BELL , MCANDREW S & HILTACHK , LL P 

ATTORNEY S AN D COUNSELOR S A T LA W 

4 B B CAPITO L MALL, SUITE 60 0 

SACRAMCNTO . CALIFORNIA 08814 

(916) 442-775 7 

F A X (916) 442-775 9 

www.bmhlaw.com 

December 9,2012 

Mr. Tom Hmtermister 

Assistant Staff Duector 

Audit Division 

Federal Election Commission 

999 E Street, NW 

Washington, DC 20543 

Re: Further Response to Final Audit Report for the 2007-2008 Election Cycle for 

California Republican Party, C#000014590 

Dear Mr. Hintermister: 

The Califomia Republican Party (CRP) responds further to the FEC Audit Division's 

Draft Final Audit Report oftiie 2007-2008 election cycle ("Audit Report"). The FEC granted the 

CRP an extension of tune to file this response to December 10,2012. 

The CRP's response and that of Strategic Fundraising, Inc. ("SFI") are enclosed in this 

transmittal. Both the CRP and SFI respond to the suggestions m both the Audit Division Report 

and the General Counsel's Report that accompanied it that the CRP and SFI could provide 

furdier information to successfully challenge the Audit Report's finding that CRP and SFI had 

not engaged in commercially reasonable efforts consistent with regular business practices to 

resolve CRP's debt to SFI, thus making the SFI debt potentially an illegal, excessive corporate 

contribution to the CRP. 

The CRP's previous response to the Audit Division's Preluninary Audit Report addressed 

in some detail the facts and circumstances bases for our contention that SFI made commercially 

reasonable efforts to collect the CRP debt, and that the SFI and CRP contractual relationship, 

from die initial contract to the negotiated settlement that resulted in CRP paying off the debt in 

early 2009, was regular and in the ordinary course of business. 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant Staff Dfrector 

Audit Division 

Federal Election Commission 

December 9,2012 

Page 2 

As the CRP noted in its prelinunary response last March, "In July 2008, the CRP and SFI 

negotiated an agreement that (1) resolved disputes about billing items; (2) negotiated a set aside 

of SFI-generated tele-fundraising receipts that were dedicated and credited to pay-down of the 

CRP debt; and (3) extended die SFI-CRP fimdraising agreement mto 2009-2010. SFI continues 

to this day as the CRP's tele-fundraising vendor." We emphasized, "the CRP along with SFI 

strongly disagrees that SFI failed to make commercially-reasonable efforts to collect the CRP 

debt, or that CRP considered the SFI's extension of debt to be a contribution by the corporation." 

Questions Raised bv Audit Division's and General CounsePs Reports 

The Audit Division's and General Counsel's Reports seem to give less emphasis to the 

fact that, in a difficult set of curcumstances, the parties worked then way to a full and final 

resolution of the debt issue. The Reports raise several questions about the effect to SFI, such as: 

(1) Did the "no risk guarantee" in the SFI/CRP agreement result in actual financial losses 

to SFI? No. (Answer detailed below) 

(2) Did SFI get paid in fiill? Yes. (Answer detailed below) 

(3) Did SFI make a profit? Yes. (Answer detailed below) 

SFI can and has addressed these issues separately. The CRP's responses to those 

questions are as follows: 

(1) No Actual Financial Losses to SFI. Given that fundraising prospectmg is 

designed to develop a useful list of donors that the telemarketer will contact on a regdar, 

periodic basis to solicit funds, looking at the profit and loss statement alone does not tell the full 

story. The telemarketer and the client, in this case the CRP, were building a working asset. 

Neverdieless, the CRF believes that SFI did not suffer actual financial losses from the "no risk 

guarantee." As the Reports noted, these types of "no risk guarantees" are not unusual in the 

fimdraismg business. We belieVe this element of the CRP/SFI agreement was conunonplace and 

in the ordinary course of business. 

(2) SFI Effectively Paid in Full. SFI was paid nearly m full for the amounts it had 

initially billed for services, and subject to the consideration, of extension of its telemarketing 

contract for 2009-2010, this was fiill and adequate consideration for which SFI was fidly paid. 

Incidentally, SFI continued to provide telemarketing services to the CRF for the 2011-2012 cycle 

as well. The CRP paid SFI the following amounts during die 2009-2010 cycle and to date m the 

2011-2012 cycle for these services that vvere dfrectiy attributable to the efforts of both parties to 

maintain their relationship arising firom the 2008 settiement. 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant StaffDirector 

Audit Division 

Federal Election Commission 

December 9,2012 

Page 3 

2009 - $ 1,053,527.73 

2010 - $ 1.031.143.59 

TOTAL - $2,084,671.32 

2011 - $ 462,329.67 

2012 - $ 511.080.35 

TOTAL - $ 973,410.02 

The CRP/SFI settiement m 2008 provided essentially as foUov^: SFI agreed to waive 

accmed mterest on the unpaid balances, subject to the CRP's agreement (a) that it would meet its 

obligations to pay the balance of amounts outstanding or that would be accmed ui the 

fundraising efforts that SFI and CRP undertook fix)m the late summer of 2008 through the 

begimiing of 2009 to extinguish the past debt, and (b) that the CRP and SH were to negotiate an 

extension ofthe fundraising agreement for the 2009 and 2010 cycle. The settiement agreement 

provided that if CRP were unable to meet conditions (a) and (b), the full amount agreed to be 

waived would become due and owing agam. The parties also agreed that for fiiture fimdraismg, 

the CRP was responsible to pay all the net fimdraising dollars from that fundraising to SH, on a 

weekly basis, that would be payable m fiill within five days. New donor prospecting was subject 

to a net dollar payment to SFI, due in 28 days. If CRP were to fail to meet these pay-as-you-go 

arrangements, the fiill amount of mterest foregone, plus interest that would have accmed, would 

again become due and payable. This mutually-agreed upon carrot and stick approach was 

successfiil. 

(3) SFI Made a Profit. Based upon its additional submission, SH believes that it 

made a profit, and contmues to make a profit on its fundraismg relationship with the CRF. The 

CRP believes that the best evidence of that is that the relationship has continued, as noted above, 

for another four years and nearly 3 Vz years after the settlement was reached and die CRP 

extinguished its 2007-2008 debt to SFI. Were SFI not to have had a profitable relationship with 

the CRP, that relationship would have ended, as SFI retained the contractual right to terminate. 

Instead, SFI pursued a mutually-satisfactory settiement for which the CRP paid off the balance 

as agreed to by the parties (as outimed above), and the parties have renewed their contractual 

relationship twice, once for the 2009-2010 cycle and again for the 2011-2012 cycle. 

CRP's Concems About the FEC's Inquiries 

Having responded to these questions, the CRP strongly believes that in the context of this 

extraordinary situation it faced, the FEC should consider procedures and tests for evaluating debt 

settlements for ongoing entities somewhat differentiy than it does for committees that db not 

have continuing existence or debt settiements m the context of extraordmary situations. 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant Staff Duector 

Audit Division 

Federal Election Commission 

December 9,2012 

Page 4 

Political party conunittees, unlike most candidate committees, expect to have continuing 

existence and not "go out of business." The FEC's debt settiement procedures contemplate that a 

political committee such as a principal (candidate) cominittee formed to accept contributions and 

make expenditures in connection with a single candidate's federal election campaign, will 

conclude its campaign activities, pay its debts and dissolve. If it caimot pay its debts, the 

coinmittee must follow prescribed FEC procedures to satisfy the Commission that it has made 

reasonable efforts to settle those debts with creditors. The FEC then blesses those efforts by 

grantmg temiination notwithstandmg that some debts are not paid in fiill. 

Conumttees with ongoing existence are different, and of those with continuing existence 

(SSFs m particular), can be distinguished fix)m party comniittees. SSFs very seldom would face 

the situation party committees face because they have a fairly stable, ongoing source of income 

and controllable (discretionary) expenses. While it may be contended that a political party 

comniittee also can simply pull in its horns or shut down its business, as SFI has noted, a 

political party must fundraise to live, and its fundraising is affected by extemal conditions, some 

of its making and some not. For if SFI's debts were not paid m a timely manner, so also other, 

smaller CRP creditors faced similar circumstances. Would the FEC consider whether each of 

these vendors had "suffered loss" from special features of their contractual relationships, got paid 

m full, or made a "profit" over a specified time period of the contract, where the parties had 

reached an arms-length commercially reasonable settiement to resolve the debt? Even a noncorporate vendor could face the possibility of having been deemed m the 20/20 focus of a 

subsequent audit to have made an "excessive" contribution. If so, every cominittee would be 

forced to confix)nt whether FEC oversight of its attempts to recover could result in an 

enforcement penalty that would make simply folding its tent preferable to the risks and costs of 

trying to work out a settiement with vendors to enable it to keep its doors open, to fldfill its 

fimction as a poiiticai party under our electoral system. 

When a political party committee vsdth continuing existence falls into a serious 

fundraising trough, leaving not only major but even minor creditors unpaid, (as happened to the 

CRP in the curcumstances outiined at pp. 2 - 4 of the CRP's March 2012 submission), 

forbearance with respect to enforcement should be considered. 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant StaffDirector 

Audit Division 

Federal Election Commission 

December 9,2012 

Page 5 

CONCLUSION 

For the foregomg reasons, and on the basis of the additional mformation submitted by 

CRP and SFI, CRP respectfidly requests the Conunission to amend Finding No. 2 and not to 

adopt Finding No. 3. 

*v tndy yours, ^ 

Charles H. Bell, Jr. 

General Counsel 

Califomia Republican Party 

Enclosure 

1001.01 
strategic 

FUNDRAISING ' 

Tom Hintermister, Assistant StafiTDixector, Audit Division 

Federal Election Commission 

999 E Street, NW 

Washington, DC 20543 

December 6,2012 

Re: Ehaft Final Audit of2007-2008 Election Cyde for Califomia Republican Party, 

C#000014590 

Dear Mr. Hintexmister: 

On behalf of Stnttegk Fundraising, Inc. (''Strategic") of St. Paul, Minnesota, this letter is in 

regard to the Draft Final Audit Report of the FEC concerning die alleged extension of credit by 

Strategic to die Califomia Republican Party ("CRP"). 

The Summary on 'Finding 3* is simply not accurate and is contradicted by the &cts ofthe 

situation, the end result and even witfain the Audit staffs own 'Facts and Analysis'. 

In the Ordinary Course of Business section, it is noted that 'safeguards proposed by the 

Commission have induded requiring advance deposits by a conimittee to rdmbiuse vendors fbr 

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

early and demand full payment. The CRP has bylaws tfaat foxbid it ftom entering mto agreements 

that span across two boaid terms essentially limiting the contact to approximately two years. 

Additionally as part of our standard fimdraising agreements widi all clients both politicd and nonprofit, we indude a tennination clause tfaat either party can execute fbr any reason. 

The Commission correcdy notes tfaat 'SFI was not responsible for the "caging" of 

contributions'. It was not/is not the case of 'the coinmittee ietain[ed] contribution proceeds while 

giving up Utde, or assum[iiigj litde to no risk witfa tfae vendor bearing all, or nearly all tfae risk'. All of 

Strategic's fundraising agreements both verbal and written give SFI die control over 'risk'. While 

some iimdraising/donor acquisition is low margin work, it goes witfaout saying that through our 20 

years of experience we are able to avoid 'losing money'. 

The Commission's condusion on this section tfaat witfaout additional infimnation SFI did 

not extend credit to tfae CRP in its ordinary course of business is witfaout basis and is contradicted by 

the fact tfaat the CRF was able to fundraise out of tfae finandal situation and pay off its balance owed 

to SFI. 

In the Commerdallv Reasonable Debt Collection section, the Commission notes diat it 

determines that these attempts are commerdally reasonable if tfae vendor has pursued its remedies as 

vigorously as it would pursue its remedies against a non-political debtor in similar drcumstance. As 

we documented in our March 2012 response to the Interim Audit Report, we recentiy had a large, 

7591 Ninth Street North. St. Paul, MN 55128 - Phone: 651.649.0404 - Fax: 651.649.0424 

www.strategicfundraislng.com 
national non-profit 501(c)(3) that found itself in a similar situation. Our contracts with our dients 

fbifoid us firom disclosing confidential information regarding the relationships unless ordered by a 

Court should it come to that. Fortunately, dieir outstanding balance faas also been paid off under a 

similar veibal agreement. 

Other documentation to demonstrate SFI's full efforts to collect the debt is difficult to come 

by as this occuned 4-S years ago, tfae CRF staff and tieasurer involved faave moved on and our CEO 

at tfae time has since rethed. I was new to SFI in mid 2008 so I personally had limited interactbns 

witfa tfae situation until after the veibal payment plan was agreed to. Mike Aim,, our PoUtical 

Account Director, located several emails from the timefirame and those are endosed. 

I was able to locate a response firom our CEO to the CRF legal team tfaat noted our long 

standmg 'billing' practices. It is noted below and was also detailed in my Mardi 2012 response to die 

Interim Audit Report. Tfae full response is endosed. 

9) Th« vm rai^oriltp of all asMinii p^rabto du* lo eiraif(|lo m loi dUHML oonbiwiUnlV upon 

oiWQM hM tm fionoi aoquMkn nMotpMiino') MIVIOM, «fv* donoi M t tiling 9wllm% wwl Id 

tKimiil, pir iivnwctfo^ oi^ghiy MIVIM oham. Thoi* chWQN m cefMlmoi wm ^ tor^tMfMbiQ 

•nd muunlly (igr^cdufWA w«wnUn9 and bMIno priMiloti UMI IMM tow In plaoi ihrouglwui niMi of 

our Houitoon yo«r r«l«lloniNp wMh dw CRP. FuilhoimoM, ol iiiifWMliiigi datoll lolntod le our 

(undroMno lotuho, ptHOfiniiie* trnfOMiii - abittwllh lh* o«hioe»vbMrhloh wppon our bwoteing 

ift (and hM «lwfly« boon) wMii ID tho CRP. Tne CRP PMOIMO de<«Dodw»oklv Involeoo along 

wHh monihly sloioiiMnlBlnn Wo alM piMldo Iho CRP (iiidoloi««ll9Mi)wlh doiiri|»f«homil^* 

dalVi weoMy and Yoar-lo-Dato fandroMng perfoimenoOb biHng animaiy and open Intofce raporti via 

cur webdte. SiraieolG hat itaaye been, and oondnuee to bevaiy oooperadve.inprwldhio cnv and 

aH d»laH or beckup retjMetiadfor omy iiwoloed amounto. In auinHiyvour boolfa nave abnya nan 

open snd Ihere hae never bean any indteatien from lha CRP hal fM^ dtapuied the aroounl owed 

Straleolc. 

The Assessment by the Audit Staff section states that we did not provide odier 'examples' of 

dient contracts or any supporting documentation to verify that the 'exdusivity clause' is common 

place; however, as I previously noted, we are bound by strict confidentiality dauses from our dient 

both political and non-profits. I am induding a recent contract witfa a candidate that lost his dection 

this year. It is similar to our other contracts but slighdy different because it was for a candidate 

committee. 

The Commission Audit staff goes onto note tfaey tfae tireak even guarantee' and 'exdusivity' 

clause are noi unusual and tfae provision tfaat tfae CRP 'retained contribution proceeds while giving 

up litde, or assuming litde to no risk' is also not unusual. The assumption by the Commission Audit 

staff tfaat 'SFI would lose money on tfae prospectmg calls' is presumptuous. As part of our agreement 

witfa die CRP we routinely audit tfae 'caged' data to verify every donation is bdn^g reported to us 

accurately and in a timely fiishion as called for in our contract. 

The Commission Audit staff assertion that 'SFI's effort to convince tfae CRP to resume tfae 

ftindralsing program and SFI's continued provision of servioes when the CRP had repeatedly failed 
to pay raises tfae question of wfaether SFI's debt collection efforts were commerdally reasonable' is 

proven wrong in tfae fact tfaat tfae CRP paid off tfae debt and is a continued partner of SFI's to tfais 

day. The fact is tfae plan to pay SFI back widi tfae money SFI faelped raise fbr tfae CRF worked as 

planned. Our experience tells us that 'witfafaolding of additional services until overdue debts are 

satisfied' doesn't work. I have been made aware of several state parties having their vendors stop 

doing work for tfaem only to 1) not get paid, 2) get paid more slowly or 3) end the relationship 

permanentiy. We sought a win-win solution and achieved it. The Commission staff suggests that 

'information supporting tfais contention by SFI (that we could fundraise out of tfae debt) wodd be 

piecisdy the type of infbrmation that would demonstrate the commercial reasonableness of SFI's 

course'. It does not seem appropriate however to disdose private (to the CRP) and prpprietaiy (to 

SFI) infbnnation ±at could/would end up on the public record. Sharing LifeTime Value data, 

inception donor counts, renewal rates, fundraising plans, etc does not appear to be in the purview of 

the Commission. 

As the Commission can dearly see, Strategic bdieved at all times that this extension of credit 

would further the CRP's recdpt of new funding from new donor acquisition, and the renewal and 

reactivation of old donors. The long term relationship we enjoy witfa the CRP was worth the extra 

effort to work out a mutually beneficial payment plan that allowed SFI to continue raising fbnds fbr 

tfae CRP. At no tune faas Strategic mtended to make a contributton to the CRP's federal account by 

vutue of its extension of credit. The bottom line is that it worked out, SFI was paid and the 

relationship was maintained^ 

MarltDbcon 

Chief Finandd Ofiicer 

Strategic Fundraising, Inc.