FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C. 20463 

OCT 2 fi 20U 

MEMORANDUM 

TO; Patricia C. Onock 

Chief Compliance Oflicer 

Thomas E. Hintermister 

Assistant Staff Director 

Audit Division 

FROM: Lisa J. Stevenson ^ 

Deputy General Counsel - Law 

Lorenzo Holloway 

Assistant General Counsel 

Compliance Advice 

Joshua Blume 

Attorney 

Jennifer G. Waldman J6 "pr- U^Vv/' 

Paralegal Specialist 

SUBJECT: Preliminary Audit Report on Gary Johnson 2012, Inc. (LRA # 90S) 

I. INTRODUCTION 

The Office of the General Counsel ("OGC") has reviewed the proposed Preliminary 

Audit Report C'PAR") on Gary Johnson 2012, Inc. ("the Committee"). The PAR contains five 

findings: Finding I - Net Outstanding Campaign Obligations, Finding 2 - Amount Owed to the 
Memorandum to Patricia C. Orrock and Thomas Hintermister 

Gary Johnson 2012 Preliminary Audit Report 

LRA # 905 

Page 2 

U.S. Treasury, Finding 3 - Use of General Election Contributions for Primary Election Expenses, 

Finding 4 - Reporting of Debts and Obligations, and Finding S - Extension of Credit by a 

Commercial Vendor. Our conunents address various aspects of these findings. We concur with 

aspects of the findings not specifically discussed in this memorandum. If you have any 

questions, please contact Joshua Blume, the attorney assigned to this audit.^ 

II. NET OUTSTANDING CAMPAIGN OBLIGATIONS 

The PAR concludes that the Conunittee has remaining net outstanding campaign 

obligations, and therefore the Committee did not receive public funds in excess of its entitlement. 

We concur with this finding, but we recommend that the Audit Division revise the PAR to 

explain why the PAR's conclusion that the Committee has remaining net outstanding campaign 

obligations is different from the Conunission's final determination that the Committee was no 

longer entitled to receive public funds because it did not have net outstanding campaign 

obligations. 

The Commission made a final determination on November 14,2013, that the Conunittee 

was no longer entitled to receive public funds because it did not have any remaining net 

outstanding campaign obligations. See Statement of Reasons in Support of Final Determination 

on Entitlement In the Matter of Governor Gary Johnson, LRA # 905, at 1 (Nov. 14,2013) 

("Statement of Reasons"). At the time of the suspension, however, the Conunission noted that 

the audit of the Committee was still pending and that the exit conference had not yet taken place. 

Statement of Reasons, at 8 n. 12. The Commission observed that the Committee would have the 

opportunity to respond to the Audit staffs findings once the audit resumed, and that the final 

determination only governed the Conunittee's future entitlement to matching funds, and did not 

address whether the Committee had received public funds in excess of its entitlement. Id. 

Following the Commission's final entitlement determination and the resumption of the 

audit, the Committee submitted additional documentation, on January 24,2014, which reduced, 

but did not eliminate its surplus position, and then submitted evidence of additional debt on June 

18,2014, which showed that the Committee actually had net outstanding campaign obligations. 

Based on this new information, the Audit Division recalculated the Committee's net outstanding 

campaign obligations based on a review through May 31,2014, and has now concluded that the 

Committee does have remaining net outstanding campaign obligations. 

' The OfTice of the General Counsel recommends that the Commission consider this document in Executive 

Session because the Commission may eventually decide to pursue an investigation of maners contained in the PAR. 

11C.F.R.§§ 2.4(a) and (bK6). 
Memorandum to Patricia C. Orrock and Thomas Hintermister 

Gary Johnson 2012 Preliminary Audit Report 

LRA #905 

Page 3 

To assist the Commission's understanding of the underlying basis for this finding, we 

recommend that the Audit Division revise the PAR to explain the developments in the audit with 

respect to the Committee submitting information showing additional net outstanding campaign 

obligations.^ 

III. AMOUNTS OWED TO THE U.S. TREASURY 

This finding has two aspects. The first concerns the Committee's use of public funds for 

non-qualified campaign expenses,^ and the second concerns the Committee's receipt of public 

funds for contributions later determined to have been ineligible for matching. 

Our comments focus upon the first of these two aspects. The finding raises a question as 

to whether the Committee used public funds to pay for non-qualified campaign expenses, and, if 

the Committee used public funds, how the Commission should calculate Ae portion of public 

funds for purposes of repayment. These questions are significant because the Commission can 

only seek a repayment for the portion that represents public funds when a conunittee spends its 

funds on non-qualified campaign expenses. See Kennedy for President Committee v. Federal 

Election Commission. 734 F.2d 1558 (D.C. Cir. 1984). 

We conclude that the Committee used public funds to pay for non-qualified campaign 

expenses. We also conclude that the Commission should use the formula found in the 

Commission regulations at 11 C.F.R. § 9038.2(b)(2)(iii) to calculate the portion of public funds 

used to pay for non-qualified campaign expenses. In performing the calculation, the Audit 

Division should include the primary election contributions that the Conunittee deposited into its 

general account, and exclude the general election contributions also deposited into that account. 

We start with background information about the Committee and the law. 

A. Background Information 

As a publicly-financed conunittee for the presidential primary election, the Committee 

had two sources of financing for that election: 1) public funds from the United States Treasury 

and 2) private contributions from individual contributors that were designated for the primary 

election. The Committee deposited these funds into two separate accounts. The Conunittee 

' The Committee had an opportunity to submit this information in the context of the entitlement proceeding, 

11 C.F.R. § 9034.S(g^2), but it failed to do so. See Statement of Reasons in Support of Final tSetermination on 

Entitlement In the Matter of Governor Gaiy Johnson, LRA # 905. 

* The Audit Division's conclusion that the Committee used public funds for non-qualified campaign 

expenses is based on the Audit Division's conclusion that public funds were used to pay for general election 

expenses. Since the conclusion that the Committee used public funds to pay for non-qualified campaign expenses is 

a basis for repayment, 11 C.F.R. § 9038.2(bX2)(iXA), we recommend that the Audit Division explain in the PAR 

how it determined that the disbursements were for general election expenses. We have a similar observation with 

respect to Finding 3. which discusses the Committee's use of general election contributions to pay primary election 

expenses. We recommend that the Audit Division explain why the expenses were considered primary election 

expenses. 
Memorandum to Patricia C. Orrock and Thomas Hintermister 

Gary Johnson 2012 Preliminary Audit Report 

LRA # 905 

Page 4 

deposited its public funds into its primaiy election account, and it deposited the private 

contributions at issue in this finding into its general election account.^ The PAR finds that the 

Committee spent $1,199,701 in private contributions designated for the primary election^ on 

general election expenses. 

The PAR concludes that the amount spent on general election expenses is a non-qualified 

campaign expense for the primary election. The PAR finds, therefore, that the Committee must 

repay a pro rata portion that represents the public funds it received from the United States 

Treasury. The Audit Division calculated the repayment amount to be $334,780. 

To calculate the amount the Committee must repay, the PAR uses a formula set forth in 

Commission regulations for determining the fraction of total spending on non-qualified 

campaign expenses^ that may reasonably be attributed to the spending of public funds, as 

opposed to private contributions. 11 C.F.R. § 9038.2(b)(2)(iii) C'repayment ratio formula")-

Under this provision, the amount of repayment is in the same ratio to the total amount spent on 

non-qualified campaign expenses, as the ratio of matching funds certified to the candidate bears 

to the candidate's total deposits.' Id. 

Total deposits is defined as "all deposits to all candidate accounts minus transfers 

between accounts, refunds, rebates, reimbursements, checks returned for insufficient funds. 

' To determine which contributions were designated for the primaiy election and which contributions were 

designated for the general election, the Audit Division used the written designation rule that the Committee used for 

its paper contribution solicitation forms and on its website contribution solicitation forms. This is the same 

designation rule that the Commission used to determine that the candidate was no longer entitled to public funds. 

See Statement of Reasons In Support of Final Determination on Entitlement In the Matter of Governor Gary Johnson 

(LRA # 90S), dated Movember 14,2013, at 9. We recommend that the Audit Division explain this in the PAR, 

which demonstrates that the Commission has taken a consistent approach between the entitlement proceedings and 

the audit. 

' Since the general election account included both primary and general election contributions, we 

recommend that the Audit Division revise the PAR to explain the methodology that the Audit Division used to 

arrive at the conclusion that the Committee used primary contributions to pay general election expenses. 

^ We agree with the Audit Division's conclusion that the payment of general election expenses with primary 

election funds is a non-qualified campaign expense. See 11 C.F.R. § 9034.4(bX3). The Presidential Matching 

Payment Account Act ("Matching Payment Act"), 26 U.S.C. §§ 9031 et seq., defines a "qualified campaign 

expense" as "a purchase, payment, distribution, loan, advance, deposit, or gift of money or of anything of value" that 

a candidate or his or her authorized committee incurs in connection with that candidate's campaign for nomination 

for election, and which does not involve a violation of Federal or State law. 26 U.S.C. § 9032(9). See also 11 

C.F.R. § 9032.9. If the Committee incurred expenses for the general election, then those expenses were not incurred 

in connection with the candidate's campaign for the nomination. 

' Both the amount of matching funds certified and total deposits are determined as of 90 days following the 

candidate's date of ineligibility. So, for example, if a candidate had matching funds certified to him or her of 

S200,000 as of 90 days following the date of ineligibility, the candidate's total deposits as of that time totaled 

SI,000,000, and the candidate spent S50.000 on non-qualified campaign expenses, then the candidate would be 

required to repay 20 percent (S200,000/S 1,000,000) of the SS0,000 spent on such expenses, or $10,000, to the U.S. 

Treasury. 
Memorandum to Patricia C. Orrock and Thomas Hintermister 

Gary Johnson 2012 Preliminary Audit Report 

LRA#905 

Pages 

proceeds of loans and other similar amounts." 11 C.F.R. §§ 9038.2(bX2)(iiiXA); 9038.3(cX2). 

To calculate the total deposits, the Audit Division included the public funds and the private 

primary contributions deposited both in the Committee's primary and its general election 

accounts, but excluded the Committee's private general election contributions deposited into its 

general election account. 

B. The Committee Used Public Funds To Defray Non-Qualified Campaign 

Expenses 

We concur that the Committee used public funds to pay non-qualified campaign 

expenses. Although under one view the Committee could be said to have used only its private 

primary contributions to defray the non-qualified campaign expenses, the private primary 

contributions and public funds are, as a matter of law, considered a "commingled pool of federal 

and private monies." Kennedy for President Committee v. Federal Election Commission. 734 

F.2d 1SS8 (D.C. Cir. 1984). The Commission has historically and consistently interpreted the 

public funds and private primary contributions as commingl^ even if a committee has more than 

one account and the public funds are held separate from the private primary contributions. The 

Commission has stated that it considers all fiinds in a publicly funded committee's accounts to be 

commingled. See Final Rule and Explanation and Justification Regarding Public Financing of 

Presidential Primary and General Election Candidates, 56 Fed. Reg. 35898,35905 (July 29, 

1991) (citing Kennedy for President Committee, 734 F.2d 1558,1565 n.l 1); Final Report of the 

Audit Division on Larouche Democratic Campaign (approved May 17,1990), at 8 (rejecting 

committee argument that no repayment requii^ because segregate federal fonds account not 

used); Final Report of the Audit Division on Albert Gore, Jr. for President Committee, Inc. 

(approved July 13,1989), at 11 (separate bank account for deposit of matching funds would still 

require repayment); Final Report of the Audit Division on The Tsongas Committee, Inc. 

(approved Dec. 16,1994), at 65-66 (rejecting argument that Kennedy decision disallows 

repayment determination where specific account used did not contain matching funds); 

Statement of Reasons, Senator Robert Dole and the Dole for President Committee, Inc. at 24-25 

(approved Feb. 6,1992) (rejecting argument that expenditures of third party on behalf of 

comminee causing committee to exceed spending limitations not subject to repayment because 

third p^y never received public funds, and stating "[ojrdinarily, federal matching funds and 

private contributions are commingled in a committee's accounts"). 

If the Commission did not consider funds held in separate accounts to be commingled for 

purposes of repayment, then a committee would be able to avoid the application of the theory of 

a "commingled pool of federal and private monies" and a possible repayment obligation simply 

by depositing its public funds and its private contributions into separately dedicated accounts. 

Committees that did so would be able to claim that they spent only their private primary 

contributions, and not their public funds, on non-qualified campaign expenses. The 

Commission has consistently rejected such an approach, as reflected in the audits cited above. 

In light of the Commission's consistent approach to this issue and the adverse 

consequences of not applying the theory of a "commingled pool of federal and private monies" 

to all of the Committee's accounts that maintained public fimds and private contributions for the 
Memorandum to Patricia C. Orrock and Thomas Hintermister 

Gary Johnson 2012 Preliminary Audit Report 

LRA » 90S 

Paged 

primary election, we conclude that the Committee used public funds to pay for the non-qualified 

campaign expenses. The Commission, therefore, may seek a repayment of public funds that 

were used to defray non-qualified campaign expenses. Kennedy for President Committee v. 

Federal Election Commission, 734 F.2d 1558 (D.C. Cir. 1984). 

C. The Commission Should Use the Repayment Ratio to Caieulate the Public Funds 

Portion of Non-Qualified Campaign Expenses, And the Ratio Should Include 

Primary Contributions And Exclude General Contributions 

Because the Committee used public funds to pay for non-qualified campaign expenses, 

the Audit Division's use of the repayment ratio to calculate the amount of public funds that must 

be repaid is appropriate. See 11 C.F.R. § 9038.2(b)(2)(iii) (mandating use of repayment ratio 

formula to determine amount of public funds to be repaid where public ftmds spent on nonqualified campaign expenses).' 

It is OGC's opinion that the Audit Division correctly included the primary election 

contributions deposited into the general election account and correctly excluded the general 

election contributions deposited into the same account from the calculation for the following 

reasons. 

Although section 9038.2(b)(2)(iii)(A) defines "total deposits" for the purpose of 

calculating the repayment amount as, in pertinent part, "all deposits to all candidate accounts," 

we believe that in the context of the facts presented in this case, "all deposits" should be 

interpreted to encompass private primary contributions deposited into a general election account. 

The fiicts presented here are unusual in that the Committee deposited nearly all of its private 

primary contributions received after May 2012 into a general election account, rather than the 

primary account that contained public ftmds, or a separate primary private account. 

These facts, however, do not change the purpose of the repayment process: to recapture 

public ftmds used for non-qualified campaign expenditures. 11 C.F.R. § 9038.2(b)(2); see also 

Comments of Office of the General Counsel on ^oposed Audit Report on Dole for President, 

Inc. - Media Advertisements and Other Expenses Paid for by the Republican National 

Committee, Repayment Ratio and Winding-Down Costs (L^ # 467) (Oct. 27,1998), in Final 

Audit Report on Dole for President, Inc. (approved June 3, 1999), at 84. If the private 

' The Audit Division's cover memorandum to the draft PAR indicates that the Audit Division used the last 

day any primary contributions submitted for matching were still-in the Committee's general election account, or 

December 20,2012, as the date on which calculation of non-qualified campaign expenses ended. See Cover 

Memorandum to PAR on Gary Johnson 2012, Inc., page 3, point 4. However, the Commission is required to review 

committee expenditures from the date of the last matching fund payment to which the candidate was entitled to 

determine the point in time at which the Committee's accounts no longer contain matching funds themselves, rather 

than the primary contributions upon which the award of matching funds is based. 11 C.F.IL § 9038.2(b)(2)(iu)(B). 

In arriving at this date, the Commission is to assume that the last payment has been expended on a last-in-first-out 

basis. Id. We, therefore, recommend that the PAR be revised to include discussion of how this aspect of the 

regulation was applied here, or explain why this requirement was not followed in this case. 
Memorandum to Patricia C. Orrock and Thomas Hintermister 

Gary Johnson 2012 Preliminary Audit Report 

LRA#90S 

Page? 

contributions for the primary election were not included in the repayment ratio formula 

calculation simply because the Committee deposited them in another account opened for a 

different election, then the accuracy of the repayment ratio formula calculation would be 

compromised in that it would fail to include all of the financing available to the Committee for 

the primai7 election. 

These same considerations warrant excluding the general election contributions deposited 

in the same account from the total deposits used in the repayment ratio calculation. Although 

section 9038.2(b)(2)(iii)(A) does not explicitly exclude general election funds properly deposited 

into general election accounts from the total deposits that must be included in the repayment 

ratio formula, we believe this exclusion is required by the general principle that primary and 

general elections are separate, and thus, general election contributions are not available to be 

spent on primary election expenses.'" See Explanation and Justification for Final Rule 

Regarding Public Financing of Presidential Primary and General Election Candidates, 64 Fed. 

Reg. 61777,61778-79 (Nov. IS, 1999). Consequently, including general election deposits in the 

formula would distort the accuracy of the repayment ratio formula calculation for a publiclyfinanced primary election conunittee. 

IV. REPORTING OF DEBTS AND OBLIGATIONS; EXTENSION OF CREDIT BY A 

COMMERCIAL VENDOR 

In the cover memorandum under the PAR's summary of Finding 4, the Audit Division 

discusses using two different sets of invoices from a commercial vendor, NSON," including a 

set sent out immediately when the debts were incurred and another set that was sent in December 

2012. We understand that the Audit Division considered one set of invoices in connection with 

the analysis for Finding 4 and that it considered the other set of invoices in cormection with the 

analysis for Finding S. We recommend that the Audit Division explain, in the cover 

memorandum to the Commission, why it used two different sets of invoices for the two findings. 

In general, candidates who are candidates for the genera! election, and their authorized committees, may 

spend funds representing contributions made with respect to the general election on primary election debt. 11 

C.F.R. § llO.I(b)(3)(iv). However, presidential candidates who are publicly financed are required to use primaiy 

election funds only for expenses incurred in connection with primaiy elections, and to use general election fiinds 

only for general election expenses. See Explanation and Justification for Final Rule Regarding Public Financing of 

Presidential Primary and General Election Candidates, 64 Fed. Reg. 61777,61778-79 (Nov. IS, 1999). This 

limitation exists for publicly-funded candidates in order to effectuate the spending limits for both the primaiy and 

the general election. Id. 

" The PAR notes that NSON is a registered corporation in the State of Utah that also does business as 

Political Advisors. It is our understanding that Political Advisors is the Committee's principal creditor and that it 

provided political consulting services to the Committee. The PAR also notes that although the Committee reported 

disbursements to this entity as disbursements to Political Advisors, the entity billed the Committee as NSON.