FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

August 17/ 2012 

MEMORANDUM 

TO: 

FROM: 

Thomas Hintermister 

Assistant StaffDirector 

Lisa J. Stevenson 

Special Counsel to 

the General Counsel 

Lawrence L. Calvert, Jr. /''^Xf^''' ^ 

. Associate General Coun^K \ ^—' 

Lorenzo Holloway 

Assistant General Counsel (/ 

For Public Finance and Audit Advice 

Danita C. Lee l^jT 

Attomey ( j 

SUBJECT: Draft Final Audit Report- Califomia Republican Party/V8 

(LRA 829) 

I. INTRODUCTION 

The Office of the General Counsel has reviewed the Draft Final Audit Report 

("DFAR") on die Califomia Republican Party/V8 ("Committee"). Our comments 

address issues in Finding 3 (Extension of Credit by a Commercial Vendor). We concur 

with any findings not specifically discussed in this memorandum. If you have any 

questions, please contact Danita C. Lee, the attomey assigned to this audit. 

II. EXTENSION OF CREDIT BY A COMMERCIAL VENDOR AND THE 

CREDITORS ATTEMPT TO COLLECT THAT DEBT (Finding 3) 

Finding 3 addresses an extension of credit by Strategic Fundraising, Inc. ("SFI"), 

which the auditors conclude may have resulted in a prohibited contribution to the 

Committee. The DFAR concludes that SFI did not extend credit to the Committee in the 

ordinary course of business and that SFI failed to make a commercially reasonable effort 

to collect the debt. The contract between SFI and the Committee presents issues similar 
Memorandum to Thomas Hintermister 

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to diose in other matters involving "no risk" or "limited risk" fundraising arrangements 

between direct mail or telemarketing vendors and political committees. See, e.g., MUR 

5635 (Conservative Leadership PAC); AO 1991-18 (New York State Democratic 

Committee); AO 1979-36 (Committee for Fauntroy). 

We conclude that while SFI's initial extension of credit to die Committee 

included some aspects that suggest that the extension was in the ordinary course of 

business, the Committee did not submit information that is necessary to resolve this issue. 

Similarly, we conclude that SFI may have engaged in commercially reasonable efforts to 

collect the debt, but the Committee did not submit enough information to show SFI's 

reasonable attempts to collect the debt. 

A. BACKGROUND 

The Committee failed to pay several invoices for SFI voter/donor file prospecting, 

caging, fundraising and mailing services for periods ranging from approximately four 

months to two years. The invoices totaled $1,171,002. The total represents the sum of 

fees SFI charged for various services — comprising, for example, fees ranging from 

$0.15 per call or similar transaction for services described as "fulfillment boost recorded 

message" to $2.75 per transaction for "current donor tdefundraising" services, as well as 

flat fees. 

The Interim Audit Report ("lAR") concluded that SFI's initial extension of credit 

to the Committee was not in the ordinary course of business because: (1) there existed no 

evidence that the "no risk"/"limited risk" fundraising terms in the agreement were 

consistent with terms offered in the telemarketing fundraising industry; or, altematively, 

(2) there was no showing that the value of the exclusivity clause contained in the 

fundraising agreement was sufficiently adequate to ensure that the Committee would 

bear some of the financial risk of the fundraising program not paying for itself 

The lAR also concluded that SFI failed to make a conunercially reasonable effort 

to collect the Committee's debt because the Committee failed to submit supporting 

evidence of SFI's debt collection efforts. In response to the lAR, the Committee and SFI 

assert that the fundraising contract was consistent with fundraising industry standards and 

that SFI engaged in commercially reasonable debt collection efforts by undertaking a 

variety of debt collection actions including discussions, negotiations, written 

communications, in-person meetings and renegotiating the Committee's payment plan. 

Letter from Charles H. Bell, Jr., General Counsel, Califomia Republican Party to Mr. 

Tom Hintermister, Assistant StaffDirector, Audit Division (Mar. 19, 2012) [hereinafter 

Committee's Resp.] and Letter fix)m Mark Dixon, Chief Financial Officer, Strategic 

Fundraising, Inc., to Tom Hintermister, Assistant StaffDirector, Audit Division 

(Undated) [hereinafter SFI's Resp.]. 
Memorandum to Thomas Hintermister 

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(LRA 829) 

Page 3 

B. THE INITIAL EXTENSION OF CREDIT LACKED ADEQUATE 

SAFEGUARDS 

1. Terms of the Initial Extension of Credit 

The terms of the contract between the Committee and SFI provide that SFI was to 

provide telephone fundraising services directed at both previous and prospective donors. 

The contract permitted the Committee itself to collect, deposit, and record the individual 

contributions generated by SFI's telemarketing calls, and required it to provide SFI with 

regular reports "identifying all individuals who contributed to the Conunittee as a result 

of SFI's efforts, along with the amount and date of each contribution." SFI was to send 

invoices to the Coinmittee weekly; these invoices were presumably based on the reports 

sent to SFI by the Committee. Prospecting invoices were to be payable upon receipt and 

invoices for proven donor efforts were to be payable within 30 days. However, regarding 

prospecting calls, the contract contained a "Break-Even Guarantee" ("Guarantee"), 

whereby the parties agreed that the Committee would not be expected to pay more for 

prospecting calls than the sum of all actual contributions generated by those calls; if the 

gross proceeds of the prospecting ever exceeded $2.25 per call made, the extra amount 

was to be credited to die Committee. 

The Guarantee clause of the contract contained both parties' explicit 

acknowledgement that SFI was "accepting significant business risk" by extending the 

Guarantee to the Committee. In consideration of that risk, the Committee granted to SFI 

the exclusive "rig|ht to conduct [the Committee's telemarketing] programs over the course 

of an entire year." 

These terms raise a question of whether SFI's initial extension of credit to the 

Committee was in the ordinary course of business. The lAR found that as a result of 

these terms, SFI may not have - at the outset of entering into the fundraising agreement -

extended credit to the Committee in the ordinary course of business. The lAR gave the 

Committee an opportunity to provide information that "no-risk" or "limited-risk" 

agreements such as the Guarantee between the Committee and SFI conform to the usual 

and normal practice in the telemarketing industry or to provide information showing that 

the value of the exclusivity clause was comparable to SFI's financial risk. Neither the 

Committee nor SFI provided such information. 

2. Contributions, Extensions of Credit, and No-Risk Contracts 

The Act defines a contribution as "any gift, subscription, loan, advance, or deposit 

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

election for Federal office." 2 U.S.C. § 431(8)(A)(i). Under die Commission's 

regulations, the term "anything of value" includes all in-kind contributions, and unless 

specificdly exempted, the provision of goods and services for no charge or at a charge 

that is less than die usual and normal charge. 11 C.F.R. § 100.52(d)(1). 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Califomia Republican ?dtrty/WS 

(LRA 829) 

Page 4 

An extension of credit to a political committee by a commercial vendor is a 

contribution unless the credit is extended in the ordinary course of business and on the 

same terms as extensions of credit to nonpolitical debtors of similar risk and for an 

obligation of similar size. 11 C.F.R. §§ 100.55,116.3(b). An extension of credit occurs 

when there is an agreement between a creditor and a political committee that full 

payment is not due until after the creditor provides goods or services to the political 

committee. 11 C.F.R. § 116. l(e)(l). In determining whether an extension of credit was 

in the ordinary course of business, the Conunission considers whether the vendor 

followed established procedures and past practices, whether the vendor received prompt 

payment in full for previous extensions of credit, and whether the extension of credit 

conformed to the usual and normal practice in the industry. 11 C.F.R. § 116.3(c). If a 

vendor extends credit and fails to make a commercially reasonable attempt to obtain 

repayment, a contribution will resuh. 11 C.F.R. §§ 100.55,116.4(b)(2). 

When addressing fundraising programs that compensate vendors using 

fundraising proceeds, the Commission has expressed concem that "regardless of the 

degree of success of the effort to raise funds, the committee would retain contribution 

proceeds while giving up little, or the committee would assume little to no risk with the 

vendor bearing all, or nearly all, the risk." Advisory Opinion 1991-18 (New York State 

Democratic Committee). "No-risk" or "limited risk" contracts similar to the one at issue 

here may result in in-kind contributions from vendors in two ways. First, they may result 

in a vendor rendering services for the committee for essentially no charge, or for what at 

the end of a series of transactions will wind up being less than the usual and normal 

charge. See 11 C.F.R. § 100.52(d)(1). Second, because these arrangements almost by 

definition involve the provision of services by the vendor before payment is recdved, 

they involve extensions of credit, and must meet all of the requirements set forth in the 

regulations for extensions of credit not to be contributions. See 11 C.F.R. §§ 100.55, 

116.3-4. 

The Commission has consistently applied there regulations to determine whether 

such arrangements resulted in in-kind contributions. See, e.g., MUR 5635 (Conservative 

Leadership PAC) (addressing a "no risk" fimdraising contract where the committee was 

not responsible for the costs of fundraising in excess of the money raised); Advisory 

Opinion 1991-18 (addressing a "limited risk" fundraising contract where the committee's 

full payment of the vendor's commissions was tied to the prospect that the fundraising 

would pay for itself over several years); Advisory Opinion 1979-36 (Coinmittee for 

Fauntroy) (addressing a "limited risk" fundraising contract where die committee was only 

required to pay three-fourths of the total amount of contributions received irrespective of 

the actual amount of fees and expenses).' In doing so, the Commission has required 

' The Commission also has addressed contracts and dealings in contexts other than ftindralsing in 

which committees assumed no risk or limited risk. See, e.g., MURs 5069 and 5132 (Comite Acevedo Vila 

Comisionado 2000) (detennining that no contribution resulted when a Puerto Rico advertising agency 

bought television time on behalf of a candidate without first receiving payment based on evidence of 

common industry practice in Puerto Rico); MUR 4742 (Juan Vargas for Congress) (fmding a reportable 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Califomia Republican PartyA^8 

(LRA 829) 

Pages 

committees to have safeguards in place to ensure that committees in fact pay for the costs 

of die fundraising programs. See MUR 5635; Advisory Opinion 1991-18; Advisory 

Opinion 1979-36. Specifically, the Commission has focused on whether a committee 

would receive anything of value without timely and proper compensation first being paid 

to the fundraising firm and any third-party vendors. See id. Safeguards proposed by the 

Commission have included requiring advance deposits by a committee to reimburse 

vendors for potential shortfalls, limiting the term of the contract, or allowing vendors to 

terminate the contract early and demand full payment as a result of poor fundraising 

performance. Seeid. 

For example, in MUR 5635, the committee entered into a "no risk" contract with 

a fundraising firm. The arrangement provided that the committee would be responsible 

for the costs of fundraising only up to the amount of funds raised. The fundraising 

program was not sufficient to cover the vendors' expenses, and the fundraising firm made 

several disbursements to the committee before the vendors' expenses were fully paid. 

Accordingly, the Commission concluded that this arrangement resulted in contributions 

from the fundraising firm because the arrangement was not in the ordinary course of 

business given the size of the disbursements and short-term nature of the program, and 

even if it was, the fundraising firm had forgiven the debt,, resulting in a contribution 

under 11 C.F.R. § 100.55(d)(1). See General Counsd's Report #2, MUR 5635, at 5-6. 

Likewise, in Advisory Opinion 1991-18, the committee proposed entering into a 

"Prospecting Program" where the costs of fundraising would be paid out of fundraising 

proceeds and the committee would be responsible for the costs of fundraising only up to 

the amount of funds raised. Moreover, under the first year of the program, the vendor 

would provide the committee with net revenues even when the vendor had not yet been 

fully paid for an earlier round of solicitations. Because of die "inherentiy speculative" 

nature of the prospecting effort, including the likelihood that the vendor would not 

receive the full contract price for more than one year, the Commission determined that it 

could not approve the program "in the absence of a record by [the vendor] or similar 

companies of the implementation of a program of similar stmcture and size in the 

ordinary course of business." Altematively, the Commission suggested safeguards that 

would prevent the program from resulting in in-kind contributions, including using short, 

defined periods of time in which the committee and the vendor would settie accounts. 

3. SFI's ''Guarantee" and Exclusivity Clause 

The Guarantee in the contract between the Committee and SFI appears very 

similar to the type of "no-risk" or "limited-risk" provisions that the Commission has 

foimd in previous matters could constitute in-kind contributions in the absence of 

safeguards ensuring that the Committee would pay for all of the costs of the fundraising 

extension of credit, but no contribution, resulting fiiom a "deferred compensation" contract with a 

candidate's general consultant where tfae consultant's retainer was only to be paid if the vendor and the 

committee agreed that the committee could afford to pay it without harm to campaign's viability). 
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Draft Final Audit Report - Califomia Republican PartyA^8 

(LRA 829) 

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programs. Moreover, SFI does not "cage" die contributions resulting fix)m the 

fimdraising activity. Under the contract, contributions were to be sent directly to the 

Committee which was to deposit the contributions in its own account and then pay the 

invoiced amounts to SFI. This provision, in combination with the Guarantee, raises 

questions as to whether the arrangement between the Committee and SFI was one in 

which "the committee retain[ed] contribution proceeds while giving up littie, or 

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

1991 -18 (New York State Democratic Party). 

SFI asserted that "all other tdefundraising firms offer the exact or similar 'breakeven guarantee' and that they "issue credit to non-political clients as well in the exact 

same fashion," but neither the Committee nor SFI provided any infonnation supporting 

this assertion, or demonstrating a record by SFI or other companies "of the 

implementation of a program of similar stmcture and size in the ordinary course of 

business." SFI's Resp. at 3. However, a committee in an audit that presents nearly 

identical issues that is currently pending before the Commission has submitted such 

information. That committee's vendor submitted 32 telemarketing and direct mail 

contracts from a variety of fundraising vendors for both political and nonpolitical clients 

to support the claims of the committee in that audit that the contract at issue there 

conformed to the usual and normal practice in its telemarketing vendor's industry. 

Because the issues in that audit are similar to the issues here, and because that 

information is reasonably current (having been submitted in a currently pending audit), 

we believe it is appropriate to consider that information here in order to determine 

whether the Commission is aware of any record by other companies of fundraising 

programs of similar stmcture and size in the ordinary course of business in the direct mail 

and telemarketing fimdraising industry. 

In diat audit, each of the 32 submitted fundraising contracts contained some norisk or limited-risk provision similar to the Guarantee at issue here. Thus, it appears that 

such provisions by themselves are not unusual in the industry. 

Another provision of the SFI contract about which we expressed concem in our 

comments on the lAR was the caging provision. This provision allowed the Committee 

to receive and deposit contributions on its own, report the proceeds to the vendor, and 

then pay the vendor based on the self-reported amounts raised. None of the previous norisk or limited-risk contracts examined by the Commission contained such a provision. 

CXir concem was that if a committee did its own caging of contributions recdved through 

direct mail or telemarketing fundraising, it might not even pay the vendor all of the gross 

proceeds, let alone an amount necessary to cover the vendor's costs. That is, in fact, what 

appears to have happened here. See Part II.C. However, 27 of the 32 contracts submitted 

in the other audit provide for caging by the committee, the committee's bank or a bank 

identified by the committee. Thus, this provision also does not appear to be unusual in 

the direct mail and telemarketing fundraising industries. 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Califomia Republican PartyA/^8 

(LRA 829) 

Page 7 

While the contract here did not contain any of the specific safeguards suggested 

by the Commission in other instances in which it has reviewed no-risk or limited-risk 

contracts, it does contain the exclusivity provision, which the contract stated was 

intended to be consideration for the "significant business risk" incurred by SFI. Ifthe 

exclusivity provision provided value to SFI sufficient to negate SFI's assumption of the 

risk that it would lose money on the prospecting calls, the original extension of credit 

would result in no contribution. However, neither the Committee nor SFI provided any 

information demonstrating any particular financial value of the exclusivity clause, let 

alone sufficient financial value to demonstrating that it negated SFI's assumption of the 

risk. Although SFI stressed that "our standard fundraising agreements with all political 

clients call for exclusivity" and that they have "a 20 year history which allows us to 

mitigate our intemal 'risk,'" it again did no more than assert these facts. SFI's Resp. at 3. 

In the absence of documentation provided by the Committee or SFI, we again tum 

to information the Commission possesses in the other audit. Only three of the 32 

contracts submitted in that audit contained an exclusivity clause as a safeguard against 

losses by the vendor; in none of those was the exclusivity clause the only safeguard, as it 

is here. 

Finally, there is no other information indicating that the costs of the fundraising 

program were eventually paid by the Committee. "With respect to the payment or nonpayment of an extension of credit, the Commission has made plain that in political 

committee fundraising, 'none of the costs of the program [may] be left unpaid by the 

Committee.'" General Counsel's Report #2, MUR 5635, at 8 (quoting Advisory Opinion 

1990-14). The Audit Division states diat it reconciled the Committee's payments to 

SFI's invoices and determined that all of SFI's invoices were paid, but were paid in an 

untimely fashion.^ However, unlike in die other similar audit currentiy pending before 

the Commission, there is no indication that the program resulted in any profit to the 

vendor. Accordingly, we do not believe that it is possible, at this stage, to definitively 

conclude that all of the fundraising program's costs were paid by the Committee. 

^ Although both the Committee and SFI indicate that they resolved disputed billing items, we do not 

possess any information regarding the specifics of the dispute or details regarding its resolution. The only 

information the auditors possess stems fi'om a memorandum from the Committee's counsel to SFI. 

Committee counsel states that 

[The Committee] is currently undertaking a comprehensive review of [SFI's] bills to [the 

Committee] from an accuracy and performance standpoint. The enclosed payment does not 

represent any conclusion as to the results of that comprehensive review or a waiver of claims or 

disputes under the respective contracts between the parties for telemarketing and caging services, 

and should be viewed solely as a good faith effort on [the Committee's] part to reduce the 

outstanding balances subject to the completion of the comprehensive review and a determination 

of what is the appropriate amount due under these contracts. 

Memorandum from Charles H. Bell, Jr., General Counsel to the Califomia Republican Party, to Strategic 

Telecommunications, Inc. (Jul. 3,2008). Despite this memorandum, the auditors indicate that the 

Committee ultimately paid SFI on all of its bills. 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Califomia Republican PartyA^8 

(LRA 829) 

Page 8 

In summary, while a comparison of information from the other audit indicates that 

some aspects of the original SFI extension of credit were similar to what other firms do in 

the ordinary course of business, the use of an exclusivity clause as the sole safeguard 

against loss by the vendor is not. Neither the Committee nor SFI produced any valuation 

ofthe exclusivity clause demonstrating that it was sufficient to offset any losses SFI 

migiht have suffered from its prospecting activities on behalf of the Committee. Nor did 

they provide any documentation diat SFI's contracts with nonpolitical clients have this 

stmcture, and there is no indication that the Committee paid all of the costs of the 

program. Consequentiy, even if the Committee had made all payments as required under 

the contract - and, as we tum to next, it did not - some of the '"costs of the program 

[may have been left unpaid] by the Committee,'" resulting in a contribution. See General 

Counsel's Report #2, MUR 5635, at 8 (quoting Advisory Opinion 1990-14). 

C. COMMITTEE MAY HAVE UNDERTAKEN COMMERCIALLY 

REASONABLE DEBT COLLECTION EFFORTS BUT MORE 

INFORMATION IS NEEDED 

Even where an extension of credit by a commercial vendor is legally permissible 

when made, it may ripen into a contribution over time through a lack of commercially 

reasonable attempts on the part of the vendor to collect the resulting debt. The 

Commission determines diat such attempts are commercially reasonable if the vendor has 

pursued its remedies as vigorously as it would pursue its remedies against a nonpolitical 

debtor in similar circumstances, including withholding delivery of additional goods or 

services until overdue debts are satisfied. 11 C.F.R. § 116.4(d)(3)(iii). 

SFI began invoicing the Committee for its services upon the commencement of 

the fundraising program. The Committee failed to pay SFI's invoices within the 30-day 

timeframe set forth in the agreement but SFI continued providing fundraising services. 

SFI said that during the first quarter of 2008, the Committee "continued to use funds 

raised from SFI's activities to pay other bills which increased the overall debt 

substantially." SFI's Resp. at 3. The Committee eventually accumulated debt to SFI 

totaling $1,171,002. 

SFI stated that it made commercially reasonable attempts to collect the debt. 

SFPs Resp. at 2. Specifically, SFI said that in addition to its normal billing and debt 

collection practices it engaged in "repeated extraordinary attempts" to obtain payment 

from the Committee. SFI said, however, that "the high balance eventually caused the 

executive director [of the Committee, presumably] to cease all prospecting in early April 

in an effort to stop the balance from growing furdier." Id. Interestingly, SFI said that 

after it stopped fimdraising for the Committee, SFI "worked diligentiy to show [the 

Committee] the importance of prospecting and its direct impact on future fundraising." 

Id. SFI said that it met with Committee staff and that together they ultimately developed 

a formal payment plan enabling the Committee "to clear up the balance." The payment 
Memorandum to Thomas Hintermister 

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(LRA 829) 

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plan "involved [SFI's] continued telefimdraising for the [Coinmittee] and a retention 

against the outstanding but unpaid balances of receipts until the obligation was satisfied 

in 2009." Id. at 3. SFI said that it "followed its established procedures and its past 

practice as with other telefundraising clients in the political and non-profit arena in 

approving the extension of credit." Id. at 2. SFI's effort to convince the Committee to 

resume the fundraising program and SFI's continued provision of services when the 

Committee had repeatedly failed to pay raises the question of whether SFI's debt 

collection efforts were commercially reasonable. 

Among the debt collection practices that the Commission may regard as evidence 

of commercial reasonableness is the withholding of additional services until overdue 

debts are satisfied. 11 C.F.R. § 116.4(d)(3)(iii). Here, it appears the opposite happened; 

the Committee, concemed about the level of debt it had accumulated, sought to suspend 

delivery of services from SFI, and it was SFI that convinced the Coinmittee that the only 

viable way for the Committee to get out of debt to SFI - and for SFI to be paid - was for 

the Committee and SFI to continue the fundraising program. If this is correct, it may be 

that SFI's decision to give the Committee additional time to pay and SFI's decision to 

continue providing services to the Committee was commercially reasonable. However, 

we believe that additional information is necessary to reach this conclusion. SFI asserted 

in its Response that, as part of its efforts to convince the Committee, it met with the 

Committee and "presented a detailed house file analysis which included details on 

historical fundraising trends and renewal rates." This meeting "led to a better 

understanding of the need to prospect and fundraise to help the CRP out of the situation it 

found itself in." SFI's Resp. at 2. Information supporting SFI's contention about "the 

need to prospect and fundraise to help the CRP out of the situation it found itself in" 

would be precisely the type of information that would demonstrate the commercial 

reasonableness of SFI's course. However, while the Committee and SFI say that SFI 

provided that information to the Conunittee in 2008, neither has provided similar 

information to the Commission in the course of diis audit. We reconunend that the Audit 

Division revise the DFAR to raise this issue and seek from the Committee the type of 

information described in SFI's letter. 

In addition, as previously discussed, both the Committee and SFI stated that they 

negotiated a payment plan for the debt, but no information has been provided about the 

plan's specific terms, whether any amounts owed were forgiven, or how the specific 

terms compare to the terms SFI has provided to similarly situated nonpolitical debtors 

beyond an assertion that "Strategic has worked with [other clients] in their mutual 

interests by providing flexible payment plans." Consequently, we recommend that the 

DFAR seek diis specific information.