FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

March 8,2012 

MEMORANDUM 

To: 

Through: 

From: 

By: 

Subject: 

The Commission 

Alec Palmer 

Staff Director 

Patricia Carmona 

Chief Compliance Officer 

Tom Hintermister—^*^ 

Assistant Staff Director 

Audit Division 

Alex BoniewiczJjn 

Audit Manager ^ 

Paula Nurthen 

Lead Auditor 

Audit Division Recommendation Memorandum on The Legacy Committee 

Political Action Committee (A09-22) 

Pursuant to Commission Directive No. 70 (FEC Directive on Processing Audit Reports), 

the Audit staffs recommendations are presented below and the findings are discussed in the 

attached Draft Final Audit Report. The Office of General Counsel has reviewed this 

memorandum and concurs with the recommendations. 

Finding 1. Misstatement of Financial Activity 

The Audit staff recommends that the Commission find that The Legacy Committee 

Political Action Committee misstated receipts and disbursements for calendar year 

2008. 

Finding 2. Failure to File Notices and Properly Disclose Independent 

Expenditures 

The Audit staff maintains that The Legacy Committee Political Action Committee 

did not timely file 24/48 hour notices of $374,327 and did not file 24-hour notices 

for $17,491 and did not properly disclose independent expenditures totaling 

$294,570 prior to payment as-"memo" entries. The Audit staff recommends that 

the Commission find that The Legacy Committee Poiiticai Action Committee failed 

to file notices and properly disclose independent expenditures. 
The Cpmmittee did not request an audit hearing. The Committee's response to the Draft 

Final Audit Report (DFAR) did not provide any additional comments with respect to the 

issues presented in the two findings. However, the Committee's response did emphasize 

that the current cash balance is sufficiently less than the ending cash balance on December 

31,2008 as indicated on page two of the DFAR. 

If this memorandum is approved, a Proposed Final Audit Report will be prepared within 

30 days of the Commission's vote. 

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

Recommendation Memorandum will be placed on the next regularly scheduled open 

session agenda. 

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

Should you have any questions, please contaci Paula Nurthen or Alex Boniewicz at 694-

1200. 

Attachment: 

- Draft Final Audit Report on The Legacy Committee Political Action Committee 

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

Audit Division on The Legacy 

Committee Political Action 

Committee 

January 1, 2007 - December 31, 2008 

Why the Audit 

Was Done 

Federal law permits the 

Commission to conduct 

audits and field 

investigations ofany 

political committee that is 

required to file reports 

under the Federal 

Election Campaign Act 

(the Act). The 

Commission generally 

conducts such audits 

when a committee.. 

appears not to haVe met 

the threshold 

requirements for 

substantial;C0mpliance 

witlvjth^'jSct!' "fie audit 

deterftiines whether itbi$. 

commiiti^e complied wili|l. 

the limi1;iiilQ.ns, 

prohibitioh$;^^..d 

disclosure reqtii^ments 

ofthe Act. 

Future Action 

The Commission may 

initiate an enforcement 

action, at a later time, 

with respect to any of the 

matters discussed in this 

report. 

About the Committee (p. 2) 

The Legacy Committee Political Action Commiltee is a 

nonconnected, multi-candidate committee headquartered in 

Laguna Niguel, California. For more information, see the chart 

on Committee Organization, p. 2.:' 

Financial Activity (p. 2) 

• Receipts 

•'.: p... Contri buti bns-:fi*>m Ind i vi dual s 

' rQ^-^vIxians Received/; 

DrsBursemeriits' 

o Iridependetif Expenditures 

o Operating'Expenditures 

o Contiibutions to Federal Candidate 

. . Comniiittees and Other Political 

Committees 

o AltiQ Disbursements 

Total bisbiirscments 

$ 1.544,747 

5,000 

S 1,549,747 

$ 1,162,464 

217,889 

47,250 

36,992 

S 1,464,595 

Fih%ngs and Recommendations (p. 3) 

• Misstatement of Financial Activity (Finding 1) 

•• . Failure to File Notices and Properly.Disclose Independent 

Expenditures (Finding 2) 

2 U.S.C. §438(b). 
Draft Final Audit Report of the 

Audit Division on The Legacy 

Committee Political Action 

Committee 

January 1, 2007 - D^tlember 31, 2008 
Table of Contents 

Part I. Background 

Authority for Audit 

Scope of Audit 

Page 

Part II. Overview of Committee 

Committee Organization 2 

Overview o f Financial Activity 2 

Part III. Summaries 

Findings and Recommendations 3 

Part IV. Findings and Recomm:e.ndatif)Lns 

Finding I. Misstatement of Financial Activityr>...;.i^^^^^^^^^ 4 

Finding 2. Failure to File Notices.and Properly tJisciose Independent 

Expenditures 5 
Part I 

Background 

Authority for Audit 

This report is based on an audit of The Legacy Committee Political Action Committee 

(LCP) undertaken by the Audit Division ofthe Federal Election Commission (the 

Commission) in accordance with the Federal Election Campaign Act of 1971, as 

amended (the Act). The Audit Division conducted the audit pursuant to 2 U.S.C. 

§438(b), which permits the Commission to conduct audits and field investigations ofany 

political committee that is required to file a report under 2.U:S.C. §434. Prior to 

conducting any audit under this subsection, the Commission must perform an internal 

review of reports filed by selected committees to deterrhine if the reports filed by a 

particular commiltee meet the threshold requirements for substantia! compliance with the 

Act. 2 U.S.C. §438(b). 

Scope of Audit 

Following Commission-approved procedures, the Audit staff evaluated various risk 

factors and, as a result, this audit examined: 

1. the consistency between reported figures and bank records; 

2. the disclosure of individual contribufprs' occupation/name of employer; 

3. the disclosure of independent expenditures; and 

4. other committee operations necessary to the review. 
Part II 

Overview of Committee 

Committee Organifzation 

Important Dates 

• Date of Registration September 19,2006 

• Audit Coverage January 1, 2007 - December 31, 2008 

Headquarters Laguna Niguel, California 

Bank Information 

• Bank Depositories One 

• Bank Accounts Two Checking Accounts 

Treasurer 

• Treasurer When Audit Was Conducted James V. Lacy 

• Treasurer During Period Covered by. Audit James V. Lacy 

Management Information 

• Attended Commission Campaign Finance Seminar Yes 

• Who Handled Accounting and Recordkeeping Tasks Paid Staff 

Overview of Financial Activity 

(Audited Amounts) 

Ca.shrion-hand ^ January 1,20.07 S 0 

Receii^ 

o ContribiUtions from individuals .. 1.544.747 

o Loans F^igGeived 5.000 

Total ReceiptSsi^: . S 1,549,747 

Disbursements 

o Independent Ekpenditur);s 1,162.464^ 

o Operating Expenditures 217,889 

o Contributions to Federal Candidate 

Committees and Other Political Committees 47.250 

o All Other Disbursements 36,992 

Total Disbursements S 1,464,595 

Cash-on-hand @ December 31,2008 $ 85,152 

' This amount, as well as the amount for operating expenditures, may change as a result ofthe finding on 

page S. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

During audit fieldwork, a comparison of LCP's reported financial activity with its bank 

records revealed that, for 2008, LCP understated its reported receipts and disbursements 

by $32,411 and $25,529, respectively. In response to the Interim Audit Report, LCP 

amended its reports to materially correct the misstatements. (For more detail, see p. 4) 

Finding 2. Failure to File Notices and Properly Disclose 

Independent Expenditures 

LCP disclosed independent expenditures totaling $1,159,647 on Schedule E (Itemized 

Independent Expenditures). During audit fieldwork, the Audit staff noted that only 

$412,891 of these expenditures appeared to meet the definition of independent 

expenditures and contained language expressly advocating the election or defeat of a 

clearly identified candidate. Of these independent expenditures ($412,891): 

• LCP did not timely file 24/4.8-hour notices for $374,327 and did not file any 24-

hour notices for $ 17,491; and 

• LCP did not properly disclose Iridependent expenditui'es totaling $294,370 made 

(i.e., publicly disseminated) prior to payment as "memo" entries on Schedule E 

and as a importable debtm Schedule D (Debts and Obligations). 

In response.to the Interim Audit Report, LCP provided information supporting its 

positiqn;:i}i8t=tbiE|:purpose of ite^^^^ fundraising and did not require 

report'ihg as independent expeii.ditures. Regarding the Audit staffs recommendation that 

theyiujbmit and implement revised.procedures for reporting independent expenditures, 

LCP iiiiicated that they f ian to terrnjnate after the audit is completed. (For more detail, 

see p. 5) '=0;'-., 'v.-; 
Part IV 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

Summary 

During audit fieldwork, a comparison of LCP's reported financial activity with its bank 

records revealed that, for 2008. LCP understated its reported receipts and disbursements 

by $32,411 and $25,529, respectively. In response to the Interim Audit Report, LCP 

amended its reports to materially correct the missialemenls. 

Legal Standard 

Contents of Reports. Each report must disclose: 

• The amount of cash-on-hand at the beginning and end of the reporting period; 

• The total amount of receipts for the reporting period and for the calendar year; 

• The total amount of disbursements for the reporting period and for the calendar year; 

and 

• Certain transactions that require itemization on Schedule A (Itemized Receipts) or 

Schedule B (Itemized Disbursements). 2 U.S.C. §434(b)(l), (2), (3), (4) and (5). 

Facts and Analysis 

A. Facts 

During audit fieldwork, the Audit staff reconciled reported financial activity with bank 

records for calendar years 2007 and 2008. A misstatement of receipts and disbursements 

was identified for 2008. The following chart outlines the discrepancies. 

2008 Activity 

Reported Bank Records Discrepancy 

Openirtg/iCash Balance v 

January 1-. 2.008 

$19,508 $19,365 $143 

Overstated 

Receipts $1,066,076 $1,098,487 $32,411 

Understated 

Disbursements $1,007,171 $1,032,700 $25,529 

Understated 

Ending Cash Balance 

^December 31.2008 

$78,413 $85,152 $6,739 

Understated 

The understatement of receipts resulted from unidentified differences that occurred 

primarily in the second half of the year. Based on a limited review of available records, it 

appeared that all contributor information received by the vendor that processed deposits 
of contributions may not have been forwarded to the vendor responsible for the data 

entry. 

The understatement of disbursements resulted from the following; 

• Refunds of contributions not reported $ 18,152 

• Bank and credit card fees not reported 4,560 

• Independent expenditures not reported 2.817 

Understatement of disbursements $ 25.529 

B. Interim Audit Report & Audit Division Recommendation 

At the exit conference, the Audit staff explained the misstatements and provided 

schedules to LCP's Treasurer and Assistant Treasurer. They agreed to amend their 

reports as necessary. 

The Audit staff recommended that LCP: 

• Amend its reports to correct the misstatements noted above; and 

• Amend its most recently filed report to correct the cash-on-hand balance with an 

explanation that the change resulted from a prior period audit adjustment. 

Further, LCP should have reconciled the cash balance of its most recent report to 

identify any subsequent discrepancies that may affect the adjustment 

recommended by the Audit staff. 

C. Committee Response, to Interim Audit Report 

In response to the Interim; Audit Report,.LCP filed amended reports for 2008 that 

materially corrected the misstatements. Iri addition, LCP pi^ovided supporting 

documentation that demonstratisd lhat ameridhi'ents to its most recently filed report were 

not necessary. 

Findin g 2. i^iO^il^re % File Notices and Properly Disclose 

Ind^;feiendent El^jgignditljLyes 

Summaifl^?;., 

LCP discloseSi^HdependentJkpenditures totaling $1,159,647 on Schedule E (Itemized 

Independent Expehd.iturcs)...:i5;uring audit fieldwork, the Audit staff noted that only 

$412,891 ofthese expisnditures appeared to meet the definition oflndependent 

expenditures and contaiiied language expressly advocating the election or defeat of a 

clearly identified candidate. Ofthese independent expenditures ($412,891): 

• LCP did not timely file 24/48-hour notices for $374,327 and did not file any 24-

hour notices for $17,491; and 

• LCP did not properly disclose independent expenditures totaling $294,570 made 

(i.e., publicly disseminated) prior to payment as "memo'* entries on Schedule E 

and as a reportable debt on Schedule D (Debts and Obligations). 

In response to the Interim Audit Report, LCP provided information supporting its 

position that the purpose of its direct-mail letters was fundraising and did not require 
reporting as independent expenditures. Regarding the Audit staffs recommendation that 

they submit and implement revised procedures for reporting independent expenditures, 

LCP indicated that they plan to terminate after the audit is completed. 

Legal Standard 

A. Definition of Independent Expenditures. The term "independent expenditure" 

means an expenditure by a person for a communication expressly advocating ihe election 

or defeat of a clearly identified candidate that is not made in coordination with any 

candidate or authorized committee or agent of a candidate. 11 CFR § 100.16. 

B. Disclosure Requirements - General Guidelines. An independent expenditure shall 

be reported on Schedule E if, when added to other independent expenditures made to the 

same payee during the same calendar year, it exceeds $200. Independent expenditures 

made (i.e., publicly disseminated) prior to payment should be disclosed as "memo" 

entries on Schedule E and as a reportable debt on Schedule D. Independent expenditures 

of $200 or less do not need to be itemized, though the commitlee must report the total of 

those expenditures on line (b) on Schedule E. 11 CFR §§l04.3(b)(3)(vii), 104.4(a) and 

104.11. 

C. Last-Minute Independent Expenditure Reports (24-Hour Notices). Any 

independent expenditures aggregating $1,000 or morCi with respect to any given election, 

and made after the 20"* day but moi-e thaii 24 hours before the day of an election must be 

reported and the report must be receivied by tKe.C^ommission within 24 hours after the 

expenditure is made, • A t4.*hour notice feequired-ieach t^^^ additional independent 

expenditures aggregate $1 jOdO.pr more. The date'that a cbmmunication is publicly 

disseminated serves as the datie that the committee must use to determine whether the 

total amount of independent expenditures has, in the aggregate, reached or exceeded the 

threshold reporting amount of $1,000. 11 CFR §§ 104.4(f) and 104.5(g)(2). 

D. Independent Expenditure Reports (48''Hour Notices). Any independent 

expenditure aggregating $10,000 or more with respect to any given election, at any time 

during a calendar year, ap:to and iiicluding the 20th day before an election, must be 

disclosed Within 48 hours each time th^ expenditures aggregate $ 10,000 or more. The 

notices must bd filed with tn^-<Commission within 48 hours after the expenditure is made. 

11 CFR §§l04:%and 104j|i)(l). 

Facts and Anaiyi^iS. . 

A. Facts 

Initially, LCP disclosed all expenditures as operating expenditures (Schedule B, Line 

21(b)). During 2008, LCP received notices from the Commission's Reports Analysis 

Division (RAD) questioning whether any ofthe expenditures, e.g., "Printing," were for 

public communications containing express advocacy. LCP's Treasurer acknowledged 

that some of the communications contained express advocacy but contended that the 

purpose ofthe communication was fundraising. RAD advised LCP that if the 

communication contained express advocacy, LCP should amend its reports to disclose the 
expenditures as independent expenditures. Subsequently, LCP filed the requested 

amended reports. 

LCP disclosed independent expenditures totaling $1,159,647 on Schedule E. During 

audit fieldwork, it was noted that most of these disbursements were for the printing and 

postage of direct mail solicitation letters and were disclosed as either in support of John 

McCain for President or in opposition to Hillary Clinton or Barack Obama for President. 

The Audit staff reviewed these expenditures to determine if they were properly reported 

on Schedule E and to determine if LCP filed the required 24/48-hour notices. The review 

noted that only $412,891 ofthese expenditures appeared to meet the definition of an 

independent expenditure and contained language expressly advocating the election or 

defeat of a clearly identified candidate. A review of the-dir^ct mail pieces and invoices 

for those expenditures ($412,891) revealed the following: • 

• LCP did not timely file 24/48-hour notices of its independent expenditures for 

$374,327. In addition, LCP did not filfe any 24-hour notices for $17,491 ofthese 

expenditures. 

• LCP reported the independent expenditures when the invoices were paid. 

However, most ofthese payments were weeks or months after the dissemination 

date ofthe printed material. For expenditures totaling $294,570, LCP should 

have disclosed independent expenditures as memo entries on Schedule E, filed 

with reports covering the dates When the materials were, disseminated, and 

included a corresporiding debt bii:Scheduler D;' • -

B. Interim Audit Rieport & Audit Divisidin^^kecommendation 

The Audit staff addressed these^fiiattcrs at tha exit conference and provided appropriate 

schedules to LCP representatives, thf Audit stiff indicated that, at this time, no 

amended reports were necessary to c6rr^ct:the. reporting ofthe independent expenditures 

or to address the 24/48irhpur ribtjces that weriB\not filed or not filed timely. LCP 

representatives stated that.they wo|Lld review these schedules. 

The Audit staff recommend^that LCS'^take the following action: 

• Provide any docum^^ry evidence that would demonstrate that these 

— disbursements were.|^| independent expenditures and therefore did not require 

24/48-hour nip!ti.ces;j^^ra3^ 

• Submit and imjiifeifii^nt revised procedures for reporting independent expenditures, 

as well as for tracking dissemination dates for such expenditures, in order to allow 

for timely filing of 24/48-hour reporting notices. 

C. Committee Response to Interim Audit Report 

In response to the Interim Audit Report, LCP offered background information for why 

they were created and the purpose of its direct-mail fundraising letters. LCP explained 

that it was formed in 2007 as a non-connected Political Action Committee (PAC) that 

was not supported by any sponsoring organization such as a labor union or corporation. 

There was no permanent staff, office or office equipment. It was formed with the 
intention of raising funds to allow it to participate in the 2008 General Election by 

making direct contributions lo candidates for Federal office. LCP indicated that the 

committee was the epitome of a "grass roots" attempt to participate in the 2008 Federal 

elections. 

LCP explained that its direct-mail advisors obtained lists of proven donors to Republican 

and conservative causes and tested various content appeals in the letters to these donors. 

The various tests included content with references to elected officials and Presidential 

candidates to clue the recipient audience that LCP was a conservative Republican PAC 

worthy of iheir support. LCP stated lhat the purpose ofthese mailings was not to 

intervene in any election. LCP indicated that the facts demonstrated that: the timing of all 

of its mailings had no reference to the timing of primary elections during 2008; the 

content of ihc letters, other than sometimes including some words considered "express 

advocacy" by the Commission, did not urge the recipient audience to vote for any 

particular candidate; and the audience was selected for its fundraising value, with no 

consideration for its electoral value. Thus the expenditures' content, timing and 

distribution, and audience served a fundraising purpose but not an electoral purpose. 

LCP stated that they disagreed that any of its direct-mail fundraising letters constituted 

independent expenditures. LCP noted that the Commission defines an independent 

expenditure at 11 CFR §100.16 as a conittiunication expressly advocating the election or 

defeat ofa clearly identified candidate. LCP acknowledged that some of its mailings did 

include words of express advocacy. However, LGP. thought ihat. if the Commission 

considered all of the facts,.;it should agree: that LCFs fuiidraisiiig letters were not 

independent expenditures and; that the speGial'it^Orting^'iai.i^$ applicable to independent 

expenditures (such as the 24/48-hour notices oi' tnemo entries) should not apply. LCP 

stated that they believe that direct-mail fundraising letters should be excluded from the 

definition of independent expenditures;, and that the intent of the regulation was not to 

include direct mail fundraising expendituc^s as independent expenditures. LCP urged the 

Commission to reform its reporting requirements for grass-roots organizations that 

engage in direct-mail fundraising since they believe that these letters are not independent 

expenditures. LCP indicated that they. have made the decision that the time requirements, 

coordination and record keeping are not worth the effort of continuing to participate and 

as such, plan to terminate the.committee after the audit is completed. 

The Audit staff does not dispute that LCP's intenlion was to raise funds via the directmail letters. However, LCP acknowledges and the Audit staff agrees that some ofthese 

letters included express advocacy language such as "Vote for John McCain". Since these 

expenditures meet the definition of an independent expenditure and the regulation does 

not exclude direct-mail fundraising letters from the definition, the Audit staff believes 

that the documentary evidence provided does not support LCP's assertion that none of 

these expenditures are independent expenditures.