FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

f,,r I , #» 

io.; «*w.. 

June 23,2011 

MEMORANDUM 

To: 

Through: 

From: 

The Commission 

Alec Palmer tf? 

Acting Staff Director 

Patricia Carmona ^{^C^ 

Chief Compliance Officer 

Joseph F. Stoltz 

Assistant Staff ] 

Audit Division / 

By: 

Subject: 

Thomas J. Nurthen 

Audit Manager 

Mary Moss^J'j^ 

Lead Auditor 

Audit Division Recommendation Memorandum on John Edwards for 

President (JEFP) 

Discussed below is JEFP's response to the attached Draft Final Audit Report 

(DFAR) as well as the Audit Division's comments and recommendations. The Office of 

General Counsel reviewed this memorandum, concurs with the recommendations, and 

provided the attached comments. 

JEFP declined the opportunity for an audit hearing and did not respond to Findings 

2,3 or 4. 

Finding 1. Matching Funds Received in Excess of Entitlement 

In response to tiie Draft Final Audit Report, Counsel for JEFP (Counsel) has 

restated many of the same arguments made previously with respect to the Febmary 7, 

2008 payroll and to JEFP's overall objection to the repayment of matchmg funds. In 

addition to those arguments. Counsel stated that the portion of the Febmary 7,2008 
payroll in question ($528,454) should be treated as a "pre-DOI [date of ineligibility] 

qualified campaign expense" for the following reasons:' 

• To compensate staff for overtime and extra hours worked during January 2008. 

• To compensate staff for remaining with the campaign after DOI to perform 

functions relating to closing out campaign offices. 

• To compensate staff for extra expenses they may have incurred, including assisting 

in the close-out of the campaign. 

Counsel continued that the flnal payroll was to compensate staff for their work prior to 

DOI and to deal with obligations (leased office space, rental cars, leased equipment, etc.) 

that were undertaken by the campaign prior to DOI. As such, according to Counsel, the 

final payroll amount that the Audit Division is challenging is a qualified campaign 

expense because the expenditure (1) occurred within several days of the end of the 

campaign, (2) was driven by conditions and obligations in existence prior to DOI, and (3) 

should be treated on the same basis as other pre-DOI expenditures. Counsel also stated 

that "the final payroll was intended to deal with a variety of issues, including all of tiie 

explanations enumerated in the DFAR." 

In addition, the response addresses a matter not discussed in detail in any response 

received to date. Counsel stated: 

"Smce JEFP filed its Response to the Preluninary Audit Report m 

December 2010, JEFP has become involved in providing extensive 

information to the Department of Justice. Although tiie Committee is not 

under investigation, it has been necessary for JEFP to incur unanticipated 

expenses, including additional staff and legal costs. These costs do not 

fall withm the ambit of typical 'winding down* costs because they are not 

incurred for a Commission audit or compliance with public financing 

laws. Rather, these costs are actually qualified campaign expenses that are 

beyond windmg down costs. Because the Committee's efforts have been 

more extensive than anticipated, and have requured a large financial 

commitment, JEFP might exceed the limit on wmdmg down costs. (11 

CF.R. §9034.11.) Therefore, JEFP is seekmg a determmation from tiie 

Commission that the Coimnittee may re-allocate those costs as qualifred 

campaign expenses. In the altemative, the Coinmittee requests tiiat the 

Coinmission determine that, due to unforeseen circumstances, these 

expenses be excluded from wmdmg down costs for the purposes of the 

10% limit on such costs." 

In response to die Preliminary Audit Report, Counsel argued tiiat this amount represented a winding down 

expense and identified an amount that represented staff salaries covering the period January 31,2008, to 

February 7,2008, as well as an amount that represented a lump-sum payment for expenses. 
Finally, Counsel stated that the Statement of Net Outstanding Campaign 

Obligations (NOCO) as it appeared in the Draft Final Audit Report (DFAR) values 

JEFP's capital assets at $29,134 but that this valuation is not an accurate reflection of 

the current value of the assets. Counsel notes that the DFAR reflects valuation of 

assets from 2008. Since that date, the value of these assets has declined dramatically. 

The response explains that electronic items substantially decreased in value with age 

and several of these items are no longer fimctional. Therefore, the value of capital 

assets for NOCO purposes should be reduced to $1,775, the current value of these 

assets. Counsel also indicated that it will provide additional documentation. 

The Audit staff offers the following conceming JEFP's response: 

February 7.2008 Pavroll - JEFP has offered a number of explanations to 

demonstrate why this payroll should be considered a qualifled campaign expense and 

included on the NOCO statement. To date, the Audit staff has not accepted any of the 

explanations. Nor does the Audit staff accept Counsel's current position: that tiie payroll 

represented a pre-DOI qualifled campaign expense because staff salaries were incurred in 

January 2008, or that the payroll covered expenses incurred after DOI but "driven by 

conditions and obligations in existence prior to DOI." 

Coimsel has not provided any documentation in support of its positions. Ninetynine individuals were on the payroll in January 2008. These individuals were paid for 

their services in the normal course. Counsel now states that a portion of the payroll in 

question represents "overtime and extra hours worked during January 2008." However, 

Counsel has provided no documentation that identifies the individuals or the hours each 

individual worked. If a portion of the payroll represented reimbursements for expenses 

incurred by staff while closing offices or retuming rental cars after DOI, as well as for 

post-DOI compensation, then documentation in support of these expenses should have 

been maintained. 

Expenditures Associated with Providing Information to thc Department of 

Justice - Counsel is seeking a determination from the Conimission that allows JEFP 

either to re-allocate the costs associated with providing information to the Department of 

Justice as a qualified campaign expense, or to exclude these wmding down expense costs 

from the winding down expense limitation. 

JEPF has not provided any documentation supporting any amounts paid or 

outstanding for providing such services. Further, the Audit staff believes that these type 

of expenditures are permissible winding down costs subject to the winding down expense 

limitation at 11 CFR §9034.11(b). 

The Explanation and Justification for this regulation appears to contemplate this 

type of activity. While discussing a commenter's argument that the Commission could 

create a fund for primary candidates like the GELAC (which is for general election 

candidates), the (Commission provided a number of reasons why such a fimd was not 

necessary. The Cominission concluded that a new primary legal defense fimd for 
enforcement matters and other legal proceedings (emphasis added), or a primary legal and 

compliance fund similar to a GELAC, is not necessary or appropriate for primary election 

candidates. 

The Explanation and Justification further states: 

"This limitation only applies to the use of public funds or a mixture of 

public and private fiinds for winding down costs. The final mle allows a 

primary candidate who is in a deficit position at DOI to pay for winding 

down costs in excess of the limitation after the committee's accounts no 

longer contain any matching fiinds." 

The last matching payment received by JEFP was $4,057,453, on July 17, 

2008. Of tills amount, JEFP was only entitied to $1,920,946 ($4,057,453 -

$2,136,507 (repayment amount)). Based on JEFP's expenditures after July 17,2008, 

the matching fiinds ($1,920,946) would have been exhausted from JEFP bank 

accounts as of April 30,2010. Therefore, JEFP can exceed the winding down 

expense limitation without incunmg a non-qualified campaign expense(s) since 

matching funds would no longer be in JEFP's bank accounts. See 11 CFR 

§9038.2(b)(2)(iiiXB). 

Valuation of Capital Assets - The Audit staff agrees that the NOCO valuation of 

capital assets is not an accurate reflection of the current value of capital assets, nor should 

it be. The NOCO represents a committee's fmancial position as of tiie candidate's date of 

ineligibility. The Regulations include as assets the fair market value of capital assets on 

hand (as of the date of ineligibility). If total liabilities exceed total assets, then the 

candidate is entitied to additional matching funds. 

As is customary, the Audit staff worked with JEFP's representative and agreed that 

the fair market value of capital assets at the candidate's date of ineligibility was $29,134. 

Committees have the option of selling theur capital assets or continumg to use them while 

winding down the campaign. Based on Counsel's response, it appears that JEFP 

continued to use some of its capital assets. 

The Audit staff recommends that the Commission fmd that JEFP was not entitied 

to $2,136,507 oftiie matching fund payment ($4,057,453) it received on July 17,2008 and 

tiiat JEFP should repay $2,136,507 to tiie United States Treasury. 

Finding 2. Misstatement of Finandal Activity 

The Audit staff recommends that the Conimission find that JEFP understated its 

cash-on-hand balance. 
Finding 3. Failure to Itemize Loan Repayments 

The Audit staff recommends that the Commission flnd that JEFP failed to itemize 

loan repayments, totaling $4,244,469, on Schedule B-P (Itemized Disbursements) 

Finding 4. Stale-Dated Checks 

The Audit staff recommends that the Commission find that JEFP should pay 

$267,529 to tiie United States Treasury. 

If the above recommendations are approved, the Audit staff will prepare a 

Proposed Final Audit Report within 30 days of the Commission's vote. 

Should an objection be received. Directive No. 70 states that the Audit Division 

Recommendation Memorandum will be placed on the next regularly scheduled open 

session agenda. 

Documents related to this audit report can be viewed in the Voting Ballot Matters 

folder. Should you have any questions, please contact Mary Moss or Thomas Nurthen at 

694-1200. 

Attachments: 

- Draft Final Audit Report of the Audit Division on John Edwards for President 

- Office of General Counsel Analysis (DFAR) Received May 12,2011 

- Office of General Counsel Analysis (ADRM) Received June 23,2011 

cc: Office of General Counsel 
Draft Final Audit Report of the 

Audit Division on 

John Edwards for President 

January 3, 2007 - March 31, 2008 

Why the Audit 

Was Done 

Federal law requires the 

Coinmission to audit 

every political committee 

established by a candidate 

who receives public fimds 

for the primaiy 

campaign.' Tlie audit 

determines whether the 

candidate was entitled to 

all of the matching fimds 

received, whether the 

campaign used the .^^^^ 

matching fimds in 

accordance with the 

About the Campaign (p. 2) 

John Edwards for President is the principal campaign committee 

for John Edwards, a candidate for the Democratic Party's 

nomination for the office'of President ofthe United States. The 

Committee is headquartered in Chapel Hill, Nortii Carolina. For 

more information; sec the chart on tiie Campaign Organization, 

p.2. 

Financial Actildty (p. 3) 

• Receipts 

o : ppntrib:utions From Individuals 

o l$^a|cm| Received 

O Bii%^-Oai'^^S:-:;;;-. 

o 

-•••i^j'Sjf.t-

, to Exp^ditures 

Otiieillecehftgr 

ilDotalRecettKl^^^' 

whether the candidate is 

entitied to addi^pffl ' ^^r, 

matching^fupd^^a%^;^. ^ • ^J^:o Ej^ditures 

wheth^-Ae-icampaigi'^^l^. " 

otherw[ii|^^^plied with"^^; 

the limitafi^) 

prohibitions,^ 

disclosure requl 

the election law 

9 Conm^ij|^£[efunds 

'bKl^JLoan Rq)ayments and Other 

''^!^l)ursements 

Tota^lsbursements 

$39,643,966 

7,404,083 

8,974,714 

967,088 

129,527 

$57,119,378 

$44,405,156 

3,720,268 

7,383,067 

$55,508,491 

Future Action 

The Coinmission may 

mitiate an enforcement 

action, at a later time, with 

respect to any of tiie 

matters discussed in this 

report. 

ngs and Recommendations (p. 4) 

atching Funds Received in Excess of Entitiement 

(Finding 1) 

Misstatement of Financial Activity (Finding 2) 

Failure to Itemize Loan Repayments (Finding 3) 

Stale-Dated Checks (Finding 4) 

26 U.S.C. §9038(a). 
Draft Final Audit Report of the 

Audit Division on 

John Edwards for President 

January 3, 2007 - March 31, 2008 
Table of Contents 

Page 

Part I. Background 

Authority for Audit 1 

Scope of Audit 1 

Inventory of Campaign Records 1 

Part II. Overview of Campaign 

Campaign Organization 2 

Overview of Financial Activity 3 

Part III. Summaries 

Fmdmgs and Recommendations 4 

Summary of Amounts Potentially Owed tp tiie U.S. Treasuiy 5 

Part IV. Findings and Recommendations 

Fmding 1. Matching Funds Received in Excess of Entitlement 6 

Findmg 2. Misstatement of Financial; Activity 19 

Finding 3. Failure to Itemize Loan Repayments 20 

Finding 4. Stale-Dated Checks 21 

•1 •. 

'&K..' 
Part I 

Background 

Authority for Audit 

This report is based on an audit of John Edwards for President (JEFP), undertaken by the 

Audit Division ofthe Federal Election Commission (the Commission) as mandated by 

Section 9038(a) of Titie 26 oftiie United States Code. That section states "After each 

matching payment period, the Coinmission shall conduct a thorough examination and 

audit ofthe qualified campaign expenses of eveiy candidate and his authorized 

committees who received payments under section 9037." Also, Section 9039(b) ofthe 

United States Code and Section 9038.1(a)(2) ofthe Commission's Regulations state that 

the Commission may conduct other examinations and audits from time to time as it 

deems necessaiy. 

Scope of Audit 

This audit examined: "V 

1. The receipt of excessive contributions and loans. 

2. The receipt of contributions .fi:6m prohibited sources^ 

3. The receipt of transfers from other authorized committees. 

4. The disclosure of contributions ahd transfer 

5. The disclosure of disbursements, debts and obligations. 

6. The recordkeeping prbpess and completeness of records. 

7. The consistency;|i|dweCT fig^s and; b ^ records. 

8. The accuracyi0£|iie Statetiieiit of Net Quj^^ding Canipaign Obligations. 

9. The campaign's^iii^pliancif il^ith spendi^jiimitations. 

10. Other^c^paign op^|^pns^^jBS(s^ to m|^r!isview. 

ThFi^l^it staff routiidi^^^pndtiil^'j^ inventory of campaign records before it begins the 

audit neSiwork. JEFP's ^^^ords wqnb^substantially complete and the fieldwork began 

immediaiel^l^ 
Part II 

Overview of Campaign 

Campaign Organization 

Important Dates 

• Date of Registration Januaiy 5,2007 

• Eligibility Period October 31,2007 - Januaiy 30,2008'' 

• Audit Coverage Januaiy 3,2007 - March 31,2008^ 

Headquarters Chapel Hill, North Carolina 

.•'-.• d' 

Bank Information 

• Bank Depositories 

• Bank Accounts .4^^. 17:Gh6bking, 2 Investment ; ' -

Treasurer ^'rnh'^^m^^.. 

• Treasurer When Audit Was Conducted" - Julius L. dhfonbers 

• Treasurer During Period .Covered by; 

Audit ^<0^'^-''-'^7.h:.. V.::-

Julius L. Chambers 

Management InfoWation 

• Attended. FEC CaiMign^liMISe^:, 

Se«iaERi=fe&'^. '^it' "^^^.^^4^-

;Xes 

• ^;|pi'Handlea^^^tii^ ^ '"^ l 

%^pidkeeping T^ ^ 

^Paid Staff 

' The period during which the candidate was eligible for matching funds began on the date of certification 

of his matching fimd eligibility and ended on the date die candidate announced his withdrawal from the 

campaign. See 11 CFR §9033. 

' Limited reviews of receipts and expenditures were performed after March 31,2008, to determine whether 

the candidate was eligible to receive additional matohing funds. 
Overview of Financial Activity 

(Audited Amounts) 

Cash on hand ® January 3,2007 $0 

o Contributions From Individuals 39.643.966 

o Matching Funds Received 7.404.083* 

o Bank Loan 8.974.714 

o Offset to Expenditures 967,088 

o Other Receipts 129,527 

Total Receipts $57,119,378 

o Operating Expenditures 44.405.156 

o Contribution Refunds 3.720.268 

o Loan Repayments and Other Disbursements 7.383.067 

Total Disbursements $55,508,491 

Cash on hand ® March 31,2008 $ 1,610,887 

V" f' 

. vi^KV ^-.1 -jr.-;. -t..'.:.-. 

V 'XH$ ' . t'l-.-. • . . .. •"^X'.-f ••*<V-:'-. 

''IVJ^;:';. :.';-r\' 

^ JEFP received an additional $5,478,795 in matohing funds after March 31,2008 for a total of 

$12,882,878. This represents 61 percent ofthe maximum entitlement ($21,025,000) a Presidential 

candidate could have received in the 2008 cycle. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Matching Funds Received in Excess of 

Entitlement 

A review of JEFP's financial activity through December 31,2008, and estimated winding 

down costs indicated that it received matching funds of more than $2.1 million in excess 

of the Candidate's entitlement. JEFP's Statement of Net Outstanding Campaign 

Obligations (NOCO) understated its cash-on-hand, overstated its accounts payable and 

winding down expenses. The Audit staff recommended that JEFP provide evidence that 

it did not receive matching funds in excess of the entitlement. 

In response. Counsel for JEFP (Counsel) stated that the payroll of February 7,2008, 

represents a qualifled campaign expense that should be included in the NOCO. Counsel 

also stated JEFP's overall objection to the repayment of matching funds. 

The Audit staff has reviewed JEFP's response and where appropriate made adjustments 

to the NOCO. However, it remains the opinion of the Audit staff that JEFP received 

matching funds, totalmg $2,136,507, in excess ofthe Candidate's entitlement. (For more 

detail, see p. 6.) 

Finding 2. Misstatement of Financial Activity 

A comparison of JEFP's reported financial activity to its bank records revealed a material 

mis^tatenieht of reported cash-on-hand in calendar year 2007 through March 31,2008. 

JEFP understated its December 31,2007, cash-K>n-hand balance by $585,814 and 

undeiistated its March 31,2008, cash-on-hand balance by $468,676. 

The Audit staff recommended that JEFP amend its most recentiy filed report to correct 

the cash-on-hmad balance. 

In response, JEFP materially complied with the recommendation. (For more detail, see p. 

19.) 

Finding 3. Failure to Itemize Loan Repayments 

During audit fieldwork, the Audit staff identified loan repayments, totaling $4,344,469, 

that were not itemized. Although JEFP reported the amoimts on the Detail Summary 

Pages and itemized them on Schedule C (Loans) and Schedule C-1 (Loans and Lines of 

Credit From Lending Institutions), it did not itemize them on Schedule B-P (Itemized 

Disbursements). 
The Audit staff recommended that JEFP file amended reports to itemize the loan 

repayments. 

In response, JEFP complied with the recommendation. (For more detail, see p. 20.) 

Finding 4. Stale-Dated Checks 

The Audit staff identified 202 stale-dated checks, totaling $267,529, and recommended 

that JEFP provide evidence that the checks are not outstanding or make a payment to the 

United States Treasury. 

In response, JEFP documented that 83 checks, totaling $138,871, were no longer staledated as they either had cleared the bank or were for amounts that were determined to be 

not owed. As a result, the remaining 128 stale-dated checks, totaling $141,808, require 

repayment to the United States Treasury. (For more detail, see p. 21.) 

Summary of Amounts Potentially Owed to 

the United States; Treasury 

• Finding 1 Matching Funds Received in ExceSS v $2,136,507 

?ofEntitiement , 

• Finding 4 •=MMiiS©ated Chedcs. '•^•5^::;: ?, 141,808 

Tdffil Due U.S;i;reasury $ 2,278,315 

AiCl 

"'^1^> ••^f;^^;^. 
Part IV 

Findings and Recommendations 

Finding 1. Matching Funds Received in Excess of 

Entitlement 

Summary 

A review of JEFP's financial activity through December 31,2008, and estimated winding 

down costs indicated that it received matching funds of more than $2.1 million in excess 

of the Candidate's entitlement. JEFP's Statement of Net Outstanding Campaign 

Obligations (NOCO) understated its cash-on-hand, overstated its accounts payable and 

winding down expenses. The Audit staff recommended that JEFP provide evidence that 

it did not receive matching funds in excess of the entitlement. 

In response, Counsel for JEFP (Counsel) stated that the payroll of February 7,2008, 

represents a qualified campaign expense that should be included in the NOCO. Counsel 

also stated JEFP's overall objection to the repayment of matching funds. 

The Audit staff has reviewed JEFP's response and where appropriate made adjustments 

to the NOCO. However, it remains the opinion of the Audit Staff that JEFP received 

matching funds, totaling $2,136,507, in excess of the Candidate's entitiement. 

Legal Standard 

A. Net Outstanding Campaign Obligations. Within 15 days after the candidate's date 

of ineligibility (see definition below), the candidate must submit a statement of "net 

outstanding campaign obligations." This statement must contain, among other things: 

• .fhe total of all coinmittee assets including cash on hand, amounts owed to the 

: committee and capital assets listed at their fair market value; 

• :•: ;tbe total of all outstanding obligations for qualified campaign expenses; and 

• a^^estimate of necessary winding-down costs. 11 CFR §9034.5(a). 

B. Date of liietigibility. The date of ineligibility is whichever of the following dates 

occurs first: 

• the day on which the candidate ceases to be active in more than one state; 

• the 30th day following the second consecutive primary in which the candidate 

receives less than lO percent of the popular vote; 

• the end of the matching payment period, which is generally the day when the 

party nominates its candidate for the general election; or 

• in the case of a candidate whose party does not make its selection at a national 

convention, the last day of the last national convention held by a major party in 

tiie calendar year. 11 CFR §§9032.6 and 9033.5. 
C. Qualified Campaign Expense. Each of the following expenses is a qualified 

campaign expense. 

• An expense that is: 

o incurred by or on behalf of the candidate (or his or her campaign) during the 

period beginning on the day the individual becomes a candidate and 

continuing through the last day of the candidate's eligibility under 11 CFR 

§9033.5; 

o made in connection with the candidate's campaign for nomination; and 

o not incurred or paid in violation of any federal law or the law of the state 

where the expense was incurred or paid. 11 CFR §9032.9(a). 

• An expense incurred for the puipose of determining whether an individual should 

become a candidate, if that individual subsequently becomes a candidate, 

regardless of when tiiat expense is paid. , 11 CFR §9034.4(a)(2). 

• An expense associated witii winding doi^ the campaign and terminating political 

activity. 11 CFR§9034.4(a)(3). Ay, 

• Monetary bonuses paid after the dk&; bf Jneligibility for committee employees and 

consultants, provided that they are paid>in,recognition of campaigQ-related 

activities or services; pursuant to a written contract made before the date of 

ineligibility; and, no later, than 3.0 days after the date of ineligibility. 

llCFR§9034.4(a)(5). 

D. Value of Capital Assets. The faifinarket value of capital assets is 60 percent ofthe 

total original cost of^x^Mi^, when aciqQi^l^. A Pfui^idate may claim a lower fair 

market value for^^bapital ais|i^iby listing^i|^ jijisi^ on the NQCO statement separately and 

demonstrating, tlubug^ documoitation, theldMr fair market value. 11 CFR 

§9034.5(c)(l). "^li^ M... % . 

E. E||mdf^l8iiil|^^ If, on tiie date of 

ine^Mity, a caiimi^te has hf^^utstandrngt^Onpaign obligations as defined under 11 

CFK;|i|^34.5, that cauSdl||te mk^^jcqntinue to receive matching payments provided that 

he or siS^stiU has net ouli%Eiding cc&paign debts on the day the matchmg payment is 

made. l'f'%R§9034.1(bii "t^v 

F. Winding ^|%Ximitad^!|. The total amount of wmding down costs that may be 

paid for, in whole^|art,.:!^ii8 matching funds shall not exceed the lesser of: 

• 10 percent of ^fii^^irall expenditures limitation pursuant to 11 CFR 9035.1: or 

• 10 percent of th^btal of: 

o The candidate's expenditures subject to the over expenditure limitation as of 

the candidate's date of ineligibility; plus 

6 The candidate's expenses exempt firom the expenditure limitations as ofthe 

candidate's date of ineligibility. 11 CFR §9034.11(b)(1) and (2). 
Facts and Analsraia 

A. Facts 

The Audit staff prepared a Statement of Net Outstanding Campaign Obligations as of 

Januaiy 30,2008, tiie Candidate's date of ineligibility (DOI). The Audit staff presented 

tiie audited statement that appears on the next page in tiie Preliminary Audit Report. This 

statement was based on the review of JEFP's financial activity through December 31, 

2008 and included estimates for windmg down costs thereafter. The Audit staff and 

JEFP agreed on all NOCO components except for accounts payable for qualified 

campaign expenses. 

•AK-'-

...yy:, '> 3i -
John Edwards for President 

Statement of Net Outstanding Campaign Obligations 

As of January 30,2008 

Prepared thru April 30,2010 

Primaiy Election Cash-in-Bank 

General Election Cash-in-Bank 

Accounts Receivable 

Capital Assets 

Total Assets 

Liabilities 

Primaiy Election Accounts Payable for Qualified 

Campaign Expenses @ 1/30/08 

Refund of General Election Contributions.. 

Loan Payable @ 1/30/08 

Actual Winding Down Costs (1/31/08 - 4^0/10) ; .. 

Estimated Winding Down Costs (S/1/10 -12^1/11) 

Payable to U.S. Treasuiy-7 Stale-Dated Checks . 

Total LiabiUties 

$3,971,887 

3.321.290 

455.789 

29.134 

$2,313,509 

3,321,290 

8.974.713 

\2.584.568 

1,423.060 

72.583 

Net Outstand|pf; Campaign :0b|^^ aii:V!j[. January 30,2008 

^"-'^te to NOCOlBttftement^klS?g. 

[a] 

$7,778,100 

$18.689.723 

($10.911.623) 

[a] Estinui^ .winding down cost^ ydll be biciiilpared to actual winding down costs and adjusted accordingly. 

• ••••'.':' . {^-i '^. . 

••V. 

Shown below are adjustment^ifor funds received after January 30,2008 and through July 

17,2008. 

Net Outstanding Cainpaign Obligations (Deficit) as of 1/30/08 (S 10,911,623) 

Private Contributions Received 1/31/08 tiirough 7/16/08 358,983 

Interest Income Received 1/31/08 tiirough 7/16/08 22,110 

Matching Funds Received 1/31/08 tfirough 7/16/08 8,825,425 

Renuuning entitiement as of 7/16/08 ($ 1,705,105) 

Matching Funds Received 7/17/08 4,057,453 

Amount Received in Excess of Matching Fund Entitlement $ 2,352,348 
10 

As a result, in the Preliminaiy Audit Report, the Audit staff concluded that JEFP was not 

entitled to $2,352,348 oftiie nmtching fimd payment ($4,057,453) it received on July 17, 

2008. 

1. Cash-In-Bank 

The primary difference between the NOCO presented on the previous page and those 

prepared by JEFP is the cash-in-bank balance. JEFP understated cash by $4.5 

million. Most of the understatement of cash represented funds received for the 

general election during the primaiy election period. The understatement of assets 

caused the NOCO statements to show a larger deficit and matching fund entitlement 

than was the case. The Audit staff and JEFP agree on the cash balances presented in 

tiie NOCO statement. 

2. Accounts Payable for Qualifled Campaign Expenses - Payroll 

Even though JEFP's accounts payable .figure on its NOCO was not accurate, the 

Audit staff and JEFP now agree on the ainpunt of accounts payable, except for the 

February 7,2008 payroll. The Audit staff 5 calculation of accounts piayable on the 

NOCO statement does not include $556,871 i^ payrpil paid on February'7,2008. 

Absent further documentation, $5.5(^,871 is considered to be a monetary bonus paid to 

99 employees. As noted in the^legM.;8ta]idards, in on|er to be a qualified campaign 

expense, monetary bonuses paidllfier 1)%;^ employees in recognition of campaignrelated activities or services must'^paid hb^l^ter than 30 days after DOI and 

provided for pp^j^i^tp^i^^written clck^lract mad^ p^pr to DOI (11 CFR 

§9034.4(a)(5))y/%FP r^j^sentatives <^bnfiMiBci tiiat thiere were no written contracts. 

JEFP paid staff tiii^e montpy from incqji^tipn through Januaiy 30,2008. In January 

200$^=te;p^oll pm^,^|]dd;^^^a^ 2008 and January 30,2008. On 

Jan^y'^i^il^Qi^^ anolli^jpay periol^^^cliidi^. This payroll totaled $761,193 and 

^)^P^paid on Fe^^p^ 7, 2Q||, The amSi^' in effect, tripled each employee's pay for 

m^onth of Janiu^ijThrotijp^iiit the audit fieldwork, the Audit staff made 

nuMero^s requests fdiir;^ expl^Jif^n and documentation of this payroll. 

B. Prelimii£^^Audit Repli^ & Audit Division Recommendation 

1. First Exitlg^fer^g^i' 

This matter was pt^pfei^ to JEFP at tiie exit conference held on Febmaiy 3,2009. 

The Audit staff pro^^led its NOCO and workpapers supporting all NOCO 

components. 

Subsequently, the Assistant Treasurer responded that the puipose ofthe Februaiy 7, 

2008 payroll was to reimburse employees who had not been paid their entire salary 

due to limited funds available beginning sometime in August 2007. Although 

requested, JEFP provided no specific details to explain how this payroll was 

calculated or what employees were not paid their full salary. At the exit conference. 
s 

11 

the Audit staff made the Assistant Treasurer aware that documentation supporting this 

payroll had not been made available. 

During the exit conference response period, the Audit staff analyzed JEFP's payroll 

for the period August 2007 tiirough January 2008. The review indicated that JEFP's 

explanation was incorrect. Employees were paid in full from August 2007 through 

January 15,2008. However, during the following pay period, which ended January 

30,2008, employees received half of their normal net pay.^ Therefore, the Audit 

staff considered that portion of the Febmaiy 7,2008 payroll necessaiy to make up the 

difference in net pay plus associated employee/employer payroll taxes ($204,322) to 

be a qualified campaign expense and included the amount on the NOCO in accounts 

payable. The Audit staff considered the remaining portion of the February 7,2008 

payroll, or $556,871, a non-qualified campaign expense and not included in the 

NOCO payables. 

Subsequently, JEFP provided a second explanation of this payroll. The Assistant 

Treasurer mdicated tiiat as of January 1,20P8, campaign staff worked 24 hours a day, 

seven days a week, witii the understanding tibat salary would be increased for tiiose 

affected. The Assistant Treasurer fiirther indicated fhat JEFP did not have sufficient 

funds to pay the mcreased salaiy:on the normal pay dates in January and that after 

DOI, JEFP calculated the total .a^bunt due each employee and paid the increased 

salary on Febmary 7,2008. It rl'jEF?^s <^ tiiat tiib Februaiy 7,2008 payroll 

represents a qualified campaign ex^pense, which was due at DOI and therefore should 

be inchided in tiigfitj^iQ.. -Ay7^i%\ 

With respect to resources not being available during Janiiary 2008 to pay the 

increased salaries, JEFP records indicate its average daily cash was approximately 

$4.2^^milliop...for Januaiy^ e}(cli^ contributions, which could not be 

us^i^br j^iiij^^^e^^ FurtheF/.J^I^ offered no explanation as to how the 

f ^ereased am6^^|is caii^|ed or how)||d when employees were notified; nor did 

iti^vide any docu^^tati6!i^||rtfae decision to increase salary. As a result, the 

Auii^l^ff did not a^^| JEFF^^lanation. 

The Au^^aff notified^l^P of its conclusion by email and gave JEFP 10 days to 

respond. Tn^^ail exp|^ed that $556,871, representing employee net pay and 

employee/empib^ p^^ll taxes, would not be mcluded in the NOCO. Counsel 

objected to the n6i^|^$[on by email and demanded a second exit conference. 

It is not clear why diis payroll was reduced. As can be seen from the NOCO statement, JEFP appears to 

have had funds available to meet the payroll, even setting aside the general election contributions, which 

could not be used for primaiy expenses. 
12 

2. Second Exit Conference 

Although not required, a second exit conference was held on April 2,2009. 

Payroll 

The Audit staff again informed JEFP tiiat $556,871 of salaiy and payroll taxes 

were considered non-qualified campaign expenses, excludable from the NOCO. 

Counsel offered as a possible (third) explanation that certain staff may have 

traveled to state office locations in order to clean out the offices and retum rental 

cars. However, no documentation supporting this explanation was provided. 

Again, tiie Audit staff provided JEFP an additional 10-day response period. 

In response. Counsel stated that in December 2007, JEFP determined that those 

staying tiirough the end ofthe campaign woiild receive a salary increase, which 

would be paid out as permitted by JEFP iribsources. JEFP intended this pay 

increase primarily to compensate staff for the fact that JEFP dispatched staff to 

many different field locations throtij^out the countiy for the Januaiy primaries 

and caucuses, placing them on an aroundrthe-clock schedule. JEFP also designed 

the increase in pay to cover increased costs that staffers incurred because they 

were on the road. In addition, Counsel stated that on January 30,2008, the date of 

ineligibility, JEFP had aj^nlQxiii^ttely 70 office ahd volunteer sites in several 

cities in various states. JEFP^haid wploycd staff toiitiese locations, where it was 

necessary to clean out and clbse^fieldom^f;^. JEFP dibtermined that it would be 

more efficiojod^^pay^j^ese individuals a fi^ji^^ai^^^ of asking 

employee^i^jp'wm in r^eipts for l^bui^iliditf/^A to Counsel, this 

would ha^liigen a difli^t accoutii&ij|j)rocess, which JEFP could more 

efficientiy i^ii^ge by a^lump-sum sstiai^ payment. 

:-^Axfe!(^^ a-^hediile that reflected JEFP's determination 

if<|>£[iat all eni^li^s nX^ved a 31 perCiiattt increase in salary between December 23, 

%2007 and FebAr 15,2(30^ which was paid in one lump sum on Februaiy 7, 

'"^'iOOS. JEFP gayk'^us^^ different employees and how this paycheck 

i^ii^^ve been all^^ted betiveen payable and winding down categories. 

With ^^1^ to the a^^untmg burden of paying travel expenses, JEFP had 

accounting^^ed]|^^n place for handling travel reimbursements. Throughout 

the campaig^^^il^ifir submitted travel reimbursements. Some were included in 

the NOCO's accents payable. The effect of a campaign increasing salary in lieu 

of paying for travel reimbursements creates additional expenses for the campaign, 

such as the employer's share of payroll taxes, not to mention the additional tax 

burden placed on employees. While it is reasonable that some staff would have 

been involved in the office closeout process, it is not Ukely that all staff, such as 

the chief of staff, chief financial officer or finance director, took part in this effort. 

The close out took place after DOI when only 14 people remamed on the payroll. 
13 

Estimated Winding Down Expenses 

In response, JEFP estimated it would spend a total of $2,771,004 in winding down 

expenses for calendar years 2009 tiirough 2011 ($969,972 for 2009, $959,972 for 

2010, $841,060 for 2011).' For tiie period Januaiy 31,2008 tiirough April 30, 

2010, estimates were converted to actual winding down expenses. Based on 

JEFP's actual spending from Januaiy 2009 tiirough April 2010, the Audit staff 

calculated that estimated winding down expenses for the period of May 1,2010 

through December 31,2011, $1,423,060 may be necessary to wind down the 

campaign. With the exception of tiie adjustment for storage costs, the Audit 

staff's remaining estimated winding down expenses are veiy close to the amount 

calculated by JEFP. 

It should be noted that throughout the post-inidit period, the Audit staff 

consistently monitored estimated winding down expenses.. Bank records and 

reported activity are reviewed in or^t^jb convert estimated winding down 

expenses to actual winding down e3q>i&^ 

JEFP's Overall Objection to the Repliiyi^ent of Ij^atching Fundk ; : ^ 

JEFP argues that the combination of a short&ll in the Presidential Primary 

Matching Payment Accoimt (Matchmg Payment Account) and the lack of a 

quorum in the Coinmission during the first half oif2008 put JEFP at a 

disadvantage with respect to the receipt of matching funds. JEFP argued that 

matchable cQiatnliuti^ns receivbdij^rior to DQIsl^ould b0.matched regardless of 

whether t^i^rairV (j^ campiti^ e^i^iem^Ses 1ti0;p^^ and concluded that the 

failure tol^ibch these 1|i||tributions;|^0|ate^ the First Amendment rights of both 

the candidateihd thosel&dividuals wjib,contributed to the candidate's comnuttee. 

Witii n^l^ectlj^ r^s^j^", tiie Audit staff tiiat under 26 USC §9033(c)(2), 

a ca^pdate who h^]passed m|^d^ of inefij^bility is not entitied to any further matching 

fun^^^ents except^tji^defi^yM^pfl campaign expenses incurred before the 

candida|e:became ineli^Me^ the'£a^,.that JEFP received contributions that otherwise 

would bS^^^chable does '^^etermiljliiwhether the candidate is eligible for further 

payments. ^^);intent of thiSf^ction is to allow the candidate to receive matching funds 

after the date l|&eligibility^^y to pay debts for qualified campaign expenses. In 

implementing this^^Sovisii^^e Commission considered both debts mcurred before the 

date of ineligibility ai^^eipsary costs of wrapping up the campaign. It also established 

a procedure to monitor^hether tiie candidate still has qualified campaign expenses to be 

paid prior to each post date of ineligibility payment, known as the NOCO Statement.^ 

Finally, the possibility of a shortage in the Matching Payment Account is recognized and 

an equitable distribution calculation is specified in both 26 USC §9037(b) and 11 CFR 

§9037.2. That equitable distribution formula was followed. 

' In its 2009 estimates, JEFP included storage costs of $18,000 for the next seven years. JEFP 

inadvertently included this same cost in its 2010 and 2011 estimates. The necessaiy adjustment has been 

made. 

^ See 11 CFR 9034.1(b), and 9034.5 
14 

Subsequent to the date of ineligibility, campaigns are required to submit a NOCO 

indicating the campaign has sufficient net debt to justify additional matching funds. The 

last matching fund payment JEFP received was $4,057,453 on July 17,2008. This 

payment was based on a NOCO filed on June 25,2008 that reflected net debt of 

$4,684,340. However, as previously noted, that NOCO statement was misstated. 

There is no question that the combination of the shortfall in the Matching Payment 

Account and the Commission's lack ofa quoram delayed payments. The Commission 

took all steps in its power to minimize the impact on all nuitching fund recipients. All 

matching fimd requests received through December of2007 were processed and certified 

while the Commission still had a quomm. That allowed the Treasury Department to 

begin making payments as soon as fiinds became available without tiie need for fiuther 

Commission action. All payments certified by the Coinmission before January 1,2008 

were paid as funds became available between February and April 2008. This procedure 

also allowed campaigns to borrow fimds using the matching fimds as collateral. JEFP 

used this avenue to borrow $8.9 million in November and December 2|007, before any 

payments could have been made under any circumstances. Even thougih the Commission 

could not certify any payments during the first ludf of 20Q8> matching fbnd requests 

received after Januaiy 1,2008 w;ere processed, ahd the caihpiaigns were informed of the 

matchable amount. Campaigns could use those amoimts as collateral for loans if they 

desired. Finally, any additional expenses incurred by'campaigns as a result of these 

circumstances, such as interest on loans br increased legal costs, would have been treated 

as qualified campaign expenses and cbiudd have rbsulted in an additional matching fimd 

entitiement. 

In summary, althoiiiglh it is tme'l^t matchii^^mbd payments were delayed during the fust 

half of 2008, the Actibd Commission's reg^tions are clear that in order to receive 

matchi^ fund paymehtisfaf^^ a candidate must have net 

outst^^g ciEin^gn obli^itibns on tii^^d$te thai tiie matching fund payments are made. 

JEI^fiddes not argiiib/Qlat it hi^isiifficient 0bii|ations to justify the full amount it received 

and a(^s that it significantly ijihci^tated its assets on its NOCO Statement. The fact 

that JE^tmay have recelyc^ contnbjajtjipns before the date of ineligibility that were not 

matched ^ii1|u^t payments delayM for reasons beyond the control of the 

CommissioiiiM||FP, does i^i^ allow JEFP to receive nuitching fimd payments after the 

date of ineligimi(lMn excesr^the amount of qualified campaign expenses to be paid. 

Based on the above, J^^^h not entitled to $2,352,348 of the matching funds payment 

($4,057,453) it receivei^'6^ July 17,2008. Therefore, the Audit staff recommended that 

JEFP demonstrate that it did not receive matching fimds in excess of its entitlement. The 

Preliminary Audit Report noted that absent such a demonstration, the Audit staff will 

recommend that the Commission make a determination that $2,352,348 m matching 

fimds is repayable to the United States Treasury. 

C. Committee Response to the Preliminary Audit Report 

In response to the Preliminary Audit Report, Counsel related that there were no nugor 

discrepancies with the NOCO. Counsel continued to maintam, however, that the entire 
15 

Febmary 7,2008 payroll should be considered a qualified campaign expense and not as a 

bonus. 

Counsel also restated JEFP's overall objection to repayment of Matching Funds as 

discussed in its exit conference response on page 13 of this report. 

In addition. Counsel provided another explanation for the Febmaiy 7,2008 payroll and 

included a chart that categorized that portion of the payroll in dispute differently from its 

previous explanations. 

JEFP's Breakdown of That Portion ofthe February 7,2008, Payroll in Dispute: 

Additional Make-up Salary $ 44,917 

Winding Down Expenses 

Salary January 31,2008 through February 7,2008 ^ $187,567 

Lump Sum Payment for Expenses; > = S320.6S9 

Total mrii^g 

JEFP provided a chart that indicated it reduced the salary of six employees iii 2007. 

Although JEFP provided no documentation to support this chart, it concluded that these 

six employees were owed $44,917 and that,, at a minimmn,. this amount should be added 

to the $204,322 that the Audit staff ixboghi^ as permissible make-up salary. 

JEFP indicated that thejij^u^^ portiQ^.of the, Fef^rup^ 7,2008 payroll was for 

winding down c()S|^ Whiclia|^ualified$ The two main components 

of these winding cu^ costs w|^ staff saii^es'^d lump sinm payments made to staff to 

reimburse for travel^^Ndging anll»ineal expeiiiS<^ jncurred during the month of Januaiy, 

andtiu^fejmiaiyti^ 

Accdtding to the response, sti^salaries fbr & period of January 31,2008 through 

Febhi^iy 7,2008 totalW^187,567^^an average $3,552 per staff. Lump sum payments for 

expensiss totaled $320,659,'an average reimbursement of $3,239 per staff. 

The Audit siiM|eyiewed JEI^/s response and offers the following: 

Make-up Salary^^^^^^ie Audit staff conducted a review of the available payroll 

records for each indi'^^^isted by JEFP. The payroll records supported a reduction in 

pay for tiie six employe^totaling $44,917. However, one of the six individuals listed, 

(make-up salary - $16,500) was not paid on February 7,2008. Therefore, any reduction 

in pay for this individual is irrelevant when discussing the Februaiy 7,2008 payroll. This 

individual received a payment of $7,675 for salary on February 11,2008 that had aheady 

been included in accounts payable on the NOCO. As a result, the Audit staff included an 

additional $28,417 ($44,917 - $16,500) as a qualified campaign expense on tiie NOCO. 

' Hie amount in dispute is actually $556,871. JEFP's total is misstated by $3,728. 
16 

Winding Down Salary - $187,567 January 31,2008, to February 7,2008. JEFP 

indicated that winding down salaries for the period averaged $3,552 per employee. JEFP 

appears to be saying that this payroll represented salary payments for only 53 (of the 99) 

individuals paid on February 7,2008 ($187,567 / $3,552). JEFP has not provided any 

documentation that identifies the staff members who were paid. This new explanation is 

inconsistent with the fact that 99 individuals were paid on Febmaiy 7,2008. 

Furtiier, if the average salary per staff member ($3,552) is incorrect and JEFP meant that 

all 99 individuals were paid for winding down activities during this period, it should be 

noted that 14 of these individuals renuiined on the payroll and received their normal 

salary for this same period on February 15,2008 (pay period January 31,2008 through 

Febmary 14,2008). The amount of that payroll has always been included in the NOCO 

as a winding down expense. The Audit staff does not accept JEFP's explanation. 

Lump Sum Payment for Expenses - $320,6^59. JEFP claimed that all 99 individuals 

incurred expenses for windmg down the campaign ($320,659 / $3,239). However, JEFP 

has not provided documentation demonstrating that all 99 individuals incurred expenses 

or retained any documentation supporting thesiBfexpenses.;:;, .1 

The response stated that high-lev^t^staff performed m down duties such as 

organizing and archiving fimmcikl .j^duine^ contacting vendors, thanking donors and 

coordinatmg with the candidates. It is unliliaely these ty[:les of activities would generate 

reimbursed expenses. Again, these hij^-level employees, 14 in total, received their 

normal pay covermg ttesaine period, likely for performing these same tasks. As 

indicated above, ^e amount of the February 15,2008 pttyiroll (January 31, through 

Februaiy 14,2008) vu:jfts included in the NOCQ as a winding down expense. The Audit 

staff does not accep^j^jP's eT^llaiation. ' 

FinalMictimi||S an)|P|cumentid|ST^b expenses after the candidate's date 

ofM^iibility woiir^^ coi^^^ permissiilte winding down expenses. Even if the 

CoitU^ion were to^^pt JEF^explanation with respect to the amount in question 

($528^^^556,871 - $2^7)), i^j^pCO statement presented on page 18 includes 

nmximum^^Q}ivable amountf windin|^down expenses. Including this amount would 

require an adjiillment to the'^^aining estimated winding down expenses presented in 

that NOCO but w^u|d not a^^t the amoimt of matching funds detennined to be in 

excess ofthe can^^dite^'s^^^ JEFP would still be required to make a repayment 

of matching fimds, tbf|[^^ifi^,136,507. 

Specifically, based on JEFP's actual winding down expenses during the post ineligibility 

period, the Audit staff estimated that JEFP will spend an additional $1,216,981 in 

winding down expenditures and reach the winding down limit ($4,205,000) by August 

31,2012. As previously stated, should the Commission accept JEFP's position on the 

remaming $528,454 the Audit staff would reduce estimated winding down expenses to 

$688,527 ($1,216,981 - $528,454). As a result, assuming a constant level of windmg 

down spending, JEFP would reach the winding down limit by October 2011. The 

repayment would remain at $2,136,507. If, however, the Coinmission does not accept 
17 

JEFP's explanation and JEFP spends less tiian the winding down estimate shown, tiie 

repayment would increase accordingly. 

The Audit staff continues to believe tiiat only $232,739 ($204,322 + $28,417) ofthe 

Februaiy 7,2008 pa3nx>ll represented a qualified campaign expense. The remaining 

$528,454 represented a non-qualified campaign expense. 

Additional NOCO Adjustments 

Based on JEFP's response to Finding 4, Stale-Dated Checks, the following components 

of the NOCO have been adjusted accordingly: (1) Cash-in-bank, (2) Accounts Payable 

for Qualified Campaign Expenses and (3) Payable to U.S. Treasury - Stale-Dated 

Checks. 

The Audit staff revised the NOCO to include all revisions discussed above. We have also 

calculated actual winding down expenses through December 31,2010 and updated the 

estimated winding down expenses through A,ugust 31,2012. The revised NOCO appears 

on the following page. 

-i--{^-y'i(f^i.'.... 

•'isi^fe,"'-^-^:-. 

Xiia?! '^•'-fi-.-r.:-:--. 

i.'-'ji'i-*L. ."• 
18 

John Edwards for President 

Statement of Net Outstanding Campaign Obligations 

As of January 30,2008 

Prepared thru December 31,2010 

Assets 

Primary Election Cash-in-Bank $3,968,555 

General Election Cash-in-Bank 3321.290 

Accounts Receivable 455,789 

Capital Assets 29,134 

Total Assets $7,774,768 

Lia|2i||ti£S 

Primaiy Election Accounts Payable for Qualified Campaign . $2,341,276 

Expenses @ 1/30/08 

Refimd of General Election Contributions! ' 3.321,290 

Loan Payable® 1/30/08 ' : 8.974,713 

Actual Winding Down Costs (1/31/08 - 12/^1/10) 2,988.019 

Estimated Winding Down^l^tB (1/1/1 l-8/3i/^^^^ 1,216,981 [a] 

Payable to U.S. TrewutyS-Stale^-bate Checks • 59,953 

$18,902,232 

' _|f*8 '(P^^''^:j^-0.^'^^W!y 30,2008 ($11,127,464) 

test ^f4. 

.ling down cosl^^kve been^^eblated not to exceed limitations at 11 CFR §9034.11(b). 

Shown below ai|iadjustmenj^ibr funds received after Januaiy 30,2008 through July 17, 

2008. 

Net Outstanding C^paign Obligations (Deficit) as of 1/30/08 11,127,464) 

Private Contributions Received 1/31/08 tiirough 7/16/08 358,983 

Interest hicome Received 1/31/08 tiuough 7/16/08 ^2,110 

Matching Funds Received 1/31/08 tiuough 7/16/08 8,825,425 

Remaining entitlement as of 7/16/08 ($ 1,920,946) 

Matching Funds Received 7/17/08 4,057,453 

Amount Received in Excess of Matching Fund Entitlement ' 2,136,507 
19 

As a result, JEFP was not entitied to $2,136,507 of the matching fund payment 

($4,057,453) it received on July 17,2008. The Audit staff believes tiiat JEFP should 

make a repayment of $2,136,507 to the United States Treasury. 

I Finding 2. Misstatement of Financial Activity | 

Summary 

A comparison of JEFP's reported financial activity to its bank records revealed a material 

misstatement of reported cash-on-hand in calendar year 2007 through March 31,2008. 

JEFP understated its December 31,2007, cash-on-hand baUmce by $585,814 and 

understated its March 31,2008, cash-on-hand balance by $468,676. 

The Audit staff recommended that JEFP amend its most recentiy filed report to correct 

the cash-on-hand balance. 

In response, JEFP niaterially complied with the recommendation. 

Legal Standard "^J^^;^ 

Contents of Reports. Each report must disclosei:% ^Ah. 

• the amount of cash-on-hand aipl^b^ginnuig and ^ d of the reporting period; 

• the total amount of receipts fb^[|||ie itp^i|ig period mdJfoT the election cycle; 

• the total amount of disbursemeti^^fpr me^i^gi^ng p^pd and for the election cycle; 

and Hh 

• certain transaidi^s di£iti^%iuire iteii^tion lp^Schedd A (Itemized Receipts) or 

Schedule B llimized Dilbursements)|2$S.C. §434(ib)(l), (2), (3), (4), and (5). 

Facts ami Analsraii??:.,. 

^ "eldwork, a c^^|rison^|JEFP's reported financial activity to its bank records 

reveaiei^ptuiterial misl^^nent (^||ported cash-on-hand for calendar year 2007 

through^^^h31,2008. ^^endinpPsh-on-hand balance for calendar year 2007 was 

understatea^^^85,814 anlQ^e ending cash-on-hand balance as of March 31,2008 was 

understated b)r^|$^676. 

B. Preliminary Aii|||jp$iDrt & Audit Division Recommendation 

The misstatement of cj|pon-hand was primarily due to two factors. First, JEFP 

understated unitemized receipts, most of which represented small credit card transactions. 

This was due to a contribution processing software malfimction. JEFP was unaware of 

this problem until the audit fieldwork. Second, certain disbursements, although initially 

reported, were inadvertentiy voided and missing from the amended reports. 

This nuitter was discussed at the exit conference. The Audit staff provided JEFP 

representatives copies ofthe Audit staffs bank reconciliations and JEFP indicated a 

willingness to correct the misstated cash-on-hand figures. 
20 

The Audit staff recommended that JEFP amend its most recently filed report to correct 

the cash-on-hand balance, with an explanation that the change resulted from a prior 

period audit adjustment. It was also recommended that JEFP reconcile the cash balance 

of its most recent report to identify any subsequent discrepancies that may have affected 

tiie adjustments recommended by the Audit staff. 

C. Committee Response to the Preliminary Audit Report 

In response, JEFP amended its reports and reiterated that the misstatements were the 

result of an anomaly in the software used by JEFP. 

I Finding 3. Failure to Itemize Loan Repayments 

Summarjr 

During audit fieldwork, the Audit staff identified loan repayments, totaling $4,344,469, 

that were not itemized. Although JEFP reported the amounts on the Detail Summary 

Pages and itemized them on Schedule C (Loans) and Schedule C-1 (Loans and Lines of 

Credit From Lending Institutions), it did not itemize them on Schedule B-P (Itemized 

Disbursements). 

The Audit staff recommended that JEFP file amended reports to itemize the loan 

repayments. 

In response, JEFP comptied with the recommendation. 

Legal Standard 

When to itemize. When a loan repayment is made to any person in any amount, the 

committee must report the: 

name and address of tiie payee; and 

date and amount of payment. 2 U.S.C. §434(b)(5)(D) and 11 CFR 

§104.3(b)(4)(iii). 

Facts and Analysis 

A. Facts 

During fieldwork, the Audit staff identified loan repayments, totaling $4,344,469, which 

JEFP did not itemize. Altiiough JEFP included the aggregate amount of these payments 

on the detailed summary pages, it failed to provide supporting Schedules B-P, itemizing 

the payments. 

B. Preliminary Audit Report & Audit Division Recommendation 

This matter was discussed at the exit conference. There was no obvious reason why tiie 

loan repayments were not itemized, but a JEFP representative agreed to amend the 

committee's reports as necessary. 

The Audit staff recommended that JEFP file amended reports itemizing the loan 

repayments on Schedule B-P, line 27(b). 
21 

C. Committee Response to the Preliminary Audit Report 

In response, JEFP filed amended reports itemizing the loan repayments. 

I Finding 4. Stale-Dated Checks 

Summary 

The Audit staff identified 202 stale-dated checks, totaling $267,529, and recommended 

that JEFP provide evidence that the checks are not outstanding or nudce a payment to the 

United States Treasuiy. 

In response, JEFP documented that 83 checks, totaling $138,871, were no longer staledated as they either had cleared the bank or were for amounts that were determined to be 

not owed. As a result, the remaming 128 stale-dated checks, totaling $141,808, require 

repayment to the United States Treasury. 

Legal Standard ^^^A^' 

Handling Stale-Dated (Uncashed) Check8< .; If a committee has issued checks that the 

payees (creditors or contributors) have not cashed, the conunittee must notify the 

Coinmission of its efforts to locate the payees and encourage them to cash the 

outstanding checks. The committee must also submit a.check payable to the United 

States Treasury for tiie total amount oftiie outstanding checks. 11 CFR §9038.6. 

A. Facts m. .Am"'^'^' 

Facta and AnalyslB 

During fieldwori^pB Audit staff identifiedt>^Oji- s^^ totaling $267,529. 

The checks were d^t«^betweeQ;|ebr^ 22i^3P07 and May 21,2008 and had not cleared 

the bank asipf Febraaiy48, ^Oi^bi^ -^A-majority^bi^the stale-dated checks represented 

refimd|ii^^elec^:^i^l& ^'^^^ 

iminary Aull^|^eport^^udit Dii^sibn Recommendation 

\^ir was discussed^t the Miiicpnference during which the Audit staff provided 

JEFP re|f^^tatives wit^ii|cheduie^oiithe stale-dated checks. In response, JEFP 

indicated tMiM^contacted ali^ber of individuals/vendors and reissued $114,481 in 

stale-dated ciiSl|b .but did nb|r|rovide the check numbers of the reissued checks. 

Without the cheCK|ia;nber^;l|b Audit staff could not determine whether any of the 

reissued checks hao^iear^the bank. 

In the Preliminary Audit report, the Audit staff recommended that JEFP provide evidence 

tiiat: 

• the $ 114,481 in reissued checks have cleared the bank by providing copies of the 

fmnt and back of the negotiated checks along with bank statements; 

and 

• the remaining stale-dated checks, totaling $153,048 ($267,529 - $ 114,481) had 

either been reissued and cleared JEFP's bank or had been voided because no 

obligation exists. 
22 

Absent such evidence, the Audit staff recommended that JEFP pay $267,529 to the 

United States Treasury. 

C. Committee Response to the Preliminary Audit Report 

In its response, JEFP stated that 83 checks, totaling $138,871, should be removed from 

the stale-dated check list and provided documentation in support of its position. 

Based on a review of JEFP's response and the documentation presented, the Audit staff 

identified that 74 checks, totalmg $125,721, were no longer stale-dated. For the 

remaining stale-dated checks, JEFP did not provide sufficient documentation to support 

its position that no obligation existed or that the checks had cleared the bank as of 

December 31,2010. Therefore, JEFP is required to pay the United States Treasuiy for 

the remaining 128 stale-dated-checks, totaling $141,808. 

'•xi'-V'-f 

-••-•i!?J§:^ 
FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

June 23/ 2011 

MEMORANDUM 

TO: 

FROM: 

Patricia Carmona 

Chief Compliance Officer 

Joseph F. Stoltz 

Assistant Staff Director 

Christopher Hughey 

Acting General Counsel ' 

Lawrence L. Calvert, Jr. X'^J^^Y' ^ 

Associate General CoimsdA V^___^,^-.^ 

Lorenzo Holloway 

Assistant General Counsel 

For Public Finance and Audit Advice 

Delanie DeWitt Painter ^ -^J ^ 

Attomey 

Allison T. Steinle 

Attomey 

SUBJECT: Proposed Audit Division Recommendation Memorandum on John Edwards for 

President, Inc. (LRA 743) 

I. INTRODUCTION 

The Office of General Counsel has reviewed the proposed Audit Division 

Recommendation Memorandum ("ADRM") and accompanying proposed Draft Final Audit 

Report ("DFAR") on John Edwards for President, Inc. (*^he Committee"). We have also reviewed 

the Committee's response to the DFAR ("DFAR Response"). Our memorandum addresses two 

new issues that the Committee raises in its response. We have already addressed the other issues 

that the Committee raises in its response in our earlier comments on the Audit Division's proposed 

DFAR. We imderstand that tiie Audit Division will attach our earlier comments to the ADRM. If 

you have any questions, please contact Delanie DeWitt Painter or Allison T. Steinle, the attomeys 

assigned to this audit. 
Legal Analysis 

Proposed ADRM and DFAR 

John Edwards for President (LRA 743) 

Page 2 of6 

II. COSTS RELATED TO DOJ INESTIGATION 

The Committee argues that the Coinmission should treat costs related to providing 

information to the Department of Justice ("DOJ") as a separate category of qualified campaign 

expenses "beyond winding down costs" that should not be subject to the 10% winding down 

limitation.' DFAR Response at 6-7. The Committee explains that although it is not under 

investigation, it has provided "extensive information" to DOJ and has had to "incur unanticipated 

expenses, including additional staff and legal costs." Id. at 6. The Committee provided no other 

information about the amount or nature of tiiese expenses. The Committee contends that these 

costs are qualified campaign expenses but are not typical winding down costs because they are not 

related to the Commission audit or compliance with the public financing laws. Id. It states that it 

might exceed the winding down limitation and asks the Commission to allow it to re-allocate these 

expenses as qualified campaign expenses instead of winding down costs. Id. at 7. Altematively, 

the Committee contends that these costs should be excluded from its winding down costs for 

purposes of the winding down limitation. Id. The Committee's arguments would increase the 

Committee's liabilities for quaUfied campaign expenses incurred after the candidate's date of 

ineligibility ("DOF*) without exceeding the winding down limitation, thus increasing the amount 

of matching funds to which it was entitled and reducing the repayment for funds received in excess 

ofthe candidate's entitlement. 

We disagree with the Conunittee's arguments. The Committee's costs related to the DOJ 

investigation appear to be just the kind of legal and staff costs that are usually considered winding 

' A grand jury indictment was filed against the candidate on June 3,2011, which alleges, inter alia, various 

election law violations. It describes the alleged payment of nearly $1 million in expenses by third parties, sometimes 

through fourth party intermediaries, for expenses connected with an effort to conceal certain facts about the 

candidate's personal life. The allegations expressed in the indictment include that these payments, and the expenditure 

of them, were for the purpose of infiuencing the candidate's election by preventing publicity about these facts fmm 

destroying his campaign, thus making the payments contributions and the consumption ofthe goods and services they 

purchased expenditures. Indictment, United States v. Edwards, 1:11 CR 161-1 (M.D.N.C. June3,2011). Because 

the alleged activity involved no payments to or by the Conunittee, the Commission's audit of the Committee's 

finances produced no independent information related to the allegations in the indictment. (The fact that the audit 

produced no independent information does not mean that the facts alleged in the indictment did not occur, a question 

we do not address here). We understand fi:om media accounts that the question of whether the alleged payments were 

in fact for the purpose of influencing Edwards's election, is likely to be strongly contested at trial. See Katherine Q. 

Seelye, Edwards Charged with Election Finance Fraud, NY Times, June 3,2011, available at 

http://www.nytimes.com/2011/06/04/us/politics/ 

04edwards.hm:U?pagewanted= l&5q'=johii%20edwards%20iiulictment&st=H:se&scp= 1 

We note that there is a theory under which the allegations in the indictment, if proven, could have potential 

repayment implications. The theory is.that canq>aign expenses that are not properly documented as qualified 

canipaign expenses in accordance with 11 C.F.R. § 9033.11 are non-qualified campaign expenses subject to pro rata 

repayment to the Treasury. See 11 CF.R. §§ 9032.9,9038.2(b)(2) and (3), 9033.11. However, tiie Commission 

declined to seek a repayment on this theory after considering the circumstances in the Tsongas for President audit, 

where the committee's chief fundraiser had aheady pled guilty to soliciting excessive contributions, depositing funds 

into a secret committee account, and embezzling funds. See Fital Audit Report, Tsongas for President Committee, 

(approved Dec. 16,1994). In contrast, there has been no guilty'plea here, and the indictment's allegations remain 

unproven. Therefore, we are making no recommendations at this time. 
Legal Analysis 

Proposed ADRM and DFAR 

John Edwards for President (LRA 743) 

Page 3 of 6 

down expenses rather than costs "beyond winding down." Although the Committee itself is not 

under investigation, several allegations in the indictment ofthe candidate relate to violations of 

campaign finance laws (presuming the indictment is related to the DOJ requests for information 

fijom the Committee). Complying with investigative requests from DOJ or any other federal or 

law enforcement agency is a reasonable cost of terminating a campaign. Costs related to a 

govemment agency investigation appear to be similar to winding down costs related to 

Conimission compliance actions. The winding down mle "allows candidates to classify 

compliance matters arising from the campaign as winding down costs." See Explanation and 

Justification for 11 C.F.R. § 9004.11,68 Fed. Reg. 47,393 (Aug. 8,2003). The Commission 

considered winding down costs related to compliance actions in determining the winding down 

limitations. Id. 

The Committee is asking the Commission to ignore its own regulations and exempt the 

Committee from the winding down limitation that applies to all other primary candidates. See 11 

C.F.R. § 9034.11(b). The winding down limitation for primary candidates is the lesser of: 10% of 

the overall expenditure limitation of 11 C.RR. § 9035.1, or 10% oftiie total ofthe candidate's 

expenditures subject to the overall expenditure limitation plus exempt expenses as of DOI. 11 

C.F.R. § 9034.11(b). The winding down limitations apply to "[a]ll expenses incurred and paid by 

a candidate during the winding down period." See Explanation and Justification for 11 C.F.R. 

§ 9004.11,68 Fed. Reg. 47,392 (Aug. 8,2003). Payment of winding down expenses in excess of 

the winding down limitation are non-qualified campaign expenses, but a primary candidate may 

pay for winding down costs in excess of the limitation after the committee's accounts no longer 

contain any matching funds without resulting in non-qualified campaign expenses.^ Explanation 

and Justification for 11 C.F.R. 9034.11(d), 68 Fed. Reg. 47,409 (Aug. 8,2003); see 11 C.F.R. 

§ 9038.2(b)(2)(iii)(B) and (iv). 

The Committee's proposals are contrary to the purpose of the winding down limitations. 

The winding down limitations for primary and general candidates were part of several changes to 

the mles for winding down costs intended to avoid future disputes over windmg down costs like 

the disputes that had lengthened previous audit and repayment processes. 68 Fed. Reg. 

47,390-391. The Commission explained tiiat the monetary limitation "estabUshes a fair and 

readily determined amount to ensure that all campaigns are treated consistently" and that the 

limitation is **necessary to ensure that publicly fiinded campaign committees wind down as quickly 

and efficiently as possible and do not inflate winding down costs" to avoid repayments. 68 Fed. 

Reg. 47,391. Permitting the Committee to either "re-allocate" these expenses as a separate type of 

qualified campaign expenses instead of winding down costs or to exclude these costs from its 

winding down costs for purposes of the winding down limitation does not treat the Committee 

consistently or fairly compared to all other publicly funded candidates, who are subject to the 

winding down limitations. Instead of avoiding lengthy disputes over specific expenses, it would 

expend Commission resources to determine which specific expenses related to DOJ activity. The 

Committee's proposal would also allow the Committee to infiate its qualified campaign expenses 

^ According to the Audit staff, based on the entitlement and repayment calculations in the DFAR, the last 

matching fimds would have been exhausted from the Coinmittee's bank accounts as of April 30,2010. After that date, 

the Conmiittee could pay for winding down expenses in excess of the limitation without making non-qualified 

campaign expenses subject to repayment. 
Legal Analysis 

Proposed ADRM and DFAR 

John Edwards for President (LRA 743) 

Page 4 of 6 

after DOI well in excess of the winding down limitation which would increase its entitlement and 

reduce its potential repayment. 

In its altemative argument, the Committee asks the Commission to create a new category 

of qualified campaign expenses incurred after the candidate's DOI that is not in the regulations. 

Generally, after DOI, candidates may use matching fimds only for qualified campaign expenses 

incurred prior to DOI and winding down costs. See 11 C.F.R. §§ 9032.9,9034.4(a), 9034.11. 

Nearly all qualified campaign expenses incurred after DOI are winding down costs subject to the 

winding down limitation. See 11 C.F.R. § 9034.11. The Conunission's regulations include 

strictly limited mles for other qualified campaign expenses after DOI for staff gifts and bonuses 

and convention-related costs. See 11 C.F.R. §§ 9034.4(a)(5) and (6). But the Commission has 

never created the kind of broad category of unUmited qualified campaign expenses incurred after 

DOI that the Committee seeks. 

Indeed, in promulgating the winding down Umitations, the Commission declined to create 

a legal defense fimd for primary candidates for "enforcement matters and other legal proceedings." 

68 Fed. Reg. 47,409. The Commission explained that "a separate compliance fimd is not 

necessary" or appropriate for primary candidates because primary candidates may use private 

contributions for winding down expenses in excess of the limitation when they no longer retain 

matching funds in their accounts. Id. Therefore, there is no basis for allowing the Committee to 

treat as liabilities on its NOCO Statement both the full amount of the winding down limitation and 

an additional substantial amount for qualified campaign expenses related to the DOJ investigation, 

thereby increasing the amount of its entitlement and reducing the repayment. 

Further, the Committee has not provided any information about the amoimt of expenses it 

seeks to **re-alIocate" as qualified campaign expenses that are not subject to the winding down 

limitation. Without this information, it is impossible for the Audit Division to calculate what 

impact the Committee's proposals would have on the amount of the candidate's entitlement and 

consequently, on the amount ofthe repayment for matching funds received in excess of 

entitiement. Even if the Commission were to accept the Committee's arguments, it would be 

impossible to implement them without information that the Committee has failed to provide. 

Finally, we recommend that the Audit staff revise the ADRM to delete the first sentence in 

the second paragraph of page 4, beginning with "Based on the above" and the fifth sentence in the 

same paragraph beginning "As a result." These sentences may cause confiision. The Commission 

has not yet considered the issue of whether the Committee may treat expenses in excess of the 

winding down limitation as liabilities on its NOCO Statement for purposes of calculating the 

candidate's entitlement and repayment. The question of whether winding down expenses in 

excess of the limitation would resuh in repayable non-qualified campaign expenses does not 

resolve this separate issue. 

in. VALUATION OF CAPITAL ASSETS 

The Committee also argues that the valuation ofthe Committee's capital assets on the 

Audit Division's Statement of Net Outstanding Campaign Obligations (**NOCO Statement") "is 
Legal Analysis 

Proposed ADRM and DFAR 

John Edwards for President (LRA 743) 

Page 5 of6 

not an accurate reflection of the current value of the Committee's assets." DFAR Response at 7. 

The Committee notes that the stated value of assets on the Audit Division's NOCO Statement is 

over two years old, and explains that since that date, "the value of those assets has declined 

dramatically." Id. The Committee points to the fact that electronic items have substantially 

decreased in value, and several items are no longer functional and therefore "should not figure in to 

the NOCO values." The Committee provided a spreadsheet that places a current value on its 

capital assets of $1,775.40, in contrast to the $29,134 figure that is reflected in the Audit Division's 

NOCO Statement. Id. at 8. The Committee's arguments would decrease the Committee's assets 

on the NOCO Statement, thus increasing the amount of matching fimds to which it was entitled 

and reducing the repayment for funds received in excess of the candidate's entitlement. 

Again, we disagree with the Committee's argument. The Committee's argument 

presupposes that the valuation of an asset on the NOCO Statement must be based on its current 

value. The Commission's regulations, however, do not provide that the valuation ofa capital asset 

can be continually adjusted based on its current value. To determine a candidate's ongoing 

entitlement to matching funds after a candidate's DOI, a candidate must submit NOCO Statements 

with each post-DOI submission for matching fiinds that reflect the difference between the 

candidate's liabilities for qualified campaign expenses and the candidate's assets as of the date of 

that statement. 11 CF.R. §§ 9034.5(a), 9034.5(f). Those statements must include tiie fair market 

value of any capital assets on hand. 11 C.F.R. § 9034.5(a)(2)(ii). The fair market value of a capital 

asset is defined as either: 60% of the total original cost of the item when acquired, or for items 

acquired after DOI, the fair market value on tiie date received. 11 C.F.R. § 9034.5(c)(1). The 

regulations further state that a candidate **may claim a lower fair market value for a capital asset by 

listing that capital asset on the statement separately and demonstrating, through documentation, 

the lower fair market value." Id. (emphasis added). The regulations, however, do not address 

whether a candidate may claim a lower fair market value for a capital asset at any point beyond 

submissions for matching funds, such as during the audit process. 

The Commission, nevertheless, has always interpreted these regulations in past audits to 

mean that the valuation of an asset on a NOCO Statement in an audit report should be based on the 

fair market value of the asset as of DOI, not the current value. Even assuming that the regulations 

allow for the valuation of an asset on a NOCO Statement to be based on the fair market value of an 

asset as of the date of that statement, not DOI, see 11 C.F.R. § 9034.5(f), they do not address 

valuation at any point beyond the submission of NOCO Statements with each post-DOI 

submission for matching funds. 

As noted above, the starting point for determining the fair market value of a capital asset is 

the value when acquired or received by the candidate. 11 CF.R. § 9034.5(c)(1). By allowing a 

candidate to use only 60% of the original cost of the item when acquired or the fair market value on 

the date received, the Commission's regulations already allow candidates to account for 

depreciation. SeeW C.F.R. § 9034.5(c)(1); Explanation and Justification for 11 CF.R. § 9034.5, 

64 Fed. Reg. 49359-60 (Sept. 13,1999); Explanation and Justification for 11 C.F.R. § 9034.5,52 

Fed. Reg, 23670 (June 3,1987) (noting that the basic threshold for determining whether an item 

should be included on the NOCO Statement is the item's original purchase price, not its value at 

the end ofthe campaign, and the regulations permit a candidate to deduct a "depreciation 
Legal Analysis 

Proposed ADRM and DFAR 

John Edwards for President (LRA 743) 

Page 6 of 6 

allowance" or otherwise provide an appraisal of the item's value at the end of the campaign). 

Under the Committee's theory, however, a candidate's entitlement to matching fiinds could be 

continually adjusted based on depreciation well after the end of the campaign, until capital assets 

would have no impact on a candidate's entitlement to matching funds at all, since most capital 

assets continue to depreciate over time. 

Finally, we note that the Committee states that additional documentation regarding the 

issue will be provided to the Audit Division. DFAR Response at 7. As of the date of this 

memorandum, however, it has failed to provide any documentation demonstrating the current fair 

market value of its capital assets. Therefore, even if the Commission were to accept the 

Committee's arguments and use the current value of the assets in the NOCO Statement, the 

Committee has failed to provide any documentation to verify its figures. See 11 CF.R. § 

9034.5(c)(1).