, "urge the public to elect a candidate,"

AD 1985-14 at 7, could be construed as equivalent to communications "that expressly

I, The "relative to" standard, on its face, was thus unhelpful in distinguishing between these two types of

speech. [d. As a result, to allow unfettered issue discussion while regulating candidate advocacy, the

government, under this standard, had to attempt to divine the speaker's intent. Id. at43. This, the Court

noted, would not only be difficult, but dangerous.

Whether words intended and designed to fall short of invitation would miss that mark is a

question both of intent and effect. No speaker, in such circumstances, safely could

assume that anything he might say upon the general subject would not be understood by

some as an invitation. In short, the supposedly clear-cut distinction between discussion,

laudation, general advocacy, and solicitation puts the speaker in these circumstances

wholly at the mercy of the varied understanding of his hearers and consequently of

whatever inference may be drawn as to his intent and meaning. Such a distinction offers

no security for free discussion. In these conditions, it blankets with uncertainty whatever

may be said. It compels the speaker to hedge and trim.

[d. (quoting Thomas v. Collins..323 U.S. 516, 535 (1945». The second prong ofthe "electioneering

message" test--given its "diminish [candidate] support" focus--requires the same difficult and dangerous

subjective inquiry.

13 Like a '57 Chevy, a dated Supreme Court opinion may be charming, but often requires substantial

restoration to be ofpractical use.

5
advocate the election or defeat of a clearly identified candidate." Federal Election

Commission v. Massachusetts Citizens For Life. Inc.. 479 U.S. 238, 249-250 (1986)

(quoting Buckley, 424 U.S. at 80). In contrast, there is virtually nothing which could be

said about a candidate for federal office which might not be interpreted as "diminish[ing]

support for one candidate [or] gamer[ing] support for another candidate." See, e.g.,

Report on DFP, Agenda Document 98-87, 11119198 at 14 (citing AO 1984-15); Report

on CGP, Agenda Document 98-87, 11119198 at 10 (citing AO 1984-15).

The "electioneering message" test is also unconstitutionally overbroad for related

reasons. As the Buckley Court observed,

[c]andidates, especially incumbents, are intimately tied to public issues

involving legislative proposals and govemmental actions. Not only do

candidates campaign on the basis oftheir positions on variOl,lS public

issues, but campaigns themselves generate issues of public interest.

424 U.S. at 42. Regulation of any statement which" diminishes [or garners) support for

[a) candidate," AO 1984-15 at 5, would encompass, then, virtually any meaningful

utterance identifYing a candidate.

The vagueness and overbreadth problems ofthe "electioneering message" and

"relative to" standards are thus two sides ofthe same counterfeit coin. They are vague

because it is not clear when they encompass issue discussion and not candidate advocacy.

They are overbroad because, given the nature ofcampaigning, they will inevitably

encompass both. For the same substantive reasons that the Supreme Court held the

"relative to" standard in the FECA to be unconstitutional, the Commission may not

employ "the electioneering message" standard. Even in the context of coordinated, or

presumably coordinated, communications in which the "electioneering message" test has

generally been proposed (see 11 C.F.R. § 114.4(c)(5)(ii)(B)(2)(E) (regulation of voter

guides)), the Commission may not ignore these constitutional requirements.

Conclusion

I Karl VSandstrom

Commissioner

t (Jtlc-pi

Date

Given the procedural and substantive infirmities with the "electioneering

message" standard, the Commission may not employ it in administering the FECA, the

Presidential Primary Matching Payment Account Act, the Presidential Election Campaign

Fund Act, or its own regulations.

/(\ , /1

.!-JJ~111i4G---//JrffJ Darryl ; Wold

~J~~ b/2~/17 David M. Mason Date

Commissioner

6
-,-

I

REPORT OF THE AUDIT DIVISION

i

! ON

i

D~LEIKEMP '96, INC.

I

I AND

10>0

!

DOLEIKEMP '96)rOMPLIANCE COMMITT~E;I~~.

4-pproved June 3, 1999

I

•

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
FEDERAL ELECTION COMMISSION

WASHINGTON, D.C 20463

•

June 10, 1999

Senator Robert J, Dole

c/o Mr. Kenneth A. Gross, Esq.

Skadden, Arps, Slate, Meagher, & Flom

1440 New York Avenue, NW

Washington, D.C. 20005

Dear Senator Dole:

Attached please find the Report ofthe Audit Division on Dole/Kemp '96, Inc. and

DolelKemp '96 Compliance Committee, Inc, The Commission approved the report on

June 3, 1999. As noted on page 3, ofthe attached report, the Commission may pursue any

ofthe matters discussed in an enforcement action.

In accordance with 11 CFR §§9007.2(c)(I) and (d)(I), the Commission has made a

determination that a repayment to the Secretary ofthe Treasury in the amount of

$3,212,143 is required within 90 calendar days after service ofthis report (September 13,

1999).

Should you dispute the Commission's determination that a repayment is required,

Commission regulations at 11 CFR §9007.2(c)(2)(i) provide you with an opportunity to

submit in writing, within 60 calendar days after service ofthe Commission's notice

(August 13, 1999), legal and factual materials to demonstrate that no repayment, or a

lesser repayment, is required. Further, 11 CFR §9007.2(c)(2)(ii) permits a Candidate who

has submitted written materials to request an opportunity to address the Commission in

open session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted

within the 60 day period when deciding whether to revise the repayment determination.

Such materials may be submitted by counsel ifyou so elect. If you decide to file a

response to the repayment determination, please contact Kim L. Bright-Coleman ofthe

Office of General Counsel at (202) 694-1650 or toll free at (800) 424-9530. If you do not

dispute this determination within the 60 day period provided, it will be considered final.
Senator Robert 1. Dole

Page 2

The Commission approved Audit Report will placed on the public record on or

about June 15, 1999. Should you have any questions regarding the public release ofthis

report, please contact Ron Harris ofthe Commission's Press Office at (202) 694-1220.

Any questions you may have related to matters covered during the audit or in the

audit report should be directed to Alex Boniewicz or Joe Stoltz ofthe Audit Division at

(202) 694-1200 or toll free at (800) 424-9530.

• Attachment:

Audit Report
FEDERAL ELECTION COMMISSION

WASHINGTON. D.C. 20463

r---~

•

June 10, 1999

Mr. Allen Haywood, Assistant Treasurer

c/o Mr. Kenneth A. Gross, Esq.

Skadden, Arps, Slate, Meagher, & Flom

1440 New York Avenue, NW

Washington, D.C. 20005

Dear Mr. Haywood:

Attached please find the Report ofthe AuditDivision on Dole/Kemp '96, Inc. and

DolelKemp '96 Compliance Committee, Inc. The Commission approved the report on

June 3, 1999. As noted on page 3, ofthe attached report, the Commission may pursue any

ofthe matters discussed in an enforcement action.

In accordance with II CFR §§9007.2(c)(I) and (d)(l), the Commission has made a

determination that a repayment to the Secretary ofthe Treasury in the amount of

$3,212,143 is required within 90 calendar days after service ofthis report (September 13,

1999).

Should the Candidate dispute the Commission's determination that a repayment is

required, Commission regulations at 11 CFR §9007.2(c)(2)(i) provide the Candidate with

an opportunity to submit in writing, within 60 calendar days after service ofthe

Commission's notice (August 13, 1999), legal and factual materials to demonstrate that no

repayment, or a lesser repayment, is required. Further, 11 CFR §9007.2(c)(2)(ii) permits a

Candidate who has submitted written materials to request an opportunity to address the

Commission in open session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted

within the 60 day period when deciding whether to revise the repayment determination.

Such materials may be submitted by counsel ifthe Candidate so elects.

Tfthe Candidate decides to file a response to the repayment determination, please

contact Kim L. Bright-Coleman ofthe Office of General Counsel at (202) 694-1650 or toll

free at (800) 424-9530. Ifthe Candidate does not dispute this determination within the 60

day period provided, it will be considered final.
Mr. Allen HUlwood. Assistant Treasurer

rage 2

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

about June 15, 1999. Should you have any questions regarding the public release ofthis

report, please contact Ron Harris ofthe Commission's Press Office at (202) 694-1220.

Any questions you may have related to matters covered during the audit or in the

audit report should be directed to Alex Boniewicz orJoe Stoltz ofthe Audit Division at

(202) 694-1200 or toll free at (800) 424-9530.

Attaclunents:

Audit Report
TABLE OF CONTENTS

DOLEIKEMP '96, INC.

AND

DOLEIKEMP '96 COMPLIANCE COMMITTEE, INC.

APPROVED JUNE 3, 1999

Final Audit Report

Background

",""

l~

• Findings

Legal Analyses

4

October 21, 1998 (LRA #506) 61

October 21, 1998 (LRA #467 and #506) 65

October 27,1998 (LRA #467) 69

Transmittal Letter-Candidate 91

Transmittal Letter-Committee 93

Chronology 95
. FEDERAL ELECTION COMMISSION

Washington, DC 20463

BACKGROUND

•

I.

A.

REPORT

OF THE AUDIT DIVISION

ON

DOLEIKEMP '96, INC.

AND DOLEIKEMP '96 COMPLIANCE COMMITTEE, INC

AUDIT AUTHORITY

This report is based on an audit of DolelKemp '96, Inc. (hereafter DK)

and Dole/Kemp '96 Compliance Committee, Inc. (hereafter GELAC). The audit is

mandated by Section 9007(a) ofTitle 26 ofthe United States Code. That section states

that "after each presidential election, the Commission shall conduct a thorough

examination and audit ofthe qualified campaign expenses ofthe candidates of each

political party for President and Vice President."

Also, Section 9009(b) ofTitle 26 ofthe United States Code states, in part,

that the Commission may conduct other examinations and audits as it deems necessary to

carry out the functions and duties imposed on it by this chapter.

In addition to examining the receipt and use of Federal funds, the audit

seeks to determine ifthe campaign has materially complied with the limitations,

prohibitions and disclosure requirements ofthe Federal Election Campaign Act of 1971

as amended.

B. AUDIT COVERAGE

The audit ofDK covered the period from its inception, April 30, 1996,

through March 31, 1997. DK reported an opening cash balance of $-0-, total receipts of

$81,866,654, total disbursements of$81,317,062 and a closing cash balance of $549,592

at March 31, 1997. 1 In addition, a limited review of activity through September 30, 1998

was conducted for the purpose of determining amounts applicable to the expenditure

limit.

The audit ofthe GELAC covered the period from its inception, February

13,1995 through March :n, 1997. The GELAC reported an opening cash balance of

All figures in this report have been rounded to the nearest dollar.
$-0-, total receipts of$5,630,170, total disbursements of$4,981,285, and a closing cash

balance of $648,885. As with DK, a limited review oftransactions was performed

through September 30, 1998.

C. CAMPAIGN ORGANIZATION

DK registered with the Federal Election Commission on May 3,1996.

The GELAC had been registered since February 15, 1995. The Treasurer of both

committees, since their inception, has been Robert E. Lighthizer. Both committees

maintain their headquarters in Washington, D.C..

To manage its financial activity, DK maintained nine bank accounts. In

addition, DK purchased three certificates of deposit to secure lines of credit, as well as 14

certificates of deposit from the primary committee. From these accounts, DK made

approximately 14,190 disbursements. DK was certified to receive $61,820,000 from the

United States Treasury on August 15, 1996. Other receipts included loans from the

GELAC totaling $1,515,903 and a bank loan in the amount of $525,000 to finance

expenses prior to the receipt ofthe August 15,1996 Federal grant. Additionally, DK

received a $2,000,000 loan from Dole for President '96, Inc. (See Finding II.A.2.a.), an

additional $1,570,964 bank loan, $874,000 from the GELAC for reimbursement of

compliance related expenses, and approximately $14,000,000 in offsets to operating

expenditures.

To manage its financial activity, the GELAC maintained 15 bank

accounts. From these accounts, the GELAC made approximately 2,000 disbursements.

Approximately 32,000 contributions were received from about 26,000 individuals. These

contributions totaled $ 3,397,511. In addition, approximately 90 contributions from

about 80 political action committees and other political committees were received

totaling $184,295. The GELAC also received $58,456 in offsets to operating

expenditures, $256,000 from DK to correct GELAC reimbursements to DK for

compliance related expenses, a loan repayment of $1 ,515,903 from DK, $215,925 from

Dole for President '96, Inc. (hereafter DFP) for primary expenses erroneously paid from

the GELAC, and $2,080 in miscellaneous receipts.

D. AUDIT SCOPE AND PROCEDURES

In addition to a review ofthe committees' expenditures to determine the

qualified and non-qualified campaign expenses incurred by the campaign, the audit

covered the following general categories:

1. The campaign's compliance with statutory limitations with respect

to the receipt of contributions or loans;

2. the campaign's compliance with the statutory requirements

regarding the receipt of contributions from prohibited sources, such

2
as those from corporations or labor organizations (see Finding

II.A.);

3. proper disclosure ofreceipts, contributions from individuals,

political committees and other entities, to include the itemization

of receipts when required, as well as, the completeness and

accuracy ofthe information disclosed;

11'1

4.

5.

6.

7.

8.

proper disclosure of disbursements, including the itemization of

disbursements when required, as well as the completeness and

accuracy ofthe information disclosed;

proper disclosure of campaign debts and obligations;

the accuracy of total reported receipts, disbursements and cash

balances as compared to campaign bank records (see Finding

II.C.);

adequate recordkeeping for.campaign transactions;

accuracy ofthe Statement ofNet Outstanding Qualified Campaign

Expenses filed by the campaign to disclose its financial condition

(see Attachment 1);

9. the campaign's compliance with spending limitations (see Finding

III.C.); and,

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

As part ofthe Commission's standard audit process, a limited inventory of

the committees' records was conducted prior to audit fieldwork. This inventory was

conducted to determine ifthe committees' records were materially complete and in an

auditable state. It was concluded that the records were materially complete.

Unless specifically discussed below, no material non-compliance with

Statutory and Regulatory requirements was detected. It should be noted that the

Commission may pursue further any ofthe matters discussed in this report in an

enforcement action.

In a series ofmeetings between December 9, 1998, and March 4, 1999, the

Commission considered the findings and recommendations contained below. The action

taken with respect to each issue is described at the end ofthe respective finding.

3
•

"

II. AUDIT FINDINGS: NON-REPAYMENT MATTERS

A. ApPARENT PROHIBITED CONTRIBUTIONS

Section 441 b(a) ofTitle 2 ofthe United States Code states, in part, that it

is unlawful for any national bank, corporation or labor organization to make a

contribution in connection with any election for Federal office.

Sections 116.3(a) and (b) ofTitle 11 ofthe Code of Federal Regulations

state, in relevant part, that a corporation in its capacity as a commercial vendor may

extend credit to a candidate or political committee provided that the credit is extended in

the ordinary course ofthe corporation's business and the terms are substantially similar to

extensions ofcredit to nonpolitical debtors that are ofsimilar risk and size of obligation.

An extension of credit in the ordinary course ofthe commercial vendor's business will

not be considered a contribution.

Further, 11 CFR §116.3(c) states, that in determining whether credit was

extended in the ordinary course of business, the Commission will consider:

(1) Whether the commercial vendor followed its established

procedures and its past practice in approving the extension of

credit;

(2) Whether the commercial vendor received prompt payment in full if

it previously extended credit to the same candidate or political

committee; and

(3) Whether the extension of credit conformed to the usual and normal

practice in the commercial vendor's trade or industry.

Finally, 11 CFR §116.3 (d), extension of credit by regulated industries,

explains that the Commission may rely on the regulations prescribed by other Federal

agencies to determine whether extensions of credit by the entities regulated by those

Federal agencies were in the ordinary course ofbusiness.

Section 9003.2(a)(2) ofTitle 11 ofthe Code of Federal Regulations states,

in relevant part, that to be eligible to receive payments under II CFR part 9005, each

Presidential and Vice Presidential candidate of a major party shall, under penalty of

perjury, certify to the Commission that no contributions have or will be accepted by the

candidate and his or her authorized committee except for contributions solicited for and

deposited to the candidate's legal and accounting compliance fund, or to make up any

deficiency in payments received from the Fund.

4
Section 9007.2(b)(5) of the Code of Federal Regulations states, in part,

that ifthe Commission determines that an eligible candidate of a major party committee,

the candidate's authorized committee(s) or agent(s) accepted contributions to defray

qualified campaign expenses, it shall notify the candidate ofthe amount of contribution

so accepted, and the candidate shall pay to the Treasury an amount equal to such amount.

1. Extension of Credit by US Airways

Office ofthe Secretary, Department ofTransportation (DOT)

regulations at sections 374a.4(a)(1) and (2) of Title 14 ofthe Code of Federal Regulations

state, in relevant part, that unless full payment in advance is made, no air carrier shall

provide transportation to any person it knows, or has reasons to know, is a candidate or a

person acting on behalf ofsuch candidate, in connection with the campaign ofsuch

candidate, except in accordance with, and subject to, the following conditions:

(1) At least once a month the air carrier shall submit to each such candidate or

person a statement covering all unsecured credit extended to such

candidate or person, as the case may be (whether in connection with the

campaign ofsuch candidate or otherwise.); and,

(2) Such statements shall be mailed no later than the second business day

following the last day ofthe billing period, covered by the statement.

Section 374a.4(a)(4)(i) ofTitle 14 ofthe Federal Code of

Regulations states that unsecured credit shall not be extended by an air carrier to a

candidate, or to any person acting on his behalf in connection with the campaign ofsuch

candidate, so long as any overdue indebtedness ofsuch candidate to such air carrier shall

remain unpaid, in whole or in part, or so long as such air carrier shall know that any

overdue indebtedness ofsuch candidate to any other air carrier remains unpaid, in whole

or in part.

Section 374a.4(a)(5)(ii) of Title 14 ofthe Federal Code of

Regulations states that within 7 days after indebtedness becomes overdue for any

unsecured credit extended by an air carrier to a person acting on behalfof a candidate in

accordance with paragraph (a)(5)(i) ofthis section, the carrier shall notifY the candidate in

writing ofthe amount ofthe overdue indebtedness, and, unless paid in full within 25 days

after the date ofsuch notice, the overdue indebtedness shall be deemed to be the overdue

indebtedness ofthe candidate, for the purposes of paragraph (a)(4)(i) ofthis section.

During the course of fieldwork, the Audit staffreviewed

documentation associated with a debt owed by Dole/Kemp '96, Inc. to US Airways. The

review indicated that DK received invoices from US Airways dated September 4, 1996

($76,905), September 18, 1996 ($81,039) and October 2, 1996 ($246,468), which were

paid in full by September 18, 1996, September 26, 1996 and October 17, 1996

respectively. The next invoice, dated October 31, 1996, showed a balance due US

5
Airways of$56l,439. The final invoice available for our review, dated December 4,

1996, indicated that DK had made no payments and the outstanding balance had

increased to $1,066,217. No additional billings for services were noted after December 4,

1996, however since the election had occurred approximately a month earlier DK likely

had no further need for the travel account. DK made regular payments from December

12, 1996 through January 15, 1998 to reduce the amount due US Airways to $325,409.2

Since that time, additional payments have been made reducing the outstanding balance to

$272,037 at September 30, 1998 3

•

As noted in the citations above, once a balance becomes an

"overdue indebtedness" the carrier is required to follow specific procedures to obtain

payment, or discontinue granting credit. Although discontinuing the granting ofcredit

was not an option, given that the first unpaid bill did not become "overdue indebtedness"

until after the election, there is no evidence in DK files that additional invoices were

received from US Airways, or that other attempts were made by this vendor to collect the

debt. Further, there was no evidence that this debt was secured in any manner by DK.

The question of an extension of credit outside the ordinary course of business was

discussed with DK representatives at a conference held at the conclusion offieldwork.

Subsequent to this conference, DK representatives provided an

unsigned statement which noted that US Airways did not give DK any favorable terms or

payment schedules; and, that all dealings were "completely at arms-length." The

statement also indicated that US Airways had made repeated demands for payment, but

provided no evidence ofsuch efforts. DK also provided a signed statement from Allen

Haywood, DK Assistant Treasurer, which stated that a travel account was established

with US Airways by the campaign's travel agent, McNair Travel, in order to consolidate

all ticketing and billing; and, that US Airways representatives have been in "regular

contact" with the campaign over collection ofthis debt. Additionally, although a May,

1997 collection letter from US Airways demanding payment is cited, no copy ofsuch a

document is provided. Finally, a letter from McNair Travel is provided which states that

DK's relationship with US Airway's Air Travel Card Division "is typical ofthe

arrangements with our other clients and is standard in the industry."

The Audit staff was not persuaded by DK's response. McNair

travel is not in a position to address whether US Airways' extension of credit is in the

On it's 1997 Year End Report, DK disclosed a debt to US Airways in the amount of$127,205.

The Audit staff determined the correct amount to be $340,781. Statements received from the U.S.

Department ofTransportation, that reflect US Airways' calculation ofthe amount owed,

materially agree with the Audit staffs calculation. DK's response to the memorandum explains

that the difference relates to amounts that were to be paid by the RNC as coordinated expenditures

[2 U.S.C. §44Ia(d)]. Since the RNC has not paid the obligations, they are once again being

recognized by DK.

US Airways reported the following balances to the U.S. Depmtme/1t of Transportation 0/1 the

dates indicated: September 30, October 31, and November 30, 1998, $269,504; December 31,

1998, $277, 670; and, January 31,1999, $280,447.

6
normal course ofits business or whether it complies with Title 14 of the Code of

Federal Regulations. Information from US Airways about its billing and collection

policies for similar clients has not been provided. Further, no documentation has been

provided ofany efforts made by US Airways, after December 4, 1996, to collect this

debt. In the Exit Conference Memorandum (Memorandum), the Audit staff concluded

that DK received a contribution from US Airways. The amount of the contribution was

$1,066,217 at December 4, 1996 and that $325,409 remained outstanding as of2/28/98.

In the Memorandum, the Audit staff recommended that DK

provide documentation to demonstrate that the credit extended by US Airways was in the

ordinary course of business and did not represent a prohibited contribution. The

information provided was to include examples of other customers or clients ofsimilar

size and risk for which similar services have been provided and similar credit was

extended. Also, information concerning billing policies for similar clients, advance

payment policies and debt collection policies were to be included.

In response to the Memorandum, DK restates its argument that it

was not given favorable terms or payment schedules by US Airways. DK's response

further states that Pam Garrett of US Airways calls Allen Haywood every 3-4 weeks for

an update on the account. Finally, DK provides a generic letter dated December 4,1996

from Mr. Frank Nicholson, Manager, Commercial Credit for US Airways, directed "To

Our Valued Customers", which requests payment and notes that effective, January 1,

1997, late charges will start being assessed on outstanding balances. The letter provided

was most likely directed to McNair Travel, the campaign's travel agent. No invoices

were available after December 4, 1996, so it is not certain whether US Airways has

actually assessed these late charges. However, DK's reported outstanding balance does

not reflect any increase that could be attributed to late charges. The increases in the

outstanding balances reported to the U.S. Department ofTransportation beginning in

December of 1998, may indicate the assessment of an interest charge.

The Audit staff concludes that DK has failed to provide

documentation which demonstrates that US Airways did not extend credit outside ofits

normal course of business, as defined under 11 CFR §116.3. OK failed to provide

documentation from US Airways detailing examples of other customers or clients of

similar size and risk for which similar services have been provided and similar credit

extended. Further, no information concerning US Airways billing policies for similar

clients, advance payment policies or debt collection policies, or documentation of any

efforts made by US Airways to collect this debt have been provided. Although not

specifically requested in the Memorandum, no evidence has been provided to indicate

that US Airways was in compliance with 14 CFR §374aA.

During the Commission's consideration ofthis finding a motion

was made to reject the Staff conclusion. That motion failed to receive sufficient votes to

be approved. Subsequently, the Commission voted to receive this finding without any

7
determination on the merits ofthe analysis ofthe facts or the interpretation ofthe law

contained herein.

2. Loan from Dole For President '96 Inc. and

Extension ofCredit By Franklin National Bank

Section 100.7(b)(11) ofthe Code of Federal Regulations states, in

part, that the term "contribution" does not include a loan ofmoney by a State bank, a

federally chartered depository institution (including a national bank) or a depository

institution whose deposits and accounts are insured by the Federal Deposit Insurance

Corporation, the Federal Savings and Loan Insurance Corporation, or the National Credit

Union Administration ifthe loan is made in accordance with applicable banking laws and

regulations and is made in the ordinary course of business. A loan will be deemed to be

made in the ordinary course of business ifit: bears the usual and customary interest rate

ofthe lending institution for the category of loan involved; is made on a basis which

assures repayment; is evidenced by a written instrument; and, is subject to a due date or

amortization schedule. For purposes ofthis section, an overdraft made on a checking or

savings account shall be considered a contribution by the bank or institution unless: the

overdraft is made on an account which is subject to automatic overdraft protection; the

overdraft is subject to a definite interest rate which is usual and customary; and there is a

definite repayment schedule.

Section 104.3 of Title 11 ofthe Code of Federal Regulations

requires political committees authorized by a candidate for Federal office to report, for

the reporting period and the calendar year, total receipts, total disbursements, transfers to

other committees authorized by the same candidate, and transfers from other committees

authorized by the same candidate. Further, each authorized committee shall report the

identification of each authorized committee ofthe same candidate to which a transfer is

made during the reporting period, together with the date and amount ofsuch transfer.

Section 100.12 ofTitle 11 ofthe Code of Federal Regulations defines identification as, in

the case of any other person, the person's full name and address.

a. Loan from DFP

In the process ofreconciling DK's bank accounts, the Audit

staff identified a series oftransfers between DK and DFP which were neither properly

disclosed nor itemized. DFP made three transfers, totaling $2,000,000, to DK between

October 30 and November 1, 1996. The transfers were reversed when DK made a

transfer to DFP in the amount of $2,000,000 on November 25, 1996.

It was noted that DFP's general ledger originally classified

each transfer as a "loan." On December 23, 1996, the general ledger classifications were

changed from "loan" to "transfer error." Further, the memo discussed below, mentions

that the funds were supposed to be transferred to a DFP bank account named "Dole for

President Operating Expenses." DFP did in fact have an account by this name; however,

8
the account signature card shows that November 4, 1996 was the opening date, three days

after the last ofthe three transfers to DK.

In a memorandum included in the FEC Report for the post

general period dated December 5, 1996, DK stated:

"In the process of consolidating its primary committee bank

accounts, transfers totaling $2,000,000 were made from Signet

Bank accounts to Franklin National Bank. These funds were

transferred in error to an account titled "Dole-Kemp '96

Operating Expenses" instead ofthe primary account which is

titled "Dole for President Operating Expenses." This error was

made, discovered, and corrected within this reporting period."

The account described as "Dole-Kemp '96 Operating

Expenses" was in fact titled "Dole for President General Committee," and as noted there

were three occurrences over a three day period. DFP transferred $500,000 on October 30;

$1,250,000 on October 31; and $250,000 on November I, for a total of $2,000,000.

Transfer advices from the originating bank identified the name and account number ofthe

destination account for each transfer as follows: October 30 - "Dole For President/AC1016040712," October 31 - "Dole For President General Operating Expenses/AC1016040712," and November I - "Dole For President Operating Expenditures/AC1016040712." Though the account name varied, the account number did not. It was the

account number of DK's operating account.

A faxed copy ofthe memorandum to the originating bank

requesting the October 31 transfer was found. The memorandum identified DK's

operating account number as the destination ofthe transfer. This document suggests that

no mistake occurred at the transferring bank with respect to the $1,250,000 transfer.

Further, no documentation could be found to suggest that the intended transfer destination

for any ofthe three transfers was not DK's operating account.

DK's cumulative bank account balance on October 29, the

day before the first transfer, was negative $199,058. The bank account balance on

November 1, the day ofthe last transfer, was negative $563,375. Further analysis

revealed that DK operated with a negative cash balance until November 15, 1996, even

with the receipt ofthe $2,000,000 from DFP. This balance excludes certificates of

deposit used as collateral for a line of credit and letters of credit issued in lieu of cash

deposits for telephone service, credit cards and other vendors. Although these certificates

of deposit represent $2,954,051 in DK funds, the balances were not available to pay

checks issued by DK. This supports the Audit staffs position that the $2,000,000 was

intended to be transferred to DK's bank accounts.

For DK to return the $2,000,000 to DFP, it was necessary

to sell back to DFP certificates of deposit, with a face value and cumulative interest

9
amounting to $1,023,147, which DK had purchased from DFP on August 30,1996. The

certificates of deposit secured letters of credit that satisfied DK's deposit requirements

with its telephone vendors and other commercial vendors. However, when the

certificates of deposit were sold back to DFP, one in the amount of $202,767 ($200,000

plus accrued interest) had already been redeemed by DK. Therefore, DK owes DFP

$202,767. That amount has been reported by DK as a debt owed to DFP.

The Audit staff concluded that the transactions described

above represent a $2,000,000 loan from DFP to DK. During the period that the loan was

outstanding, it was a contribution.4 Further, DFP made an additional contribution to DK

when it repurchased the certificates of deposit that either secured DK's deposits, or had

been liquidated by DK, since funds represented by the CD's were not available to DFP.

The contributions were resolved when the letters of credit and other security requirements

were eliminated in the winding down period and the funds represented by the CD's

became available.

At a conference held at the end of fieldwork, the Audit staff

addressed this matter with DK representatives. Subsequent to the conference, DK

representatives filed amended reports which materially disclosed the transfers detailed

above.

In the Exit Conference Memorandum it was recommended

DK, provide documentation that demonstrates the transfers were not contributions from

DFP to DK for the period that the funds were with DK, and provide any other relevant

information regarding the transfers between DFP and DK which would support their

contention that the transfers were inadvertent and not intentional. It was further specified

that the documentation to be provided should demonstrate that it was permissible for DFP

to purchase certificates of deposit from DK that were serving as security for deposits

required ofDK; and that the DFP operating account at Franklin National Bank was open

at the time the transfers were made. Finally, DFP was to provide transfer requests which

identify the DFP operating account by number; an analysis of DK's security deposit

requirements at the time the certificates of deposit were repurchased by DFP; and any

documentation from Franklin Bank which supports DFP's contention that the transfers

had been erroneously credited.

In its response to the Memorandum, DK refers to the DFP

response to the same issue. In that response DFP maintains that the transfers occurred in

error but provided none ofthe requested documentation to support their contention.

In advisory opinion 1992-38, the Commission permitted the Clinton-Gore committee to borrow

funds from its GELAC to cover short term cash flow problems caused by amounts due from the

press and Secret Service. That opinion did not permit similar borrowing from a Federally funded

primary campaign. The opinion further required the amount borrowed to be repaid from the next

available funds, and full reporting ofthe transactions.

10
With respect to the conclusion that OFP's purchase ofthe

certificates of deposit constituted a contribution to OK, DFP explained that its letters of

credit, underlying certificates of deposit, lines of credit, and loans were obtained in the

normal course of business as provided for at 11 CFR §110.7(b)(11) and therefore could

not be contributions. DFP's relationship with the banking institutions that provided the

certificates of deposit, letters of credit, and commercial loans was not questioned. Rather,

DFP's purchase during the expenditure report period ofthe certificates of deposit

securing the business relationship between DK and its vendors is the issue. In the

Memorandum that transaction was identified as a contribution from DFP to DK. With

respect to this, OFP notes only that the Certificates ofDeposit were transferred back to

OFP which has been the lead committee during the wind down phase. That statement

does not resolve the question.

OK has failed to demonstrate that the $2 million transferred

to OK, and DFP's purchase ofthe certificates of deposit underlying DK's security

arrangements with its vendors were not contributions to DK.

After considering the Staff conclusion, the Commission

voted to receive this finding without any determination on the merits ofthe analysis of

the facts or the interpretation ofthe law contained herein.

b. Extension ofCredit By Franklin National Bank

The Audit staffreviewed cash balances for all DK bank

accounts maintained with Franklin National Bank, in conjunction with the review ofthe

loan from DFP discussed above, and noted that the cumulative cash balance was

significantly below zero. During the 21 day period from October 25, 1996 through

November 14, 1996, the cumulative cash balance was overdrawn by as little as $69,507

on November 6, 1996 to as much as $933,984 on November 4, 1996. The average daily

cumulative cash balance during this period was negative $374,061. Absent the

$2,000,000 loan from DFP, the cumulative cash balances would have ranged from

negative $2,069,507 to negative $2,933,984, with an average daily cumulative cash

balance ofnegative $1,909,775. As explained earlier, these negative balances exclude

certificates of deposit used as collateral for a line of credit and letters of credit issued in

lieu of cash deposits for telephone service, credit cards and other vendors. Although

these certificates ofdeposit ranged in value from as much as $2,954,051 on October 21,

1996, to as little as $1,751,000 on November 13, 1996, the balances were not available

to pay checks issued by DK.

During this period, Franklin National Bank honored every

check that was presented for payment without charging DK any fees. Franklin National

Bank sent OK unavailable funds/insufficient funds notices whenever one ofOK's bank

account balances fell below zero. The notices listed the checks that were paid by

Franklin National Bank, and the negative account balances which resulted from the

11
payment ofthese checks. There was no evidence in DK's files of any attempts by

Franklin National Bank to have DK correct its negative cash balance.

On November 5,1996,11 days after DK's cumulative cash

balance fell and remained below zero, Franklin National Bank provided DK a $900,000

line of credit. 5 The line of credit was guaranteed by DK's credit card receivables, and

was to be fully paid by November 15, 1996. DK immediately made a draw of $806,940

against the line of credit, which brought its cumulative cash balance to negative

$281,095. Without the draw, the cumulative cash balance would have been negative

$1,088,035. From November 5 through November 15,1996, DK made a series of draws

and repayments, amounting to $1,570,964, against this line of credit. Despite these

draws, DK's cumulative cash balance remained well below zero until November 15,

1996. The line of credit was paid on November 18, 1996.

Based on the facts as presented above, the Audit staff

concluded that DK received a contribution from Franklin National Bank which amounted

to as much as $933,984 on November 4, 1996.

At a conference held at the conclusion offieldwork, the

Audit staff addressed this issue with DK representatives, who stated that they would look

into this matter. The DK representatives further stated that DK had no special

relationship with Franklin National Bank, and that no contribution should result from the

actions described above.

In the Memorandum, the Audit staffrecommended that DK

provide evidence to demonstrate that the credit extended by Franklin National Bank was

in the ordinary course of business, and did not represent a contribution. Further, with

respect to the overdrafts, DK was to provide documentation that the accounts were

subject to automatic overdraft protection; the overdrafts were subject to a definite interest

rate which is usual and customary; and there was a definite repayment schedule. The

information provided was also to include examples of other clients ofsimilar size and

risk for which similar services have been provided.

With respect to Franklin National Bank, the response notes

that over the course ofthe campaign, DFP and DK opened various lines of credit and

loans with Signet Bank and Franklin National Bank to cover matching funds which were

not paid in early 1996, to secure vendor services, overdraft coverage, borrowing against

funds due the campaign and other credit agreements made in the normal course of

business. As such, DK notes these agreements do not qualify as contributions to the

campaign under 11 CFR §11 0.7(b)(11). DK goes on to explain that the campaign

This was the second line of credit between Franklin National Bank and DK. Previously, Franklin

National Bank had provided DK with a $546,200 line of credit on July 19, 1996. DK fully repaid

this line of credit in a timely manner. All lines of credit complied with the provisions of II CFR

§100.7(b)(lI).

12
generally used certificates ofdeposit to secure its letters of credit. Most letters of credit

were established during the primary, with some new vendors added during the general

election and some existing vendors requiring additional deposits during the general

election. Letters of credit already in place when the general election began were

transferred to DK from DFP, with underlying certificates of deposit. After the general

election, these letters of credit and the underlying certificates of deposit were transferred

back to DFP, which has been the lead committee during the windown phase ofthe

campaign. The response concludes, thus, none ofthese transactions resulted in

contributions to DolelKemp.

DK's response does not provided any ofthe requested

information and does not specifically address the overdrafts. Therefore, the conclusion

reached in the Memorandum, that DK received a contribution from Franklin National

Bank that amounted to as much as $933,984 on November 4,1996, is unchanged.

The Commission voted to receive this finding without any

determination by the Commission on the merits ofthe analysis ofthe facts or the

interpretation ofthe law contained herein.

B. EXCESSIVE CONTRIBUTION MADE BY GELAC- PRIMARY EXPENSES

PAID BY THE GELAC

Section 44Ia(a)(I)(A) ofTitle 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 100.7(a)(I) ofTitle 11 ofthe Code of Federal Regulations states,

in part, that the term contribution includes a gift, subscription, advance, or deposit of

money or anything of value made by any person for the purpose ofinfluencing any

election for Federal office. The term anything ofvalue includes all in-kind contributions.

Section 9003.4(a) ofTitle 11 ofthe Code of Federal Regulations states, in

part, that a candidate may incur expenditures before the beginning ofthe expenditure

report period ifsuch expenditures are for property, services or facilities which are to be

used in connection with his general election campaign and which are for use during the

expenditure report period.

Section 9002. 12(a) ofTitle 11 ofthe Code of Federal Regulations states,

in part, that expenditure report period means, with respect to any Presidential election,

the period oftime which begins on the date on which the major party's presidential

nominee is chosen and ends 30 days after the Presidential election.

Sections 9034.4(e) ofTitle 11 ofthe Code of Federal Regulations

discusses the attribution of expenditures between the primary and general election

spending limitations. Subsection (e)(I) sets forth the general rule that expenditures for

13
goods and services to be used exclusively in the primary campaign shall be attributed to

the primary spending limitation, and expenditures for goods and services to be used

exclusively in the general election campaign shall be attributed to that spending

limitation. Subsections (e)(3), (6), and (7) provide guidance with respect to specific

categories ofexpenditures as described below:

• Expenses for the usage of offices or work performed on or before the date ofthe

candidate's nomination shall be attributed to the primary election, except for

periods when the office is used only by persons working exclusively on general

election campaign preparations.

• Costs of a solicitation shall be attributed to the primary election or to the GELAC,

depending on the purpose of the solicitation. If a candidate solicits funds for both

the primary election and for the GELAC in a single communication 50% ofthe

cost ofthe solicitation shall be attributed to the primary election, and 50% to the

GELAC.

• Expenditures for campaign-related transportation, food and lodging of any

individual, including the candidate, occurring prior to the date ofthe candidate's

nomination shall be attributed according to when the travel takes place. If the

travel takes place on or before the date of the candidate's nomination, the cost is a

primary election expense. Travel to and from the convention shall be attributed to

the primary election. Travel by a person who is working exclusively on the

general election campaign preparations shall be considered a general election

expense even ifthe travel occurs before the candidate's nomination. (emphasis

added)

Prior to the 1996 election cycle, substantial effort was dedicated to

determining whether expenditures made in the late primary period had a primary or

general election purpose. In the 1992 election cycle, a number of expenditures made in

the primary period by both mqior party candidates were questioned as possible general

expenses. Both the Bush and Clinton committees argued convincingly in response to

their respective preliminary audit findings that most disbursements made prior to their

candidate's date of nomination were necessarily made on behalfofthe primary campaign.

In 1995, the Commission formulated new regulations found at 11 CFR

§9034.4(e) which codified the position adopted when the 1992 audit detenninations were

made. For 1996, the major factor considered when reviewing expenditures and making a

determination to which election they relate [primary or general] is when the expenditure

was incurred. The key date is the date that the party nominates its candidate. Expenses

incurred before that date are presumed to be for the primary campaign, while expenses

incurred after that date are presumed to be for the general election campaign. Limited

exceptions are provided, but such exceptions require a definite showing of exclusive use

14
for the election other than that indicated by the date. Allowing exceptions to be granted

easily would have the effect ofinvalidating the rule.

By March 31, 1996, DFP reported having only $2 million in spending

limitation remaining, but was four and one half months from the end ofthe primary

campaign period. Given this situation, the Audit staff, using the newly formulated

regulations as guidance, perfonned a detailed review of expenses incurred by the

GELAC, before the Candidate's August 14, 1996 date of ineligibility. The results of

those reviews are presented below.

The GELAC registered with the Federal Election Commission on

February 15, 1995. Between registration and August 14, 1996, the GELAC spent

$1,405,245, and shared staff and offices with DFP. For the first eleven months, the

GELAC accepted only contributions that were redesignations of contributions initially

made to DFP and incurred little in the way of expenses. In January 1996, GELAC began

paying salaries to stafffonnerly paid solely from DFP fund-raising accounts, and began

soliciting direct contributions. These solicitations were frequently done jointly with DFP.

An initial review ofthe GELAC disbursements made prior to Senator Dole's nomination,

identified expenditures of approximately $950,000 that were correctly attributed to the

GELAC in the primary period. However, expenditures of$454,404 attributable to DFP

were also identified.

Ofthe $454,404 in DFP disbursements, salaries accounted for $210,262

and overhead $115,302. Overhead expenses included office supplies, computer hardware

and software, telephone costs, and charges for other office equipment. Under I I CFR

§9034.4(e)(3) these salary and overhead expenses were viewed as primary campaign

expenses unless it could be demonstrated that they relate to periods devoted exclusively

to the general election effort. No such showing was made. The balance ofthe primary

disbursements, $128,839, were for travel, including some expenses related to attending

the Republican National Convention, and the primary share ofjoint solicitation costs.

Approximately $93,000 ofthe $128,839 was spent on two fund-raising projects.

On April 11 and 12, the campaign held a series offund-raising events in

Memphis, Tennessee, and Dallas, San Antonio and Houston, Texas, described as a

compliance trip. All associated costs, including advance travel costs, air charter expense,

plane catering, ground transportation, press filing center costs and solicitation costs, were

paid by the GELAC. An invitation for the Memphis event contained ajoint solicitation

for DFP and for the GELAC. This, along with the fact that over seventy percent ofthe

contributions received and attributed to these fund-raisers was deposited to primary

accounts, establish that the events were joint solicitations. As a result, travel costs of

$57,267, are primary expenses pursuant to 11 CFR §9034.4(e)(7). Additionally, half of

all solicitation costs related to the fund-raisers, $32,603 are DFP expenses pursuant to 11

CFR §9034.4(e)(6).

15
The second instance of a joint solicitation funded by the GELAC was a

"Lawyers for Dole" event held in Chicago on July 19, 1996. A solicitation device for this

event requested contributions for both the DFP and the GELAC. This time 45% ofthe

receipts attributed to this event, $58,675, were deposited in the primary accounts. The

GELAC paid $2,887 ofthe primary share ofthe solicitation costs.

At the close offieldwork, campaign officials were provided a schedule of

GELAC expenditures identified as having been made on behalfofDFP. DFP provided

documentation in response, and where appropriate, adjustments were made to the total

presented here.

The Exit Conference Memorandum provided to DFP recommended that

DFP provide documentation which demonstrated that disbursements in the amount of

$454,404 made by the GELAC were not DFP expenses pursuant to 11 CFR §9034.4(e).

Absent such a demonstration, the Audit staffstated that it would recommend that the

Commission determine that these expenses are attributable to the DFP spending

limitation and that the amount is due to the GELAC.

DFP responded to that Memorandum as follows:

"The attached documents establish that payments made by the Compliance

Committee were for expenditures for overhead and salaries incurred

exclusively for the benefit ofthe Compliance Committee. See Exhibit 7.

Indeed the Audit Stafffocuses on costs incurred for facilities and

expanded work space that would be used by the Compliance Committee

exclusively in the general election campaign. This rebuts the presumption

that expenditures incurred prior to the date ofa candidate's nomination

should be allocated to the primary election. 11 C.F.R § 9304.4(e);[sic]

Financial Control Compliance Manual for Presidential Primary Candidates

Receiving Public Financing Chapter I, Section C(2)(c).

"With respect to the fundraisers in Texas and Tennessee referenced by the

Audit Staff, DFP has pro-rated between the Committees the costs ofthe

fundraisers and travel thereto in accordance with he Commission's

regulations at 11C.F.R. 9034.4. Indeed, when travel costs were related to

a dual fundraising purpose, the Primary Committee diligently followed the

Commission's procedure for allocating such expenditures between the

Primary Committee and the Compliance Committee. See II C.F.R.

9034.7.

"Thus, only $35,317 is owed to the Compliance Committee."

Exhibit 7 to the response to the Memorandum consists of copies of

documents such as invoices, check requests and tissue copies ofthe checks that were

reviewed during the audit field work. These documents do not show that expenditures

16
made by the GELAC were exclusively for general election purposes. The only evidence

of exclusive GELAC activity is DFP's statement to that effect. During the period in

question the GELAC was principally engaged in fundraising. In point offact, most ofthe

fund-raising was done jointly between GELAC and DFP. This fact seems to refute any

claim ofexciusivity.6 As noted in DFP's Memorandum, ofthe disbursements

reclassified, salaries accounted for $210,262 and overhead $115,302. The balance,

$128,839, were for travel, including some expenses related to attending the Republican

National Convention, and the primary share ofjoint solicitation costs. The reclassified

expenditures were not as DFP suggests in their response predominately "costs incUlTed

for facilities and expanded work space."

DFP concedes that some ofthe costs associated the fund-raisers? in Texas

and Tennessee should have been allocated, including a portion ofthe related travel

expense. For the allocation oftravel expenses DFP cited 11 CFR §9034.7. However that

section deals primarily with the allocation oftravel costs between campaign and noncampaign purposes and the use of government conveyance. Neither subject is relevant to

the matters at hand. All campaign travel in the primary period, ifit cannot be exclusively

attributed to the general campaign, is an expense ofthe primary campaign as outlined at

II CFR §9034.4(e)(7). Section 9034.4(e)(6) ofTitle 11 ofthe Code of Federal

Regulations states that the cost ofcommunications that solicit contributions for both the

GELAC and the primary campaign will be allocated equally between the two. Given

these rules the allocation ofthe fundraising and travel costs in the DFP Memorandum is

correct. The solicitation (event) costs are allocated equally between DFP and the GELAC

and the travel costs are attributed to DFP.

Since no demonstration has been made that the GELAC was exclusively

engaged in activity related to the general election, the conclusion remains that the

GELAC made disbursements in the primary period on behalf ofDFP. Such

disbursements constitute a contribution from the GELAC to DFP. However it was

determined that the salaries of fundraising personnel could be included among the cost of

the joint solicitations. The amount ofthose salaries is $153,394 with 50%, or $76,697,

being attributable to the GELAC. Therefore, the contribution is $377,186 ($454,404

from the DFP Memorandum - $521 refund - $76,697 in fundraising salaries).

The Commission voted to receive this finding without any determination

on the merits ofthe analysis ofthe facts or the interpretation ofthe law contained herein.

While it is DFP's intention to apply the general rule found at 11 CFR 9034.4(e)(l), it

fails to establish the exclusivity of purpose required for its application. Instead DFP

simply says that GELAC is exclusively occupied with GELAC matters despite the fact

that GELAC is mailing joint solicitations and engaging in joint events for both the

GELAC and DFP. Under such circumstances, the brightline regulations at 11 CFR

9034.4(e)(3), (4), (6) and (7) apply.

DFP does not address the Lawyers for Dole fund raiser.

17
C. MISSTATEMENT OF FINANCIAL ACTIVITY

Sections 434(b)(1), (2) and (4) ofTitle 2 ofthe United States Code state,

in relevant part, that each report shall disclose the amount of cash on hand at the

beginning of each reporting period, the total amount of all receipts, and the total amount

of all disbursements for the reporting period and calendar year.

1. Dole/Kemp '96, Inc.

The Audit staffs reconciliation ofDK's reported financial activity

to its bank activity, from the date ofthe first bank transaction, April 30, 1996, through

December 31, 1997, revealed that DK had misstated its receipts, disbursements and cash

on hand balances. DK did not provide the Audit staffwith workpapers detailing how its

reported activity was calculated.

a. April 30, 1996 through December 31, 1996

DK reported total receipts of$79,139,998. Utilizing DK's

financial records, the Audit staff determined that DK should have reported total receipts

of$82,369,908. Therefore, receipts were understated by $3,229,910. The net

understatement ofreceipts resulted primarily from DK's failure to report: a $2,000,000

loan from DFP (see Finding II.A.2.a.); transfers from the GELAC totaling $946,795;

refunds from the press of $282,610; and, vendor refunds of $7,653. In addition, a net

overstatement oftransfers from DFP of $8,839, the overstatement of a draw on a line of

credit of $325 and an unexplained difference of $2,016 contributed to the misstatement.

Total reported disbursements were $78,707,989. DK

should have reported total disbursements of$81,121,627. Therefore, disbursements were

understated by $2,413,638. The understatement resulted mainly from DK's failure to

report: a $2,000,000 loan repayment to DFP (see Finding II.A.2.a.); transfers to the

GELAC in the amount of$23 1,051; credit card charges associated with the collection of

reimbursements from the press who traveled with the campaign, totaling $245,722; and,

interest paid on a line of credit of$7,458. In addition, the understatement offour

disbursements by $35,999, the reporting of voided checks totaling $109,135 and an

unexplained difference of $2,543 contributed to the misstatement.

DK reported an ending cash on hand balance of $432,010

on December 31, 1996. This amount was understated by $816,272. This understatement

resulted from the misstatements detailed above. The correct ending cash balance was

determined to be $1,248,282. Further, DK's beginning cash on hand balance at January

I, 1997 needed to be corrected to reflect the same amount of $1 ,248,282.

18
b. January 1, 1997 through December 31, 1997

DK reported total receipts of$3,846,006. The correct

amount was $2,571,496. Therefore, reported receipts were overstated by $1,264,509.

The overstatement ofreceipts resulted primarily from DK's reporting as receipts

interaccount transfers totaling $1,551,000. In addition, DK failed to report: vendor

refunds of$7,337; interest earned in the amount of$36,924; transfers from DFP of

$180,192; and, transfers from the GELAC totaling $97,964. Finally, an overstatement of

refunds for press travel of$28,108, and an unexplained difference of$7,819 contributed

to this misstatement.

DK reported a cash on hand balance of$I,009,2188 on

December 31, 1997. The correct cash balance was $8,127. Therefore, the cash on hand

balance at December 31, 1997 was overstated by $1,001,091. The ending cash on hand

overstatement resulted from the receipts misstatements detailed above and DK's failure to

report disbursements totaling $24,854.

At a conference held at the conclusion offieldwork, the

Audit staff provided DK representatives with documentation explaining the

misstatements for each year. On April 6, 1998, DK filed amended Summary and

Detailed Summary pages which materially corrected the misstatements detailed above.

Subsequently, the appropriate Schedules A-P and B-P were also filed.

In the Memorandum, the Audit staffrecommended no

further action with respect to these matters. In its response, DK notes it amended its

reports as the Audit staffsuggested during the preliminary audit stage.

2. Dole/Kemp '96 Compliance Committee, Inc.

The reconciliation ofthe GELAC's reported financial activity to

bank activity from its inception, February 13, 1995, through March 31, 1997, determined

that the GELAC had misstated receipts, disbursements and cash on hand balances. Like

DK, the GELAC did not provide the Audit staff with workpapers detailing how its

reported amounts were calculated.

The reported ending cash on hand does not foot, since the original reports were used to determine

DK's reported amounts for 1997. On the original reports, cash on hand at January 1, 1997 was

$432,010. On October 15, 1997, OK filed amended reports for the 1996 Post General, 1996 Year

End and the July 15, 1997 quarterly reports which disclosed transfers from the GELAC for

allocated expenses and transfers to the GELAC for allocation corrections. The reporting ofthese

transfers resulted in an increase in cash on hand of$528,000 for the October IS, 1997 quarterly

report and the Year End, 1997 report.

19
a. February 13, 1995 through December 31, 1995

The GELAC reported total receipts of$721,164. Utilizing

the GELAC's financial records, it was determined that the GELAC should have reported

total receipts of$701,008. Therefore, receipts were overstated by $20,156. This

overstatement results from the reporting of$15,463 in contributions redesignated from

DFP which were never actually transferred to the GELAC; and an unexplained difference

of$4,693.

The GELAC reported total disbursements of$18,701. It

should have reported total disbursements of $20,701. As such, disbursements are

understated by $2,000. The understatement resulted from a $1,000 contribution refund

reported twice, a $2,000 math error on the GELAC's Year End (October I to December

31) disclosure report, and the GELAC's failure to report a $1,000 transfer made to DFP.

The GELAC reported a cash on hand balance on December

31, 1995 of $702,463. After correcting for the errors noted above, the correct ending

cash-on- hand balance was $680,307. Thus, cash.on hand was overstated by $22,156.

b. January 1, 1996 through December 31, 1996

The GELAC reported total receipts of$4,596,736 in 1996.

The correct amount was $4,809,657. Thus, reported receipts were understated by

$212,921. The understatement was due to the GELAC's failure to report $231,280 in

transfers from DK; the over reporting oftravel reimbursements from the press by

$30,902, and an unexplained under reporting ofreceipts by $12,543.

The GELAC reported total disbursements of$4,699,525.

The correct figure was $5,470,830, resulting in an understatement of$771,305. The

understatement was due to: $720,187 in unreported transfers to DK; $85,980 in other

unreported disbursements; over reported disbursements of$26,522 resulting from both

disbursements that were reported twice and from disbursements that were reported but

not paid; a $7,000 math error on the GELAC's' August Monthly (July I to July 31)

report; and, an unexplained difference of $1 ,341.

The GELAC reported a cash on hand balance on December

31, 1996 of $599,692. The correct cash balance was $18,487. Therefore, the ending cash

on hand balance was overstated by $581,205. This overstatement resulted from the

misstatements detailed above for both 1995 and 1996.

c. From January 1, 1997 through March 31, 1997

During the first three months of 1997, the GELAC reported

total disbursements of $263,058. The GELAC should have reported total disbursements

20
of$298,608. Therefore, its disbursements were understated by $35,550. The Audit staff

determined that the understatement in reported disbursement activity was due to the

GELAC's failure to report $23,417 in transfers to OK, its failure to report $11,589 in

other disbursements, and an unexplained difference of $544.

At March 31, 1997, the GELAC reported an ending cash on

hand balance of $648,903. After correcting for the errors noted in the foregoing sections,

and a $3,757 adjustment in 1997 reported receipts, the Audit staff determined that the

correct ending cash on hand balance was $35,905. Therefore, the GELAC's ending cash

on hand balance was overstated by $612,998.

During the course of audit fieldwork, the GELAC filed

amended disclosure reports for the three periods covered discussed above. These

amended reports materially corrected the 1996 reports. The amended reports filed for the

1995 and 1997 however, failed to correct all ofthe misstatements noted above. At a

conference held at the end offieldwork, the Audit staff provided GELAC representatives

with documentation explaining the misstatements for each year. The GELAC Officials

indicated that they would file the appropriate amended reports.

Subsequent to audit fieldwork, the GELAC filed amended

disclosure reports for 1995 and 1996 materially correcting the 1995 misstatement noted

above. When the Memorandum was prepared no amended report for 1997 had been filed.

In the Memorandum, the Audit staffrecommended that the

GELAC file an amended report to correct the misstatements in reported activity for 1997,

as well as appropriate Schedules B-P for reporting years 1995 and 1996 to disclose

disbursements which had not been itemized. In response, the GELAC has filed the

appropriate amended reports.

The Commission voted to receive this finding without any

determination on the merits ofthe analysis ofthe facts or the interpretation ofthe law

contained herein.

m. FINDINGS AND RECOMMENDAnONS - PAYMENTS TO THE U.S.

TREASURY

A. IN-KIND CONTRIBUTION-MEDIA EXPENSES PAm By HIE RNC

The RNC sponsored a television advertising program in the spring

and summer of 1996. It was argued by the DFP and the RNC that the ads featuring

Senator Dole andJor President Clinton were alleged "issue ads"9.

For the full presentation and discussion ofthis issue see Agenda Documents 98-88 and 99-50,

Finding lILA. and the audio tapes ofthe Commission's Open Session meetings on the following

21
In the audit report presented to the Commission, the Audit staff and the

Office ofGeneral Counsel (Staff) concluded that media expenditures in the amount of

$12,864,719 were attributable to DK. This amount was reduced by $1,233,341, the

remaining 2 U.S.C. §441a(d) Coordinated Expenditure limitation as calculated by the

Staff. The net amount applicable to DK's spending limitation was $11,631,378.

After considering this finding, the Commission directed the Audit staffto

remove the discussion and recommendation in this section and to insert a discussion of

the same matters into its report on the Dole for President (Primary). See Section III.AA.

ofthe Dole for President, Inc. audit report.

B. ApPARENT EXCESSIVE PRESS AND SECRET SERVICE REIMBURSEMENTS

Sections 9004.6(a) and (b) ofTitle I I ofthe Code of Federal Regulations

provide, in part, that expenditures by an authorized committee for transportation, ground

services or facilities (including air travel, ground transportation, housing, meals,

telephone service, and typewriters) made available to media or Secret Service personnel,

will be considered qualified campaign expenses, and, except for costs relating to Secret

Service personnel, subject to the overall spending limitation at 11 CFR §9003.2(a).

Further, the amount ofreimbursement sought for such expenditures shall not exceed

110% of either: the individual's pro rata share ofthe actual cost ofthe transportation and

services made available; or a reasonable estimate for the individual's pro rata share ofthe

transportation and services made available. An individual's pro rata share is calculated by

dividing the total number ofindividuals to whom such transportation and services are

made available into the total cost oftransportation and services. Any reimbursement

received in excess ofthis amount shall be disposed ofin accordance with 11 CFR

§9004.6(d)(I).

Section 9004.6(c)(l) ofTitie 11 ofthe Code of Federal Regulations

provides, in relevant part, that the committee may deduct from the amount of

expenditures subject to the overall expenditure limitation the amount ofreimbursements

received from media representatives in payment for the actual cost oftransportation and

services described in paragraph (a) of this section. This deduction shall not exceed the

amount the committee has expended for the actual cost oftransportation and services

provided. The committee may also deduct from the overall expenditure limitation an

additional amount ofreimbursements received equal to 3% ofthe actual cost of

transportation and services provided under this section as the administrative cost to the

committee of providing such services and seeking reimbursement for them. Ifthe

committee has incurred higher administrative costs in providing these services, the

committee must document the total cost incurred for such services in order to deduct a

higher amount ofreimbursements received from the overall expenditure limitation. For

dates: December 3rd, 9th, and 10th 1998, January 14th and 28th, February 3rd and 25th, March

4th, and April 29, 1999.

22
purposes ofthis paragraph, "administrative costs" includes all costs incurred by the

committee in making travel arrangements and seeking reimbursement, whether these

services were performed by committee staff or by independent contractors.

Section 9004.6(d)(I) ofTitle 11 ofthe Code of Federal Regulations

provides, in relevant part, that reimbursements received in excess of 110% ofthe actual

pro rata cost of the transportation and services made available to a media representative

shall be returned to the media representative.

During fieldwork, the Audit staffreviewed records relative to four aircraft

operated by DK: One was utilized for Mrs. Dole's campaign travel; one was used for

Secretary Kemp's campaign travel, and two were used for Senator Dole's campaign

travel. As a result ofthe various reviews performed, it was determined that DK had over

billed members ofthe traveling press (Press) and United States Secret Service personnel

(Secret Service) traveling aboard the aircraft used by Senator Dole and Secretary Kemp.

Further, the review of documentation in support ofamounts billed to the Press indicated

that some ofthese costs were event related, not ground costs and other services as

permitted under 11 CFR §9004.6.

The greatest portion ofthe over billing arose from the DK estimate ofthe

direct, and indirect, hourly cost of each aircraft. DK used the calculated hourly cost of

each aircraft and the elapsed time for each flight to calculate the airfare to be billed to the

Press and Secret Service. The contracts for these aircraft contained a fixed price and

specified the maximum number of hours that could be flown at that price. This required

DK to estimate not only the variable costs (such as fuel, landing fees, catering, etc.)

related to operating the aircraft, but also estimate the total number of hours to be flown by

each aircraft. These estimates were revised several times during the campaign. The

estimated hourly rate used by DK increased as the campaign progressed and then dropped

slightly prior to the campaign's conclusion. The Audit staff determined the hourly rate

for each aircraft by accumulating all operating costs and dividing that total by the actual

number ofhours flown by each aircraft. That calculation resulted in a significantly lower

average hourly cost for the aircraft used by Senator Dole and Secretary Kemp than used

by DK to bill the Press and Secret Service.

The Audit staff also took exception to some ofthe other costs billed to the

Press. Members ofthe Press were billed for sound and lighting equipment which appear

to be event-related, not ground costs. Additionally, the Press was billed for such items as

spotlights, port-a-johns, security personnel, barricades, etc., which again appear to be

event-related costs. Finally, catering expenses were adjusted in those instances where the

quantity ofthe food and drink billed to the Press was in excess of their needs (for

example, 20 traveling press billed for 40 dinners) or which may have been for an event.

The number and type of vehicles supplied by DK for the Press was also

evaluated. DK billed the Press for buses and vans utilized in motorcades and for other

23
transportation needs. In some instances, it was determined that the Press was billed for

vehicles which were either not used by them, or far exceeded their seating needs; 10

Lastly, the estimated amounts used by DK to bill the Press accompanying

Secretary Kemp for telephones exceeded what should have been billed based on the

actual costs incurred as documented during the audit fieldwork.

The Audit staff reviewed DK workpapers and other documentation used to

determine the amounts to be billed to the press traveling with Senator Dole and Secretary

Kemp. It was determined that DK had received excessive reimbursements from the press

traveling with both Senator Dole and Secretary Kemp. Further, the Secret Service

traveling with Senator Dole had been over billed.

At the conference held at the conclusion offieldwork, the Audit staff

informed DK representatives of the these matters and provided them with copies ofthe

workpapers. Further, DK representatives were advised that this matter impacted

expenditures subject to the overall spending limitation. The amounts determined to be in

excess ofcost associated with Press travel can not be used, as it was by DK, to offset

expenditures subject to the spending limitation. Similarly, any amount determined to be

in excess ofthe cost oftransportation provided to the Secret Service can not be used to

offset expenditures subject to the spending limitation.

Subsequent to that conference, DK representatives submitted

documentation and workpapers detailing additional press related costs, to include an

analysis of administrative costs associated with this program. A narrative was also

provided which addresses the Audit staffs exclusion of various costs. Finally, the DK

response briefly addresses the overpayment received from the Secret Service.

DK argued that underpayments by the Secret Service for travel on the

other aircraft should more than offset the overpayment received for travel on the Dole

plane. The Audit staff did not agree. The Secret Service reimburses for travel based on

the lower of cost or first class airfare, the maximum amount it will reimburse. What DK

characterized as "underpayments" were the result ofthe amounts billed by DK exceeding

the maximum reimbursable amount. Over billings for other travel cannot be used to

increase the Secret Service's maximum reimbursable amount. Therefore, when the

Memorandum was prepared the amount due to the Secret Service, $20,429, remained

unchanged.

DK also provided documentation and analyses with respect to each ofthe

aircraft supporting additional telephone, ground and press filing center costs which were

not previously billed to media representatives. The Audit staffreviewed this

documentation and adjusted the analyses accordingly.

10 A minimum of two seats per press traveler was allowed.

24
Finally, in its narrative, DK took exception to the Audit staffs exclusion

of certain costs, which it felt could be billed to the Press. However, DK failed to provide

any documentation in support of any ofthe examples it used, nor was documentation

provided relative to specific items excluded. Each area of concern is discussed below.

With respect to "Quantity of Press Services," DK stated that press costs

which the Audit stafffeit were excessive were disallowed. "For instance, if four press

buses were used and the auditors felt three were enough, then the cost ofthe fourth bus

was disallowed. Another example is catering. Ifthe invoice says catering for 100 and

there were 75 press, then the auditors are disallowing 25% ofthe cost." DK argued that

its Advance staff was required to make accommodations based on the trip logistics and

anticipated number oftraveling press. DK noted that simultaneous movements ofthe

press would require an additional vehicle; and, in any case, two seats were provided for

each press person to accommodate the individual and his or her equipment. Regarding

catering, DK noted an example where although breakfast for 75 was ordered, there were

complaints after half the press had eaten and another 75 breakfasts were ordered. DK

noted that the auditors would disallow 50% ofthe cost.

The Audit staffnot only allowed the cost of vehicles based on two seats

per press person, but also considered the use of both vans and buses in transporting the

press. Additionally, DK's own analyses, itineraries, and manifests were used to make

these determinations and they establish that the number oftraveling press was relatively

constant. Finally, DK did not address the more significant examples identified with

respect to transportation, which included billing the Press for the cost of using eight (8)

buses to transport people to a rally, and, billing the Press for vehicles that were not used

by them. The cost of catering was pro rated based on the number oftraveling press.

However, allowances were made for uncertainty and press preferences, resulting in only

the more significant cases being adjusted, for example, the cost of catering a barbecue for

500 people, which DK had billed in its entirety to the approximately 20-25 press traveling

with Secretary Kemp. Alternatively, 90 meals for 80 press would not have been prorated.

Finally, DK failed to provided any documentation to support either its examples or to

document specific items disallowed and which DK feels could have been billed to the

Press. These differences may be the result ofDK accommodating local press in

determining the level ofservices to provide; however, these additional costs calIDot be

billed to the traveling press.

Next, DK's response stated that ifsomething was not on the schedule, the

auditors assumed that it was not for the Press and disallowed the cost. The example cited

was where no time was scheduled for filing by the Press, then the cost ofthe press filing

center was not allowed. DK explained that services provided to the press were dictated

by circumstances on the ground and not on the schedule. DK noted that although a staff

person attempted to be as current as possible, the schedule is only as accurate as what the

staff person knew at the point in time it was last printed. The schedule (itinerary) is the

only evidence available. As such, unless DK can document that time was made available

for the Press to use the filing center, or provide other evidence that the filing center was

25
used by the Press, the Audit staffstands by its determination that the Press can not be

billed for services acquired but not made available to them. It was acknowledged that

costs which could not be associated with press travel were not allowed.

The response stated that DK felt, in some cases, security was deemed

necessary for a press filing center, either for crowd control during an event or for security

prior to an event. Usually, the press risers were front and center and members ofthe press

would complain if people from the crowd came into the press area. Also, according to

DK, security was required prior to an event to prevent theft and vandalism. DK's

explanation seems to reinforce the position that these security costs were more event

related and not provided to accommodate the Press. Again, DK failed to identify and

document specific examples.

DK's narrative continued by noting that the auditors disallowed

generators. DK explained that power was needed to run laptop computers, lights, or for

the mult-box and other audio equipment necessary in the filing center; and, that the Press

was billed separately from that used by the campaign for the event. However, DK's

arguments were not supported by documentation, itineraries or other evidence detailing

specific events or applicable travel legs where the exclusion was in error.

Noting that the "...auditors usually disallowed sound cost when it exceeded

several hundred dollars," the response explained that such costs could exceed this

threshold. The response noted that the auditors also disallowed all lighting and explained

that the press would be billed for those situations where the lighting would not be there

just for the event; for example, an outdoor event. Further, allowing the press to be

responsible for their own lighting needs would have created logistical problems. The

Audit staff did not disagree that sound costs could exceed several hundred dollars;

however, this was not the standard by which it was determined whether amounts were

billable to the Press. DK appeared to be confusing this with the fact that only those travel

legs that resulted in several hundreds of dollars being billed to each press person for filing

center costs were reviewed in detail. In addition, there may have been legitimate press

lighting requirements. However, based on the documentation available, the Audit staffs

exclusion of certain sound and lighting costs remained unchanged.

DK noted that the auditors allowed only one-half ofthe cost for luggage

trucks and suggested it should be billed proportionally based on the number oftravelers.

DK was mistaken. Absent specific examples, the Audit staffmaintained that these costs

were allocated proportionately as suggested.

Similarly, DK argued that pipe and drape costs disallowed by the auditors

were used at some events to cordon off a press filing area from the crowd. Again, no

documentation was provided, nor specific examples cited, and absent such additional

information, no adjustment was made.

26
Lastly, although DK expressed its concern over various miscellaneous

costs excluded by the auditors, such as bellhop tips, fencing for filing centers and room

rental costs; it failed once more to provide examples and documentation to support

specific costs excluded. Generally, the Audit staff allowed press related tips and fencing

proportionately, if documentation was available.

Prior to preparation of the Memorandum the documentation provided by

DK was reviewed and the calculations adjusted accordingly. In the Memorandum each

aircraft was discussed separately. The Memorandum concluded that with respect to the

Dole aircraft, DK had received excess reimbursements from the Secret Service in the

amount of$20,429 and had received excess reimbursements from the Press in the amount

of$565,669. With respect to the Kemp aircraft, the Memorandum concluded that DK

had received excess reimbursements from the Press in the amount of $315,672

Additionally, the Memorandum noted that this matter also impacts

expenditures subject to the overall spending limitation. The amounts that were

determined to be in excess of cost associated with Press travel could not be used, as it was

by DK, to offset expenditures subject to the spending limitation. Similarly, any amount

determined to be in excess of the cost oftransportation provided to the Secret Service

could not be used to offset expenditures subject to the spending limitation. The Audit

staff adjusted the analysis of expenditures subject to the spending limitation presented in

the Memorandum accordingly. Additionally, the amounts were recognized as payable on

the Statement ofNet Outstanding Qualified Campaign Expenses (NOQCE) included with

the Memorandum.

In the Memorandum, the Audit staffrecommended that DK submit

documentation to demonstrate that excessive reimbursements had not been received from

the Press. Absent such a demonstration, the Audit staff would recommend that the

Commission determine that DK was required to refund, on a pro rata basis, the excessive

reimbursements it had received from the Press, as well as, any amount determined to be

refundable to the Secret Service. Further, these amounts would be added to DK's

expenditures subject to the spending limitation.

In its response to the Memorandum, DK states that the amount which the

Audit Staff has established as the permissible hourly rate to charge the Press is unfairly

low. The actual hourly cost of operating the aircraft was higher as demonstrated by the

enclosed material. Based on this correct cost, DK charged the Press 110% ofthe cost of

operating the aircraft as permitted under 11 CFR §9004.6.

Additionally, DK's response states that:

"The attached documents also establish that all ofthe expenses attributed by

DolelKemp to the Press were for services or facilities provided for the exclusive

use of the Press as permitted underll CFR §9004.6. As the Audit Staff

acknowledges, Commission regulations explicitly entitle a Presidential campaign

27
committee to incur expenses on behalf of the press for travel, food, and ground

services and facilities. Id. The following briefly summarizes the types of

documents which are attached.

"These documents provide specific examples ofthe expenditures for security, pipe

& drape, audio visual equipment, generators and other ground services needed or

requested by the Press. For example, lighting at outdoor daytime events was

necessary to ensure clear pictures for the Press. This would not have been done

had the Press not required it. See statement ofKim Fuller at Exhibit 4.

"The attached documents also explain that Dole/Kemp reasonably estimated the

transportation and catering requirements ofthe Press II. These estimates were

based on anticipating press needs and responding to express Press complaints

about the inadequacy and inferiority ofservices while maintaining the flexibility

required by event logistics. For example, when simultaneous events were

scheduled, DK could not predict which members ofthe Press would attend which

event. Thus, additional means oftransportation to and food at those events were

necessary. In other instances, extra food was ordered in response to on the spot

Press complaints about insufficient quantities offood. It would be unreasonable

and unfair to require that a committee underestimate anticipated Press attendance

or ignore Press complaints. Thus, the Audit Staffshould recognize that these

expenses were legitimately charged to the Press.(Text offootnote omitted)

"Finally, Dole/Kemp has explained that many costs that could have been

legitimately passed onto the Press were paid by Dole/Kemp. See Exhibit 3. Thus,

Dole/Kemp had no need or incentive to fabricate Press expenses with such

legitimate but unreimbursed expenses available to it.

"Thus no amount must be refunded to the Press or added to Dole/Kemp's

expenditures subject to the spending limit."

In the statement from Kim Fuller, Director of Press Advance for DK,

referenced in the response, she states that she has done this type ofwork for the past nine

years, including press advance for the Bush White House. The statement notes that the

amount and type offacilities and transportation which were provided were adjusted over

time based on interaction with, and the needs ofthe Press. She explains that each event

would not necessarily have a filing center, but there would be a filing center in every city.

Even ifthere was no specific filing time noted on the schedule, the standard procedure

was to always provide at least one filing opportunity in each city. In some cases, press

filing centers were wired for sound and video, as some press would cover these events

from there. The number oftelephone lines increased over time not only as a result of an

increase in the number of Press, but also as a result ofthe limited filing time available in

some instances. With respect to vehicles, she states that the guiding rule was to plan on

two seats for each person, one for the person and one for their equipment. However, in

some circumstances, when some press would go directly to an event, and others would go

28
directly to the filing center, even a 40 seat bus would not be sufficient for 20 people with

these two separate destinations.

Much ofDK's response consists of narratives which restate many ofthe

arguments advanced previously and are discussed above. With respect to the hourly rates

used to bill aircraft costs, the response notes that DK's disagrees with the hourly rates

used by the Audit staff, but fails to provide any specific errors in the calculations with

respect any ofthe aircraft.

In discussing services and facilities provided to the Press, DK provides no

support for its argument that the Press specifically requested that certain ground services

be provided. Further, the statement by Kim Fuller fails to note any specific examples

where the Audit staff was incorrect in its assessment of costs billable to the Press or

where there are errors in the analysis. Additionally, a copy of an agreement between the

White House Travel Office (WI-ITO) and the White House Correspondents' Association

was obtained. This agreement specifies which costs were billed to the Press for travel in

1996. While this agreement has no regulatory effect, it does represent an "arm's-length"

agreement covering an identical travel program. The agreement states, in part, that the

press will NOT be billed for "[s]ite expenses such as lighting, press risers, pipe and

drape, unless the item is ordered by the news organization itself, and the specific news

organization (e.g. TV Pool) will be billed." Not only is this agreement consistent with

many ofthe Audit staffs conclusions, ifit had been followed by DK, the amount billed to

the Press would have been less than that allowed by the Audit staff. For example, DK

billed substantial amounts for press risers that would not have been billed by the WHTO.

With respect to the refund due the Secret Service, the response notes that

DK has fully documented that all Secret Service reimbursements are legitimate under 11

CFR §9004.6. It goes on to say that DK has attached documents and accompanying

explanations that establish that it has not received sufficient reimbursements from the

Secret Service for costs associated with the Dole, Kemp and Mrs. Dole's aircraft. The

accompanying documentation states that after receiving the Memorandum, DK requested

information on the airplane costs that may be in question. It goes on to state that although

the Audit staff has not yet identified to DK any items that may be in question with respect

to the Dole aircraft, they have provided such information for the Kemp aircraft. The

Audit stafftakes exception to that statement. At the conference held at the conclusion of

fieldwork, the Audit staff provided computer diskettes to DK which contained

information for each aircraft detailing those costs which were accepted and those costs

which were not.

The response did contain some additional documentation that had not been

available previously. That documentation was reviewed and the Audit staffs calculations

were adjusted accordingly. It was also learned that since the calculations presented in the

Memorandum, DK has, with the help of a collection agency, collected an additional

$171,228 from the Press.

29
Each aircraft is discussed separately below. For ease ofpresentation,

Senator Dole's aircraft and the accompanying Press aircraft are treated as one.

1. Excess Reimbursements from the Secret Service and the Press

Aboard the Dole Aircraft

DK billed the Secret Service $526,449 for travel aboard the aircraft

utilized by Senator Dole and $48,731 for travel aboard the additional aircraft utilized by

the Press. The Secret Service, after its review ofthe amount billed for each leg flown by

its personnel, reimbursed DK only $484,378 and $47,132, respectively. Based on our

review, the amounts that could have been billed to the Secret Service were $421,772 for

the Dole aircraft and $43,983 for the Press aircraft. Therefore, DK has received excess

reimbursements from the Secret Service in the amount of$62,606 ($484,378 - $421,772)

relative to the Dole aircraft, and $3,148 ($47,132 - $43,984) relative to the Press aircraft.

However, because the Secret Service paid the lesser of its share ofthe aircraft cost, or first

class airfare, without access to its calculations, the amounts remain an approximation.

The amount of any excess reimbursement that is eventually determined, should be

refunded to the Secret Service. 11 This is a larger amount than was presented in the

Memorandum. The increase in the amount is due in large part to a reduction in the hourly

rate used to determine the amount which could have been billed. The reduction is due to

the correction ofa flaw in the original calculation. The 10% mark-up allowed for the

press had inadvertently been applied to the Secret Service.

Utilizing its workpapers, it was determined that DK billed the Press

traveling aboard the aircraft utilized by Senator Dole and the accompanying press plane, a

totalof$7,679,690. Through August, 1998, DK had received reimbursements from the

press totaling $7,701,413 and reported outstanding press accounts receivable of

$189,480. 12 Based on the revised analysis, the Audit staff calculated that the correct

billable amount (cost plus 10%) was $6,845,976. Therefore, DK received excess

reimbursements from the Press in the amount of $855,437 ($7,701,413 - $6,845,976).

Again this amount is larger than that presented in the Memorandum. The increase in the

amount is due to additional reimbursements received by DK and, as with the Secret

Service, a flaw in the original calculation. In the case ofthe Press, the 10% mark-up was

inadvertently applied twice.

2. Excess Reimbursements from the Press Traveling

Aboard the Kemp Aircraft

\l

12

For two other aircraft on which Secret Service personnel traveled, the amount reimbursed was less

than the amount detennined to be billable. However, the cost for some of the legs may exceed the

first class airfare. Therefore, the results of our work for all four aircraft will be provided to

appropriate Secret Service personnel when it becomes final.

The amount collected, when added to the reported accounts receivable, exceeds the amount

reflected in DK's billing workpapers. No explanation for the difference has been found.

30
DK billed the Press traveling aboard the aircraft utilized by

Secretary Kemp a total of$1,846,476. Through August 1998, DK had received

reimbursements of $1 ,902,793. Using the additional information provided with the

response to the Memorandum, the Audit staff calculated that the amount that DK could

have billed the Press (cost plus 10%) was $1,604,703. Therefore, DK received excess

reimbursements from the Press in the amount of$298,090 ($1,902,793 - $1,604,703).

This amount is less than that presented in the Memorandum. The difference is the result

of additional costs that were documented.

As explained above, Press and Secret Service reimbursements

received by DK were reported as offsets to expenditures subject to the limitation. As a

result, the amounts that were received in excess ofthe maximum amount billable to the

Press and the Secret Service must be refunded and applied to the spending limitation.

The amounts to be refunded and added to limitation are $1,153,527 for the Press and

$65,754 for the Secret Service. Also as previously noted, the Secret Service may

determine that a different amount is due. Further, any additional collections from the

Press will increase the refund amount due. The Audit staff has adjusted its analysis at

Finding lILC., Expenditure Limitation, by these amounts. Additionally, these amounts

are recognized as payable on the Statement ofNet Outstanding Qualified Campaign

Expenses (NOQCE) presented at Attachment I.

Recommendation

The Audit staff recommended that the Commission determine that DK is

required to refund $65,754 to the Secret Service and, on a pro rata basis, $1,153,527

($855,437 + $298,090) to the Press. It was further recommended that the Commission

determine that these amounts should be added to DK's expenditures subject to the

spending limitation.

The Commission approved the Staffrecommendation.

C. EXPENDITURE LIMITATION

Sections 441a(b)(l)(B) and (c) ofTitle 2 of the United States Code state,

in relevant part, that no candidate for the office of President ofthe United States who is

eligible under section 9003 of Title 26 to receive payments from the Secretary ofthe

Treasury may make expenditures in excess of $20,000,000 as adjusted for the increases in

the Consumer Price Index.

Section 9007(b)(2) of Title 26 ofthe United States Code states that ifthe

Commission determines that the eligible candidates of a political party and their

authorized committees incurred qualified campaign expenses in excess ofthe aggregate

payments to which the eligible candidates of a major party were entitled under section

31
9004, it shall notify such candidates ofthe amount ofsllch excess and such candidates

shall pay to the Secretary ofthe Treasury an amount equal to such amount.

Section 9004.4(a) ofTitle II ofthe Code ofFederal Regulations, in part,

limits the use ofsuch payments to expenditures for the following purposes: to defray

qualified campaign expenses; to repay loans that meet the requirements of 11 CFR

§100.7(a)(1) or §100.7(b)(11) or to otherwise restore funds used to defray qualified

campaign expenses; and to restore funds used in accordance with 11 CFR §9003.4 for

qualified campaign expenses incurred prior to the beginning ofthe expenditure report

period.

Section 9003.4(a) ofTitle 11 ofthe Code of Federal Regulations states, in

relevant part, that a candidate may incur expenditures before the beginning ofthe

expenditure report period ifsuch expenditures are for property, services or facilities

which are to be used in connection with his or her general election campaign. Examples

given include expenditures for establishing financial accounting systems, and

organizational planning.

To further clarify the rule at 11 CFR §9003.4(a), Section 9034.4(e)(I) of

Title 11 ofthe Code of Federal Regulations establishes the general rule for allocating

expenses between the primary and general elections for candidates who receive public

funding in both. The rule states that any expenditure for goods or services that are used

exclusively for the primary election campaign are attributable to primary election

limitations; and, any expenditure for goods or services that are used exclusively for the

general election campaign shall be attributed to general election limitations. Sections

9034.4(e)(2) through (7) address the attribution ofthe following expenses between the

primary and general campaigns:

- Overhead expenditures and payroll costs incurred in connection with

state or national campaign offices shall be attributed according to when usage occurs or

the work is performed. Expenses for usage of offices or work performed on or before the

date ofthe candidate's nomination shall be attributed to the primary election, except for

periods when the office is used only by persons working exclusively on general campaign

preparations;

- Campaign materials, such as bumper stickers, campaign brochures,

buttons and pens, that are purchased by the primary election campaign committee and

later transferred to and used by the general election committee shall be attributed to the

general election limits. Materials transferred to but not used by the general election

committee shall be attributed to the primary election limits;

- For media communications that are broadcast or published before and

after the date ofthe candidate's nomination, 50% ofthe media production costs shall be

attributed to the primary election limits and 50% to the general election limits.

32
Distribution costs, such as air time and advertising space in newspapers shall be

attributed depending when the communication is distributed or broadcast;

- Campaign communications such as solicitation costs shall be attributed

depending on the purpose ofthe solicitation. Ifthe solicitation is for both the primary

committee and the GELAC, the costs will be attributed 50% to each. Other campaign

communications shall be attributed based upon the date of broadcast, publishing or

mailing;

- Travel costs shall be attributed according to when the travel occurs. Ifit

occurs on or before the date ofthe candidate's nomination it will be considered a primary

election expense. Travel to and from the convention shall be attributed to the primary

election. Travel by a person who is working exclusively on general election campaign

preparations shall be considered a general election expense even ifit occurs before the

candidate's nomination.

Read together II CFR §§9003.4(a) and 9034.4(e) require that expenses

paid before the candidate's date of nomination in relation to the general election must be

for goods and services that are exclusively for the general election.

Further, II CFR §9003.4(b), in relevant part, limits the sources offunds

used to make expenditures prior to the expenditure report period to: a candidate

obtaining a loan which meets the requirements for loans in the ordinary course of

business; borrowing from his or her legal and accounting compliance fund; use ofthe

candidate's personal funds up to his or her $50,000 limit; and, for a candidate who has

received federal funding under II CFR part 9031 et seq., borrowing from his or her

primary election committee(s) an amount not to exceed the residual balance projected to

remain in the candidate's primary account(s) on the basis ofthe formula set forth at 11

CFR §9038.3(c).

Section 9004.9(d)(l) ofTitle 11 ofthe Code ofFederal Regulations states,

in part, that the term capital asset means any property used in the operation ofthe

campaign whose purchase price exceeded $2000 when acquired by the committee. The

fair market value of capital assets may be considered to be the total original cost ofsuch

items when acquired less 40% to account for depreciation.

The expenditure limitation for the 1996 general election for the office of

President ofthe United States is $61,820,000.

Based on a reconciliation ofthe DK's bank records to its reported activity

through December 31, 1997, the Audit staff determined that DK disbursed $84,930,086.

From this figure was deducted: loan repayments $4,096,289; the purchase ofCertificates

of Deposit from the DFP, $1,856,524; offsets to operating expenditures $14,000,112; net

reimbursements from the GELAC $2,601,302 for compliance related expenditures; nonqualified campaign expenses subject to repayment of$32,694; additional offsets to

33
; ...

operating expenditures collected from January 1, 1998 through September 30, 1998 of

$192,097; and, added $41,007 to this figure for wind down expenses incurred by OK

from January 1, 1998 through September 30, 1998 to arrive at operating expenditures

subject to the limitation of $62,192,075.

In addition, the following adjustments are necessary.

1. Amounts Due OK from the OFP

The Memorandum included accounts receivable 01'$751,236 owed

to OK by OFP. This amount included payments by OK for: a supporter list acquired

from OFP, $378,774; expenses relative to a telephone system, $18,628; media

production expenses, $106,204; primary expenses paid by OK, $207,378; interest earned

by OK but received by OFP, $10,230; undocumented assets purchased from OFP,

$28,546; and, OFP occupancy costs paid by OK $1,476. Each ofthese matters is

discussed below and any change in the amounts resulting from OK's response to the

Memorandum or the Commission's consideration ofthe audit report are noted. OK's

response to the Memorandum simply refers to the OFP response to the same issues in its

Memorandum.

a. Supporter List

OFP transferred supporter lists to OK in exchange for

$324,817 on May 31, 1996. This represented OFP's calculation of halfofthe list

development costs. An additional $53,957 was wired on July 2, 1996 to OFP from OK.

A recalculation ofthe list value accounted for this transfer. In the documentation

accompanying the second payment, OFP and OK value the lists at 60% ofthe cost of

828,227 names at $.40 per name and 60% of estimated development costs of $300,000.

From this it was concluded that OFP and OK regard the lists as capital assets and were

transferring them as such under the provisions of 1I CFR §9034.5(c)(1). However, OK

neither reports a subsequent sale ofthe supporter list nor includes it as an asset on OK's

statement ofNet Outstanding Qualified Campaign Expenses. Historically, campaign lists

have not been included among capital assets because there is a reluctance on the part of

the Commission to require their sale in order to settle campaign debts.

Using OFP's costs, their valuation of the supporter list is

approximately $.76 per name or $760 per thousand names. It should also be noted that

OFP representatives have maintained that the suppOlter list is not the OFP donor list.

Generally, a donor list is more valuable than a supporter list. One directory ofmailing

lists offers political supporter lists for $55.00 per thousand names. Clinton-Gore '96

contracted with Nan1es in the News/California, Inc., a list management company, to

manage and offer for public use the campaign's active donor list. The price charged was

$80.00 per thousand names, substantially less than $760 per thousand. Further,OFP,

despite numerous requests, had not provided any documentation which established the

number of names contained on the supporter list or documented its cost calculation.

34
For these reasons, the supporter lists were not considered to

be capital assets. Therefore the proper valuation ofthe lists is fair market value.

Information gathered to date suggests that $760 per thousand names is many times the

fair market value. However, because the number ofnames had not been established, at

the time the Memorandum was prepared there was no way to attach even a reduced

valuation to the lists. As a result, the entire amount was considered to be due from DFP.

In DFP's Memorandum it was recommended that DFP

provide documentation which demonstrates the number of names included on the

supporter lists, and provide evidence ofthe lists' fair market value. Absent such a

demonstration, the Audit staffintended to recommend that the Commission determine

that DFP received an in-kind contribution from DK and that DFP repay $378,774 to DK.

DFP responded as follows:

"As DFP explained in its previous response, it is standard industry practice

to establish a price per supporter name by dividing the total cost of a

supporter program by the total number ofnames generated by such

program. See statement attached at Exhibit 13. As the Audit Staff

requested, DFP has attached records documenting that the total number of

names generated by the Dole Supporter program was 876,087. Id. Thus at

$0.40 per name, these documents establish that the $350,435 was the fair

market value ofthe list.

"Thus only $28,340 should be added to DFP's spending limitation and

$8,714.55 must be repaid to the U.S. Treasury."

DFP cites the memo from Campaign Tel Ltd (CTL) which

notes that "the .40 cent pricing ofthe 1996 records" is a "price as any other industry

'price per record' is based on the following formula: Total cost ofprogram dollar amount

divided by the number offavorables generated." CTL goes on to state that this, referring

to the derivation ofthe unit cost, is an industry standard. DFP citing this industry

standard, reverses the derivative process by multiplying the number of names on the lists

by the "industry standard" .40 cents and arrives at the cost ofthe list and then, in a non

sequitur, equates this unit cost with the fair market value. At no point in its memo does

CTL address fair market value let alone suggest that a cost of .40 cents per name is a

reflection offair market value.

Fair market value of a list is not determined by the cost but

rather by what someone is willing to pay for the use ofthe list. The SRDS Direct

Marketing List Source, June 1998, Volume 32 Number 3, a catalog ofthousands of

available lists, was consulted to make a determination of the valuation oflists comparable

to the Dole supporter lists. Donor lists, which the Dole supporter list is not, were first

35
considered. 13 The "Republican-Solid GOP Donors" list is currently available for $100.00

per thousand names [$0.10 per name]. The Dole Donors ($5 to $500) list is currently

valued at $125.00 per thousand [$0.125 per name]. The "Dole Signature Series Donors"

list, comprised of donors to various conservative and government reform, veterans and

charitable appeals, signed and endorsed by Senator Dole, is available for $85.00 per

thousand [$0.085 per name]. In the category ofsupport lists, there is a "Run Pat Run!"

list ofsupporters of Pat Buchanan which is available for $100.00 per thousand. Based on

this and the market value ofthe Clinton campaign's donor lists as discussed above, the

Dole supporter lists cannot be reasonably valued at more than $100 per thousand names.

As requested in the Memorandum, DFP included in its response documentation from

CTL which establishes the total number of names on the list as '876,087. 14 Accordingly,

the Staffconcluded that the estimated fair market value at which the list could have been

transferred to DK is not more than $87,609 (876,087 names multiplied by $100.00 per

thousand names). Therefore, the Staff determined that DFP owes DK $291,165

($378,774 - $87,609), DK has made a contribution to DFP in that amount, and DK may

deduct the amount from its expenditures subject to the spending limitation.

During its consideration ofthe DFP audit report, the Commission

adopted the Staffrecommendation with the following stipulation. They directed that the

valuation assigned to the lists be equal to half ofthe list cost documented, $150,000

($300,000 x 50%). Thus, DFP received an in-kind contribution in the amount of

$228,774 ($378,774 - $150,000), DFP is required to repay $228,774 to DK, and must add

$228,774 to DFP's spending limitation.

b. Telephone System

On March 30, 1995, DFP signed a contract with NTFC to

lease a telephone system. The system provided by this lease was initially installed at the

headquarters office in Washington, D.C. In the contract, DFP agreed to make seventeen

payments to NTFC. Title to the telephone system remained with NTFC. In October

1995, the lease was amended, the telephone system was divided, and the equipment was

moved. Some equipment was sent to Iowa and some to Florida.ls

13

14

15

It should be noted that donor lists are generally perceived to be more valuable than supporter lists.

The number of names attributed to the list by OFP has not been a constant. Each time the lists

were valued, the number has changed. When the lists were transferred on May 27, ]996 to OK,

transfer documentation stated that the lists contained 874,085 names. When the transfer was

adjusted on July 2, 1996, the supporting calculation indicated that there were 828,227 names on

the lists.

The Iowa system was later returned to Washington, DC and the lease was assumed by New

Century Media.

36
•

On March 15, 1996, DFP moved out ofits state

headquarters office in Tallahassee, Florida. On March 27, 1996, technicians arrived to

remove the phone system, but discovered it missing.

DFP sold this telephone system to DK for 60% of$18,200,

the value DFP placed on the system, or $10,920, and reported the amount as an offset to

the spending limitation. In July 1997, DFP repurchased the telephone system from DK

for 60% of $1 0,920, the amount that it received the previous year, or $6,552. DFP

received $10,920 from DK for the period August 22, 1996 through July 27, 1997 and still

owes DK $4,368 (the 1996 sales price of $10,920 less the 1997 repurchase price, $6,552).

The recommendation in the DFP's Memorandum invited

DFP to demonstrate that the analysis presented above was inaccurate. In response, DFP

states that it does not dispute that the missing telephone system should not have been sold

to, and repurchased from DK and that it owes DK $4,368.

On May 30,1995, DFP signed a capital lease [purchase]

agreement with NTFC (Lease #48972) to finance the acquisition of a telephone system

for its national headquarters office. DFP agreed in this contract to make sixteen

payments of$19,304 for equipment valued at $273,200. At the completion ofthe

contract, DFP would be permitted to purchase the system for one dollar. On August 22,

1996, DFP sold this telephone system to DK. DFP valued the system at $282,000 and

received 60% ofthat amount, or $169,200. DFP has not explained this higher valuation

ofthe telephone system. DFP inflated the phone system value by $8,800 ($282,000-

$273,200). As such, the over valuation of$5,280 ($8,800 x 60%), should be returned to

DK.

In a letter dated July 18, 1997, a representative ofLine Two

Communications (LTC) agreed to broker the sale ofthis telephone system for a

guaranteed minimum price of$110,500. This was apparently agreed to when the letter

was signed by the Assistant Treasurer for both DFP and DK on July 23, 1997. On July

28,1997, DK deposited a check dated July 24,1997 for $130,000 from Telpro, Inc., the

purchaser ofthe telephone system.

Also on July 28, 1997, DFP reported repurchasing the

telephone system from DK for $101,520 ($169,200 x 60%) and reported the purchase as

an exempt compliance expense. The Audit staff concludes that DFP could not repurchase

the telephone system. First, DFP has not demonstrated any legitimate Winding down

purpose for the repurchase. Second, the documentation available states that DK had

previously sold the telephone system to a third party. LTC necessarily negotiated the sale

with DK and not DFP because DK had purchased DFP's interest in the system on August

22,1996. As already noted, the commitment to sell the equipment was signed on July 23,

1997. The Telpro, Inc. check, dated July 24,1997, indicates that the sale was made on

that date. Consequently, after July 24, 1997, DK no longer owned the telephone system

and could no longer transfer it to DFP. The $130,000 realized from the sale ofthe

37
telephone system was transferred to DFP on July 31, 1997 with the explanation that it had

been mistakenly deposited to the DK account. DFP purchased an asset from DK that it

no longer owned, and received a transfer from DK ofthe proceeds ofits sale ofthe asset.

These transactions need to be reversed by DFP paying DK $8,980 ($130,000-$121,020).

As with the other sections ofthis finding, DFP was invited

to disprove the analysis presented above. Regarding the overvaluation ofthe equipment,

DFP simply notes that the proper valuation is $308,864, the sum ofthe 16 lease

payments. This is a greater value than used at the time ofthe sale to DK, $282,000, or

the cost ofthe equipment specified in the lease contract, $273,200. Using this higher

value, DFP concludes that after the sale to DK and the repurchase by DFP, DK owes DFP

$6,647. Not only is the cost of an asset not established by the sum ofthe lease payments

made on it, DFP didn't make all the payments. The RNC made two, one has not been

made yet, and portions oftwo others were made by the GELAC. In the Staff analysis, the

cost used in the Memorandum, $273,200 remained unchanged.

DFP explained its repurchase ofthe telephone system by

stating that it was to provide telephone service to the staff and auditors during the

winding down period. However, that explanation-does not explain why the system then

owned by DK which was also winding down was more appropriately a DFP asset. DFP

also contends that the telephone system was actually transferred to DFP shortly after the

election, long before it was sold to the third party. It then goes on to explain that the

transaction went unrecorded for eight months until the third party sale was completed.

No evidence to support this explanation is provided. DFP does agree to reverse the

transaction as suggested in the Memorandum ifthat is the preferred course of action,

however it notes that after its recalculation ofthe sale amount the effect is immaterial. If

all ofDFP's calculations are accepted, the conclusion is correct. However, as explained

in the Staff analysis the calculations in the Memorandum and the $8,980 net payment due

DK shown in the Memorandum were unchanged.

As a result ofthese transactions, in the report presented to

the Commission the Staff adjusted expenditures subject to the spending limitation by

$18,628 ($4,368 + $5,280 +$8,980).

Adjustments to this finding were necessitated by the

Commission's action on DFP's audit report. Finding III.A.2. in that report concerns

expenditures by the RNC believed by the Staffto be primary in character. As a result the

Staff had concluded that they represented in-kind contributions to DFP rather than

coordinated expenditures [2 U.S.C. §44Ia(d)] on behalfofDK. The Commission

accepted the RNC's characterization ofthose expenditures. Included among those

disbursements were two payments made by the RNC on Lease #48972 for DFP's

headquarters telephone system.

The valuation ofthe telephone system when transferred to

DK has been reduced by the two payments made by the RNC. Since these payments are

38
considered coordinated expenses they are not considered part of DFP's basis in the

telephone system. As a result the amount that DFP could receive from DK when the

system was sold is reduced. In the Staff analysis, the overvaluation ofthe telephone

system was $5,280. That amount is now $25,770. The total amount due DK from DFP

has been revised to $39,118 ($4,368 + $25,770 + $8,980).

When the Commission considered the Staff

recommendation with respect to this matter during the discussion ofthe DFP audit report,

the revised amounts had been determined. As a result the Commission approved the

Staffs revised recommendation that DFP must pay DK $39,118 related to the sale,

repurchase, and valuation oftwo ofthe telephone systems discussed above.

c. Media Production

DFP transferred film footage to DK on May 31, 1996 for

$266,086. The valuation of the transfer was later reduced to $189,081 and an appropriate

amount was refunded. The amount paid represented one half of the production costs as

calculated by DFP, $155,942, and one half of associated focus group costs equal to

$33,139.

Documentation provided shows that fourteen primary

commercials were transferred to DK. Records also establish that each was broadcast at

least once in the general election period. Examples ofplacements were "Historic

Reforms" shown once at 6: 18 A.M. on September 18, 1996, in Bismarck, North Dakota

and "American Hero" shown once at 7:35 A.M. on September \6,1996, in Sioux City,

Iowa. For an expenditure of only $455, DK ran all fourteen commercials and met the

requirement for primary and general cost sharing.

The documentation failed to establish a connection between

the commercials and some of the production costs. The Audit staff could only associate

$54,193 ofthe production costs with the commercials used by DK. Similarly, $28,684 of

the focus group costs were associated with the commercials. Thus, DFP transferred

$101,749 ($155,942 - $54,193) in production costs and $4,455 ($33,139 - $28,684) in

focus group costs more than supported. In this transaction, DFP received $106,204

($101,749 + $4,455) in excess of the asset value transferred to DK.

Based on the documentation made available at the time the

Memorandum was prepared, DFP owed DK $106,204.

In DFP's Memorandum it was recommended that DFP

provide documentation which would show the connection between the remaining

production and focus group costs and a specific commercial.

DFP responded to the Memorandum as follows:

39
"DFP has attached invoices that demonstrate that twelve ofthe fourteen

advertisements whose production costs were assessed to Dole/Kemp were

aired during the general election. There has been some confusion

generated by the remaining two ads because the production code numbers

assigned to those ads changed after the ads were edited by the primary

committee, but the original pre-edit code numbers were used when the ads

were transferred to the general committee. DFP has attached

contemporaneous memoranda that establish that the remaining two ads

transferred to DolelKemp whose production costs were charged to

DolelKemp were also aired by during the general election."

It is not clear to what confusion DFP is alluding in its

response. Earlier, during fieldwork, a question had been raised about three commercials

that were not identified on the television station invoices. The answer provided at the

time was essentially the same as in the response. The Memorandum acknowledged that

all 14 commercials had been rlln by DK.

DFP did not address the underlying problem in its response

to the Memorandum, that is the lack of documentation which would establish a direct

connection between the film production costs and the commercials run. Ofthe $3 I 1,883

in total production costs, only nine ofthirty-four invoices totaling $108,384 had been

specifically identified with any ofthe fourteen commercials in question. It appears that a

portion ofDFP's library of film footage is being attributed to these commercials as well.

The cost of establishing a library offilm footage is not part ofthe cost ofproducing these

particular commercials. To permit such a calculation would require a recalculation ofthe

cost of a particular commercial each time a portion ofthat footage was used by either the

primary or the general election campaign. No documentation was provided that would

warrant an increase in the amount ofthe production costs to be transferred to DK.

Similarly, DFP identified focus group costs of$66,281 which it maintains were related to

the production ofthe commercials. Of this amount, $57,369 ofthe costs could be

identified with the fourteen commercials from the description on the documentation

provided. Again, no new documentation was provided which would indicate that the

balance spent for the foclls group work was connected with these commercials.

Accordingly, no increase in the value of the focus group work to be reimbursed by DK is

indicated.

In the DFP audit report, the staffrecommended and the

Commission agreed that $101,749 ($155,942 - $54,193) in production costs and $4,455

($33,139 - $28,684) in focus group costs were improperly reimbursed to DFP by DK.

Further, the Commission determined that DFP is required to return the amounts to DK.

d. Primary Expenses Paid by DK

A review of disbursements, totaling about $4 I6,000,

incurred by DK during the period June 17, 1996 through August 14, 1996 indicated that

40
$207,378 were primary related and benefited DFP. These costs included: telephone

service and equipment, $58,786; office furniture and equipment, $80,288; utilities,

$36,173; collateral materials, $6,588; headquarters security, $11,552; supplies, $8,550;

convention related expenses, $4,186; and, miscellaneous expenses, $1,255. The analysis

of expenditures in the Memorandum showed this amount, $207,378, due from the DFP.

In DFP's Memorandum, the Audit staffrecommended that

DFP provide documentation which would demonstrate that disbursements made by DK

were not primary related. For office and overhead expenses, the information submitted

was to demonstrate that the facilities were being used by persons working exclusively on

the general election (11 CFR §9034.4(e)(3». For all other expenses, the material

submitted was to establish that the goods and services were used in the Expenditure

Report Period. Absent such a showing, the Audit staffstated that it would recommend

that the Commission determine that $207,378 paid by DK represent primary expenses

and an equal amount is due to DK.

DFP responded to the Memorandum as follows:

"Expenditures made prior to the date ofthe Republican party convention

are allocated to the general election ifthose expenditures were made

exclusively for general election purposes. 11 C.F.R. § 9304.4(e);[sic]

Financial Control and Compliance Manual For Presidential Primary

Candidates Receiving Public Financing Chapter I, Section C(2)(c). The

attached documents make clear that the expenditures singled out by the

Audit Staff were for facilities, including furniture, supplies, and equipment

and the build-out ofthe office space necessary to accommodate the larger

campaign staff, obtained for the general election. ... As Andrea Mack,

the campaign's Deputy Director for Administration, explains in the

attached statement, the general election committee had to begin

preparation for the general prior to the date of Senator Dole's nomination

so that the Committee staff would have facilities and equipment with

which to work once the general election campaign began. ... Thus, given

the exclusive general election purpose for which almost all ofthe preconvention expenditures were made, they must be attributed to the general

election.

"Upon review of the items in question, the Committee has determined that

$1,543.16 should have been paid by Dole for President. The remaining

$262,054.65 is not owed to Dole/Kemp. Also, this amount should not be

added to DFP's expenditures subject to the spending limit and $80,581.80

is not subject to repayment to the U.S. Treasury."

As noted in the citations above, §9003.4 permits a general

election campaign to incur expenses prior to the beginning ofthe expenditure report

period, if those expenses are for property, services, and facilities to be used in the general

41
election campaign. Examples ofsuch expenditures include expenses for establishing

accounting systems and for organizational planning. This regulation must be read in

conjunction with II CFR §9034.4(e) which requires that expenses incurred by the general

election campaign before the beginning ofthe expenditure report period be exclusively

for the general election. Therefore, the campaign must be able to demonstrate that any

expenditure incurred by DK prior to the candidate's date of nomination, is exclusively for

the general election. Absent that demonstration the expenditure will be attributed to the

primary campaign.

The documentation provided consists of copies ofinvoices

with the associated check requests and tissue check copies. It is the same documentation

that was originally reviewed to ascertain that DK had made disbursements on behalf of

DFP. To paraphrase DFP, the attached documents not only single out expenditures made

for facilities, including furniture, supplies, and equipment and the build-out ofthe office

space necessary to accommodate the larger general election campaign staff, they, more to

the point, single out disbursements made within the primary period where exclusive

general election use has not been demonstrated. Andrea Mack's statement explains that

campaign was in the process of gearing up for the general election. Implicit in Ms.

Mack's memo is Senator Dole's status as the presumptive nominee.

There can be no doubt that the campaign was engaged in

preparations for the general election during July and August of 1996. Given the

Senator's travel schedule and the necessary preparations for the convention, there is also

no doubt that the primary campaign was continuing. It is important to note that the 11

CFR §9034.4(e), as previously discussed, was instituted to simplify the allocation of

expenses between the campaigns for both the Commission and the campaigns.

According to that regulation, unless the campaign can establish and document that a

discrete group of employees occupying a discrete portion of campaign headquarters were

engaged exclusively in general election preparation, all salary and overhead expenses up

to the date of nomination are primary expenses. Although DFP argues that the various

expenses enumerated above were exclusively for the general election, it is noted that none

ofthe campaign staff was paid by DK prior to Senator Dole's nomination, and that DFP

allocated the tenth floor renovations, which it maintains were exclusively general, equally

between itself and DK. DFP's share was paid by the RNC as a coordinated expenditure.

The documentation provided does not support a case for exclusive general election

activity but does confirm that the disbursements were incurred prior to the nomination.

With respect to campaign materials that were purchased

before the date of nomination, they should have been purchased by DFP and any amounts

that were on hand could have been sold to DK at cost. (See II CFR §9034.4(e)(4)). The

"Financial Control and Compliance Manual for Presidential Primary Candidates

Receiving Public Financing," suggests that an inventory be prepared to support the

transfer. A similar procedure could be used for office supplies and materials. No

evidence of any such procedure has been provided.

42
'<

Having failed to establish that the expenses enumerated

above related exclusively to the general election, overhead expenses of $207,378, paid by

DK in the primary period, are primary expenses attributed to DFP.

A subsequent analysis ofDK's expenditures questioned in this

finding identified disbursements in the amount of $114,391 for assets that, ifthey had

been properly acquired by DFP, would have been transferable to DK after the convention.

At the time ofthe transfer, DK would have reimbursed DFP 60% ofthe original cost of

the assets. Total disbursements made by DK on behalfofDFP is therefore reduced by

$68,635 [$114,391 x 60%] to $138,743.

During the consideration of the DFP audit report, the Commission

determined that, pursuant to 11 CFR §9034.4(e), disbursements in the amount of

$138,743 made by DK are attributable to DFP's spending limitation and that that amount

is payable to DK by DFP.

e. Undocumented Assets Sold to DK

As a result of our review of a group of assets sold by DFP

to DK at a value of $52,60 I, the Audit staff identified $8,546 in assets whose acquisition

by DFP was not supported by documentation. In addition, a copier included in this sale

had been over valued by $20,000. Therefore DFP owes DK $28,546.

In DFP's response to its Memorandum it did not contest

this calculation.

During its consideration ofthe DFP audit report, the

Commission adopted the Staffrecommendation that DFP is required to repay $28,546 to

DK.

f. Occupancy Costs

In February 1995, DFP leased office space from Union

Center Plaza Associates Washington, D.C. for its national headquarters. DFP's rent

between March 1, 1995 and May 31, 1996 was $28,382 per month. DFP expanded the

office space it occupied in June 1996 and again in July. The rent owed by DFP rose to

$48,677 for June 1996 and to $96,275 for July and August. 16 In the review ofthe

headquarters rent, three problems were identified. Rent due from DFP was partially paid

by others. Construction work and miscellaneous headquarters expenses incurred prior to

the date ofineligibility were not paid by DFP. Security deposits paid by DFP were not

correctly reimbursed and assigned.

I' The August rent actually owed by DFP was prorated at approximately 45% [(14 + 31) x 100%].

43
DK paid rent of $29,110 in July which is during the

primary period. Also documentation indicated that DK paid $21,779 for renovations of

the 10'h floor of campaign headquarters prior to the date of nomination. This amount

represented 50% ofthe total cost with the other half being paid by the RNC. In addition,

DK paid miscellaneous occupancy costs such as electrical work and invoices for adding

and changing locks during the primary period. These miscellaneous expenses totaled

$13,758.

All security deposits paid in the primary period should have

been paid by DFP. The outstanding deposits should then have been transferred to DK.

DFP paid $104,362 ofthe $124,657 paid in the primary period for security deposits. DK

paid one security deposit of$20,295 on June 1, 1996 which made up the balance of

DFP's deposit liability.17 DFP did not transfer any security deposits to DK at the

beginning ofthe general election campaign. On February 21, 1997, DK reimbursed DFP

$29,100 for one security deposit. Security deposit refunds totaling $77,060 have been

received by DK. Included in these refunds are deposits that were made by, or should

have been made by DFP. In the Memorandum it was concluded that DFP is owed

$47,960 by DK ($77,060 ofDFP paid deposits less the DK transfer of$29,100).18

Finally, the security deposits earned interest while

outstanding. Since DFP paid or should have paid these deposits the interest earned is due

DFP. Interest totaling $6,406 and $647 has been received by DK and the GELAC

respectively.

These issues were discussed with DK and DFP

representatives. Subsequently, they noted that "many ofthe payments in question fall

under the headings 'bright line'. The committees believe that rent and build-out expenses

incurred in preparation for the General Election were properly paid by the General or

Compliance Committees." No other information or documentation was submitted.

In the Memorandum a chart was presented that summarized

the adjustments discussed above. The net ofthe various amounts due to and due from

DFP was $1,476 due to DFP. DK and DFP were invited to demonstrate that this

calculation was incorrect.

In its response to the Memorandum, DFP objected to the

finding's conclusion that payments made for occupancy expenses paid by DK in the

primary period were primary expenses. DFP also questioned the amount ofthe deposits

and interest owed DFP by DK.

17

"

OK correctly paid an additional security deposit of$8,815 on September 19, 1996.

The DFP is carrying as a receivable a security deposit it made to Union Center Plaza Associates,

for $56,764.70. This amount was included in the refunds paid to DK.

44
DFP contends that the tenth floor " ...was used by

Dole/Kemp in the general presidential election and was used exclusively by persons

working for the general election campaign." It offers, as proof positive, that the tenth

floor was the site of exclusive general election activity, the memorandum from Andrea

Mack, the campaign's former Deputy Director of Administration, in which she describes

the preparations beginning in June 1996 for the general election campaign and states that

the office expansion, office preparation, and equipment acquisition was for the exclusive

benefit ofthe general campaign. Accordingly, DFP, assumes but never states, that it was

also proper for DK to also make payments for the rent and renovation ofthe tenth floor.

This conclusion is apparent from DFP's version ofthe chart presented in the

Memorandum. On DFP's version, it shows that it owes no reimbursements and received

no in-kind contributions.

Beginning in June and running through the date of Senator

Dole's nomination in mid August of 1996, DFP certainly was engaged in preparations for

the general election. DFP was also certainly engaged in the candidate's primary

campaign and planning for the convention. Accordingly, II CFR §9034.4(e)(3) states

that unless the campaign can establish through documentation that a discrete group of

employees occupying a discrete portion of campaign headquarters were engaged

exclusively in general election preparation, all salary and overhead expense up to the date

of nomination is an expense of the primary.

In fact, there is evidence that the tenth floor was never used

by any Dole staff engaged solely in general activity during the primary period. DFP's

notations on the July 18, 1996 invoice for the tenth floor renovations sent to the RNC to

be paid from coordinated funds identified the share to be paid as that of the primary. This

reference indicates an awareness on the part ofDFP that the tenth floor was used, prior to

Senator Dole's nomination, for primary related activity. Testimony ofsenior DFP staff

members establishes that they had offices on the tenth floor in the primary period and

while occupying offices on that floor, were paid exclusively by DFP. Further, after

resigning from the Senate, Senator Dole's office was on the tenth floor. He was at that

time a candidate for the nomination. Given that DFP cannot make a claim that the tenth

floor was used exclusively by the general election campaign in the primary period, the

rent and renovations occurring as they did in the primary period were obligations ofDFP

and paid by the RNC and DK.

DFP states that DK owes it $27,664 for rent deposits paid

by DFP and refunded to DK. The Audit staff agrees. The calculation has been amended

to show the refund already received by DFP.

Rather than attributing the interest received by DK but due

to DFP according to which committee paid the rent deposit or which should have paid the

deposit, DFP has assigned slightly less interest to DFP and more to DK. In spite ofthe

fact that it is not apparent why DFP allocated interest this way, the effect ofthe change is

relatively minor reduction in the amount due to DFP. The difference is $2,197 ($6,406 ..

45
$4,209). The outcome ofretaining additional interest in the general campaign is as

follows: an increase in the amount ofinterest net oftaxes which is refundable to the

United States Treasury by DK and, an increase of $2,197 in the amount due DK from

DFP ($3,673 - $1,476). The Audit staff accepts DFP's calculation.

The net effect ofthe transactions discussed above is an

amount due to DK from DFP of$32,773. During the Commission's consideration ofthe

DFP audit report, it approved the Staffrecommendation that DFP should transfer $32,773

to DK, and that the transfer should be reported by both committees.

a. Supporter List Expenses

b. Telephone System Expenses

c. Media Production Expenses

d. Primary Expenses Paid by DK

e. Undocumented Assets Sold to DK

f. Occupancy Costs

Total

2. Amounts due DFP from DK

($228,774)

($39,II 8)

($106,204)

($138,743)

($28,546)

($32,773)

$(574,158)

During the review ofthe DFP's vendor files, disbursements made

by DFP were found that appear to be for the benefit ofthe general election campaign and

are discussed below.

a. AV Atlantic Payments

During May, 1997 DFP transferred $80,316 to DK. This

transfer was made in error to correct an AV Atlantic (one ofthe campaign's air charter

vendors) payment thought to have been paid from a DK account. In addition, DFP paid

AV Atlantic for leased equipment used on aircraft operated by DK, $6,350. Therefore,

DK owes DFP $86,666 ($80,3 16 + 6,350). This amount has been included in

expenditures subject to the spending limitation. Neither DFP nor DK commented on this

correction in their responses to the Memoranda.

b. Telephone Expenses

During fieldwork, the Audit staff identified a $20,000

refund from Bell Atlantic, deposited by DK, which was the result of an expenditure made

by DFP. Additionally, as a result ofmaterials submitted subsequent to conclusion of

fieldwork, refunds received by DK from Ameritech, $1,500, and from Bell Atlantic,

$4,645, were determined to have resulted from DFP expenditures. Again neither

committee commented on these items. Finally, two payments for DK telephone service

46
•

were paid by DFP in June of 1998. The two payments total $10,870. These amounts are

due to DFP and $37,015 is applicable to DK's spending limitation..

c. Travel Expenses

DFP paid $3,688 for hotel rooms at a Holiday Inn in

Pittsburgh, PA for the period August 16 through August 18, 1996. These are qualified,

general election expenses associated with Senator Dole's travel and should have been

paid by DK. As such, this amount is due DFP and has been included in determining

expenditures subject to the spending limitation. As with the previous two sections, DK

did not comment on this expense.

~~~~'fM,":"-:i'*"i'~~"~';§li~ffi"l'~lWlijff'AlWfUd1fi~~D1f~&*DER~0li~~i!Bi0&"1!I\'lJfr~r'i~lfk\liit.liij ~Jl~J:~~~~!ill~it,,",__~>_,., '".. ,_¥>~""~~_,>_.~._" ~"'_'_'~~ __' ""'" •."._"".~,!I~~%~";"'I.,~,j_~I_\~~ a. Payments Relative to AV Atlantic $86,666

b. Telephone Expenses $37,015

c. Travel Expenses $3,688

Total $127,369

3. Accounts Payable Reported as of September 30, 1998

• The Memorandum noted that DK had accounts payable totaling

$1,028,481, as ofDecember 31, 1997. Included in accounts payable is a debt owed to the

DFP of $202,767 representing the amount still due as a result ofDK's sale of a

Certificate ofDeposit (CD) to DFP on November 25,1996 (See finding II.A.2.a. above).

This CD had already been redeemed by DK when it was sold to DFP. Since this

transaction merely represents money owed on an exchange of assets (CDs for cash), it is

not applicable to the spending limitation and the Audit staff has excluded it from the

amount of debt outstanding. Also included in accounts payable was a debt owed to DFP,

totaling $31,208, as a result of a transfer of assets. This debt was paid by DK on

November 25, 1996 and has been excluded from Accounts Payable. Therefore, the Audit

staff has added $794,506 ($1,028,481 - $202,767 - $31,208) to operating expenditures for

outstanding obligations as ofJune 30,1997.

No comment on this calculation was offered by DK in its response

to the Memorandum. However, as a result ofDFP's response to its Memorandum and a

review ofDK's records for the period January 1, to September 30,1998, the following

adjustments were made. DFP's response provided documentation which indicated that a

portion of amounts owed to NTFC, for a telephone lease, represented a debt owed by DK

(See Report ofthe Audit Division on Dole for President, Inc. Section III.CA.). As such,

this amount ($1,519), adjusted for a permissible compliance exemption, resulted in a

$1,261 increase in accounts payable at December 31, 1997.

Based on the response to the Memorandum and reported activity

through September 30, 1998, the adjustment to operating expenditures, for debt

outstanding to entities other than DFP, has been revised to $830,497.

47
4. Excessive Reimbursements Received from the GELAC

From a review ofthe DK and GELAC disbursement databases, the

Audit staff determined that $1,740,301 could have been allocated to exempt compliance

under the alternative allocation method of campaign payroll, payroll taxes, overhead and

other accounting costs.

However, during the expenditure report period, the GELAC also

incurred qualified campaign expenses which totaled $1,686,733 and should have been

paid by DK. In addition, the GELAC made 1I transfers to DK for allocable expenses

which totaled $874,000 and received five transfers from DK, correcting overpayments of

allocable expenses by the GELAC, which totaled $256,000.

Based on the above transactions DK received excessive

reimbursements from the GELAC totaling $564,432 ($1,686,733 - $1,740,301 +

$874,000 - $256,000). DK's response to the Memorandum made no comment on this

calculation.

5. Accounts Receivable from the GELAC

Reimbursements received from the Secret Service were less than

the amounts billed for Secret Service personnel traveling on the aircraft used by Mrs.

Dole, $13,193; Secretary Kemp, $3,333; and, the Press Plane, $1,091. The total amount

ofthese underpayments by the Secret Service is $17,617; and DK can be reimbursed by

the GELAC for this amount ( See 11 CFR §9003.3(a)(2)(i)(H)).

As the result of additional information submitted by DK and the

revision ofthe calculation ofDK's cost of providing transportation to the Secret Service,

some ofthese amounts have been revised. The revised amounts are: Mrs. Dole's aircraft,

$13,193; and, Secretary Kemp's aircraft, $4,081, for a total of$17,274. No amount may

be reimbursed for Senator Dole's aircraft or for the Press Plane.

In response to the Memorandum, DK argues that all amounts that

were billed to the Secret Service were pennissible and that the reimbursements received

were substantially less than its cost. Ifthat assertion were accepted the amounts

discussed here would be substantially larger. The subject ofDK's billings for travel on

campaign aircraft is discussed at length in Finding IILB. above.

Further, the Memorandum concluded that offsets to operating

expenditures received by the GELAC for vendor refunds and the sale of assets, totaling

$11,608, resulted from either expenditures originally paid by DK or assets purchased and

used by DK. These moneys should be returned to DK by the GELAC. Additionally,

wind down costs paid by DK totaling $13,227 may be reimbursed by the GELAC. No

comment on this conclusion was contained in DK's response to the Memorandum.

48
Based on reported activity through September 30, 1998, the

adjustment to operating expenditures has increased by $41,007 for additional wind down

costs incurred by DK which may be reimbursed by the GELAC to a total of$83,116.

6. DK Expenses Paid by Kemp for Vice President

In the Memorandum it was explained that as a result of an audit of

Kemp for Vice President, the Audit staff identified expenditures for pictures, film, photo

processing and room service costs in San Diego, totaling $8,011 which occurred after the

date ofthe candidate's nomination and, for this reason, were determined to be applicable

to general election limitations. As a result ofinformation received from Kemp for Vice

President, these expenses are no longer considered to be attributable to the DK spending

limitation.

7. Reversal of Asset Purchase (Other Than Telephone Systems)

On July 28, 1997, DK sold assets, to include two phone systems, to

DFP for $166,427. This transfer is not recognized because it represents a repurchase of

assets which had been previously sold to DK by DFP at a time both DK and DFP are

winding down. The adjustment for the phone systems is addressed at Section III. C.l.b.

above. The remaining adjustment to expenditures subject to the spending limitation of

$58,355, represents assets other than the two phone systems.

In response to section II1.C.I.b., DK agrees to reverse the sale of

the telephone systems. No comment is made with respect to assets other than the

telephone systems. Further, no demonstration of a primary campaign winding down

purpose for this transaction has been made and, therefore, no change to the conclusion

reached in the Memorandum is warranted.

Shown below is Audit staffs analysis of expenditures subject to the

limitation after considering DK's response to the Memorandum:

49
Disbursements from Inception through December 31,1997

LESS:

Loan Repayment

Purchase ofDFP CD's

Offsets to Operating Expenditures

Reimbursements from the GELAC for Compliance Expenditures

Non-Qualified Campaign Expenses Subject to Repayment

(See Finding IUD.!. below)

Wind down Disbursements (1/1/98 - 9/30/98)

Accounts Receivable Collected (1/1/98 - 9/30/98)"

Adjusted DK Expenditures Subject to the Spending Limitation

Add: In-Kind Contribution from the RNC for Media Expenses

(See Finding ULA.)

Less: Amounts Receivable from DFP (See Finding III..C. I., page 46)

Add: Amounts Payable to DFP (See Finding III.C.2., page 47)

Add: Accounts Payable at 9/30/98 (See Finding m.C.3., page 47)

Add: Excess Reimbursements from the GELAC (See Finding mCA., page 48)

Less: Amounts Receivable from the GELAC (See Finding JJI.C.5., page 48)

Add: Reversal ofAsset Purchase (See Finding IlI..C.7., page 49)

Add: Press/USSS Collections in Excess of Costs (See Finding lILB., page 31)

Adjusted Expenditures Subject to the Limitation

Less: Limitation (2 U.S.C. §44Ia(b)(I)(B»

Amount Over the Spending Limitation

$84,930,086

($4,096,289)

($1,856,524)

($14,000,112)

($2,601,302)

$0

$41,007

($192,097)

$62,224,769

$0

($574,158)

$127,369

$830,497

$564,432

($83,116)

$58,355

$1,219,281

$64,367,429

($61,820,000)

$2,547,429 20

,.

20

As of September 30,1998, DK reported accounts receivable of$ll,245. The remaining amount

represents outstanding billings to the Press, which, if collected, would require an equal amount to

be refunded (See Finding III.B.).

The Audit staff determined that the value of capital assets transferred from the DFP to OK totaled

$148,345. In addition, other capital assets purchased amounted to $29,828. The compliance

related portion ofthese assets was calculated to be $33,800. Therefore, the cost basis ofthese

assets to OK is $144,373 ($148,345 + $29,828 - $33,800). Adjusting for depreciation, the value of

these capital assets was determined to be $86,624 ($144,373 x .60). The sale ofassets would result

in a reduction of amount in excess ofthe spending limitation.

50
Based on the above analysis, DK has exceeded the limitation at 2 U.S.C.

§44Ia(b)(l)(B) in the amount of $2,547,429.

At the conference held at the conclusion of fieldwork, these matters were

presented to DK representatives, who disagreed with the Audit staffs treatment ofmany

ofthese items.

In the Memorandum it was recommended that DK provide evidence that

the expenditure limitation has not been exceeded. The amount calculated in the

Memorandum was $2,217,762. Absent such evidence it was stated that the Audit staff

would recommend that the Commission make a determination that an equal amount is

payable to the United States Treasury..

In addition to its comments on individual topics discussed above, DK's

observed that to the extent that it has exceeded its spending limitation, any such amount

could not be more than $250,000. No supporting calculations were provided to

demonstrate the derivation of that estimate.

Recommendation

The Audit staffrecommended that the Commission determine that DK had

incurred qualified campaign expenses in excess ofthe spending limitation at 2 U.S.C.

§44Ia(b)(l)(B) in the amount of $14,035,577 and that pursuant to 26 U.S.C. §9007(b)(2),

an equal amount was repayable to the United States Treasury.

The Commission adopted the Staffrecommendation that it determine DK

has incurred qualified campaign expenses in excess ofthe spending limitation and an

equal amount is repayable to the United States Treasury. However, as a result of

Commission action on the DFP audit report21 and on other findings in this report, the

amount in excess ofthe spending limitation and repayable is $2,547,429 22.

21 For a full presentation ofthe issues in the DFP audit report affecting this finding, see Agenda

Documents 98-87 and 99-49, at Findings III.A.4., 1I1.B.2., III.C., III.D., and III.E. and the audio

tapes ofthe Commission's Open Session meetings on the following dates: December 3rd, 9th, and

10th 1998, January 14th and 28th, February 3rd and 25th, March 4th, and April 29, 1999. Also

see the explanations of Commission action above and at section III.D.l. below.

The amount voted by the Commission was $2,535,225. The differences are an addition of

$32,694 for expenses that the Staff had recommended be considered non-qualified campaign

expenses but the Commission accepted as qualified (See Finding 111.0.1. below). This amount

was shown as a credit to the spending limitation to avoid a double repayment. That credit is no

longer necessary. Also, as a result ofthe Commission's action on the Telephone System Expenses

section (Finding III.C.I.b.), an additional $20,490 is due to DK from DFP. This amount is a

credit to the spending limitation. The net effect is an amount in excess ofthe spending limitation

of $2,547,429 ($2,535,225+$32,694-$20,490).

51
D. ApPARENT NON-QUALIFIED CAMPAIGN EXPENSES

Section 9002(11) of Title 26 ofthe United States Code defines, in part, the

term "qualified campaign expense" as an expense incurred by the candidate of a political

party for the office of President, by the candidate of a political party for the office ofVice

President, or by an authorized committee ofthe candidates of a political party for the

offices of President and Vice President to further the election of either or both ofsuch

candidates to such offices.

Section 9007(b)(4) ofTitle 26 ofthe United States Code states, in part,

that ifthe Commission determines that any amount of any payment made to the eligible

candidates of a political party was used for any purpose other than to defray the qualified

campaign expense with respect to which such payment was made, it shall notify such

candidates ofthe amount so used, and such candidates shall pay to the Secretary ofthe

Treasury an amount equal to such amount.

Section 9004.4(b)(3) ofTitle II ofthe Code of Federal Regulations states,

in part, that any expenditures incurred after the close ofthe expenditure report period, as

defined in 11 CFR §9002.l2, are not qualified campaign expenses except to the extent

permitted under 11 CFR §9004.4(a)(4).

Section 9004.4(a)(4)(i) ofTitle 11 ofthe Code of Federal Regulations

states, in relevant part that, costs associated with the termination of candidate's general

election campaign such as complying with the post-election requirements ofthe Act and

other necessary administrative costs associated with winding down the campaign,

including office space rental, staffsalaries, and office supplies; shall be considered

qualified campaign expenses.

I. Lost Equipment

Payments for the replacement ofleased equipment that had been

lost or stolcn were questioned as non-qualified campaign expenses23•

The Staffrecommended that the Commission determine that $32,694 is

repayable to the U.S. Treasury pursuant to 26 U.S.C. §9007(b)(4).

The Commission rejected the Staffrecommendation and determined that

$32,694 will instead be considered as a qualified campaign expense, and directed the

Staffwill to make the appropriate adjustment to the expenditures subject to limitation.

2J For the full presentation and discussion ofthis issue see Agenda Documents 98-88 and 99-50,

Finding III.D.1. and the audio tapes of the Commission's Open Session meetings on the following

dates: December 3rd, 9th, and 10th 1998, January 14th and 28th, February 3rd and 25th, March

4th, and April 29, 1999.

52
2. DFP Expenses Paid by DK

Finding III.C.l., Amounts Due DK from the DFP, details

expenditures made by DK which have been determined to be for DFP expenses. As such,

these expenses were not incurred to further the election of a candidate of a political party

for the office ofPresident or Vice President and can not be considered qualified campaign

expenses under 26 U.S.C. §9002(11). These items are as follows:

...•.·.·~1.\'S"~..'.Jf.;,,,;;·c:.~S"";;;";';;"'"~""···WJf··N'·,··;;;",P·J:<;j"'·;:''"l··fi··''····;jv·;w"''".".,; ••,,,... ··"';:,"'.~0,.;"'''..~'''''''.·'''Q·,,·'.;J.ff'·,'''"·,.,l!tl''' ·"I.lir,"· !.j '.' ~l:":' .,,,,;tEfst~r::..'1i~~j) ummary,o 1 on. '" ua I leu;Gampalgn~Expenses~'F~;·i(!ifit:~j!)':\I)'.Ii~[~'\fu~<JM !",~~",j ..".:u~ J",,,~ J.a:,;"A',,,,,-:.-,"j,S~~,,, .. , .._'-'"'''-''' "_.. , "h",."m"-,"'H""O,_,,,,',,,,,._'''",, """,,_ ,,_ , ,._" ,p, "_","' ,/:..... "'-'''0' Ah,,!f:&>-~'d'~I';fPJJ.UllJ.;IW~l<!;,,%:,,~iY8'i.;t.~~

Finding III.C.I.a. Supporter List Expenses $228,774

Finding III.C.l.b. Telephone System Expenses $39,118

Finding III.C.l.c. Media Production Expenses $106,204

Finding III.C.l.d. Primary Expenses Paid by DK $138,743

Finding IILC.l.e. Undocumented Assets Sold to DK $28,546

Finding IILC.l.f Occupancy Costs $32,773

Total $ 574,158 24

DFP's response to these matters, as presented above at Finding

lILC.l., Amounts Due DK from the DFP, failed to demonstrate that these expenditures

were qualified campaign expenses ofDK. It should be noted that this section provides

for a $574,158 accounts receivable due DK from DFP and adjusts the calculation of

expenditures subject to the overall limitation by this amount. Therefore, should DFP

transfer funds to DK for all, or a portion ofthese items, any repayment requested below

would be reduced by a similar amount.

Recommendation

The Audit staffrecommended that, absent a reimbursement from DFP, the

Commission determine that an amount equal to the amount ofthese disbursements was

repayable to the U.S. Treasury pursuant to 26 U.S.c. §9007(b)(4).

The Commission adopted the Staffrecommendation. As noted above the

revised amount is $574,128.

E. INCOME EARNED BY DK

Section 9004.5 ofTitle II ofthe Code of Federal Regulations states, in

relevant part, that the investment of public funds or any use ofpublic funds that results in

income is permissible, provided that an amount equal to all net income derived from such

use, less Federal, State and local taxes paid on such income, shall be paid to the

Secretary.

24 The amount presented to the Commission was $553,668. Due to Commission action on the

Telephone System Expenses section (Finding Ill.C.I.b.), an additional $20,490 is due to DK from

DFP. The increase is $20,490.

53
2. DFP Expenses Paid by DK

Finding III.C.i., Amounts Due DK from the DFP, details

expenditures made by DK which have been determined to be for DFP expenses. As such,

these expenses were not incurred to further the election of a candidate of a political party

for the office of President or Vice President and can not be considered qualified campaign

expenses under 26 U.S.C. §9002(11). These items are as follows:

~~~i'~~~~l~rf}Jsuntm~jy!?of.,,$N~ofi~@uiIHt~YtlBaffi.p~aign~tE'x?p~ifs~S'f~f~~f~~~~f:'\~~~1~~~fj\~;~~~I~f,1 ~~~.3t..ig.~J!"lf,lO<-~~~t""",}HS~"., __.~" ..._..".. ~_.~_, _, _",,"_'. __." '_'.~""" .~_,'._.,,_,. '_",","_'" __ '" _, _''',_ .",. "'_',",.. _"_'0,;,,,,,,,.',,t~,,,~)~,, •.,,,,w"_~"''1,~t?,,,ne>,tJ~

Finding III.C.l.a. Supporter List Expenses $228,774

Finding III.C.l.b. Telephone System Expenses $39,118

Finding III.C.l.c. Media Production Expenses $106,204

Finding IILC.l.d. Primary Expenses Paid by DK $138,743

Finding III.C.I.e. Undocumented Assets Sold to DK $28,546

Finding III.C.l.£. Occupancy Costs $32,773

Total $ 574,158 24

DFP's response to these matters, as presented above at Finding

III.C.l., Amounts Due DK from the DFP, failed to demonstrate that these expenditures

were qualified campaign expenses ofDK. It should be noted that this section provides

for a $574,158 accounts receivable due DK from DFP and adjusts the calculation of

expenditures subject to the overall limitation by this amount. Therefore, should DFP

transfer funds to DK for all, or a portion ofthese items, any repayment requested below

would be reduced by a similar amount.

Recommendation

The Audit staffrecommended that, absent a reimbursement from DFP, the

Commission determine that an amount equal to the amount ofthese disbursements was

repayable to the U.S. Treasury pursuant to 26 U.S.C. §9007(b)(4).

The Commission adopted the Staffrecommendation. As noted above the

revised amount is $574,128.

E. INCOME EARNED BY DK

Section 9004.5 of Title 11 of the Code of Federal Regulations states, in

relevant part, that the investment of public funds or any use of public funds that results in

income is permissible, provided that an amount equal to all net income derived from such

use, less Federal, State and local taxes paid on such income, shall be paid to the

Secretary.

24 The amount presented to the Commission was $553,668. Due to Commission action on the

Telephone System Expenses section (Finding III.C.I.b.), an additional $20,490 is due to OK from

OFP. The increase is $20,490.

53
Section 9007.2(b)(4) ofTitle 11 ofthe Code of Federal Regulations states

that ifthe Commission determines that a candidate received any income as a result ofan

investment or other use of payments from the fund pursuant to II CFR §9004.5, it shall

so notify the candidate, and such candidate shall pay to the United States Treasury an

amount equal to the amount determined to be income, less any Federal, State or local

taxes on such income.

OK earned interest totaling $38,289 on certificates of deposit held to

secure letters of credit that satisfied OK's deposit requirements with its telephone and

other vendors. In addition, certificates of deposit purchased from OFP that secured letters

of credit serving as security deposits for vendors utilized by both OFP and OK earned

interest in the amount of $12,997 while in OK's possession (see Finding II.A.2.).

Further, OK received $6,576 in interest on moneys maintained in an escrow account with

AV Atlantic, one of DK's air charter vendors, and $1,849 from the Secret Service. The

Secret Service paid OK interest for any travel billing that was not paid on a timely basis.

At a conference held at the conclusion offieldwork, the Audit staff

provided DK representatives with a schedule ofthe interest income.

Prior to the conclusion offieldwork, the Audit staff had not been presented

with any evidence of any taxes paid relative to this income. Therefore, when the

Memorandum was prepared, it appeared that a payment to the United States Treasury in

the amount of $59,711 was warranted.

In the Memorandum, the Audit staffrecommended that OK provide

documentation to demonstrate that the interest should not be considered income, or

submit copies ofthe relevant tax returns showing any Federal, State or local income taxes

paid on this income. Absent such demonstration, the Audit staffstated that it would

recommend that the Commission make a determination that $59,711 is payable to the

United States Treasury.

In its response to the Memorandum, OK provided copies ofincome tax

returns filed on behalf ofDFP for 1996 and on behalf ofDK for 1997. Also included

with OK's response was a photocopy of a check in the amount of $13,201dated March

12, 1998. This check was used to pay DK's 1997 tax liability. DK has not provided any

further documentation on these matters, despite several requests.

Additionally, DK's response notes that "[w]ith regard to monies

maintained in escrow accounts, DolelKemp's calculations in the response to Press billing

findings and reconunendations show that the Secret Service underpaid the Committee for

travel expenses. Therefore, DolelKemp simply applied payments characterized as

'interest' by the Secret Service to outstanding or underpaid bills. Thus, such payments

are not properly characterized as interest."

54
Ofthe interest income reported on DFP's 1996 tax return, $2,767 in

reported interest income appears to be the interest earned on a certificate of deposit which

was redeemed by DK. No documentation has been provided to establish that DFP's 1996

tax liability has been paid. Absent evidence that income taxes have been paid on the

$2,767, the entire amount is due to the U.S. Treasury. In 1996, DK had additional

interest income of$18,060. No evidence has been submitted to establish that any taxes

have been paid on this amount. Therefore, the entire amount is due to the U.S. Treasury.

On DK's 1997 tax return, it reported income of$37,818. DK paid taxes

on this income of $13,201. The Audit staff calculated that DK earned interest income

totaling $38,414 in 1997, including that received from the Secret Service. Therefore, a

payment of $25,213 ($38,414 - $13,201) to the United States Treasury is required.

The Audit staff is not persuaded by DK's arguments that the Secret

Service payments are not properly characterized as interest. As noted in finding III.B.,

the Secret Service follows a well known policy concerning the maximum amount that it

will pay for travel on campaign aircraft. Because DK believes that it should have been

paid more than the Secret Service policy allows, does not convert the interest payments

into additional travel reimbursements in violation ofthat policy. These amounts are

included in the above payment determinations. Additionally, DK earned $470 interest

from the Secret Service in 1998, which is also required to be repaid to the United States

Treasury.

Recommendation

The Audit staff recommended that the Commission determine that

$46,510 ($20,827 + $25,213 + $470) was payable to the United States Treasury pursuant

to 2 U.S.C. §9004.5.

The Commission approved the Staffrecommendation..

F. STALE-DATED CHECKS

Section 9007.6 ofTitle II ofthe Code of Federal Regulations states that if

the committee has checks outstanding to creditors or contributors that have not been

cashed, the committee shall notify the Commission ofits efforts to locate the payees, if

such efforts are necessary, and its efforts to encourage the payees to cash the outstanding

checks. The committee shall also submit a check for the total amount ofsuch outstanding

checks, payable to the United States Treasury.

Based on the Audit staffs bank reconciliations, 90 checks to creditors

totaling $27,728 have been issued by DK but have not been negotiated.

Also, 30 contributor refund checks, totaling $16,318, were issued by the

GELAC but not negotiated.

55
At a conference held at the conclusion offieldwork, DK representatives

were provided with schedules ofthe stale-dated checks. DK representatives agreed to

review their records and provide additional and ongoing infonnation in an effort to

resolve these items.

In the Memorandum, the Audit staffrecommended that DK provide

evidence that the above noted checks are not outstanding by providing copies ofthe front

and back ofthe negotiated checks along with bank statements, or that the outstanding

checks are void by providing either copies ofthe voided checks with evidence that no

obligation exists, or copies of negotiated replacement checks. Absent such information,

the Audit staffstated that it would recommend the Commission determine that stale-dated

checks totaling $44,046 ($27,728 +$16,318) are payable to the United States Treasury.

In response to the Memorandum, DK's states that, with respect to checks

with a face value of $1 ,000 or less, the failure to negotiate the check indicates an intent to

make a contribution to DK. Because donations of personal services and personal travel

expenses are exempt under 11 CFR §100.7(b), stale checks of$I,OOO or less having to do

with such personal services or travel need not be repaid to the Treasury. Thus, only

$20,984 must be repaid to the Treasury. Although not detailed in its narrative, DK on a

supporting schedule provided notes that no balance is due relative to two checks payable

to AT&T. Finally, the response notes that OK does not dispute the $16,318 payment for

stale dated GELAC checks.

OK provided no evidence in its response that the stale dated outstanding

checks identified in this finding were either negotiated or void and that no obligation

exists. Instead, predicated on the undemonstrated assumption that the payee intended

donate personal services or travel costs, OK calculates that a portion ofthe stale dated

outstanding checks do not require a payment to the U.S. Treasury.

Section 9007.6 ofthe Code of Federal Regulations makes no such

assumption. Ifstatements from the payees ofthe stale dated checks had been provided to

support DK's contention an allowance would be appropriate. No such evidence has been

provided. Further, with respect to the two checks payable to AT&T, no statement has

been provided from the vendor or any reconciliation ofDK's account with AT&T

indicating these amounts are not due. As a result, the Audit staffs position remains

unchanged. DK's third quarter 1998 disclosure report shows that a number ofthe checks

that DK acknowledges are stale and payable to the U.S. Treasury, have been voided, the

amount added back to DK's available cash and subsequently disbursed.

Recommendation

The Audit staffrecommended that the Commission determine that DK

was required to pay $44,046 to the United States Treasury pursuant to Section 9007.6 of

Title 11 ofthe Code of Federal Regulations.

56
The Commission approved the Staffrecommendation.

G. SUMMARY OF AMOUNTS DUE TO THE U.S. TREASURY

III.C.

III.D.

Expenditure Limitation

Non-qualified Expenditures

1. Lost Equipment

2. DFP Expenses Paid by DK

III.E. Income Eamed by DK

III.F. Stale-Dated Checks

Total Amount Due to the U.S. Treasury

57

$2,547,429

574,158

46,510

44,046

$3,212,143
Attachment #1

Page 1 of2

DOLEIKEMP '96, INC.

STATEMENT OF NET OUTSTANDING QUALIFIED

CAMPAIGN EXPENSES AT DECEMBER 5, 1996 !f

(As Determined by the Audit Staff as of September 30, 1998)

ASSETS

Cash

Accounts Receivable

Dole for President Committee, Inc..!;!1

DolelKemp Compliance Committee, Inc.!;.1

Refunds Received (12/6196 to 9/30198) !II

Capital Assets ~I

TOTAL ASSETS

LIABILITIES

Accounts Payable

Payments for Qualified Campaign

Expenses (12/6/96 to 9130198)

Outstanding Accounts Payable

at 9/30/98 [I 358,593

US Airways (See Finding ILA.) 340,781

Secret Service (See Finding lII.B.)

Press (See Finding III.B.)

DolelKemp Compliance

Committee, Inc. (See Finding IILC.)

Dole for President (See Finding IILe.)

Total Accounts Payable

Payments for Wind Down

Expenses gI

$ 574,158

83,1l6

2,885,890

$4,339,842

699,374

65,754

1,153,527

564,432

387,480

$1,021,119

3,543,164

$4,650,907

7,210,409

54,234

Payable to U.S. Treasury (See Finding IILE. - Income Earned)

TOTAL LIABILITIES

NOQCE SVRPLVS/(DEFICIT)

58

$7,311,153

$(2,660,246)
Attachment #1

Page 2 of2

DOLEIKEMP '96, INC.

FOOTNOTES TO NOQCE STATEMENT

al All figures are rounded to the nearest dollar.

•

h/ This figure represents OFP expenses paid by OK.

This figure represents refunds due OK which were deposited by the GELAC

($11,608); uncollectible Secret Service travel costs which may be reimbursed by

the GELAC ($17,274); and wind own costs incurred by OK ($54,234).

The Audit staff has not included $11,245 reported by OK as outstanding accounts

receivable from the Press. Based on Finding III.B., collection of any ofthese

amounts will result in an equal amount becoming refundable to the Press.

The value of computers and related equipment transferred to OK was determined

to be $178,173. Under 11 CFR §9035.1 (c) an alternative allocation of costs to

exempt compliance is allowed. The compliance portion oflegal, accounting, and

national offices is 18.97% or $33,800. Under 11 CFR §9004.9(d)(I), capital

assets are allowed to be depreciated and presented on the NOQCE at 60% ofits

fair market value or cost. Based on this, the Audit staff calculated capital assets to

be $86,624 ($178,173 - 33,800 x 60%).

[I As a result ofthe Dole for President response to its Exit Conference

Memorandum, $1,261 due to NTFC is owed by OK and is included in this figure.

(see Audit Report on Dole for President, Inc. Finding III. CA.)

gl Dole for President, Inc. paid lOO% ofthe $2,141,602 ofshared wind down costs

incurred from 12/6/96 to 7/31/98. Fifty percent ofsuch costs should be

attributable to OK and, as such, are reimbursable by the GELAC and not currently

recognized on this statement. In addition, a review ofOK's post 12/5/96

disbursements identified $54,234 which had been incurred for wind down related

costs which may be reimbursed by the GELAC.

59
60
FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 20463

OCtobe~ 21, 1998

MEMORANDUM

•

TO:

THROUGH:

FROM:

SUBJECT:

Robert J. Costa

Assistant StaffDirector

Audit Division

James A. Pehrkon

Acting StaffDirect

Lawrence M. Noble if /I,fJi/

General Counsel /{/f../

Kim Bright-Coleman \U~ Associate General Counsel

Lorenzo Holloway '1. ffl- . Assistant General Counsel

Proposed Audit Report on Dole/Kemp '96, Inc. and

Dole/Kemp '96 Compliance Committee, Inc. (LRA # 506)

The Office ofGeneral Counsel is reviewing the proposed Audit Report on

Dole/Kemp '96, Inc. ("the General Committee") and Dole/Kemp '96 Compliance

Committee, Inc. ("the GELAC") submitted to this Office on September 18, I998. This

Office will submit comments to you as they are prepared. If you have any questions

concerning our comments,. please contact Peter Blumberg, the lead attorney assigned to

these matters. As a threshold matter, we understand that the draft Audit Report was

submitted to this Office prior to the completion ofthe referencing process and, therefore,

we request that you inform us in writing of any changes to the Report that may be made

during the referencing process.l

Additionally, because the proposed Audit Report concern the audit ofa publicly-financed

candidate, the Office of General Counsel recommends the Commission consider the Audit Report in open

session. 11 C.F.R. §§ 9007.I(e)(l) and 9038. I(e)(l).
?

Memorandum to Robert 1. Costa

Proposed Audit Report on Dole/Kemp '96

Page 62

I. DOLE/KEMP PROHIBITED CONTRIBUTION-US AIRWAYS CREDIT

(H.A.I.) 2

We agree with your conclusion that the General Committee received a

contribution from US Airways as a result of an extension of credit. However, we

recommend that the Report be clarified on two points. First, the Report indicates that the

Committee received invoices from US Airways and made payments on a regular basis

through mid-October, 1996. We recommend that you include additional information as

to when payments began and how often they were made through mid-October in order to

show US Airways' prior practice for extending credit to the General Committee. See II

C.F.R. § 116.3(C)(2); see also 14 C.F.R. § 374a.4(a)(I) and (2).3 If US Airways did not

adhere to its established terms for extending credit to the General Committee after midOctober, then it appears that US Airways did not extend credit in its ordinary course of

business. 11 C.F.R. § 116.3(c)(2).

Second, the Report indicates that the Committee provided a generic letter dated

December 4, 1996 noting that late charges would be assessed on outstanding balances,

effective January I, 1997. We recommend that you include information regarding

whether or not such late charges were assessed. If no late charges were assessed, and

applying late charges is in the ordinary course of US Airways business, this would lend

support to the argument that US Airways did not follow its ordinary practice for

extending credit. 11 C.F.R. § 116.3(c).

II. EXCESSIVE PRESS AND UNITED STATES SECRET SERVICE

REIMBURSEMENTS (1II.B.)

We agree with the conclusions in this section. The proposed Audit Report

recommends that the General Committee refund $65,754 to the Secret Service and

$1,165,457 to the press for excessive reimbursements it had collected from these

organizations. The Audit Division's recommendation is based, in part, on the conclusion

that certain costs associated with press filing, security, generators, sound and lighting,

Parenthetical references are to the relevant sections of the Primary Committee's proposed Audit

Report.

US Airways is engaged in the commercial airline industry, a regulated industry. 49 U.S.C.A.

§ 40101 et seq. The Commission may rely on the regulations prescribed by other Federal agencies to

determine whether extensions of credit by the entities regulated by those Federal agencies were made in the

ordinary course of business. II C.F.R. § 116.3(d). We recommend that the Audit Division revise the

Audit Report to include references to the regulations governing extensions of credit by commercial airlines.

If US Airways did not submit a statement to the General Committee at least once a month, no later than the

second business day following the last day ofthe billing period covered by the statement, then US Airways

may not have complied with 14 C.F.R. § 374.4(a)(I) and (2). Further, US Airways should have ceased

providing services to the General Committee in light of its "overdue indebtedness" pursuant to 14 C.F.R.

§ 374a.4(a)(4)(i) and (ii); 14 C.F.R. § 374a.4(a)(5)(ii).

62
Memorandum to Robert J. Costa

Proposed Audit Report on Dole/Kemp '96

Page 63

luggage trucks, pipe and drape, and other miscellaneous items were not ground costs.

The Audit Report states that the Audit staffs review of documentation in support of

amounts billed to the press indicated that some ofthese costs were event related, not

ground costs and other services as permitted under section 9004.6. In specifically

discussing the various costs and concluding that they are not reimbursable under 11

C.F.R. § 9004.6, the Audit Report also appears to rely on the fact that the Committee

failed to provide documentation and specific examples to establish that costs billed to the

press were not excessive or "made available" to the press.

This Office agrees with the Audit Report conclusion that the General Committee

has failed to provide documentation and specific examples to establish that costs billed to

the press were not excessive. This requirement is consistent with the purpose of

section 9004.6, which is to eliminate the possibility for the subsidizing of a campaign by

the media or other individuals through the charging of higher than pro rata shares for the

use of candidate-supplied transportation. See Explanation and Justification/or 11 C.F.R.

§ 9004.6, 45 Fed. Reg. 43376 (Sept. 5, 1980). The need for such documentation is

amplified in instances where the costs charged to the press are associated with items

(here, costs ofsecurity, pipe and drape, lighting) that do not appear to be closely related

in nature to the examples of "ground services or facilities" delineated in section 9004.6,

i.e., air travel, ground transportation, housing, meals, telephone service, and typewriters.

{fthe General Committee cannot establish that the services provided to the press were, in

fact, related to transporting the press or assisting in the performance of their work

obligations, then this may be indicative ofthe General Committee's attempt to use the

costs for the services as a mechanism to subsidize the campaign and lower the amount

subject to the overall expenditure limitation. Id.; 11 C.F.R. § 9004.6(a) (reimbursements

received from the press are deducted from the overall expenditure limitation).4

While the Audit Report concludes that the costs are not reimbursable based on the General

Committee's failure to identify and provide documentation ofthe services, the Report states that certain

costs appear to be event-related and not ground costs, and therefore not reimbursable under section 9004.6.

The Office of General Counsel does not believe that there should be a per se rule that certain services do

not constitute "ground services" or facilities pursuant to Section 9004.6. A review of the Explanation and

Justification for section 9004.6 and Commission advisory opinions provides no specific guidance as to

what all is encompassed by these terms. A committee may be able to demonstrate that services, including

those addressed in the Audit Report, could be required by the press in given circumstances and could fall

within the category of "ground services or facilities."

63
Memorandum to Robert J. Costa

Proposed Audit Report on DolelKemp '96

Page 64

III. OTHER RECOMMENDATIONS

Finally, this Office concurs with your findings and recommendations on the

following sections ofthe proposed Report and has no comments on the sections:

Misstatement of Financial Activity (II.B.)

Stale-dated Checks (IILE.)

Staff assigned:

Peter G. Blumberg

Susan L. Kay

Tracey L. Ligon

J. Duane Pugh

Jamila 1. Wyatt

64
_.

FEDERAL ELECTION COMMISSION

WASH INGTON, DC. 20463

October 21, 1998

MEMORANDUM

TO:

THROUGH:

FROM:

SUBJECT:

Robert J. Costa

Assistant Staff Director

Audit Division

James A. Pehrkon

Acting Staff Dire r

Lawrence

General Counsel

M. NobleL

Kim Bright-Coleman

Associate General Counsel

Lorenzo Holloway ~. Assistant General Counsel

Proposed Audit Reports on Dole for President, Inc.;

DolelKemp '96, Inc.; and DolelKemp '96 Compliance

Committee, Inc. (LRA # 467 and # 506)

The Office of General Counsel is continuing its review ofthe proposed Audit

Reports on Dole for President, Inc. ("the Primary Committee"), DolelKemp '96, Inc.

("the General Committee"), and DolelKemp '96 Compliance Committee, Inc. ("the

GELAC") [collectively, "the Dole Committees"] which were submitted to this Office on

September 16,1998 and September 18, 1998, respectively. This Office will present its

comments to you as they are prepared. Individual subject matters are discussed in

individual sections, as noted by the section headings.
Memorandum to Robert J. Costa

Proposed Audit Reports on Dole Committees

Page 66

I. PRIMARY COMMITTEE LOAN TO GENERAL COMMITTEE (II.A. IN

PRIMARY COMMITTEE REPORT AND II.A.2.a. IN GENERAL

COMMITTEE REPORT)

We concur with the Audit staffs conclusion that, in connection with the

October 30 and November 1, 1996 transfer of $2 million from Primary Committee

accounts to General Committee accounts, the Primary Committee incurred non-qualified

campaign expenses when it contributed to the General Committee by loaning it funds.

Further, we concur with the Audit staffthat, in cOIUlection with the subsequent purchase

of certificates of deposit, the Primary Committee contributed to the General Committee

when it purchased certificates of deposit from the General Committee.l However, we

recommend that the Audit staff also conclude that the Primary Committee incurred nonqualified campaign expenses when it purchased the certificates of deposit from the

General Committee for two reasons.

First, the Primary Committee paid the General Committee more than the usual

and normal charge for the funds it received. The Committees acknowledge that one

certificate of deposit in the amount of $200,000 plus $2,767 interest had already been

redeemed by the General Committee, and the Committees acknowledge a debt of

$202,767 owed to the Primary Committee by the General Committee. The full value of

the remaining certificates of deposit was $800,000 plus earned interest. However, the

certificates of deposit were worth less than their face value plus interest because the

General Committee continued to use the certificates of deposit to secure letters of credit.

However, the Primary Committee paid $800,000 plus earned interest to purchase the

certificates of deposit. If a committee pays more than the usual and normal charge for

goods or services, the excessive amount has no connection with the candidate's

nomination and therefore is not a qualified campaign expense. 11 C.F.R. § 9032.9(a)(2).

Therefore, the amount by which the Primary Committee's payments exceeded the value

of the certificates of deposit is a non-qualified campaign expense. See Statement of

Reasons in the Matter ofDr. Lenora B. Fulani, et al. (Mar. 7, 1997).

The second reason for our view that the Primary Committee incurred nonqualified campaign expenses when it purchased the certificates of deposit from the

General Committee is that the Primary Committee permitted the General Committee to

continue to use the certificates of deposit to secure letters of credit used in the General

Committee's operations. By doing so, the Primary Committee used its funds, which

include public funds, to provide a form ofsecurity to the General Committee. A

guarantee, endorsement, and any other form or security are considered loans and therefore

contributions pursuant to 11 C.F.R. § 100.7(a)(l)(i). In Advisory Opinion 1988-5, the

Commission recognized that a committee's use of public funds received in connection

with one election to secure the obligations of another committee in connection with a

The proposed Audit Reports refer to this transaction as a "repurchase" because the General

Committee had purchased these certificates of deposit from the Primary Committee on August 3D, 1996.

66
Memorandum to Robert J. Costa

Proposed Audit Reports on Dole Committees

Page 67

different election would be a non-qualified campaign expense. See Advisory Opinion

1988-5 (noting that such use would be non-qualified campaign expense whether the

transactions were characterized as "transfers, contributions or loans (including any loan

guarantee or security)").2 Therefore, we recommend that the Audit staff conclude that the

Primary Committee also incurred non-qualified campaign expenses when it purchased the

certificates of deposit from the General Committee.

We understand that the letters of credit that were secured by the certificates of

deposit have expired and that the Primary Committee has unfettered access to the

certificates ofdeposit funds. With the expiration ofthe letters of credit, the value ofthe

certificates of deposit was no longer reduced by the General Committee's use ofthe

certificates of deposit as security. Consequently, the Primary Committee received the full

value ofthe certificates of deposit in its possession once the certificates of deposit were

no longer used by the General Committee as security. Pursuant to I I C.F.R.

§ 100.7(a)(I)(i), when the Primary Committee permitted the General Committee to use

Primary Committee certificates of deposit as security, the Primary Committee loaned

those funds to the General Committee. When the General Committee, which had already

provided the certificates of deposit to the Primary Committee, ceased using the

certificates ofdeposit as security, it repaid the loan. Pursuant to 11 C.F.R.

§ 1OO.7(a)(l)(i)(B), a loan, to the extent it is repaid, is no longer a contribution. On this

basis, we concur with the Audit staffs conclusion that the Primary Committee should not

be required to repay the non-qualified campaign expenses for which it has received or

expects to receive reimbursements.

II. PRIMARY EXPENSES PAID BY DOLE-KEMP '96 (III.B.2. IN PRIMARY

COMMITTEE REPORT AND III.A.l.d. IN GENERAL COMMITTEE

REPORT)

The Audit staffrecommends that the Commission determine that, pursuant to

I I C.F.R. § 9034.4(e), disbursements in the amount of $207,378 made by the General

Committee, are attributable to the Primary Committee's overall expenditure limitation.

While we generally agree with your approach, we do not believe you have sufficiently

addressed the issue of whether some ofthese expenditures may be General Committee

pre-expenditure report period expenses for property, services or facilities which are to be

used in connection with the general election campaign and which are for use during the

expenditure report period. 11 C.F.R. § 9003.4. Such expenditures may include, but are

Furthermore, we recommend that the proposed reports be revised to include a discussion of

Advisory Opinion 1988-5, which concludes that use of public funds in connection with any election other

than the election for which they were awarded is a non-qualified campaign expense. Additionally, to put

the Advisory Opinion in context, this finding should also include the definition ofthe term "qualified

campaign expense," 11 C.F.R. § 9032.9, even though that regulatory section is discussed elsewhere in the

proposed Audit Report.

67
Memorandum to Robert J. Costa

Proposed Audit Reports on Dole Committees

Page 68

not limited to: expenditures for establishing financial accounting systems and

expenditures for organizational planning. Id.

The Explanation and Justification for section 9003.4 states that purpose ofthe

regulation was to "permit a candidate to set up a basic campaign organization" before the

date ofineligibility. Explanation and Justification for II C.F.R. § 9003.4,45 Fed.

Reg. 43375 (June 27,1980). Section 9003.4 was modified by section 9034.4 only as it

relates to polling expenditures, and otherwise continued to allow general election

committees to incur expenditures prior to the general election expenditure report period.

See Explanation and Justification for II C.F.R. § 9003.4, 60 Fed. Reg. 31857 (June 16,

1995). In order to effectuate the regulation's undisturbed purpose of assisting in the setup of a "basic campaign organization," certain "start-up" costs can be incurred by the

General Committee. In this case, we believe that the costs oftelephone equipment and its

installation and the costs of office furniture and equipment may constitute expenditures

contemplated by section 9003.4 as "property, services or facilities which are to be used in

connection with the general election campaign" and constitute parts of a "basic campaign

organization."]

Staff assigned:

Peter G. Blumberg

Susan L. Kay

Tracey L. Ligon

1. Duane Pugh

Jamila Wyatt

We note that the Office of General Counsel memorandum to the Audit Division ofMarch 20,

1998 regarding the application of 11 C.F.R. § 9034.4(e)(3) addressed candidate committee campaign

expenditures in general. The March 20, 1998 memorandum references section 9003.4 and notes some of

the potential uses offunds for the pre-expenditure report period.

68
FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 20463

October 27, 1998

MEMORANDUM

TO:

THROUGH:

FROM:

SUBJECT:

Robert J. Costa

Assistant Staff Director

Audit Division

..../2J.~. James A. Pelrrkop:'·'-:j .'

Acting StaffI)ifector'

Lawrence M. Noble~ .

General Counsel

Kim Bright-Coleman \~ Associate General Counsel

Lorenzo Holloway

Assistant General Counsel

Proposed Audit Report on Dole for President, Inc. - Media

Advertisements and Other Expenses Paid for by the Republican National

Committee, Repayment Ratio and Winding-Down Costs (LRA # 467)

The Office of General Counsel has completed its review ofthe proposed Audit Report on

Dole for President, Inc. ("Primary Committee") submitted to this Office on September 16, 1998.

The following memorandum contains our comments on issues related to the media, polling,

winding-down costs and coordinated expenditures sections ofthe proposed Audit Report

(sections IILAA., III.A.S., III.G.l.b. and III.A.2., respectively, ofthe proposed Audit Report).

We understand that the proposed Audit Report was submitted to this Office prior to the

completion ofthe referencing process and, therefore, we request that you alert us to any changes

to these sections. If you have any questions concerning our,comments, please contact Peter G.

Blumberg or J. Duane Pugh.
Memorandum to Robert J. Costa

Dole for President, Inc. Audit Report

(LRA#467)

Page 70

I. INTRODUCTION

During the course of audit fieldwork, you requested this Office's assistance in preparing

subpoenas to obtain additional information for the audits. Thereafter, the Commission issued

subpoenas and orders to answer questions to 10 entities. Specifically, subpoenas and orders were

issued to Dole for President, Inc., DolelKemp '96, Inc. (the "General Committee"), the

Republican National Committee (the "RNC"), AV Atlantic, United Jet International, and Multi

Media Services Corp. on January 21, 1998; to Franklin National Bank on March 13, 1998; and to

the RNC, Fabrizio, McLaughlin, and Associates, Robert M. Ward, and Target Enterprises, Ltd.

on May II, 1998. We recommend that you reference these subpoenas in your Report so that

there is a record ofthis activity.

Moreover, two ofthe subpoenas have not yet been fully complied with and additional

documentation is expected which may have an impact on your findings. Therefore, we

recommend that you consider withholding the findings in sections III.A.3.a., b. and c. (Payroll)

and III.A.5. (Polling Expenses),lor portions thereof, ifthe outstanding documentation cannot be

incorporated into this Report. Once the information is obtained, the Commission can issue

addenda to the Audit Report. 11 C.F.R. § 9038.1(d)(3). The addenda can include additional

repayment determinations. II C.F.R. § 9038. I(d)(3); see 11 C.F.R. § 9038.2(f). Further, the

Commission could consider the information in connection with any subsequent inquiry pursuant

to 26 U.S.C. § 9039 and 11 C.F.R. § 9039.3. These procedural options should be considered in

light ofthe requirement that repayment determinations be more than a "progress report" and must

satisfy the repayment notification requirement. See Simon v. FEe, 53 F.3d 356, 359 (D.C. Cir.

1995). See also Fulani v. FEe. 147 F.3d 924, 926 (D.C. Cir. 1998) (repayment determinations

must be "the product of a 'thorough examination and audit"'). The lack of documentation is

especially relevant with respect to your findings at sections III.A.3.b.-c. (Other Employees and

Consultants) where you conclude that expenditures made by the Republican National Committee

to certain consultants and other employees are attributable to the Primary Committee's overall

expenditure limitation based prim.arily on the unusual timing ofthe RNC's hiring ofthese

individuals. The Commission is continuing to seek documents from the RNC that would provide

information on the type ofwork performed by these individuals.'

The supoenas seek information related to polling expenditures discussed in the proposed Audit Report, as

well as information related to polling expenditures that are in addition to those already discussed in the Audit Report.

Similar evidentiary problems may not exist with the related findings on advance staff (section III.A.3.a.

(Advance Staff)) since the RNC advance staff's appearance on Primary Committee travel itineraries is persuasive

evidence that the individuals were working for the Primary Committee.

70
Memorandum to Robert J. Costa

Dole for President, Inc. Audit Report

(LRA #467)

Page 71

II. RNC EXPENDITURES FOR MEDIA (III., A., 4.)

The proposed Audit Report attributes media expenditures paid for by the RNC on behalf of

Senator Dole's campaign to the Primary Committee's overall expenditure limitation.2 The

proposed Audit Report recommends that the Commission find that the RNC paid a total of

$18,453,619 directly and through Republican state party committees for media expenditures on

behalf ofthe Dole campaign for advertisements that aired between April 1996 and August 1996.

This recommendation is based on your conclusion that there is evidence that the campaign staff

and consultants coordinated with the RNC regarding the creation and placement ofthe media

advertisements that appear to contain an "electioneering message" and references to a "clearly

identified candidate.")

This Office concurs with the proposed Report's recommendation that some ofthe cost of

the advertisements paid for by the RNC on behalf of the Dole campaign should be added to the

expenditures subject to the Primary Committee's overall expenditure limitation; however, as

noted below, we also recommend that the proposed Audit Reports be revised to attribute some of

the media expenditures to the General Committee's expenditures subject to its expenditure

limitation.4 Moreover, this Office concurs that, as a result, and in combination with other

findings that add expenditures to the overall expenditure limitation, the Primary Committee

The Primary Committee argues that "Ifthe Audit Division believes that an excessive contribution was made

[by the RNC to the Primary Committee], the proper procedure is to ... let the Commission decide whether to pursue

the matter in an enforcement action." Generally, a finding can be a part of an audit report regardless of whether it is

part of an enforcement action. It is well established that audits related to repayments under the Presidential Election

Campaign Fund Act ("Fund Act"), 26 U.S.C. §§ 9001, et seq., and the Presidential Primary Matching Payment

Account Act ("Matching Payment Act"), 26 U.S.C. §§ 9031, et seq., and enforcement investigations related to

violations of the Federal Election Campaign Act ("FECA" or "the Act"), 2 U.S.C. §§ 431, et seq., are separate and

independent processes. See Reagan Bush Comm. v. FEe, 525 F. Supp. 1330, 1337 (D.D.C. 1981)(noting that

"repayment determinations are not considered to involve violations of law ... the procedure leading to repayment

determinations which includes the audit process and the procedure for enforcing violations ofthe [Fund Act] and

FECA are treated as two different functions under the statutory scheme and by the FEC in practice"). Moreover, the

Commission has authority to examine a committee's compliance with FECA during its audits. See I I C.F.R.

§ 9038. I(b)(2)(iii). Further, in Bush-Quayle '92 Primary Comm., Inc. v. FEC, 104 F.3d 448, 451 (D.C. Cir. 1997),

the Court of Appeals explicitly noted that the audit finding at issue in that case presupposed a violation offederal

election law, but it did not question the propriety ofsuch an audit finding.

There are grounds on which to conclude that the subject RNC advertisements are in-kind contributions to the

Dole campaign separate from the coordination/content analysis. The RNC used Primary Committee film footage in

its advertisements and therefore fmanced "the dissemination, distribution, or republication, in whole or in part, of any

broadcast or any written, graphic or other form of campaign materials prepared by the candidate, his campaign

committees, or their authorized agents." 2 U.S.C. § 44Ia(a)(7)(B)(ii). This use of "campaign materials ... shall be

considered to be to be an expenditure for purposes ofthis paragraph" (e.g. a coordinated expenditure and a

contribution to the relevant candidate). Id. The Primary Committee acknowledges the RNC's limited use of certain

footage, but states that "the RNC made a decision independent ofthe campaign to use that footage in its ad and

entered into an 'arms-length' agreement" to purchase the footage from the Primary Committee.

See Part II.C. infra. According to the proposed Audit Report, an allowance has already been made for a

contribution from the RNC to the Primary Committee for the full amount permitted under 2 U.S.c. § 441 a(a)(2).

71
Memorandum to Robert J. Costa

Dole for President, Inc. Audit Report

(LRA #467)

Page 72

exceeded its expenditure limitation. 2 U.S.C. § 44Ia(b)(I)(A) and (c); 26 U.S.C. § 9035(a).

Further, we concur with the recommendation that the Commission determine that the Primary

Committee must make a pro rata repayment for non-qualified campaign expenditures in excess

ofthe expenditure limitation.

The overall expenditure limitation for candidates receiving public funds for the primary

election is set forth at 2 U.S.C. § 441a(b)(l)(A), (c) and 26 U.S.C. § 9035(a), and at 2 U.S.C.

§ 44Ia(b)(l)(B) and (c) for the general. See also 11 C.F.R. §§ 11O.8(a); 9035.1(a)(l). An

expenditure is made on behalf of a candidate, and thus subject to the expenditure limitation, ifit

is made by an authorized committee or any other agent ofthe candidate or any person authorized

or requested by the candidate, an authorized committee ofthe candidate, or an agent ofthe

candidate, to make the expenditure. 2 U.S.C. § 441a(b)(2)(B). Because the statute requires that

expenditures made by others at the campaign's request be subject to the expenditure limitation,

this Office believes that it is appropriate to apply the RNC expenditures to the Primary or

General Committee's expenditure limitation as long as the expenditures were "knowingly

incurred in connection with the candidate's campaign for the nomination." 26 U.S.C.

§§ 9003(b); 9035(a); see also Statement ofReasons Supporting Final Repayment Determination

in Dole for President (February 6, 1992) (Commission concluded that in-kind contributions from

a political committee to a presidential committee are subject to the state expenditure limitation).

The evidence of coordination between the RNC and the Dole campaign with regard to the media

expenditures establishes that the Dole campaign knowingly incurred the expenditures.

A. RNC's Coordination with Dole Campaign

As noted above, your recommendations are based on the conclusion that the RNC's

media expenditures were coordinated with the Dole campaign and the advertisements contained

an electioneering message with reference to a clearly identified candidate. Thus, we begin our

analysis with the question of whether the RNC's expenditures for media were "made by any

person in cooperation, consultation, or concert, with, or at the request or suggestion of, a

candidate, his authorized political committees or their agents.,,5 2 U.S.C. § 441a(a)(7)(B)(i);

Buckley v. Valeo, 424 U.S. 1,78 (1976) (the term "contribution" includes "all expenditures

placed in cooperation with or with the consent of a candidate, his agents, or an authorized

committee ofthe candidate"); see 11 C.F.R. § 109.I(b)(4). Congress's decision to treat

coordinated expenditures as in-kind contributions was designed to prevent and limit the

opportunities for corruption and the appearance of corruption inherent in coordinated activity.

The Buckley Court stated that the absence of prearrangement or coordination of an expenditure

"alleviates the danger that expenditures will be given as a quidpro quo for improper

commitments from the candidate." 424 U.S. 1,47 (1976). The reverse is equally true - the

The statute's inclusion of authorized political committees, agents ofthe candidate and agents ofthe

committees establishes that a finding of coordination can be based on the activities of any ofthese actors. Such a

finding does not require candidate involvement.

72
Memorandum to Robert J. Costa

Dole for President, Inc. Audit Repon

(LRA #467)

Page 73

presence ofprearrangement or advance coordination of an expenditure between a candidate or

his or her committee or agents and the person making the expenditure presents a danger of an

illicit quid pro quo like a contribution ofmoney. The Commission must consider all ofthe facts

and circumstances to determine whether the quantity and substance of contacts between a

candidate and a person, entity or political committee compromised the independence of an

expenditure and transformed it into a coordinated expenditure pursuant to 2 U.S.C.

§ 441 a(a)(7)(B)(i).

In defining independent expenditures related to communications that include express

advocacy, the Federal Election Campaign Act ("FECA" or "the Act"), 2 U.S.C. §§ 431, et seq.,

describes the quantity and substance of contact that defeats the independence ofthe expenditure.

2 U.S.C. § 431(17). To be independent, an expenditure must be made without cooperation or

consultation with any candidate, or any authorized committee or agent ofsuch candidate, and it

must not be made in concert with, or at the request or suggestion of, any candidate, or any

authorized committee or agent ofsuch candidate. Id. The Commission's regulation on this

subject states that any arrangement, coordination, or direction by the candidate or his or her

agent prior to the communication is sufficient to defeat the independence of an expenditure and

to render the expenditure a contribution to the candidate. 11 C.F.R. § 109.1(b)(4) and (c).

While the line has not always been clear, the Commission has provided some guidance

on the quantity and substance of contacts that constitute coordination.6 For example, the

Commission has taken the approach in some case that passing any information about a

candidate's plans, projects or needs from the campaign to the expending person may trigger a

conclusion of coordination that compromises the independence of an expenditure.? However, in

See, e.g., 11 C.F.R. § 114.2(c) (any coordinated communications may negate the independence of any

subsequent communications). See also 11 C.F.R. § 114.4(c)(5) (concerning voter guides that include express

advocacy: any contact or other cooperation, coordination, consultation, request, or suggestion will result in a

contribution. Concerning voter guides that do not include electioneering messages: any contact other than written

exchanges about the candidate's positions on issues will result in a contribution); but see Clifton v. FEC, 114 F.3d

1309 (Ist Cir. 1997), cerl. denied, \] 8 S. Ct. 1036 (1998)(declaring II C.F.R. § 114.4(c)(5) invalid under First

Amendment insofar as it limited contact with candidates to written inquiries and replies). Cf 62 Fed. Reg. 24,367

(May 5, 1997) (notice of proposed rulemaking regarding the definition of coordination to be codified at II C.F.R.

§ 100.23).

See, e.g., MUR 3918 (Hyatt for Senate) (supporting probable cause determination, coordination found where

advertisements, ostensibly for a candidate's law firm, were written by the campaign's media adviser and approved

by the candidate); MUR 3192 (Orton for Congress) (supporting probable cause determination, coordination found

where an ad hoc citizens' group attacked a candidate's opponent where member of group had formerly been a

policy advisor to the candidate in the same election cycle and the group learned from the candidate that he would

not publicly attack his opponent on allegations raised by group and that the candidate did not want the allegations

raised); Advisory Opinion ("AO") 1996-1 (coordinated endorsements by a trade association may compromise its

ability to make subsequent independent expenditures); AO 1984-30 (coordinated in-kind contributions in the

primary election precluded independent expenditures regarding same candidates in the general election); FEC v.

National Conservative PAC, 647 F. Supp. 987, 990 (S.D.N.Y. 1986) (use of common campaign strategist

constitutes coordination).

73
Memorandum to Robert J. Costa

Dole for President, Inc. Audit Report

(LRA #467)

Page 74

other cases, the Commission has not pursued matters where contacts between a candidate and an

expending person resulted in changes to the content of a specific communication. 8

In discussing the quantity and substance of contact necessary to impair the

independence of an expenditure and constitute coordination, the United States Supreme Court

recently stated that there was not coordination in a situation that lacked a "general or particular

understanding." FEC v. Colorado Republican Fed. Campaign Comm. 518 U.S. 604, 614

(1996)(plurality opV This Office believes that the phrase was intended to convey a realistic

understanding ofthe concept ofcoordination that is broad enough to effectuate the statute's

purpose oflimiting real or apparent corruption without violating First Amendment rights. While

some "general understanding" regarding the expenditures may be necessary, requiring a specific

agreement in every case would allow expending persons to make "independent" expenditures

after extensive consultation with the candidate or committee about plans, projects, activities and

needs, so long as the campaign had no approval ofthe final content or timing ofthe

communication. Indeed, it might then be more difficult to prove that an expenditure was

"coordinated" and therefore a contribution -- a statutory structure intended to broadly limit

opportunities for illicit quidpro quos -- than it would be to prove the quid pro quos themselves

under criminal bribery and extortion statutes such as the Hobbs Act, 18 U.S.C. § 1951. See

Evans v. United States, 504 U.S. 255, 274 (Kennedy, 1., concurring) ("The official and the payor

[in a Hobbs Act bribery/extortion case] need not state the quidpro quo in express terms, for

otherwise the law's effect could be frustrated by knowing winks and nods."). Such a situation

would be at odds with the purpose of2 U.S.C. § 441a(a)(7)(B)(i) -- to avert real or apparent

corruption.

The Primary Committee argues for a much narrower interpretation of2 U.S.C.

§ 441a(a)(7)(B)(i); it maintains that only expenditures that are directed and controlled by a

See, e.g., MUR 4282 (Archdiocese of Philadelphia), where it was alleged that after a candidate's committee

received word that the Archdiocese's planned voter guide misstated the candidate's record and put him in no better

light than his opponent, a representative of the candidate contacted the Archdiocese to complain, and as a result, the

Archdiocese changed the voter guide. Although that case involved admitted contact between a candidate's

representative and an expending person that was about, and resulted in changes to, the content of a specific

communication, the Commission was divided 3-2 on a motion to find reason to believe that violations ofthe Act

occurred. See also MUR 41 I 6, Statement of Reasons ofChairman Joan D. Aikens and Commissioner Lee Ann

Elliott,3 (June 4,1998) ("we would not agree that mere inquiries, without a meeting ofthe minds oftwo or more

persons on a course of action resulting in expenditures, is sufficient for coordination").

The Supreme Court's holding in Colorado Republicans was that the First Amendment prohibits the

presumption that national party committee's expenditures are coordinated with its congressional candidates.

Colorado Republicans, 518 U.S. at 608. The Supreme Court expressly limited its holding, stating: "Since this case

involves only the [FECAl provision concerning congressional races, we do not address issues that might grow out

ofthe public funding of Presidential campaigns." Id., 518 U.S. 604, at 612; see also RNC v. FEC, 487 F. Supp.

280,284-87 (S.D.N.Y.) (Congress may condition public funding eligibility upon candidate's voluntary acceptance

of expenditure limits ), aff'd memo 445 U.S. 955 (1980). However, the Supreme Court did not specify to which

public fmancing issues it was referring. Of course, the conclusion in the proposed Audit Report that the RNC's

media expenditures were coordinated with the Dole campaign is based on the facts, not on any presumption.

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campaign are coordinated expenditures pursuant to 2 U.S.C. § 441a(a)(7)(B)(i). According to

the Primary Committee, the RNC "independently designed, produced, and aired" the

advertisements "without direction from the candidate or campaign" and the RNC had "full and

final authority over both the production and the geographic distribution ofthe ads." The Primary

Committee adds that its only involvement with the "production or airing ofthe ads" was when,

"as a matter of courtesy, [the RNC] showed the ads to the campaign after the ads were finalized

and made public." In addressing the role of Don Sipple, the Primary Committee's media

consultant, in the RNC advertising campaign, the Primary Committee states that "when the ads

at issue were created, produced and aired, Mr. Sipple was being directed by and his legal duty

was to the RNC."

We concur with the Report's conclusions on coordination and believe that the

RNC's expenditures were "made ... in cooperation, consultation, or concert, with, or at the

request or suggestion of, a candidate, his authorized political committees or their agents." 2

U.S.C. § 441a(a)(7)(B)(i). The record in the audit includes evidence ofsubstantial

, communication between the RNC and the Dole campaign on every facet ofthe media campaign.

Thus, there is sufficient evidence of coordination between the RNC and the Dole campaign to

support the Audit staffs conclusion that the RNC media expenditures were in-kind contributions

to the Primary or General Committees. The evidence of coordination that the Report details is

such that it is difficult to distinguish between the activities ofthe RNC and the Dole campaign

with respect to the creation and publication ofthe media advertisements at issue.

Documents and other evidence available to the Commission indicate that campaign

officials were provided with, inter alia, the following RNC advertising campaign materials:

copies offirst drafts of advertisement scripts, copies ofrevised drafts of advertisement scripts;

copies offocus group summaries where potential advertisements were screened and reviewed;

copies of polling results relating to the advertisements' effect on the popularity ofSenator Dole

and President Clinton; and memoranda relating to which advertisements should, or would, be

broadcast in which markets on which dates. Documents and other evidence available to the

Commission also establish that Senator Dole's campaign manager, Scott Reed, attended weekly

meetings with RNC personnel where he actively participated in discussions about, inter alia,

RNC advertising content and about where the RNC ought to run advertisements.

Moreover, evidence indicates that many ofthe RNC advertisements were produced

by Don Sipple, who was employed by Senator Dole's campaign at various points during the

campaign as chiefmedia consultant. Additionally, Anthony Fabrizio, another senior Dole

consultant and pollster, also consulted and conducted polls for the RNC. The key role ofthese

individuals for both the RNC and the Dole campaign is evidence of coordination. Cf 11 C.F.R.

§ 109.1(b)(4)(i)(B). Thus, the facts set forth in the proposed Audit Report are sufficient to

support a conclusion that the media expenditures made by the RNC were "made ... in

cooperation, consultation, or concert, with, or at the request or suggestion of, a candidate, his

authorized political committees or their agents." 2 U.S.c. § 441a(a)(7)(B)(i).

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B. Content of Advertisements Paid for by the RNC

The next question in determining whether a media expenditure by a national committee

is an in-kind contribution is whether the content ofthe advertisement constitutes an

"electioneering message" and references a "clearly identified candidate."lo See AOs 1985-14;

1984-15. In order to determine ifthe advertisement includes an electioneering message and

references to a clearly identified candidate, the Commission will consider the purpose, content

and timing ofthe advertisements at issue.

The Commission first set forth the clearly identified candidate/electioneering message

standard in AO 1984-15 and AO 1985-14. In AO 1984-15, the Commission determined that two

television advertisements which the RNC proposed to broadcast had "[t]he clear import and

purpose ... to diminish support for any Democratic Party presidential nominee and to garner

support for whoever may be the eventual Republican Party nominee" and "effectively advocate

the defeat of a clearly identified candidate." The Commission concluded that because the

"expenditures for these advertisements benefit the eventual Republican presidential candidate

and are made with respect to the presidential general election and in connection with the

presidential general election campaign," the expenditures would be reportable either as

contributions subject to the limitation set forth at 2 U.S.C. § 441a(a)(2)(A), or as coordinated

party expenditures subject to the limitation set forth at 2 U.S.C. § 441a(d).

AD 1985-14 involved television, radio and print advertisements, and mailers, which the

Democratic Congressional Campaign Committee ("DCCC") proposed to publish, and which

purported to describe Republican policies. Citing AD 1984-15, the Commission concluded that

amounts used to fund the communications would be expenditures subject to the limitation set

forth at 2 U.S.C. § 44Ia(d) ifthe advertisement funded by that amount "(1) depicted a clearly

identified candidate and (2) conveyed an electioneering message." The Commission cited

United States v. United Auto Workers, 352 U.S. 567, 585, 587 (1957), in which the Supreme

Court stated that advertisements "designed to urge the public to elect a certain candidate or

party" constitute an "expenditure in connection with any federal election."!1 Applying this

standard, the Conm1ission determined that advertisements which referred to "the Republicans in

Congress" were not subject to limitation under 2 U.S.C. § 441a(d), regardless of whether the

advertisement closed with the statement "Vote Democratic." The Commission also concluded

that advertisements which referred to "your Republican Congressman" were not subject to

limitation under 2 U.S.C. § 44Ia(d), if the advertisement did not close with the statement "Vote

Democratic." However, the Commission on a tie vote was unable to decide whether

advertisements which referred to "your Republican Congressman" and which closed with the

10 The Act defines "clearly identified" as meaning "(A) the name of the candidate involved appears; (B) a

photograph or drawing ofthe candidate appears; or (C) the identity ofthe candidate is apparent by unambiguous

reference."2U.S.C. §431(18);seealso 11 C.F.R. § 100.17.

11 In United States v. United Auto Workers, the Supreme Court defined "expenditure in connection with any

election" as used in section 304 of the Taft-Hartley Act. 352 U.S. at 582.

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statement "Vote Democratic" were subject to limitation under 2 U.S.C. § 441a(d). Finally, the

Commission concluded that the costs ofproduction and distribution ofthe proposed mailer

would be subject to limitation under section 441a(d). Because the advertisements in this audit

identify specific Republican and Democratic candidates for President, these advertisements are

akin to the proposed mailer at issue in AO 1985-14, in which the DCCC intended to identify

specific congressmen by name. Based on its understandings that the proposed mailers would

identify particular congressmen by name, and that the distribution ofthe mailer would include

all or part ofthe district represented by the congressman identified in that mailer, the

Commission concluded that the costs of production and distribution would be subject to

limitation under the Act.

In AOs 1984-15 and 1985-14, the Commission considered the purpose, content,

and timing ofthe advertisements at issue. The Commission's determination that the costs ofthe

proposed mailer were subject to limitation under section 441 a(d) was based on the

Commission's assumptions that the mailer would identify particular congressmen by name, and

that the distribution ofthe mailer would include all or part ofthe district represented by the

congressman identified in that mailer. As to timing, the Commission considered the proposed

dates on which the advertisements were to be run, stating that the "proposed program is for the

purposes ofinfluencing the 1986 election process," "emphasiz[ing] that this opinion is limited to

the timetable you have specified." The Commission's reference to the place and the timing of

the communicative activity makes clear that the determination whether spending for a particular

communication contains an electioneering message requires consideration ofthe context in

which the communication is published. 12 The Commission also considered the purpose ofthe

advertisements. In AO 1985-14 the Commission explicitly relied on the representation that the

media program had "the clear purpose ofinfluencing voter perceptions ofthese candidates with a

view toward weakening their positions as candidates for re-election." Similarly, in AO 1984-15,

the conclusion that the proposed television advertisements were subject to regulation as

contributions or coordinated party expenditures was explicitly based, in part, on the opinion that

"the clear import and purpose of [the] proposed advertisements [was] to diminish support for

whoever may be the presidential nominee and to gamer support for whoever may be the eventual

Republican Party nominee.,,13

12 The Commission in AO 1985-14 assumed that the media campaign was developed without cooperation or

consultation with any candidate, and based the theory that the limitations under 2 U.S.C. § 44Ia(d) apply to party

expenditures irrespective of actual coordination with a candidate. AO 1984-15 involved a RNC media campaign

which, in the view ofthe Commission, was intended to benefit "the eventual Republican Party nominee [for

President]." Thus, AOs 1985-14 and 1984-15 both involved media campaigns which had a purpose ofinfluencing

the election of certain candidates, but which were implemented without coordination with the candidate. Both

AO 1984-15 and 1985-14 were issued prior to the Supreme Court's 1996 decision, Colorado Republicans.

Il In another opinion, AO 1995-25, the Commission concluded that costs related to advertisements focusing on

national legislative activity and the promotion ofthe Republican Party were allocable between the Republican

Party's federal and nonfederal accounts pursuant to II C.F.R. § I06.5(b)(2)(i) and (ii). Unlike the situation in

AO 1995-25, here the content of the media campaign, the coordination between Dole campaign officials and the

RNC, and the content of the advertisements together reveal that the purpose ofthe advertising campaign was to

influence the election of Senator Dole. Moreover, the Commission in AO 1995-25 explicitly declined to address

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As noted, the FECA permits limited coordinated expenditures to be made by party

committees "in connection with general election campaign[s] of candidates for federal office,"

including expenditures for communications such as media advertising. 2 U.S.c. § 44Ia(d). The

Supreme Court, in Colorado Republican, did not address the appropriate measure ofthe content

ofsuch communications. However, the Court of Appeals in its earlier decision in FEC v.

Colorado Republican Federal Campaign Comm., 59 F.3d 1015 (10th Cir. 1995), vacated and

remanded on other grounds, 518 U.S. 604 (1996) (plurality op.), expressly deferred to the

Commission's long standing "construction of § 44Ia(d) as regulating political committee

expenditures depicting a clearly identified candidate and conveying an electioneering message."

59 F.3d at 1022 (citing AO 1984-15). The Court of Appeals relied not upon particular language

in the communication, but rather upon the overall impact ofthe message as one intended to

"gamer support" for one candidate and to "diminish support" for another. 59 F.3d at 1023.

The Primary Committee argues that the Audit Division did not apply the "express

advocacy" test. However, the Commission has not required express advocacy in order to

determine that a coordinated disbursement is a contribution or, in the case of coordinated party

expenditures, subject to the limitations of2 U.S.C. § 441a(d). The Buckley Court applied the

"express advocacy" test only in the limited context ofindependent expenditures, 424 U.S. at 40-

44, 78-79, and no court has, without being overruled by a higher court, required application of

the express advocacy test to anything other than independent expenditures. 14 The Supreme Court

in Buckley recognized a distinction between independent expenditures and expenditures for

communications that are authorized or requested by the candidate, an authorized committee of

the candidate, or an agent ofthe candidate, and held that the latter are to be treated as

expenditures ofthe candidate and contributions by the person or group making the expenditure.

424 U.S. at 46-47, n. 53. The Court explained that coordinated expenditures are treated as inthe issue whether or not the proposed advertisements contained an electioneering message, stating that "[t]he

Commission relies on [the requesting party's] statement that those advertisements that mention a Federal candidate

or officeholder will not contain any electioneering message. In view ofthis representation, the Commission does

not express any opinion as to what is or is not an electioneering message by a political party committee." AO 1995-

25 at n.l. Moreover, the Commission explicitly left open the possibility that the advertisements might be subject to

section 44Ia(d), stating its conclusion that "legislative advocacy media advertisements that focus on national

legislative activity and promote the Republican Party should be considered as made in connection with both Federal

and non-federal elections, unless the ads would qualify as coordinated expenditures on behalf of any general

election candidates of the party under 2 U.S.C. § 44 Ia(d)."

14 Another reason to limit the express advocacy test to independent expenditures is that not all coordinated

expenditures are communicative. For instance, if a supporter provided aircraft charter service to a publicly funded

candidate's campaign, in coordination with the campaign, the supporter has made an in-kind contribution and an

expenditure. This is consistent with the definition of "expenditure" at 2 U.S.C. § 43 I(9)(A) and with 2 U.S.C.

§ 44Ia(a)(7)(B)(i), which provides that coordinated expenditures are contributions. Yet, there is surely no "express

advocacy" in the provision ofthe aircraft charter services to the campaign. As the Colorado Republicans Court

noted the similarities between coordinated expenditures and other kinds of contributions are similar: "many

[coordinated] expenditures are also virtually indistinguishable from simple contributions (compare, for example, a

donation of money with direct payment of a candidate's media bills)." 518 U.S. at 624.

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kind contributions subject to the contribution limitations in order to "prevent attempts to

circumvent the Act through prearranged or coordinated expenditures amounting to disguised

contributions." 424 U.S. at 46-47.

Furthermore, the vagueness concerns that caused the Supreme Court to apply the

express advocacy test to independent expenditures in Buckley and FEe v. Massachusetts

Citizens/or Life, Inc., 479 U.S. 238 (l986),ls are not present in the case of coordinated

expenditures. The Buckley Court was concerned that the requirements ofthe FECA, for

disclosure ofindependent expenditures above a certain dollar threshold "could be interpreted to

reach groups engaged purely in issue discussion." 424 U.S. at 79. However, because "the

i:r distinction between discussion ofissues and candidates and advocacy of election or defeat of

candidates may often dissolve in practical application," id. at 42, it would be difficult to know in

advance without the express advocacy standard whether a given independent communication had

a sufficient nexus to a Federal election to be subject to the Act; but in the case of a coordinated

communication some ofthe required nexus to a Federal election may be found in the act of

" coordination itself. See id. at 78 ("So defined, 'contributions' have a sufficiently close

relationship to the goals ofthe Act, for they are connected with a candidate or his campaign").

Moreover, the application of a strict "express advocacy" test to coordinated

expenditures would undermine the statutory purpose of protecting the electoral process from real

or apparent corruption. The Buckley Court noted that:

It would naively underestimate the ingenuity and resourcefulness of persons and groups

desiring to buy influence to believe that they would have much difficulty devising expenditures

that skirted the restriction on express advocacy of election or defeat but nevertheless benefited

the candidate's campaign. Yet no substantial societal interest would be served by a loopholeclosing provision designed to check corruption that permitted unscrupulous persons and

organizations to expend unlimited sums ofmoney in order to obtain improper influence over

candidates for elective office.

Buckley, 424 U.S. at 45. The Supreme Court went on to say that the independent

expenditure limitations were, in any event, not necessary to close a loophole in the Act's

contribution limitations, because the Act treated coordinated expenditures as contributions, thus

closing the loophole. Id. at 45-46. Thus, express advocacy only applies to independent

expenditures.

The advertisements in question in this audit "clearly identify" Senator Dole, or in some

cases, President Clinton, both candidates at the time the advertisements ran. Additionally, based

on the texts ofthe advertisements, it appears that the advertisements contain an electioneering

IS See also California Medical Ass'n v, FEC, 453 U,S. 182, 195 (1981) (plurality op.); Akins v. FEC, 101 F.3d

731,741 (D.C. Cir. 1996) (en bane), vacated on other grounds. 118 S. Ct. 1777 (1998); Orloski v. FEe, 795 F.2d

156, 167 (D.C. Cir. 1986).

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message. The texts contain phrases such as "Tell President Clinton you won't be fooled again"

and "Bill Clinton, he's really something." These phrases may be designed to urge the public to

elect a certain candidate. The advertisements feature Senator Dole and President Clinton,

sometimes together and sometimes separately, and juxtapose their positions on certain political

issues like the gas tax or on matters relating to personal behavior. The advertisement, "the

Story," is unique in that it provides biographical facts about the candidate and describes his

commendable personal characteristics in a manner that appears to serve to gamer support for the

candidate. For instance, the advertisement's focus on Senator Dole's military service is

consistent with the reported campaign strategy to highlight his military record. See Katharine Q.

Seelye, Dole Says Veterans Are Better Americans, N.Y. TIMES, August 15,1996. 16 Although

"the Story" references "Work for Welfare," "Criminal Justice Reform" and "Wasteful

Washington Spending," there is no representation that these items are part of a legislativ~

agenda. Additionally, as noted in the Report, the advertising campaign's purpose appeared to be

designed to assist the Dole campaign and elect Senator Dole. One memorandum refers to

broadcasting advertisements in "target presidential states," and poll results track the

advertising's effectiveness by measuring Senator Dole's popularity versus President Clinton's.

Therefore, this Office concurs with the proposed Audit Report's conclusions that the RNC and

the Dole campaign coordinated media expenditures, that the advertisements contain an

electioneering message and references to a clearly identified candidate, and that the

advertisements should be considered an in-kind contribution to the Dole campaign. 17

C. Treatment ofMedia Expenditures as Primary Expenditures

The proposed Audit Report applies the RNC media expenditures on behalf of

Senator Dole's campaign to the Primary Committee's overall expenditure limitation. The

magnitude ofthe activity involved raises the difficult question ofwhether these expenditures

should be applied to the primary or general election expenditure limit.

The Office of General Counsel agrees with the Audit Division's conclusion that these

media expenditures should be subject to attribution between the primary and general expenditure

limitations according to the same analysis that a candidate's expenditures are attributed.

II C.F.R. § 9034.4(e). Because the media expenditures were simultaneously in-kind

contributions by the RNC and expenditures by the candidate, they are equivalent to and

commingled with expenditures paid for by his authorized committee and are subject to the

expenditure limitations. See 11 C.F.R. § 104. 13(a); 2 U.S.C. § 44Ia(b) and (c); 26 U.S.C.

§ 9035(a). Cj 11 C.F.R. § I09.I(c). This Office believes that the Commission's "bright-line"

rules at 11 C.F.R. § 9034.4(e) for attribution of expenditures between the primary and general

" Similarly, the advertisement's focus on Senator Dole's value system was also consistent with the Senator's

reported campaign strategy ofmaking character an issue. See Robert Shogan, GOP Mounts BroadAttack on

President's Character, L.A. TIMES, June 18, 1996.

17 See irifra Part II., C. for a discussion of attribution to applicable expenditure limitation.

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election limitations provide guidance for the attribution ofthe media expenditures, consistent

with the application ofthese rules to all expenditures subject to the expenditure limitations.

Therefore, this Office reaches the conclusion that the media expenditures should be attributed

between the primary and general expenditure limitations pursuant to II C.F.R. § 9034(e).

The Commission promulgated II C.F.R. § 9034.4(e) to establish a "bright line"

cut-off date between primary and general election expenses "with regard to certain specific types

of expenditures that may benefit both the primary and the general election." See Explanation

and Justification for II C.F.R. § 9034.4(e), 60 Fed. Reg. 31,867 (June 16,1995). The general

"bright line" rule is that goods or services used exclusively for the primary or general election

campaign are allocable to that election. II C.F.R. § 9034.4(e)(I). Otherwise, expenditures for

media and other communications used for both the primary and general elections are attributed

between the primary and general elections based upon whether the date of broadcast or

publication is before or after the candidate's date ofnomination. 11 C.F.R. § 9034.4(e)(6).

In adopting the rule, the Commission recognized that the application ofthe rules could

result in the attribution ofsome primary-related expenditures to the general election expenditure

limitations and vice versa, but reasoned that "these differences should balance themselves out

over the course ofa lengthy campaign." 60 Fed. Reg. 31,867 (June 16, 1995). The Commission

has promulgated regulations based on the timing ofthe contribution in other contexts, such as

the designation of contributions to the primary or general election. See, e.g., 11 C.F.R.

§ 110.2(b)(2)(ii); see also 11 C.F.R. § 102.9(e). While 1I C.F.R. § 9034.4(e) does not explicitly

discuss national party committees, the regulation applies to a publicly financed candidate's

expenditures subject to the limitations, which include expenditures in the form ofin-kind

contributions.

This Office believes that the "bright line" regulations should apply because in-kind

contributions are also expenditures by the recipient candidate. See II C.F.R. §§ 104.13(a)(1)

and (2); 109.1 (c). By coordinating with the Dole campaign and paying for media expenditures

in order to influence the election of Senator Dole, the RNC made in-kind contributions to the

candidate which were simultaneously expenditures by his campaign committees. See 2 U.S.C.

§§ 431(8)(A)(i) and (9)(A)(i); 11 C.F.R. §§ 100.7(a)(1)(iii) and IlO.8(a)(1)(iv)(A). The

Commission treats in-kind contributions like any other expenditures by a publicly financed

candidate. See Statement of Reasons, Senator Robert Dole and the Dole for President

Committee, Inc. at 24 (February 6, 1992)(The Commission "generally allocates in-kind

contributions to a [publicly financed] committee's expenditure limitation."). Moreover, the inkind contributions are considered commingled with the candidate's other expenditures and

subject to repayment: "[o]rdinarily, federal matching funds and private contributions are

commingled in a committee's accounts. The Commission considers in-kind contributions to be

part ofthis commingled pool of available funds." Jd at 25. Thus, all ofa publicly financed

candidate's expenditures, including expenditures in the form ofin-kind contributions received,

are considered commingled in the mixed pool of expenditures subject to the expenditure

limitations. See 2 U.S.C. §§ 441a(b) and (c); 26 U.S.C. § 9035(a). The "bright line" rules

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should be applied consistently to all of a campaign's expenditures, including in-kind

contributions paid for by national party committees, in order to avoid having two identical media

expenditures paid for and broadcast at the same time and made on behalf of a candidate's

campaign treated as primary and general expenditures depending on whether the candidate or

party corrunittee paid for them.

Pursuant to 11 C.F.R. § 9034.4(e)(l), any expenditure for goods or services that are

used exclusively for the general election can1paign shall be attributed to the general election

expenditure limits, which are set forth at 11 C.F.R. § 110.8(a)(2), as adjusted under 11 C.F.R.

§ 110.9(c). Based on the facts described in the proposed Audit Reports, some ofthe

fd1\ advertisements attempted to diminish support for President Clinton, but in no way referred to

Senator Dole. Without any reference to any of the competitors in the primary election, these

advertisements appear to have been used exclusively for the general election campaign. Such

advertisements include: Case Study, Even More Talk, More, More Talk, Pledge, Stripes and

Who. Because these seven advertisements apparently had a purpose only to diminish support for

President Clinton and did so in a way that did not attempt to increase support for any ofthe

candidates for the Republican nomination over the competitors for that party's nomination, the

advertisements apparently wcre not used for the primary election campaign. Senator Dole

became the inevitable nominee on March 26, 1996,18 and it appears all ofthe advertisements

were broadcast after that date. Because Senator Dole was the presumptive nominee and because

these seven advertisements attempted to diminish support for his general election opponent, the

advertisements were used exclusively for Senator Dole's general election campaign. Therefore,

pursuant to 11 C.F.R. § 9034.4(e)(I), the expenditures related to the seven advertisements should

be attributed to the expenditure limits ofthe General Committee.

Alternatively, as general election expenditures, the RNC would have been permitted to

make such coordinated expenditures pursuant to 2 U.S.C. § 441a(d). Thus, the media

expenditures related to the seven advertisements listed above can be considered coordinated

party expenditures to the extent the RNC has not exhausted the applicable contribution limit at

2 U.S.C. § 441a(d), as adjusted by other findings in the proposed Audit Report. In order to

attribute these media expenditures to the coordinated party expenditure limitation at 2 U.S.C.

§ 441a(d), the RNC must have made those expenditures directly or through its properly

designated state party committees, and the RNC must have used funds raised in accordance with

the limitations and prohibitions of the FECA. 11 C.F.R. § 11 0.7(a)(4). Any remaining amounts

should be attributed to the General Committee's expenditure limitation. 2 U.S.C.

§ 441a(a)(I)(B) and (c). Therefore, we recommend that the proposed Audit Reports for the

Primary and General Committees be revised in accordance with this discussion.

With respect to the expenditures related to the other three advertisements described in the

proposed Audit Report, the Plan, Surprise and the Story, there is an argument that none ofthe

18 See, e.g., R. Cook, Dole's Nomination Clinch Fits Reagan, Bush Molds, Congressional Quarterly, 897 (Mar.

30, 1996).

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media expenditures were used exclusively for the primary or exclusively for the general

campaign. Rather, it can be argued that the advertisements were used for both the primary and

the general elections. The Plan, Surprise and the Story all appear to have been used for both the

primary and general election campaigns. Surprise depicts both Senator Dole and President

Clinton and therefore it seems to have an obvious general election use, but also a primary

election use of urging support for Senator Dole as the best choice for the Republican nomination

because of his standing compared to the Republican nominee's ultimate opponent, the

Democratic nominee. 19 Cf Final Audit Report on Reagan Bush '84 Primary (July 7, 1986)

(stating that expenditures to unify party or to help candidate retain delegates' support had a

primary election purpose). The Story is a flattering portrayal of Senator Dole and it was

broadcast prior to his nomination, both ofwhich indicate a primary election use.20 Because it

was broadcast in states chosen based on Senator Dole's competitive standing against his general

election opponent, the advertisement cannot meet the exclusively use test under 11 C.F.R.

§ 9034.4(e)(l). The Plan presents Senator Dole's position in a favorable light without reference

to any ofhis primary or general election opponents.

Therefore, the three advertisements are not subject to attribution under the exclusive use

tests of 11 C.F.R. § 9034.4(e)(l), but are instead attributed by broadcast date pursuant to

II C.F.R. § 9034.4(e)(6).21 Using this approach, based on the timing ofthese three

advertisements, the related media expenditures were primary campaign expenditures that are

allocable to the Primary Committee's expenditure limitations. 11 C.F.R. § 9034.4(e)(6).

Therefore, this Office concurs with the finding in the Audit Report with respect to these three

advertisements that the Primary Committee exceeded the expenditure limitation and the

recommendation that the Commission determine that the Primary Committee must make a pro

rata repayment ofthe excessive amount. 26 U.S.C. § 9038(b)(2).

The approach ofsubjecting national party committee in-kind contributions to attribution

between the primary and general elections pursuant to II C.F.R. § 9034.4(e) does give rise to an

anomaly regarding 2 U.S.C. § 441a(d) expenditures. As a result of applying II C.F.R.

§ 9034.4(e) to some ofthe media expenditures involved in this audit, advertisements that may

have a sufficient general election purpose to have been permitted as section 441a(d) coordinated

party expenditures but for section 9034.4(e)'s requirement that mixed purpose advertisements be

attributed based on broadcasttiming, should not be permitted as coordinated party expenditures

19 In fact, some unsuccessful primary election candidates compare themselves not to their primary election

opponents, but to their general election opponents and argue that they are their party's candidate most likely to

defeat the other general election candidates. Nonetheless, the primary election purpose ofsuch efforts is clear and

is not eliminated by any candidate's success in the primary election.

20 See also description in Part II., B. supra.

21 Media production costs for media broadcast both before and after the date of nomination are split 50% to the

primary and 50% to the general election. 11 C.F.R. § 9034.4(e)(5). Because it was broadcast before and after

Senator Dole's nomination, production costs for the Plan should be attributed pursuant to II C.F.R. § 9034.4(e)(5).

Distribution costs for the advertisement known as the Plan are discussed in Part VI infra.

83
Memorandum to Robert 1. Costa

Dole for President, Inc. Audit Report

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Page 84

and, instead, should be attributed to the Primary Committee's expenditure limit. We recognize

that this consequence may be undesirable. If II C.F.R. § 9034.4(e) did not control the

attribution ofthe media expenditures, AO 1984-15 would provide guidance. In that advisory

opinion, which was issued before the promulgation of II C.F.R. § 9034.4(e), the Commission

concluded that a national party committee could make coordinated party expenditures pursuant

to 2 U.S.C. § 441a(d) on behalf ofits "presumptive nominee" before the individual has received

the official nomination. The Commission explained, "[a]lthough timing is relevant, the

Commission does not view the timing of broadcast as controlling how expenditures for the

advertisements should be treated for limitation and reporting purposes." AO 1984-15. Instead,

"the proper analytical focus for attributing a national party expenditure between a primary and a

general election campaign is whether the expenditure was made for the purpose ofinfluencing

the outcome ofthe general election or for the purpose ofinfluencing the outcome ofthe

nomination." Id. However, the advisory opinion applies only to 2 U.S.C. § 441a(d)

expenditures, while II C.F.R. § 9034.4(e)(1) allocates expenditures exclusively related to an

election to that election regardless oftiming. Thus, we do not believe that the advisory opinion

resolves the issue of how to attribute expenditures between the primary and general election

limitations where the expenditures appear to have a mixed purpose related to both the primary

and general elections. The Commission promulgated II C.P.R. § 9034.4(e) in order to resolve

these kinds ofsituations.

Under a "functional" approach, an examination ofthe facts related to each

advertisements could lead to an attribution of expenditures related to the advertisements between

the primary and general election that reflected the relative purposes served by each

advertisement. The Office ofGeneral Counsel believes that the better approach is to analyze

these expenditures under 11 C.F.R. § 9034.4(e). To analyze each mixed purpose advertisement,

including external events occurring at the time each was developed and aired, in addition to

investigating activity leading to the creation ofeach particular advertisement, to determine which

purpose predominated, would be a difficult undertaking. The Commission promulgated the

"bright line" rules for expenditures having a mixed purpose in order to obviate the need to use its

limited resources to perform such a time consuming task. This Office recommends that the audit

report should be revised to apply II C.F.R. § 9034.4(e)(2) through (6), which allocate

expenditures based on date, to any expenditures used for both Senator Dole's primary and

general elections that were reported by the RNC as coordinated party expenditures pursuant to

2 U.S.C. § 44Ia(d). While this approach may seem to limit the RNC's ability to allocate

expenditures under section 441a(d) before the candidate's date of nomination in apparent

contradiction to the guidance provided by AO 1984-15, the exclusivity standard in 11 C.F.R.

§ 9034.4(e)(1) preserves the national party committees' ability to use coordinated party

expenditures subject to 2 U.S.C. § 441a(d) prior to the nomination oftheir candidates. Finally, it

is important to note that the repayment amount in these proposed Audit Reports is substantial not

because of 11 C.P.R. § 9034.4(e)(1)'s limitation on 2 U.S.c. § 441a(d) to expenditures that are

used exclusively for the general election. Instead, the repayment amounts are substantial due to

the size ofthe RNC's in-kind contribution to the Primary Committee, which dwarfs either of the

applicable contribution limits, whether it is for a $5,000 contribution to the Primary Committee

84
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Page 85

under 2 U.S.C. § 441a(a)(2) or whether it is the amount remaining under 2 U.S.C. § 441a(d) for

a coordinated party expenditure.

III. OVERALL EXPENDITURE LIMITATION AND THE REPAYMENT RATIO

With respect to the Primary Committee, the Commission may seek a pro rata repayment

for the amounts spent in excess ofthe expenditure limitations. 11 C.F.R. §§ 9038.2(b)(1 )(i) and

(ii). Amounts in excess ofthe overall expenditure limitation are non-qualified campaign

expenses. 11 C.F.R. § 9034.4(b)(2). The Commission may seek a repayment for non-qualified

campaign expenses. 26 U.S.C. § 9038(b)(2). However, the non-qualified campaign expense or

the amount in excess ofthe expenditure limitation is not composed ofonly expenditures that the

RNC made on behalf ofthe Primary Committee, it is also composed of public funds. See

II C.F.R. § 9034.4(a); Kennedy for President Committee v. FEC, 734 F.2d 1558, 1565 (D.C.

Cir. 1984); Reagan for President Committee v. FEC, 734 F.2d 1569 (D.C. Cir. 1984).

Therefore, when the Commission seeks a repayment for amounts in excess ofthe expenditure

limitation, it is not capturing expenses paid by the RNC on behalf ofthe Primary Committee.

Rather, the repayment for exceeding the expenditure limitation is an attempt "to 'recoup' only

the federal funds used for unqualified expenditures." Kennedy, 734 F.2d at 1565. See John

Glenn Presidential Committee v. FEe. 822 F.2d 1097, 1098 (D.C. Cir. 1987) ("The statutory

fiJ recoupment remedy pursued by the FEC does not call back private spending; it does police the

restrictions Congress placed on the expenditure of public moneys"). The regulations

contemplate that the sum to be repaid for exceeding the expenditure limitation will equal the

portion ofthe matching payments that was used for non-qualified purposes. 11 C.F.R.

§ 9038.2(b)(2).

The proposed Report raises a related issue of whether contributions made by the RNC to

the Primary Committee are to be included in the total deposits when calculating the repayment

ratio. The repayment ratio in the proposed Report is 0.21. 22 The Report includes all

contributions, whether in-kind or monetary, in the mixed pool of public and private funds used

in calculating the repayment ratio. The in-kind contributions are included in the repayment

ratio's denominator as part oftotal deposits. This Office agrees that the method for calculating

the repayment ratio in the proposed Audit Report is correct.

The regulations establish that the amount of a repayment shall bear the same ratio

to the total amount determined to have been used for non-qualified campaign expenses as the

amount ofmatching funds certified to the candidate bears to the candidate's total deposits, as of

90 days after the candidate's date of ineligibility. 11 C.F.R. § 9038.2(b)(2)(iii). Total deposits

22 We note that the Primary Committee's proposed Audit Report states a repayment ratio rounded to the nearest

hundredth, while the proposed Audit Report for the Clinton/Gore '96 Primary Committee, Inc., states a repayment

ratio rounded to the nearest hundred-thousandth. We recommend that you round and state the ratios consistently in

the two proposed Audit Reports.

85
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(LRA #467)

Page 86

is defined as all deposits to all candidate accounts minus transfers between accounts, refunds,

rebates, reimbursements, checks returned for insufficient funds, proceeds ofloans and other

similar amounts. 11 C.F.R. § 9038.3(c)(2). However, the Commission's regulations do not

explicitly state whether in-kind contributions are to be included in the denominator ofthe

fraction for total deposits when calculating the repayment ratio.

The Office ofGeneral Counsel believes that the in-kind contributions that are attributable

to the Primary Committee's expenditure limitation should be included in the denominator ofthe

fraction for total deposits. The purpose ofthe repayment process is to recapture public funds

used for non-qualified campaign expenditures. 11 C.P.R. § 9038.2(b)(2). Since federal

matching funds and private contributions are commingled in the campaign fund, it is difficult to

determine an absolutely accurate estimate ofthe amount ofmatching funds used for nonqualified purposes. Kennedy, 734 F.2d at 1565. In order to be as accurate as possible in

recapturing public funds, in-kind contributions must be included in the denominator. The

Kennedy Court noted that "by requiring repayment of 100 percent of the amount of unqualified

expenditures, without at least estimating the extent to which such expenditures derived from

matching funds sources, the Commission has shirked its statutory responsibility to make a

reasonable determination that the repayment sum represents the matching funds used for

unqualified purposes." Id. at 1562. Including in-kind contributions in the denominator for total

deposits lowers the ratio of public funds to more accurately reflect the amount that can be

recaptured as public funds spent in excess ofthe overall expenditure limitation.23 Furthermore,

in an example of a calculation ofthe repayment ratio based on surplus funds, the amount ofinkind contributions are included when determining total deposits and receipts ofthe committee.

See Financial Control and Compliance Manual, at 67-68 (January 1996).

Footnote 19 ofthe proposed Audit Report notes that the RNC in-kind contributions are

included in the repayment ratio calculation. However, it is unclear whether other in-kind

contributions were included in the calculation. Therefore, we recommend that the proposed

Audit Report be revised to note the amount and types ofin-kind contributions that were included

in the ratio calculation. In order to facilitate the discussion ofthis issue, this Office recommends

that the Report include discussion on calculating the repayment ratio when a committee receives

an in-kind contribution subject to the expenditure limitations.

With respect to the General Committee, any of these expenditures that are attributable to

the General Committee's expenditure limitation and were not within the 2 U.S.C. § 441a(d)

limitation are entirely repayable since publicly financed general election committees that receive

the full public grant must repay the entire amount ofa contribution. 26 U.S.C. § 9007(b)(3).

2J According to the proposed Audit Report, the RNC's payment of media expenses, salaries, consulting

payments, and other expenditures were determined to be in-kind contributions by the RNC to DFP. Footnote 49 of

the proposed Audit Report states the figure that represents the repayment ratio.

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(LRA #467)

Page 87

IV. POLLING

With regard to the Audit Report finding on polling, the question arises whether

11 C.F.R. § 106.4 applies to polling activity paid for by the RNC. The Audit Report notes that

the Primary Committee "was part ofthe planning for the RNC polling that was done between the

end ofMarch of 1996 and the convention," held on August 14, 1996. A significant portion of

the polling appears to be related to the RNC's media expenditures. The RNC paid for focus

groups that viewed and commented on potential advertisements and for tracking polls that

measured the effectiveness ofthe advertising campaign over time. The Audit Report establishes

that the poIling was coordinated by, inter alia, a pollster who was simultaneously a consultant

for both the Primary Committee and the RNC and that polling results were made available to the

Primary Committee, which had otherwise stopped purchasing polls in March 1996.24 This

factual situation falls within the ambit ofsection 441 a(a)(7)(B)(i) ofthe Act, which provides that

an expenditure made by any person in cooperation, consultation, or concert, with, or at the

request or suggestion of, a candidate, his authorized political committees or their agents shall be

considered a contribution to such candidate. 2 U.S.C. § 441a(a)(7)(B)(i); Buckley, 424 U.S.

at 78.

Section 106.4 appears to contemplate a situation in which poll results are purchased

by a person not authorized by a candidate to make expenditures and are subsequently accepted

by a candidate or a candidate's authorized committee or agent. See AO 1990-12 (Commission

concluded that if campaign volunteer who previously commissioned and paid for survey for

purposes unrelated to campaign, imparted poll results to campaign or used poll information to

advise campaign, information would constitute in-kind contribution, the amount of which would

be determined by Section 106.4).25 Thus, ifthe expenditures for polling were not coordinated

from the start, and polling information was shared only subsequent to it being obtained by the

RNC, section 106.4 would apply to determine the amount ofthe contribution. I I c'F.R.

§ 106.4.26 While section 106.4 does not specifically address in-kind contributions resulting from

coordinated expenditures, it would not be inconsistent to apply the regulation to allocate

coordinated expenditures such as the polling expenditures at issue here. Since the RNC's

payment of 100% ofthe polling expenditures was not correct and no attempt at allocation

24 See supra note I and accompanying text (regarding polling information subpoenas).

25 Poll results are considered to be accepted by a candidate ifthe candidate or the candidate's authorized

political committee or agent (1) requested the poll results before their receipt; (2) uses the poll results; or (3) does

not notify the contributor that the results are refused. 11 C.F.R. § I06.4(b)(J), (2), and (3). The regulation then

delineates how the amount ofsuch contribution will be determined. II C.F.R. § 106.4(e).

26 We understand that in the audit for the Clinton/Gore '96 Primary Committee, Inc., the Audit Division has

concluded that section 106.4 should apply to expenditures for ce11ain polls shared between the Clinton Committee

and the Democratic National Committee. Ifthe facts in the Clinton and Dole situations are similar, you must use

the same approach. If there are relevant factual distinctions, then alternative approaches for the two audits are

justified.

87
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Memorandum to Robert J. Costa

Dole for President, Inc. Audit Report

(LRA #467)

Page 88

between the RNC and the Dole campaign was made, it is not necessary to reach the issue of how

the polling costs should be allocated at this time.

V. OTHER REPAYMENTS: NON-QUALIFIED CAMPAIGN

EXPENDITURES INCURRED IN THE POST EXPENDITURE REPORTING PERIOD

We concur with the Audit staffs conclusion that the costs of winding-down the Primary

Committee and the General Committee should not be allocated entirely to the Primary

Committee. Winding down expenses of $2,141,602 for both the Primary and General

Committees were incurred between December 5, 1996 and July 31, 1998. The Primary

Committee paid all ofthese costs. Pursuant to 11 C.F.R. § 9034.4(a)(3), costs associated with

the termination of political activity, such as the costs of complying with the post election

requirements ofthe Act and other necessary administrative costs associated with winding down

the campaign including office space rental, staffsalaries, and office supplies, shall be considered

qualified campaign expenses. The regulation's use of "the campaign" refers to the primary

election campaign, and not the general election campaign. Therefore, the winding down costs

that are qualified campaign expenses for the Primary Committee pursuant to 11 C.F.R.

§ 9034.4(a)(3) are limited to winding down costs for the Primary Committee.27

Section 9034.4(a)(3) ofthe Commission's regulations provides that winding down costs

are qualified campaign expenses.' Therefore, the Primary Committee also has the burden of

proving its expenditures are winding down costs as defined in 11 C.F.R. § 9034.4(a)(3).

11 C.P.R. § 9033.11. Because the winding down expenditures at issue include winding down

expenditures for the General Committee, this Office believes that the Primary Committee has not

met its burden ofproofwith respect to these expenditures. Due to the Primary Committee's

failure to meet its burden, the Audit staff lacks a precise method to allocate the winding down

expenditures between the Primary and the General Committees. However, because some

winding down costs were for the purpose of winding down the Primary Committee's activity, we

concur with the Audit staffs attribution ofthe winding down expenses equally to the Primary

and the General Committees. Nevertheless, ifthe Committee can show through supporting

documentation that another allocation method more accurately reflects the winding down

expenses ofthe respective committees, the adjustments can be made accordingly.28 Cf

Buchanan Statement ofReasons at 23 (Aug. 1, 1995) (winding down costs require some

specificity).

27 The Primary Committee acknowledges that some portion of the winding down expenses at issue relate to the

termination ofthe General Committee's political activity.

" See I I C.F.R. § 9038.2(c)(2) (committee may seek administrative review).

88
Memorandum to Robert 1. Costa

Dole for President, Inc. Audit Report

(LRA #467)

Page 89

VI. COORDINATED EXPENDITURES (III.A.2.)

The Audit Report concludes that Republican National Committee expenditures totaling

$936,245 that were reported as coordinated party expenditures under 2 U.S.C. § 44Ia(d) do not

qualify as coordinated party expenditures pursuant to the statute since the expenditures were not

made for the general election, but rather, were operating expenditures ofthe Primary Committee.

Therefore, the Audit Report concludes that these expenditures are in-kind contributions to the

Primary Committee and attributable to the Primary Committee's overall expenditure limitation.29

Additionally, the proposed Audit Report states that the advertisement known as the Plan was

broadcast by the RNC and the expenditures related to the distribution costs were reported as

coordinated party expenditures subject to 2 U.S.c. § 44 Ia(d).

As described supra in Part II.C., this Office believes that 11 C.F.R. § 9034.4(e) applies to

in-kind contributions from the national party committees. Therefore, pursuant to 11 C.F.R.

§ 9034.4(e)(1), a national party committee can make coordinated party expenditures pursuant to

2 U.S.C. § 44Ia(d) prior to the nomination of its candidate only to the extent those expenditures

meet the exclusive use test of I I C.F.R. § 9034.4(e)(l). lfthe expenditures were for goods and

services that were not used exclusively for the general election, then the expenditures must be

attributed in accordance with II C.F.R. § 9034.4(e)(2) through (6). This Office recommends

that the Audit Division amend its analysis to state and apply the exclusive use test of II C.F.R.

§ 9034.4(e)(l) to the expenditures. Most ofthe expenditures at issue do not appear to have been

used exclusively for the general election. The proposed Audit Report should make clear that any

expenditures that were not used exclusively for the general election under section 9034.4(e)(l)

cannot be section 44Ia(d) coordinated party expenditures. With regard to the expenditures that

do no meet the exclusive use test ofsection 9034.4(e)(l), the analysis should include the

requirements of II C.F.R. § 9034.4(e)(2) through (6) and attribute the expenditures as provided

in those provisions.

Finally, we recommend that the proposed Audit Report be revised to include the

discussion ofthe RNC's coordinated party expenditures under 2 U.S.C. § 44Ia(d) for telephone

service and equipment, and rent, renovations and related services currcntly addressed in Sections

IILC. and III.D., to Section II.A.2. ofthe proposed Audit Report so that all ofthe RNC

coordinated party expenditures are discussed in one section. This will provide administrative

convenience as well as a comprehensive presentation ofthe expenditures at issue.

29 The Audit staff identifies nine "Expense Categories" for which the Dole campaign received coordinated

funds. These categories include: travel and event expenses, rent, overhead, speech writers and coaches, telephone

expenses, polling, convention related travel and expenses, telemarketing and a miscellaneous category.

89
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Memorandum to Robert J. Costa

Dole for President, Inc. Audit Report

(LRA #467)

Page 90

Staff assigned:

Peter G. Blumberg

Susan L. Kay

Tracey L. Ligon

J. Duane Pugh

Jamila 1. Wyatt

90
FEDERAL ELECTION COMMiSSION

Washington, DC 20463

June 10, 1999

Senator Robert J. Dole

c/o Mr. Kenneth A. Gross, Esq.

Skadden, Arps, Slate, Meagher, & Flom

1440 New York Avenue, NW

Washington, D.C. 20005

Dear Senator Dole:

Attached please find the Report ofthe Audit Division on DolelKemp '96, Inc. and

Dole/Kemp '96 Compliance Committee, Inc. The Commission approved the report on

June 3,1999. As noted on page 3, ofthe attached report, the Commission may pursue any

ofthe matters discussed in an enforcement action.

In accordance with 11 CFR §§9007.2(c)(l) and (d)(l), the Commission has made a

determination that a repayment to the Secretary of the Treasury in the amount of

$3,212,143 is required within 90 calendar days after service ofthis report (September 13,

1999).

Should you dispute the Commission's determination that a repayment is required,

Commission regulations at 11 CFR §9007.2(c)(2)(i) provide you with an opportunity to

submit in writing, within 60 calendar days after service ofthe Commission's notice

(August 13, 1999), legal and factual materials to demonstrate that no repayment, or a lesser

repayment, is required. Further, 11 CFR §9007.2(c)(2)(ii) permits a Candidate who has

submitted written materials to request an opportunity to address the Commission in open

session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted

within the 60 day period when deciding whether to revise the repayment determination.

Such materials may be submitted by counsel if you so elect. Ifyou decide to file a

response to the repayment determination, please contact Kim L. Bright-Coleman ofthe

Office ofGeneral Counsel at (202) 694-1650 or toll free at (800) 424-9530. If you do not

dispute this determination within the 60 day period provided, it will be considered final.
Senator Robert J. Dole

Page 2

The Commission approved Audit Report will placed on the public record on or

about June 15, 1999. Should you have any questions regarding the public release ofthis

report, please contact Ron Harris ofthe Commission's Press Office at (202) 694-1220.

Any questions you may have related to matters covered during the audit or in the

audit report should be directed to Alex Boniewicz or Joe Stoltz ofthe Audit Division at

(202) 694-1200 or toll free at (800) 424-9530.

Sincerely,

Robert J. osta

Assistant StaffDirector

Audit Division

Attachment:

Audit Report

92
FEDERAL ELECTION COMMISSION

Washington, DC 20463

June 10, 1999

Mr. Allen Haywood, Assistant Treasurer

c/o Mr. Kenneth A. Gross, Esq.

Skadden, Arps, Slate, Meagher, & Flom

1440 New York Avenue, NW

Washington, D.C. 20005

Dear Mr. Haywood:

Attached please find the Report ofthe Audit Division on DolelKemp '96, Inc. and

Dole/Kemp '96 Compliance Committee, Inc. The Commission approved the report on

June 3, 1999. As noted on page 3, ofthe attached report, the Commission may pursue any

ofthe matters discussed in an enforcement action.

In accordance with 1I CFR §§9007.2(c)(l) and (d)(I), the Commission has made a

determination that a repayment to the Secretary ofthe Treasury in the amount of

$3,212,143 is required within 90 calendar days after service ofthis report (September 13,

1999).

Should the Candidate dispute the Commission's determination that a repayment is

required, Commission regulations at II CFR §9007.2(c)(2)(i) provide the Candidate with

an opportunity to submit in writing, within 60 calendar days after service ofthe

Commission's notice (August 13, 1999), legal and factual materials to demonstrate that no

repayment, or a lesser repayment, is required. Further, II CFR §9007.2(c)(2)(ii) permits a

Candidate who has submitted written materials to request an opportunity to address the

Commission in open session based on the legal and factual materials submitted.

The Commission will consider any written legal and factual materials submitted

within the 60 day period when deciding whether to revise the repayment determination.

Such materials may be submitted by counsel ifthe Candidate so elects.

Ifthe Candidate decides to file a response to the repayment determination, please

contact Kim L. Bright-Coleman ofthe Office ofGeneral Counsel at (202) 694-1650 or toll

free at (800) 424-9530. Ifthe Candidate does not dispute this determination within the 60

day period provided, it will be considered final.
Mr. Allen Haywood, Assislanl Treasurer

Page 2

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

about June l5, 1999. Should you have any questions regarding the public release ofthis

report, please contact Ron Harris ofthe Commission's Press Office at (202) 694-1220.

Any questions you may have related to matters covered during the audit or in the

audit report should be directed to Alex Boniewicz or Joe Stoltz ofthe Audit Division at

(202) 694-1200 or toll free at (800) 424-9530.

Sincerely,

Assistant Staff Director

Audit Division

Attachments:

Audit Report

94
CHRONOLOGY

DOLEIKEMP '96, INC.

AND

DOLE?KEMP '96 COMPLIANCE COMMITTEE, INC.

Audit Fieldwork

Exit Conference Memorandum to the

Committee

Response to Exit Conference Memorandum

Audit Report Approved

95

4/21/97 - 3/16/98

5/13/98

7/28/98

6/3/99
FEDERAL ELECTION COMMISSION

Washington, DC 20463

.'.f " ;I .~

i

, ,

/ '.

/

/

Attached is a copy of the Statement of Reasons regarding

Audits of 1996 Clinton/Gore and Dole/Kemp Campaigns signed by

MEMORANDUM

TO:

FROM:

DATE:

SUBJECT:

Commissioners

Staff Director Pehrkon

General Counsel Noble

Press Office Ron Harris f!)~

Mary W. DoveNeneshe Ferebee-Vine ~~ Commission Secretary

July 6,1999

Statement for the Record in Audits of

1996 Clinton/Gore and Dole/Kemp Campaigns

Chairman Scott E. Thomas and Commissioner Danny Lee McDonald.

This was received in the Commission Secretary's Office on July 6, 1999

at 11 :42 a.m.

cc: V. Convery

Attachments
FEDERAL ELECTION COMMISSION

WASHINGTON, DC 20463

•

III

ru

Statement for the Record in Audits of

1996 Clinton/Gore and Dole/Kemp Campaigns

Chairman Scott E. Thomas

Commissioner Danny L. McDonald'

Our colleagues, Commissioners Sandstrom, Wold, Elliott and Mason,

recently joined in what must be seen as a very odd Statement of Reasons

regarding the audits of the 1996 Clinton and Dole campaigns. 1 Little is written of

the audits. Instead, the thrust of their statement is a tirade against an innocuous

shorthand reference the Commission coined in Advisory Opinion 1985-142 to

analyze whether party communications are subject to the statutory limits on

support of particular candidates. The energy expended by our colleagues to

savage the Commission's own advisory opinion process is surprising. The

strangest aspect of the Sandstrom ef al. Statement, though, is that it claims to

abhor vagueness but, in the end, is itself very confusing.

We write this Statement to explain the state of the law in this area, and to

clarify that the Sandstrom et al. Statement does not effect a 'sea change' when

analyzing which party communications should be subjected to the statutory limits

on coordinated expenditures. In particular, we wish to emphasize that 'express

advocacy' is not required.

I.

The limits on coordinated expenditures by party committees on behalf of

their candidates have been on the books for over 24 years. They were part of

the Federal Election Campaign Act Amendments of 1974.3 In addition to the

1 Statement of Reasons of Vice Chairman Wold and Commissioners Elliott, Mason and Sandstrom

issued June 24, 1999 (hereinafter "Sandstrom et al. Statement").

2 Fed. Elec. Camp. Fin. Guide (CCH Transfer Binder), 5819.

3 Pub. L. 93-443, 88 Stat. 1263, § 101.
$5,000 per election contribution limit available to all political committees,· parties

have coordinated expenditure allowances permitting additional spending in

connection with the general election campaigns of their candidates. 5

The party coordinated expenditure limits serve an important role in

preventing party donors from having an indirect way of effecting a 'quid pro quo'

arrangement with candidates for federal office-- the link between money and

official government action the statute is designed to prevent. If a party

committee is able to undertake only a limited amount of coordinated expenditure

activity on behalf of a particular candidate, donors or groups of donors will not be

able to expect large-scale donations to the party to result in large-scale spending

by the party on behalf of such candidate. For example, ten banking industry

PACs who donate $15,000 each to a party's House campaign committee and

who are close to a particular House committee chairman running for reelection

would not be able to expect $150,000 in coordinated expenditures by the party

on behalf such candidate because the coordinated expenditure limit would

prevent it.

The direct payment of funds to a candidate's campaign has been treated

as a "contribution"6 subject to the contribution limit. A party's coordinated

payment to a third party on behalf of a candidate has been treated as either an

in-kind "contribution" or a coordinated "expenditure, "7 at the option of the

expending committee. 8 If treated as a coordinated expenditure, the party has to

4 Currently codified at 2 U.S.C. § 441a(a)(2)(A).

511 C.F.R. § 110.7(a)(3), (b)(3). Codified at 2 U.S.C. § 441a(d), the coordinated expenditure

allowance provides:

Notwithstanding any other provision of law with respect to limitations on expenditures or

limitations on contributions, the national committee of a political party and a State

committee of a political party, including any subordinate committee of a State committee,

may make expenditures in connection with the general election campaign of candidates

for Federal office, SUbject to the limitations contained in paragraphs (2) and (3) of this

SUbsection.

Subsections (2) and (3) set forth formulas that in the last presidential election permitted a national

party committee to spend over $12 million on behalf of its presidential candidate, and that in the

1998 congressional elections permitted a national and state party committee each to spend

$32,550 for a House candidate and each to spend amounts ranging from $65,100 in small states

like Wyoming to over $1.5 million in California for a Senate candidate.

62 U.S.C. §431(8).

72 U.S.C. § 431(9).

8 FEC Campaign Guide for Party Committees (1996) at 16. The FEC for many years operated

with a presumption that all party spending was coordinated with the parties' eventual nominees.

11 C.F.R. § 110.7(a)(5), (b)(4) (1996). The Supreme Court invalidated that presumption in

Colorado Republican Federal Campaign Committee v. FEC, 518 U.S. 604 (1996) (hereinafter

"Colorado I"). As a result, only party spending that can be shown to meet the legal test of

'coordination' can be subjected to the limits at 2 U.S.C. § 441a(a)(2)(A) and (d). The legal test for

coordination is set forth at 2 U.S.C. § § 431 (17) and 441a(a)(7)(8) and at 11 C.F.R. § 109.1(b)(4)

and (d)(1).

2
keep within the coordinated expenditure limit, but only the party need report the

transaction. 9

Because party committees are primarily in the business of electing

candidates, the Commission has required virtually all party-building activity to be

at least allocated so that indirect federal candidate support is not paid for with

funds not permitted under federallaw. 10 At the same time, recognizing party

committees sometimes undertake generic party-building activities that may help

their candidates only in a general way-- a way that should not result in a

contribution to or coordinated expenditure on behalf of a particular candidate--

the Commission has tried to clarify when a party activity need not be subjected to

a candidate-specific limitation. Thus, the Commission has specified at 11 C.FR.

§ 106.1 (c) that an expenditure for rent, personnel, overhead, general

administrative costs, educational campaign seminars, training of campaign

workers, or registration or get-out-the-vote drives need not be attributed to

individual candidates unless the expenditure is "made on behalf of a clearly

identified candidate, and the expenditure can be directly attributed to that

candidate."

When identifying which party activities fall under the candidate-specific

limits, though, the Commission must deal first and foremost with the underlying

statutory terms. A "contribution" is a payment or gift of value made "for the

purpose of influencing any election for Federal office."11 A coordinated

"expenditure" is a payment, advance or gift of anything of value made "for the

purpose of influencing any election for Federal office" and "in connection with the

general election campaign" of a candidate for Federal office. 12

Over the years, the Commission has grappled with the difficult factual

distinctions that make a party communication a generic party-building

expenditure on the one hand, or an in-kind contribution or coordinated

expenditure on the other. The best-known instances were Advisory Opinion

1984-1513 and the aforementioned Advisory Opinion 1985-14. In each of those

opinions, the Commission analyzed the facts according to the basic underlying

statutory provisions cited above.

In Advisory Opinion 1985-14, the Commission developed a shorthand

reference to the legal analysis to be used. Instead of repeating the statutory

phrases, "for the purpose of influencing" and "in connection with," the

Commission described the process as a search for whether the communication

911 C.F.R § 104.3(a)(3)(iii).

'°11 C.F.R. § 106.5.

11 2 U.S.C. § 431(8). 12 2 U.S.C. §§ 431(9) and 441a(d).

13 Fed. Elec. Camp. Fin. Guide (CCH Transfer Binder), 1[5766

3
contained an "electioneering message." 14 The Commission then cited a

Supreme Court decision for further guidance as to what was meant by

"electioneering message."15 There, the Court simply described its view of the

reach of the corporate and union prohibition at 2 U.S.C. § 441b: whether a

communication is "designed to urge the public to elect a certain candidate or

party."1B This phrasing, of course, is Virtually indistinguishable from the "for the

purpose of influencing any election for Federal office" language at the heart of

any "contribution" or "expenditure" inquiry. Thus, at most, the Commission in

Advisory Opinion 1985-14 was paraphrasing the statutory language underlying

any coordinated party expenditure analysis.

II.

Our colleagues grossly overstate the significance of the "electioneering

message" phrase and then gyrate into an inappropriate constitutional hypothesis

regarding the vagueness of that phrase and other phrases used in Advisory

Opinions 1984-15 and 1985-14. Along the way, they grumble about perceived

improper rulemaking through the advisory opinion process.

A.

Dealing with the last 'red herring' first, to our knowledge no commissioner

has been confused about the legal effect of advisory opinions. While advisory

opinions clearly have binding consequences, the statute is clear that general

rules of law have to emanate from the statute or from regulations of the

Commission. 17 Nonetheless, our colleagues seem convinced that the

Commission's use in Advisory Opinions 1984-15 and 1985-14 of paraphrases

and synonyms for the statutory test was, in fact, the creation of a new

substantive rule of law.1s The reality, of course, is that there are only so many

words in the English language, and after citing the underlying statutory

provisions, the Commission simply attempted to explain the legal test in other

helpful ways.19

14 Fed. Elec. Camp. Fin. Guide (CCH Transfer Binder), 115819 at 11,185.

'5 United States v. United Auto Workers, 352 U.S. 567 (1957) (hereinafter "UAW').

'6 Id. At 587.

17 2U.S.C. §437f(b).

,. At one point our colleagues call the phrases used a "test" and at other times they refer to them

as an "amalgam." Sandstrom et al. Statement at 2 and 4.

'9 Lest our colleagues be struck down by a bolt of lightning for insinuating they would never stoop

to helpful descriptions of the underlying statutory and regulatory provisions, they should concede

that only recently in AdVisory Opinion 1999-11, they engineered a description of the statute's

reach that depended on whether there was "any campaign activity" at the event in question. See

Memorandum from Commissioner Sandstrom, Agenda Doc. No. 99-61-A; Advisory Opinion 1999-

11 (unpublished) at 3.

4
Thus, our colleagues have felled a demon they didn't need to imagine in

the first place. The regulated community has had notice of the underlying

statutory provisions at 2 U.S.C. §§ 431(8) and (9) and 441a(d) all along.

Advisory Opinions 1984-15 and 1985-14 neither expanded nor diminished those

underlying rules of law.

Interestingly, our colleagues do not purport to supersede Advisory.

Opinions 1985-14 and 1984-15, but rather disagree with the phrasing of the legal

analysis therein. We take that to mean the Commission's conclusions regarding

specific proposed ads in those opinions still serve as valid legal precedent in

terms of the underlying statute. For example, a party committee that ran ads

under materially indistinguishable circumstances could 'rely upon' the

conclusions reached by a majority of commissioners in those opinions in

determining whether the ads would be a coordinated expenditure or not. 20 This

rightly diminishes the negative impact of our colleagues' statement and suggests

only that the Commission cease using the pesky "electioneering message"

phrase when explaining its interpretations under the statute.

We must address our colleagues' suggestion that an advisory opinion

may not be used as a "sword of enforcement." Sandstrom et al. Statement at 3.

Apparently, they disregard the statutory language quoted in the previous

footnote. Someone who receives an advisory opinion that certain conduct would

be illegal, as well as anyone in materially indistinguishable circumstances, surely

may 'rely on' that legal conclusion to file a complaint against someone else

engaging that conduct. Essentially, that is what happened when Democratic

Party representatives received a response in Advisory Opinion 1985-14 that

certain targeted communications attacking a likely opponent would be

coordinated expenditures subject to limit. Other Democratic Party

representatives then filed a complaint against the Colorado Republican Party

regarding certain ads that attacked the likely Senate nominee, Tim Wirth. That

enforcement case became the subject of the Supreme Court's decision in

Colorado I, supra.

Our colleagues may have missed the fact that the 10th Circuit in that

case upheld the FEC's use of Advisory Opinion 1985-14 (even its

"electioneering message" phrase) to bolster its c1aimY Although the Supreme

Court vacated the 10th Circuit's opinion on other grounds, Colorado I, this is a

strong indication advisory opinions can be used as a "sword."

20 The statute provides that any advisory opinion rendered by the Commission "may be relied

upon" by the person to whom the opinion is issued or by "any person involved in any specific

transaction or activity which is indistinguishable in all its material aspects ...." 2 U.S.C. §

437f(c)(1 ).

21 FEC v. Colorado Republican Federal Campaign Committee, 59 F. 3d 1015 (101h Cir. 1995).

5
This proposition is supported by a 9th Circuit decision, a case our

colleagues cite but misconstrue.22 There, in a successful enforcement action

against a committee that accepted excessive contributions, the FEC used its

advisory opinion precedent as a "sword," and the court specifically sanctioned

this approach.23

The courts have strongly indicated the Commission is bound to apply its

advisory opinion precedent consistently.24 We caution our colleagues not to get

so agitated over the use of paraphrases and shorthand references in prior

advisory opinions that they issue statements undermining the ability of the

agency to enforce the law.

B.

Our colleagues go well beyond their role as commissioners by opining

about the possible unconstitutional vagueness and overbreadth of the words

"electioneering message."25 First, as just explained, everyone should agree that

"electioneering message" is not a rule of law and, hence, it is not the proper

focus of any constitutional debate. Second, even if it were, Commissioners are

not members of the judiciary entitled to render their own rules unconstitutional.26

It is one thing to interpret the statute in an advisory opinion, or to interpret the

22 FEC v. Ted Haley Congressional Committee, 852 F.2d 1111, 1115 (9'h Cir. 1988) (hereinafter

"Haley") ("interpretation of FECA by the FEC through its regulation and advisory opinions is

entitled to due deference and is to be accepted by the court unless demonstrably irrational or

clearly contrary to the plain meaning of the statute").

23 We cannot fathom our colleagues' attempt to distinguish Haley. They appear to argue the

court's reliance on advisory opinions is insignificant because there happened to be a relevant

regulation to apply as well. Sandstrom et a/. Statement at 4, n. 9. As our colleagues well know,

the existence of a regulation is not essential to the legal value of an advisory opinion. The law, 2

U.S.C. § 437f(a), specifically contemplates adVisory opinions applying the statute as well-- just as

was the case in Advisory Opinions 1984-15 and 1985-14. As precedent, such opinions may be

"relied upon" just as much as advisory opinions applying a regulation. 2 U.S.C. § 437f(c).

24 See Common Cause v. FEC, 676 F. Supp. 286 (D.D.C. 1986) (certain FEC commissioners,

including Commissioner Elliott, ordered to issue statement of reasons in dismissed enforcement

case where advisory opinion precedent seemingly inconsistent); Common Cause v. FEC, Fed.

Elec. Camp. Fin. Guide (CCH Transfer Binder), 119263 (D.D.C. 1988) (related case noting, "The

importance of respect for the Rule of Law ... requires that courts be vigilant to ensure that in the

process 'prior policies and standards are being deliberately changed, not casually ignored.''').

25 Sandstrom et a/. Statement at 4.

26 Commissioners have an obligation to seek compliance with the statute passed by Congress. 2

U.S.C. § 437c(b)(1). The D.C. Circuit has stated, "[A]dministrative agencies ... cannot resolve

constitutional issues." American Coalition for Competitive Trade v. Clinton, 128 F.3d 761, 766 n. 6

(D.C. Cir. 1997). See also, Gilbert v. National Transportation Safety Board, 80 F.3d 364,366-67

(9th Cir. 1996) ("challenges to the constitutionality of a statute or a regulation promulgated by an

agency are beyond the power or the jurisdiction of an agency").

6
statute through a clarifying regulation. 27 It is altogether different to opine that a

mere shorthand reference used to paraphrase the statute is unconstitutional. 28

That said, we believe it important to note a fundamental flaw in our

colleagues' 'judicial detour.' Their reliance on Supreme Court analysis of

independent spending provisions is simply inapposite. In the area of

coordinated expenditures, there is no basis for applying the "express advocacy"

standard created in Buckley29 and FEC v. Massachusetts Citizens for Life30

where independent disbursements were at issue. Indeed, Buckley could not

have been clearer that its "express advocacy" test did not apply to coordinated

expenditures. When analyzing former 18 U.S.C. § 608(e), the independent

expenditure limit struck down by the Court, the per curiam opinion noted:

The parties defending § 608(e)(1) contend that it is necessary to prevent

would-be contributors from avoiding the contribution limitations by the

simple expedient of paying directly for media advertisements or for

other portions of the candidate's campaign activities. They argue that

expenditures controlled by or coordinated with the candidate and his

campaign might well have virtually the same value to the candidate as a

contribution and would pose similar dangers of abuse. Yet such

controlled or coordinated expenditures are treated as contributions

rather than expenditures under the Act. [footnote omitted] Section

27 The D.C. Circuit has noted that the adVisory opinion process provides an opportunity "to reduce

uncertainty or narrow the statute's reach" and that "the susceptibility of the [Federal Election

Campaign Act] to challenge on the grounds of vagueness has consequently been reduced."

Martin Tractor Co. v. FEC, 627 F.2d 375, 386 (D.C. CiL), cert. denied, 449 U.S. 954 (1980).

28 This would apply, as well, to our COlleagues' constitutional analysis of other phrases used at one

time or another by the Commission to explain the application of the underlying statutes, such as

whether the communication would "tend to diminish support for one candidate and garner support

for another candidate." Sandstrom et at. Statement at 4, n. 11, discussing Advisory Opinion 1984-

15.

We are baffled by our colleagues' suggestion that the Supreme Court's phrase in UAW

("designed to urge the public to elect a certain candidate or party") is but "charming" and of little

"practical use" because it dates back to the days of a '57 Chevy. Sandstrom et a/. Statement at

5, n. 13. That might explain why the old case of Marburv v. Madison, 5 U.S. 137, 178 (1803) (It is

for Article III jUdges to consider constitutional disputes and "say what the law is."), is of little value

to them. More importantly, because the phrasing used in UAW is so close to the current language

of the statute governing coordinated expenditures ("for the purpose of influencing any election for

Federal office"), we hope our colleagues are not suggesting the latter is unconstitutionally vague.

In Buckley v. Va/eo, 424 U.S. 1(1976), the Court made crystal clear that it viewed the phrase "for

the purpose of influencing" in the context of coordinated expenditures to be free of constitutional

vagueness concerns ("We construed [the term 'contribution' which relies on a 'for the purpose of

influencing' test] to include ... expenditures placed in cooperation with or with the consent of a

candidate. . .. So defined, 'contributions' have a SUfficiently close relationship to the goals of the

Act, for they are connected with a candidate or his campaign."). 424 U.S. at 78, referring back to

n. 24 at 23. 29 424 U.S. at 42-44, 76-82. 30 479 U.S. 238, 249-50 (1986) (hereinafter "MCFL").

7
608(b)'s contribution ceilings ... prevent attempts to circumvent the Act

through prearranged or coordinated expenditures amounting to disguised

contributions. By contrast, § 608(e)(1) limits expenditures for express

advocacy of candidates made totally independently of the candidate

and his campaign.31

Similarly, in MCFL, the Court made clear that its "express advocacy" construction

need only apply to the provision in 2 U.S.C. § 441 b "that directly regulates

independent spending."32

III.

We can only hope our colleagues' statement does not get misconstrued

by the regulated community and the courts. We note with interest, for example,

that one business day after our colleagues' statement was circulated at the

Commission, counsel for the defendant in FEC v. Christian Coalition33 filed a

pleading suggesting its relevance to the issue in that case: whether a

corporation made in-kind contributions or independent expenditures prohibited

under 2 U.S.C. § 441b. In fact, no allegation in that case involves a claim that

depends on the phrase "electioneering message."34

31 424 U.S. at 46,47. See also Buckley at 78-80 (defining coordinated expenditures as

"contributions" and defining non-coordinated "expenditures" covered by former 2 U.S.C. § 434(e)

to reach only communications containing 'express advocacy'). 32 479 U.S. at 249.

33 No. 96-1781 (D.D.C., filed 1996).

34 Interestingly, the Commission passed a regulation in 1995 that implements 2 U.S.C. § 441b as it

relates to certain voter guides. It uses the phrase "electioneering message." Specifically, for

voter gUides prepared with the candidates' cooperation and participation, the regulation specifies

that such guides "shall not score or rate the candidates' responses in such way as to convey an

electioneering message." 11 C.F.R. § 114.4(c)(5)(ii)(E). As it post-dates the activities at issue in

FEC v. Christian Coalition, supra, it should not enter the debate there, but that has not stopped

the defendant's counsel. For activities properly sUbject to this regulation, we can only ponder

what our colleagues will say.

8
The confusion generated by our colleagues is regrettable. While the

Commission's efforts to apply the in-kind contribution and coordinated

expenditure provisions in the statute must focus, as always, on the words of the

statute, surely a great deal of energy now will be expended on what to make of

the banning of the innocuous "electioneering message" phrase. The answer is,

"not much." Sadly, a lot of explaining will be required to get there.

Date

Date

9

Scott E. Thomas, Chairman

~'ifc~~~ DannyL. cDonalct:Qmmissioner ~.7Y.,,{)
FEDERAL ELECTION COMMISSION

WASHINGTON, DC. 20463

MEMORANPUM

TO:

FROM:

DATE:

SUBJECT:

Commissioners

Staff Director Pehrkon

General Counsel Noble

Press Officer Harris

Mary W. Dove/Lisa R. Da is

Acting Commission Secre

June 25,1999

Statement of Reasons for the Audits of

Clinton/Gore '96 and Dole/Kemp '96.

Attached is a copy of the Statement of Reasons in the Audits of

Clinton/Gore '96 and Dole/Kemp '96 signed by Vice-Chairman Darryl R.

Wold, Commissioner Lee Ann Elliott, Commissioner David M. Mason and

Commissioner Karl J. Sandstrom. This was received in the Commission

Secretary's Office on Thursday. June 24, 1999 at 3:47 p.m.

cc: V. Convery

Attachment
FEDERAL ELECTION COMMISSION

WASH INC TON. 0 C 2U4bJ

STATEMENT OF REASONS of

VICE CHAlRMA.l'l DARRYL R. WOLD and

COMMISSIONERS LEE ANN ELLIOTT,

DAVID M. MASON and,

KARL J. SANDSTROM

On The Audits Of

"DOLE FOR PRESIDENT COMMITTEE, INC." (pRIMARY),

"CLINTON/GORE '96 PRIMARY COMMITTEE, INC.,"

"DOLEIKEMP '96, INC." (GENERAL),

"DOLEIKEMP '96 COMPLIANCE COMMITTEE, INC'~ (GENERAL),

"CLINTON/GORE '96 GENERAL COMMITTEE, INC.," and

"CLINTON/GORE '96 GENERAL ELECTION

LEGAL AND COMPLIANCE FUND"

Pursuant to 26 U.S.C. §§ 9038(a) and 9007(a), the Federal Election Commission

("the Commission") audited the "Dole For President Committee, Inc.," the "Clinton/Gore

'96 Primary Committee, Inc.," "DolelKemp '96, Inc.," the "DolelKemp '96 Compliance

Committee, Inc.," the "Clinton/Gore '96 General Committee, Inc." and the "Clinton/Gore

'96 General Election Legal And Compliance Fund." In doing so, our Audit Division and

Office ofGeneral Counsel (collectively the "staff') analyzed media advertisements the

Democratic and Republican National Committees (collectively "the parties") ran during

1995 and 1996. The purpose ofthis analysis was to determine whether the cost ofthese

advertisements constituted in-kind contributions (coordinated expenditures) by the parties

on behalf oftheir respective presidential candidates' committees (which, among other

things, could have caused the presidential committees to exceed their primary or general

election spending limits in violation of2 U.S.C. § 44Ia(b».

In analyzing these advertisements, I the staff examined their content for the

presence oftwo factors to determine whether the advertisement were "for the purpose of

influencing" an election for Federal office, as that phrase is used in 2 U.S.C. § 431 (8)(A)

("contribution") and (9)(A) ("expenditure"): Whether the advertisements referred to a

"clearly identified candidate" and whether they contained an "electioneering message."2

J See. e.g., "Report of the Audit Division on the Dole For President Committee, Inc. (Primary)" ("Report

on DFP"), Agenda Document 98-87, 11/19/98 at 14 & 50; "Report of the l\udit on Clinton/Gore '96

Primary Committee, Inc." ("Report on CGP"), Agenda Document 98-85, 11/19/98 at 10,32-35 & 36-38.

2 The staff cited Advisory Opinions ("AO")1984-15 and 1985-14 as the authority for using "electioneering

message" as a test ofthe content of a communication. Only AO 1985-14 used that phrase, and it did so in

erroneously concluding that the Commission had employed the "electioneering message" test in AO 1984.

15, see AO 1985-15 at 7; in fact, those words never appear in AO 1984-15. See footnote eleven, infra, for

a discussion ofthe problems with the staffs interpretation of these opinions.
Because the stafffound that both factors were present/ the staffrecommended that the

Commission detennine that the costs ofthe advertisements were in-kind contributions

from the parties to their respective presidential campaign committees. 4 The staff also

recommended that the Commission detennine that the applicable spending limits were

exceeded based in part on the cost ofthe advertisements, and that the Commission require

a repayment ofpresidential matching funds. For various reasons, the Commissioners

unanimously rejected the staff's repayment recommendations.

We write here to express our disagreement with the use of "electioneering

message" as a test to detennine whether communications are "for the purpose of

influencing" elections and, therefore, constitute expenditures or contributions under the

Federal Election Campaign Act ("FECA"). Specifically, we agree that: (1) The phrase

"electioneering message" cannot serve as a substantive test to describe the content of

communications that are "for the purpose ofinfluencing" an election because it is derived

only from advisory opinions and is not found either in the FECA or in regulations

promulgated by the Commission in accordance with the rulemaking procedures specified

in the FECA; and (2) The phrase "electioneering message" cannot be used as a shorthand

expression ofthe Commission's interpretation ofthe statutory standard of "for the

purpose ofinfluencing" an election because the advisory opinions from which the phrase

is drawn do not convey a clear and consistent application ofthe statutory standard, and

the phrase, standing alone, is both too vague and too broad to have a sufficiently definite

meaning. Therefore, we conclude that the phrase "electioneering message" should not be

used to describe the content ofcommunications which the Commission would detennine

to be "for the purpose ofinfluencing" an election to Federal office.

Procedural Defects With Employing The "Electioneering Message" Standard

Congress included an express prohibition in the FECA against the Commission

using advisory opinions to establish rules of conduct. SUbpart (b) of 2 U.S.c. § 437[, the

section governing the use ofsuch opinions, provides that the Commission may employ

rules oflaw that are not set forth in the FECA only ifit complies with the procedures set

forth in 2 U.S.C. § 438(d) in promulgating them.s By necessary implication, subpart (b)

of § 437fprohibits the Commission from using advisory opinions as rules oflaw, for the

3 See. e.g., Report on DFP, Agenda Document 98-87,11/19/98 at 50; Report on COP, Agenda Document

98·85, 11/19/98 at 38.

4 See. e.g., Report on DFP, Agenda Document 98-87, 11/19/98 at 52; Report on COP, Agenda Document

98-85, 11/19/98 at 43.

S See id. at § 437f(b) ("Any rule oflaw which is not stated in this Act or in chapter 95 or chapter 96 of title

26 may be initially proposed by the Commission only as a rule or regulation pursuant to procedures

established in section 438(d) of this title."); United States Defense Committee v. Federal Election

Commission, 861 F.2d 765,771 (2" Cir. 1988) (USDC) (citing 2 U.S.C. § 438(d)) ("A rule oflaw may

initially be proposed by the Commission only as a rule or regulation pursuant to very elaborate procedures

involving submission ofthe rule or regulation to the Congress.").

2
Commission does not follow the requirements of2 U.S.c. § 438(d) in drafting such

opinions; instead, it follows the requirements of § 437f."

As a result, the Commission may not use advisory opinions as a substitute for

rulemaking. Rulemaking is not simply the preferred method for filling in gaps in the

FECA. It is the required method. 2 U.S.C. § 437f(b), note five, supra. Where the law is

of uncertain application, advisory opinions cannot be used as a sword of enforcement.

See generally id. The regulated community can, however, use advisory opinions as

shields against Commission enforcement actions in appropriate circumstances. 2 U.S.C.

§ 437f(c).

Advisory opinions are binding only in the sense that they may be relied on

affirmatively by any person involved in the specific transaction or activity

discussed in the opinion or in any materially indistinguishable transaction or

activity.... On the other hand, to the extent that the advisory opinion does

not affirmatively approve a proposed transaction or activity, it is binding on

no one-not the Commission, the requesting party, or third parties. 7

This reading ofthe FECA's rulemaking requirements, of course, does not prevent

the Commission from enforcing the FECA in novel or unforeseen circumstances. It only

requires that, absent controlling regulations or the authoritative interpretations ofthe

courts, the Commission's enforcement standard be the natural dictate ofthe language of

the statute itself.8

The threshold problem with the "electioneering message" standard, then, is that it

is not a rule. It is only a shorthand phrase that purports to describe the Commission's

reasoning in two advisory opinions. See note two, supra. The phrase is not defined in

either ofthose opinions. In fact, it does not appear at all in one ofthem. Rather than

being promulgated pursuant to the requirements ofthe FECA (see 2 U.S.C. §§ 438(d) and

"See 2 U.S.c. § 437f(b) ("... No opinion of an advisory nature may be issued by the Commission or any

ofits employees except in accordance with the provision ofthis section [i.e., § 4371].").

7 USDC, 861 F.2d at 771 (emphasis added) (citing 2 U.S.C. §§ 438(d) and 437f(b)&(c)); see also Weber v.

Heaney. 793 F. Supp. 1438, 1452 n. 9 (D. Minn 1992) (" ... Commission advisory opinions are binding in

the sense that they may be relied upon affirmatively by any person involved in the specific transaction or

activity discussed in the opinion or in any materially indistinguishable transaction or opinion."), aff'd. 995

F.2d 872 (8'h Cir. 1993); Stockman v. Federal Election Commission. 138 F.3d 144.149 n. 9 (5'" Cir. 1998)

(same). Some argue that Orloski v. Federal Election Commission. 795 F.2d 156 (D.C. Cir. 1986), supports

the contrary conclusion. Unlike USDC, however, Orloski did not address the FECA's clear prohibitions on

using advisory opinions as rules of conduct. Instead, Orloski analyzed the advisory opinions implicated

there for purposes of determining whether the Commission's interpretation of the FECA was reasonable

and consistent and thus should be accorded deference. 795 F.2d at J64-167.

8 See Sullivan v. Everhart, 494 U.S. 83, 89 (1990) (Scalia, J.) (quoting Chevron U.S.A.. Inc. v. Natural

Resources Defense Council. bic.. 467 U.S. 837, 843 (1984) and National Labor Relations Board v. Food

and Commercial Workers, 484 U.S. 112, 123 (1987)) (,"[I]fthe statute is silent or ambiguous with respect

to the specific issue, the question for the court is whether the agency's answer is based on a permissible

construction of the statute,' that is, whether the agency's construction is 'rational and consistent with the

statute. ''').

3
437f(b) & (e), the "electioneering message" standard is an amalgam ofthese advisory

opinions. Even at that, it is not the most natural, let alone the only reasonable, reading of

those opinions. In fact, it is difficult to draw any clear meaning from a comparison or

combination ofAOs 1984-15 and 1985-14 (see "Substantive Difficulties," infra).

As a result, the regulated community most likely does not have notice as to how

this standard will govern its conduct, and it certainly did not have an opportunity to

comment on whether it should. Because ofits procedural infirmities, the Commission

may not employ the phrase "electioneering message" as expressing a general rule for

determining whether communications are "for the purpose ofinfluencing" a federal

election.·

Substantive Difficulties With The "Electioneering Message" Standard

Apart from its procedural infirmities, the "electioneering message" standard

suffers from serious problems of vagueness and overbreadth. As presented by the staff, a

communication satisfies this standard ifit includes statements which are "designed to

urge the public to elect a certain candidate or party,'O or which would tend to diminish

support for one candidate and garner support for another candidate." See, e.g., Report on

DFP, Agenda Document 98-87,11119/98 at 14 (citing AO 1984-15); Report on CGP,

Agenda Document 98-87, 11119/98 at IO (citing AO 1984-15).11

• Democratic Congressional CampaIgn Committee v. Federal Election Commission, 645 F. Supp. 169

(D.D.C. 1986), aff'd in part and rev 'd in part, 831 F.2d 1131 (D.C. CiL 1987) (DCCC) and Federal

Election Commission v. Ted Haley Congressional Committee, 852 F.2d 1111 (9'h CiL 1988) (Haley) do not

affect this conclusion. In DCCC, the Commission dismissed a complaint, contrary to the recommendation

ofits General Counsel, without providing a statement ofreasons for domg so when it appeared the

complaint alleged activity that satisfied the "electioneering message" standard. 645 F. Supp. at 170-171.

The Court, in an action brought pursuant to 2 U.S.c. § 437g(a)(8), was faced with the question of whether

the Commission had acted "contrary to law" for appearing to disregard its "electioneering message" test

without articulating any reason for doing so, id. at 171-174; the Court was not faced with the issue here:

whether thattesl, itself, was validly established. In Haley, the Court noted that the Commission's

interpretation ofthe FECA in its regulations and advisory opinions was entitled to due deference. 852 F.2d

at 1115. But all the advisory opinions to which that Court referred interpreted a Commission regulation,

id. at 1114-1115; they did not attempt to circumvent the FECA's clear requirement that for rules of

conduct, the Commission have a regulation. See also Federal Election Commission v. Legi-Tech. 967 F.

Supp. 523, 529-530 (D.D.C. (997) (Commission advisory opinions interpreted regulation).

'0 The staff cites AO 1984-15 as authority for this phrase. This phrase, however, comes from 1985-14. See

id. at 7 (citing United States v. United Auto Workers. 352 U.S. 567, 587 (1957)).

11 There is substantial question as to whether the staffs analysis properly characterizes AO 1984-15. While

that opinion uses the phrases "diminish support" and "gamer support," id. at 5, it concludes that

advertisements which clearly identif'y presidential candidates of one party and include exhortations to

"vote" for another party "effectively advocate the defeat of a clearly identified candidate." /d. Whatever

distinction there may be between "effectively" and "expressly" advocating, the facts presented in that

advisory opinion bear similarities to the facts in Federal Election Commission v. Massachusetts Citizensfor

Life. Inc.. 479 U.S. 238 (1986) (MCFL), and the Commission's conclusion in AO 1984-15 and the court's

conclusion in MCFL can be read consistently. The staffsuggests an extremely broad interpretation of AO

1984-15, citing the phrase "dimish [or] gamer support." See Reports on DFP & CGP. supra. That

opinion's facts, however, suggest a more narrow, and more natural, construction, similar to MCFL.

4
Such formulations, the Supreme Court has held, offend the First Amendment. ]n

Buckley v. Valeo, 424 U.S. I, 42-44 (1976), the High Court held as impermissibly vague

the "relative to ... advocating the election or defeat of[a clearly identified) candidate"

standard in 18 U.S.C. § 608(e) (1970) ofthe original FECA. The "diminish support for

one candidate" prong--like the "relative to" standard in the original FECA- is especially

problematic because "the distinction between discussion ofissues and candidates and

advocacy ofelection or defeat ofcandidates may often dissolve in practical application."

Buckley, 424 U.S. at 42 (emphasis added)."

The factual question ofwhat a particular statement was designed to do also gives

rise to vagueness problems. The fact that the term "electioneering" and the phrase

"designed to urge the public to elect a certain candidate or party" were plucked out of

context from a four-decade old Supreme Court opinion (United States v. Auto Workers,

352 U.S. 567 (1957) (UA W)) does not resolve the question. 13 First, it is clear that UA W

was not enunciating a constitutionally-permissible standard for regulating speech, but

describing a particular communication in the course of an opinion explicitly refusing to

reach a ruling on the constitutionality ofregulating the specific speech'so described. See

id. at 591 (internal citation omitted) ("Clearly in this case it is not absolutely necessary to

a decision to canvass the constitutional issues."). Second, the speech at issue in UAW

included specific endorsements of candidates. Id. at 584. Third, the per curiam opinion

in Buckley cites the dissent in UAW, see 424 U.S. at 43 (citing UAW, 352 U.S. at 595-596

(Douglas, J., dissenting)), which had urged that the FECA's predecessor statute be

declared unconstitutional as applied to the electioneering speech at issue in UA W.

The relationship, if any, ofthe two prongs ofthe "electioneering message" test

underscores the test's vagueness. Read narrowly, "urge the public to elect a candidate,"

AD 1985-14 at 7, could be construed as equivalent to communications "that expressly

12 The "relative to" standard, on its face, was thus unhelpful in distinguishing between these two types of

speech. Id. As a result, to allow unfettered issue discussion while regulating candidate advocacy, the

government, under this standard, had to attempt to divine the speaker's intent. Jd at 43. This. the Court

noted. would not only be difficult, but dangerous.

Whether words intended and designed to fall short of invitation would miss that mark is a

question both ofintent and effect. No speaker, in such circumstances, safely could

assume that anything he might say upon the general subject would not be understood by

some as an invitation. In short, the supposedly clear-cut distinction between discussion,

laudation, general advocacy, and solicitation puts the speaker in these circumstances

wholly at the mercy ofthe varied understanding of his hearers and consequently of

whatever inference may be drawn as to his intent and meaning. Such a distinction offers

no security for free discussion. In these conditions, it blankets with uncertainty whatever

may be said. It compels the speaker to hedge and trim.

Id. (quoting Thomas v. Collins•. 323 U.S. 516, 535 (1945)). The second prong of the "electioneering

message" test--given its "diminish (candidate] support" focus--requires the same difficult and dangerous

subjective inquiry.

Il Like a '57 Chevy, a dated Supreme Court opinion may be channmg. but often requires substantial

restoration to be of practical use.

5
advocate the election or defeat of a clearly identified candidate." Federal Election

Commission v. Massachusetts Citizens For Life, Inc., 479 U.S. 238, 249-250 (1986)

(quoting Buckley, 424 U.S. at 80). In contrast, there is virtually nothing which could be

said about a candidate for federal office which might not be interpreted as "diminish[ing]

support for one candidate [or] gamer[ing] support for another candidate." See, e.g.,

Report on DFP, Agenda Document 98-87, 11/19/98 at 14 (citing AO 1984-15); Report

on CGP, Agenda Document 98-87, 11/19/98 at 10 (citing AO 1984-15).

The "electioneering message" test is also unconstitutionally overbroad for related

reasons. As the Buckley Court observed,

[c]andidates, especially incumbents, are intimately tied to public issues

involving legislative proposals and governmental actions. Not only do

candidates campaign on the basis oftheir positions on various public

issues, but campaigns themselves generate issues of public interest.

424 U.S. at 42. Regulation of any statement which" diminishes [or garners] support for

[a] candidate," AO 1984-15 at 5, would encompass, then, virtually any meaningful

utterance identifying a candidate.

The vagueness and overbreadth problems ofthe "electioneering message" and

"relative to" standards are thus two sides ofthe same counterfeit coin. They are vague

because it is not clear when they encompass issue discussion and not candidate advocacy.

They are overbroad because, given the nature of campaigning, they will inevitably

encompass both. For the same substantive reasons that the Supreme Court held the

"relative to" standard in the FECA to be unconstitutional, the Commission may not

employ "the electioneering message" standard. Even in the context of coordinated, or

presumably coordinated, communications in which the "electioneering message" test has

generally been proposed (see 11 C.F.R. § 114.4(c)(5)(ii)(B)(2)(E) (regulation of voter

guides», the Commission may not ignore these constitutional requirements.

Conclusion

a~k;;'f-?:J Lel~:m Elliott Date

Co issioner

/-d/~ r;/zfh1

I Karl VSandstrorn Date

Commissioner

Given the procedural and substantive infirmities with the "electioneering

message" standard, the Commission may not employ it in administering the FECA, the

Presidential Primary Matching Payment Account Act, the Presidential Election Campaign

Fund Act, or its own regulations.

/(\'/1//._, / I ,fJJ1v'f11jt1~:/t!tft,; t-~'1!¥1

Darryll{, Wold Date

f1~~ ;)p/1j

David M. Mason Date

Commissioner

6