FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C 20463 

MAR 1 8 2015 

MEMORANDUM 

TO: Patricia C. Orrock 

Chief Compliance Officer 

Thomas E. Hintermister 

Assistwt Staff Director 

Audit Division 

FROM: Lisa J. Stevenson 

Deputy General Counsel - Law 

Lorenzo Holloway 

Assistant General Counsel 

Compliance Advice 

Joshua Blume 

Attorney 

SUBJECT: Draft Final Audit Report on Gary Johnson 2012, Inc. (LRA U 90S) 

I. INTRODUCTION 

The Office of the General Counsel ("OGC") has reviewed the proposed Draft Final Audit 

Report ("DFAR") on Gary Johnson 2012, Inc. ("the Committee"). The DFAR contains five 

findings: Finding I - Net Outstanding Campaign Obligations, Finding 2 - Amount Owed to the 

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. We concur with these findings, but we provide some comments on certain 

issues raised in Findings 2 through S. If you have any questions, please conmct Joshua Blume, 

the attorney assigned to this audit. 

II. FINDING 2 - AMOUNTS OWED TO THE U.S. TREASURY 

Finding Two recommends that the Committee repay a total of $ 334,914 to the United 

States Treasury. This finding has two aspects, the most significant of which is that the 

Committee used primary election funds on expenses incurred in connection with the general 

election. According to the Audit Division, the vast majority of these expenditures occurred 
Memorandum to Patricia C. Orrock and Thomas E. Hintermister 

Gary Johnson 2012 Draft Final Audit Report 

LRA # 90S 

Page 2 

between May S, 2012, the Candidate's date of ineligibility, and December 7,2012. The Audit 

Division, therefore, recommends that the Committee repay a pro-rata portion of the total amount 

of funds so spent, in this case $333,664, to the United States Treasury. See 11 C.F.R. § 

9038.2(b)(2)(iii) (setting forth formula for computing amount to be repaid). 

We concur with Finding Two. In response to the Preliminary Audit Report, the 

Committee makes two arguments related to Ais finding and we provide comments on both. As a 

part of our coimnents in response to the Committee's first argument, we have comments on the 

Audit Division's calculation of the repayment for non-qualified campaign expenses. 

A. The Calculation of The Repayment for Non-Qualified Campaign Expenses 

1. The Commission Uses Repayment Ratio to Calculate Repayment for 

Nonqualified Campaign Expenses 

First, the Committee contends that at all times when it received public funds, the amount 

of money it spent on qualified campaign expenses exceeded the amount of public funds it 

received. As a result, the Committee implies it can separate private contributions and public 

funds and conclude that it spent private fimds, and not public funds, on any non-qualified 

campaign expenses. Initial Response, at 1. 

We disagree with this argument. The Committee fails to take into account Commission 

regulations that prohibit the spending of ar^ funds collected for the primary election on nonqualified campaign expenses. See 11 C.F.R. § 9034.4(a) (all contributions received for the 

primary election as well as public funds may only be spent on qualified campaign expenses). 

While the Commission can only seek a repayment under 26 U.S.C. § 9038(b) for the portion of 

total spending that represents public funds when a committee spends primary funds on nonqualified campaign expenses, see Kennedy for President Committee v. Federal Election 

Commission, 734 F.2d 1SS8, IS61 (D.C. Cir. 1984), a publicly-funded committee's private 

primary contributions and public fimds 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 1558,1564 (D.C. Cir. 1984). 

To determine if any portion of public funds in this commingled pool of Federal and 

private funds was used to pay for non-qualified campaign expenses, the Commission does not 

examine how much of the public funds remained afi» the Committee paid for non-qualified 

campaign expenses. Rather, the Commission applies a repayment ratio to determine the pro rata 

share of total non-qualified campaign spending that is attributable to the use of public funds. 11 

C.F.R. § 9038.2(b)(2)(iii) (the "repayment ratio"). The Committee's detailed examination of its 

actual spending, the result of which, it claims, shows that public funds were not actually spent on 

non-qualified campaign expenses is precisely the kind of analysis that the repayment ratio is 

intended to obviate. The Kennedy court recognized that, because all funds are conuningled, the 

determination of the amount of public funds that were spent for non-qualified purposes "may 

never be perfectly accurate." Id. at 1562. Rather, Congress delegated to the Commission the 

task of devising a method that would reasonably estimate the amount of public funds improperly 
Memorandum to Patricia C. Oirock and Thomas E. Hintermister 

Gary Johnson 2012 Draft Final Audit Report 

LRA # 905 

Pages 

spent. Id. This is what the repayment ratio is designed to accomplish. See Explanation and 

Justification for Fined Rule on Repayments by Publicly Financed Presidential Candidates, SO 

Fed. Reg. 9421 (Mar. 8, 1985) ("The use of such formulas is consistent with the court's opinion, 

which does not require a mathematically precise determination of the amount of the Federal 

funds spent improperly but only a reasonable determination of the amount of Federal matching 

funds so used.").' 

2. The Audit Division Uses The Date That It Can Verify To Determine When 

The Committee's Accounts No Longer Contain Public Funds 

Before applying the repayment ratio, however, the Commission must determine the date 

when a committee's account no longer contains public funds. 11 C.F.R. § 9038.2(b)(2)(iv). To 

calculate this date, the Commission examines the committee's expenditures starting with the date 

that the committee received its last payment of public funds. 11 C.F.R. § 9038.2(b)(2)(iii)(B). 

The Commission assumes that this last payment of public funds is expended on a last-in and 

first-out basis. Id. In the DFAR, the Audit Division states that the date upon which matching 

funds were no longer in the accounts was February 20,2014. However, because the Coiiunittee 

has not provided an itemization of the general account's receipts, the Audit Division cannot 

determine with certainty what expenditures have been made for what purposes, and therefore 

whether expenditures were made for the general or the primary election using d\e February 20, 

2014 date. Rather than using the date of February 20,2014, the Audit Division instead uses the 

last date that it can verify - December 20,2012 - which is the date the last contribution 

submitted for matching funds was deposited in the Committee's general account. 

We concur with this approach. While extending the date when the Committee's accounts 

no longer contained public flmds may produce a slightly higher repayment obligation for nonqualified campaign expenses,^ the Audit Division does not have the information necessary to 

verify the .nature of the expenditures using the later date. Given that the Commission's 

repayment determination must include a factual basis, 11 C.F.R § 9038.2(c)(1), we believe that 

the repayment determinations for non-qualified campaign expenses should be based on the dates 

for which the Commission can verify the nature of the expenditures. The DFAR indicates that 

the Audit Division has requested the necessary information and the Committee has not provided 

it. The Commission, therefore, has the option of issuing a subpoena to obtain this information. 

11 C.F.R § 9038.1(b)(l)(v). We, therefore, recommend that the Audit Division raise this issue in 

the memorandum that forwards Ais report to the Commission. 

' For this reason, the CommiUee's argument regarding S7,301 spent on winding-down expenses that the PAR 

identifies as part of the non-qualified expenses for which repayment is required is also of no avail. See Interim 

Response, at 2. That the Committee may not have speciflcally used public fimds, as opposed to other primary fiinds, 

to pay these expenses is not a relevant consideration. 

' We understand from the Audit Division that using the estimated date of February 20,2014 would result in 

an estimated additional repayment of S4,462.62. 
Memorandum to Patricia C. Orrock and Thomas E. Hintermister 

Gary Johnson 2012 Draft Final Audit Report 

LRA#905 

Paged 

B. The Commission May Only Seek A Repayment for Non-Qualified Campaign 

Expenses That Have Been Paid 

Second, the Committee identifies several items that were not previously reported as debts 

and argues that, because of this information, "the effective matching funds cut-off date is moved 

forward, and the amount to be paid to the U.S. Treasury is reduced." Supplemental Response 

("Supp. Response"), at 1. Specifically, the Committee states that if all the newly discovered 

debts are included as reportable debt, then the "matching funds cut-off date" is moved forward to 

October 22,2012, and the amount the Committee must repay is reduced to a maximum of 

$33,930.70. Supp. Response, at 1. The Committee asks that the declared amount owed by the 

Committee be no greater than this amount, pending any additional deductions that may be 

appropriate to make in the future. Id. at 3. 

We disagree with the Committee's assertion that a reduction in the amount of funds 

repayable for non-qualified campaign expenses is in order because of newly discovered 

reportable debts. Neither the existence nor the magnitude of the Committee's primary election 

debt has any relationship to the Committee's repayment obligation for non-qualified campaign 

expenses.^ The Committee's repayment obligation is premised wholly upon its actual 

expenditures of primary funds, and not upon the mere incurrence of indebtedness in cormection 

with the primary election. 11 C.F.R. § 9038.2(b)(2)(iv). See Kennedy for President Committee 

V. Federal Election Commission, 734 F.2d at 1565 (authority to seek repayment limited to 

amount of public funds actually spent on non-qualified expenses). It would be inequitable, in 

fact, for the Commission to seek repayment for debts that a committee has not actually paid. 

Rather, the effect of the Committee's discovery of additional debt would be to increase its net 

outstanding campaign obligations, thereby necessitating revision of the Statement of Net 

Outstanding Campaign Obligations. See 11 C.F.R. § 9034.5(a)(1) (statement of net outstanding 

campaign obligations composed consists in part of "[tjotal of all outstanding obligations for 

qualified campaign expenses as of the candidate's date of ineligibility...". The Audit Division 

has already accounted for these newly-discovered debts on the NOCO Statement. 

^ While debt per se would not afTect the Committee's repayment obligation, changing the matching ftmds 

cut-ofT date would afTect the calculation of the amount of funds that the Committee must repay to the U.S. Treasury 

because the cut-off date determines how much of a committee's non-qualified expenses should be included in the 

repayment ratio. See 11 C.F.R. § 9038.2(bX2)(iv) ("Repayment determinations under 11 CFR 9038.2(b) will 

include all non-qualified campaign expenses paid before the point when committee accounts no longer contain 

matching funds..The Committee's calculations suggest that the later the matching funds cut-off date is, the 

less the amount of funds it must repay to the U.S. Treasury. See Supp. Response, at I (noting that if cut-off date is 

moved to October 4, then Committee will owe no more than SI 10,941.76, whereas if cut-off date is moved to 

October 22, then Comminee will owe no more than S33,930.70). This relationship is the opposite of the relationship 

posited in section 9038.2(bX2)(iv). Under that provision, the earlier the matching funds cut-off date is, the less the 

Committee will be required to repay. This is because fewer non-qualified campaign expenses would be included in 

the calculation with an earlier date, as section 9038.2(bX2)(iv) shows. 
Memorandum to Patricia C. Orrock and Thomas E. Hintennister 

Gary Johnson 2012 Draft Final Audit Report 

LRA # 90S 

Pages 

III. FINDING 3 - USE OF GENERAL ELECTION CONTRIBUTIONS FOR 

PRIMARY ELECTION EXPENSES 

Finding Three concludes that the Committee used $12,396 in contributions designated for 

the general election to pay expenses incurred in connection with the primary election before the 

date of the primary election.^ The Committee originally deposited $22,396 in contributions 

designated for the general election in its primary election account, but shortly thereafter 

transferred $10,000 of this amount to its general election account. The balance of $12,396 

remained in the primary election account. 

In response to this finding, the Committee states that it treated the $12,396 as "an 

advance against anticipated matching funds, which the [Coirunission] notes were not paid to [the 

Committee] until after the [date of ineligibility]." Initi^ Response, at 2. This statement implies 

that the use of contributions designated for the general election in Ais marmer is permissible. 

To the extent that the Committee is characterizing the advance of general election funds 

as a loan to the primary account, the Commission's regulations specify that such loans must 

come from a qualified financial institutions, which the general account clearly was not. 11 

C.F.R. § 100.82(e)(2). See also Explanation and Justification for Final Rule on Loans From 

Lending Institutions to Candidates and Political Committees, 56 Fed. Reg. 67118 (Dec. 27, 

1991) (provision does not extend to loans from lenders other than banks or other qualified 

financial institutions). 

Alternatively, the Committee's use of its general election contributions to pay for primary 

election expenses could be viewed as a transfer of funds from the general election account to the 

primary election account. See Advisory Opinion 1996-04 (LaRouche) (Commission analyzed 

proposed "loan" of frmds from previous presidential primary committee to current campaign 

committee based on anticipated receipt of public funds as transfer between coimnittees). 

However, none of the transfer rules permit such a transfer under the circumstances presented 

here. While campaigns are permitted to transfer unused primary election contributions to their 

general election accounts in spite of the contribution limitations announced in section 110.1, see 

11 C.F.R. § 110.3(c)(3), Conunission regulations do not authorize transfers from the general 

election account to the primary election account. 

The Commission has issued audit reports in the past in which publicly funded 

presidential campaigns misallocated the costs of goods of services between their primary and 

their general election committees, or their general election legal and accounting compliance fund 

(GELAC) committees. In those reports, the Commission recommended reimbursement by one 

committee to the other to bring the various committees within their expenditure limitations. See 

Final Audit Report on Dole for President, Inc., at 24 (approved June 3,1999); Final Audit 

* The date of the primaiy election in this case is identical to the date of ineligibility - both being May S, 2012 

- the date upon which the Candidate received the nomination for election to the office of President by his party 

during his party's nominating convention. See 52 II.S.C. § 30101(b); 11 C.F.R. § 100.2(e) (selection of nominee at 

convention with authority to nominate is an election). See atso 26 U.S.C. § 9032(7); 11 C.F.R. § 9032.7 (same). 
Memorandum to Patricia C. Orrock and Thomas E. Hintermister 

Gaiy Johnson 2012 Draft Final Audit Report 

LRA # 90S 

Paged 

Report on Kerry-Edwards 2004, Inc. and the Kerry-Edwards 2004 Inc. General Election Legal 

and Accounting Compliance Fund, at 14-22 (approved June 14,2007); Final Audit Report on 

Clinton/Gore '96 Primary Committee, at 10-16 (approved June 3,1999).^ See also 11 C.F.R. § 

9034.4(e) (providing bright-line rule for attributing expenditures of publicly-funded committees 

to the primary or the general election). However, the ability of conunittees in this position to 

undertake corrective action for a misallocation of expenditures does not cure the underlying 

impropriety of one committee's (or, in this case, one account's) payment of another committee's 

expenses. 

IV. HNDING 4 - REPORTING OF DEBTS AND OBUGATIONS 

Finding Four concludes that the Committee failed to continuously report debts totaling 

approximately $407,000 owed to six creditors. Of this amount, $300,000 represented a bonus 

owed to the Committee's principal campaign consultant, NSON, which, according to the terms 

of the contract between NSON and the Committee, was payable to NSON "for receiving any 

party nomination as either [Vice President] or [President]." See Addendum to NSON Service 

Agreement, signed Oct. 14,2011. The Audit Division concludes that the Committee's reporting 

obligation with respect to the bonus began on the date of the Candidate's nomination. May 4, 

2012. 

The Committee argues in its Initial Response, however, that it was not required to report 

the bonus owed to NSON as a debt until it received the invoice for the bonus, citing a provision 

of its contract with NSON specifying that payments would not- be due until receipt of Ae invoice. 

Initial Response, at 3. According to the PAR, the Committee did not receive an invoice for the 

bonus (actually for one-half of the bonus amount, or $150,000) until December 21,2012. 

In its Supplemental Response, the Committee states that it defers to the "Audit staffs 

recommendation that the Committee treat the bonus as a primary expenditure." Supp. Response, 

at 3. Based upon our understanding that the Committee has not actually made an expenditure to 

pay the bonus to NSON as of yet, this statement may indicate the Committee's acceptance of the 

Audit Division's position regarding when reporting of the debt should have begun. In the event 

that it does not, however, we agree with the Audit Division that the Committee was required to 

begin reporting the debt to NSON for the bonus on May 4,2012, and to report the debt 

continuously thereafter under 11 C.F.R. § 104.11(b). This regulation requires debts or 

obligations, "including a loan, written contract, written promise or written agreement to make an 

^ These recommendations were made in the content of findings that the committees in question exceeded 

their expenditure limitations. The Audit Division, however, is not recommending such corrective action in this case, 

because its calculations already assume that such correction would have taken place in the ordinary course of events. 

This corrective action would not have an impact on the Committee's repayment obligation because the Committee 

used general election funds to pay primary election expenses. 

* The PAR noted 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 noted that although the Committee reported 

disbursements to this entity as disbursements to Political Advisors, the entity billed the Committee as NSON. 
Memorandum to Patricia C. Orrock-and Thomas E. Hintermister 

Gaiy Johnson 2012 Draft Final Audit Report 

LRA » 90S 

Page? 

expenditure", if totaling over $500, to be reported "as of the date on which the debt or obligation 

is incurred." 11 C.F.R. § 104.11(b). 

Here, according to the terms of the contract, payment of the $300,000 bonus was 

conditioned upon the Candidate's receipt of nomination to the office of Vice President or 

President. This condition occurred on May 4,2012. Consequently, the Committee incurred an 

obligation to pay the bonus on that date, and, according to the terms of section 104.11(b), a 

concomitant obligation to begin reporting its debt in this amount to NSON. 

V. FINDING 5 - EXTENSION OF CREDIT BY A COMMERCIAL VENDOR 

Finding Five concludes that NSON made a prohibited corporate contribution to the 

Committee by extending credit to the Committee outside of its normal course of business and by 

not making commercially reasonable attempts to collect approximately $1.75 million dollars in 

debt owed by the Committee for services rendered. The PAR notes that NSON provided 

services to the Committee between April 2011 and December 2012, for which it billed the 

Committee approximately $2.2 million. As of March 2013, however, approximately $1.75 

million had been outstanding for over 120 days, and approximately $936,000 remains 

outstanding to date. 

We do not have comments on the substance of this finding. However, we do have two 

observations regarding the Committee's statement that NSON may agree to waive interest 

assessments it has recently applied to the Coirunittee, and perhaps the underlying principal 

indebtedness as well, in exchange for assets of the Committee. See Interim Response, at 3-4. 

First, as the DFAR notes. Commission regulations would not allow the Committee to settle its 

debt to NSON, or take any action on that settlement, without previous Commission review and 

approval of a debt settlement plan embodying the terms of the proposal. See 11 C.F.R. § 

116.7(a). Second, the Committee refisrs to specific assets that it may use to settle part of its debt 

to NSON. However, the DFAR notes that these assets were not previously discloUd. Further, 

the existence of these assets has not actually been verified. Assuming proper verification of the 

existence of these assets, the Committee would be required to disclose them in its Statement of 

Net Outstanding Campaign Obligations. 11 C.F.R. § 9034.5(a), (c). Thus, that statement vnW 

require amendment in light of any previously undisclosed assets. See 11 C.F.R. § 

9034.5(a)(2)(ii) (statement of net outstandiiig obligations includes "[t]he fair market value of 

capital assets and other assets on hand.")