16

The Audit staff disagreed with the General Committee’s 25% reduction for
engineering costs. The value of any asset includes not only parts and materials,
but labor and any expenditures necessary to place the asset in “a ready for use”
condition. It should be noted that when the General Committee purchased other
capital assets from the Primary Committee it did not reduce the cost of these
assets by 25% prior to applying the allowable depreciation. The purchase of these
assets should not be treated differently. With respect to the cost of labor involved
in reconfiguring the aircraft, the Audit staffs position is supported by the Federal
Accounting Standards Advisory Board’s Statement of Federal Financial
Accounting Standards No. 6 (Accounting for Property, Plant, and Equipment),
which is just one of many non-exclusive examples of this accounting principle
that can be found in many other sources. Within its discussion of Asset
Recognition, it states, all general property, plant and equipment (PP&E) shall be
recorded at cost. Cost shall include all costs incurred to bring the PP&E to a form
and location suitable for its intended use. For example, the cost of acquiring
PP&E may include, among others, amounts paid to vendors; labor and other direct
or indirect production costs (for assets produced or constructed); and, engineering,
architectural and other outside services for designs, plans, specification, and
surveys.

It was the Audit staff's position that the General Committee should have paid
$555,598 ($925,997 x 60%) to the Primary Committee for the reconfiguration of
the aircraft.

The General Committee objected to the Audit staff's reliance on the Federal
Accounting Standards Advisory Board’s Statement of Federal Financial
Accounting Standards No. 6 (Standard No. 6) as justification for including the
cost of labor and engineering to the cost of an asset. In response to the
preliminary audit report, the General Committee stated:

“As the audit approaches its third year, the Committee observes
that the Audit staff's decision after the completion of field work to
introduce the complexities of Federal Accounting Standards
Advisory Board’s Statement of Federal Financial Accounting
Standards No. 6 (Accounting for Property, Plant, and Equipment),
discussed below, has only prolonged this process — in furtherance
of no regulatory mandate or even any discernible policy goal. To
the contrary, if the Commission adopts this novel approach, it will
be opening a Pandora’s box of future regulatory uncertainty that
will inevitably yield a long line of matters that center on the proper
calculation of capital assets.”

The General Committee considered the Audit staff’s use of Standard No. 6 as
inappropriate because it did not explicitly apply to the General Committee or its

® Treatment of the reconfiguration as an asset by the General Committee was considered reasonable in this
situation and is consistent with the treatment of assets relative to the Boeing 727 aircraft.


37

Clinton/Gore Compliance Fund. The Commission concluded that the described loan and
its terms of repayment were permitted.

The Commission reasoned that the proposed loan would be made on the basis of
anticipated reimbursements from the Secret Service. The committee proposed using the
loan proceeds to pay non-deferrable qualified campaign expenses that, but for the
temporary hiatus in obtaining Secret Service reimbursements, would have been paid from
committee operating funds. In essence, the short term loan merely enabled the committee
to make payment of urgent obligations very promptly after the election and prior to
receiving payment of accounts receivable owed to the committee by the Secret Service.
Moreover, the loan did not convey to the committee additional funds to defray new
campaign expenses not already incurred before the loan proceeds are received.

The Commission emphasized that approval of the loan proposal was conditioned on its
use of the proceeds to defray only qualified campaign expenses and the campaign’s
compliance with the expenditure limit. In addition, the campaign was required to
immediately apply all receipts that result from the Secret Service reimbursements to
satisfy any outstanding loan balance owed by the committee.

he $966,262 loan was made (December 10, 2004), after the end of the expenditure report
period (December 2, 2004). It is obvious that at the time this loan was made, the General
Committee had exceeded the expenditure limitation. The limitation calculation, noted in
Finding 2, shows the General Committee approximately $1.4 million over the limit, as of
that date.

With respect to the Compliance Fund loan of $250,000 on December 14, 2004 it was not
repaid until March 30, 2005, even though the General Committee received $408,772 in
press reimbursements during the period December 15, 2004 through December 23, 2004

It is the opinion of the Audit staff that the facts addressed in the Advisory Opinion
support the conclusion that, under the circumstance, the two loans were not permissible.
The General Committee exceeded the expenditure limit and, did not repay the $250,000
until March 30, 2005, even though within two weeks of receiving the loan, it received in
excess of $400,000 in press reimbursements.

The Commission voted to receive this finding, without any determination on the merits of
the analysis, or the facts, or interpretation of the law contained therein.


33

and normal charge for such goods or services is a contribution. The term anything of
value includes all in-kind contributions. 11 §§CFR 100.52(d)(1) and 9002.13.

Facts and Analysis

The General Committee sold a database of e-mail addresses to Senate 08 for $2,000,000

on January 3, 2005. The database was made up of approximately 1,000,000 names along
with other information, including e-mail addresses and often postal addresses, as a result

of individuals “opting in” to the website www.johnkerry.com between July 30, 2004 and
November 2, 2004.

The General Committee provided an appraisal estimating the fair market value of the list
as $2,000,000. Valuation sources identified by the Audit staff indicated a lower fair
market value. The Audit staff also recommended that the list be valued in part on the
marginal cost of its development. The Commission agreed that a “cost of development”
approach was impractical and inappropriate and that the relevant cost was the fair market
value of the list.

The Commission discussed whether the General Committee received a contribution or
income from this sale. The Commission did not view the facts as presenting a case under
which an income analysis would be appropriate. Three Commissioners believed that the
General Committee should provide additional information to explain the different
valuations. Other Commissioners believed that no additional information was necessary.

Issue 3. Interest Earned

Summary

The General Committee’s media firm used funds transferred to it for media buys to make
loans to its parent company. Interest earned of $159,446 was calculated but never paid to
the General Committee. After a discussion of this issue, no repayment is required.

Legal Standard

Investment of Public Funds - Other Uses Resulting in Income. Investment of public
funds or any other use of public funds that results in income is permissible, provided that
an amount equal to all net income derived from such a‘use, less Federal, State and local
taxes paid on such income, shall be paid to the United States Treasury. 11 CFR §§9004.5
and 9007.2(b)(4).

Background

According to representatives of Riverfront and the General Committee, Riverfront is “a
separate, wholly-owned business unit of Greer, Margolis, Mitchell and Burns (GMMB).
Riverfront’s only clients were Senator John Kerry’s primary and general presidential
election campaigns and Kerry related general election ads paid for by the DNC.
Riverfront’s accounting functions, media buying and general operations, were performed
by employees of GMMB. GMMB is owned by Fleishman-Hillard International
Communications and according to the Fleishman-Hillard International Communications’


National Committee, and would now owe this amount to the U.S. Treasury. However, no such
repayment is duc for these advertisements because the actions of the campaign and the DNC in
sharing the costs were in full compliance with the law.

May 31, 2007

Dard Mas ba
David M. Mason “C- HAns A. von Spakovsky”
Vice Chairman Cortmissioner



repayment existed because the funds were actually used for campaign purposes and,
therefore, triggered the regulation involving receipt of income.

Preliminary Audit Report Recommendation

The Audit staff recommended that the General Committee provide evidence that
demonstrated either no interest or that a lesser amount of interest was earned on public
funds; and, what federal, state and local taxes were paid by the General Committee, if
any; or that the General committee did not benefit from the interest earned. Absent such
evidence, the Audit staff would recommend that the interest income of $41,277, less
applicable taxes paid by the General Committee is repayable to the United States
Treasury.

Committee Response to Recommendation and Audit Staff’s
Assessment

In response to the recommendation, the General Committee stated the sworn facts are that
the Committee was unaware of the interest being earned and that it was not taken into
account by either party during the negotiation of fees, or used for the Committee’s
benefit. The General Committee further stated that the Audit staff acknowledged that
they could not point to any particular invoice or expense paid for by the interest and even
if the General Committee somehow “received” the interest at issue — which it did not —
the information that Riverfront provided in response to this audit shows that the proper
interest calculation is $6,632, not $41,277.

The General Committee provided an affidavit from Mr. Brad Perseke, Partner and Media
Director of Riverfront. Mr. Perseke stated as is industry practice, all monies housed in
Riverfront Media’s bank account were subject to earning interest and being assessed bank
fees. He went on to relate that due to campaign and media timelines, the vast majority of
all monies received (net dollars for vendors) were immediately paid back out of media
outlets. Interest was earned primarily on Riverfront’s media commissions. Finally, Mr.
Perseke related the interest earned by Riverfront Media did not affect the financial terms
offered to the General Committee.

The Audit staff accepts that the General Committee had no knowledge that interest was
being earned. Further, it is fact that no interest payments were paid directly to the
General Committee by Riverfront. However, the Audit staff disagrees with the interest
calculation provided by Riverfront and that the interest was not used to offset General
Committee expenses. Riverfront’s calculation is based on the period between when
funds were received from the General Committee and DNC, and checks were issued to
various media outlets. The proper calculation, and the common practice among banking
entities, is the period between when funds were received and checks cleared the account.
Using this methodology and the exhibit provided by Riverfront, interest in the amount of
$61,607 was credited to the Omnicom Capital Inc. — Statement of Account.

Finally, it is interesting that the General Committee noted that the Audit staff could not
point to any particular invoice or expense paid by the interest. Later in its response the
General Committee notes:


20

and those used for the general election shall be attributed to the general election.
This provision is followed by a list of five types of expenses that are discussed
individually.!? Under the 11 CFR 9034.4(e)(7) that governs the transportation
food and lodging of individuals, there is an exception for travel in the primary
period that relates exclusively to preparations for the general election. Under
either section, these expenses were for the general election. Records relating to
the use of the aircraft do not reflect any usage of the aircraft after the
reconfiguration and before the beginning of the expenditure report period. All use
subsequent to the reconfiguration was in the expenditure report period. The
decals installed on the 757 identified Senator Edwards as Senator Kerry’s Vice-
Presidential running mate. They clearly referred to the general campaign, as the
Democratic Party’s Presidential and Vice-Presidential nominees, and not to
Senator Kerry’s primary campaign. It is the Audit staffs opinion that these decal
costs should be considered general election expenses.

In response to the preliminary audit report, the General Committee stated that the
bright-line rule of 11 CFR §9034.4(e) can not be expanded beyond its enumerated
exceptions, as the Audit staff seeks to do and that the Audit staff's creative
interpretation of section 9034.4(e)(7) is not appropriate in this context.

As previously stated, the decals were part of the reconfiguration of the Boeing
757 that occurred in the latter part of July 2004. The General Committee believes
that 11 CFR 9034.4(e) permits the cost of the decals to be paid by the Primary
Committee, apparently because the installation occurred in the primary period.
There has been no evidence or suggestion that the aircraft was used during the
primary period after the decals were installed.

The Commission determined that these decals could be treated as capital assets of the
Primary Committee and therefore could be transferred to the General Committee at cost
less 40% depreciation. As a result, the General Committee should have reimbursed the
Primary Committee $37,862 ($63,103 X 60%) for these decals.

e _Banked Flight Hours - The lease agreement was based on the aircraft being used
60 hours each month. If the aircraft was used more than the allotted hours,
additional charges were incurred. If the aircraft was not used for the allotted
hours, those hours could be banked and used in subsequent months. At the end of
the Primary Committee’s portion of the lease, it had banked 10.4 hours. These
hours were subsequently used by the General Committee. The General
Committee determined it owed the Primary Committee $203,060. However, the
General Committee did not use the correct hourly rate. The correct amount is
$205,067, an increase of $2,007. The General Committee has agreed with this
adjustment.

"2 These included polling, state and national campaign office expenses, campaign materials, campaign
communications, and travel costs


38

Part VI. Findings and Recommendations
— Compliance Fund

|Finding 1. Receipt of Impermissible Contributions

Summary

The Compliance Fund failed to provide evidence that 160 excessive contributions
received by the Primary Committee, totaling $177,556, were properly redesignated to the
Compliance Fund. In response to the recommendation, the Compliance Fund provided
copies of presumptive redesignation letters sent to the contributors whose excessive
contributions totaled $167,006. With respect to the remaining excessive contributors, the
Compliance Fund notes that it is unable to locate the contributors. Therefore, $10,550 is
payable to the U.S. Treasury.

Legal Standard

Authorized Committee Limits. An authorized committee may not receive more than a
total of $2,000 per election from any one person. 2 U.S.C. §441a(a)(1)(A), (2)(A) and
(f); 11 CFR §§110.1(a) and (b) and 110.9.

Permissible Contributions to the Compliance Fund. A major party candidate, or an
individual who is seeking the nomination of a major party, may accept contributions to a
legal and accounting compliance fund if such contributions are received and disbursed in
accordance with 11 CFR §9003.3.

Redesignation of Excessive Contributions. When an individual makes an excessive
contribution to a candidate’s primary election, the campaign may presumptively
redesignate the excessive portion to the GELAC if the contribution:

1. Is not designated in writing for a particular election; 11 CFR
§110.1(b)(5)(ii)(B)(2).

2. Would be excessive if treated as a primary election contribution; 11 CFR
§110.1(b)(5)(ii)(B)(3).

3. As redesignated, does not cause the contributor to exceed any other contribution
limit. 11 CFR §110.1(b)(5)(ii)(B)(4).

4. Excessive contributions made with respect to the primary election may be
redesignated and transferred by the candidate to the GELAC if the contribution
was not designated for a particular election, the contribution would exceed the
primary election contribution limit. 11 CFR §110.1(b)(5)(ii)(B)(5).

5. The committee is required to notify the contributor of the redesignation within 60
days of the treasurer’s receipt of the contribution, and must offer the contributor
the option to receive a refund instead. Further, a political committee must retain
written records concerning the redesignation in order for it to be effective. 11
CFR §110.1(b)(5)(ii)(B)(6).


Part I
Background

Authority for the Audits

This report is based on audits of Kerry-Edwards 2004, Inc. and Kerry-Edwards 2004 Inc.
General Election Legal and Accounting Compliance Fund undertaken by the Audit
Division of the Federal Election Commission (the Commission) as mandated by Section
9007(a) of Title 26 of the United States Code. That section states that in the case of
publicly financed campaigns, “after each presidential election, the Commission shall
conduct a thorough examination and audit of the qualified campaign expenses of the
candidates of each political party for President and Vice President.” Also, Section
9009(b) of Title 26 of the United States Code states, in part, that the Commission may
conduct other examinations and audits as it deems necessary.

Scope of the Audits

These audits examined:

The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The receipt of transfers from other authorized committees.
The disclosure of contributions and transfers received.

The disclosure of disbursements.

The disclosure of debts and obligations.

The recordkeeping process and completeness of records.
The consistency between reported figures and bank records.
The accuracy of the Statement of Net Outstanding Qualified Campaign Expenses
10. The campaigns compliance with spending limitations.

11. Other campaign operations necessary to the review.

CEN ARRYN =

Inventory of Campaign Records

The Audit staff routinely conducts an inventory of campaign records before it begins the
audit fieldwork. The committees’ records were materially complete and the fieldwork
began immediately.


31

Part V. Additional Issues

Issue 1. In-Kind Contributions - Democratic National
Committee Hybrid Ads

Facts and Analysis

The cost of one series of media ads that referred to either, Senator Kerry and a general
reference to Democrats, or President Bush and a general reference to Republicans was
allocated 50% to the General Committee and 50% to the DNC. Senator Kerry and
President Bush were the only candidates clearly identified in the ads. Since these ads
contained references such as the Democrats, Democrats in Congress, Republicans,
Republicans in Congress, right wing Republicans, etc., the General Committee termed
these ads as “hybrid ads.”

The Commission addressed whether a 50% allocation of the cost of these hybrid ads is
consistent with Commission precedent and existing regulations.

First, the Commission considered the extent to which, if any, 11 CFR §106.1(a) provides
guidance regarding the proper allocation for these hybrid ads. Section 106.1(a) of the
Commission’s regulations provides that expenditures made on behalf of more than one
clearly identified candidate should be attributed to each candidate according to the benefit
reasonably expected to be derived (determined by the proportion of space or time devoted
to each candidate as compared to the total space or time devoted to all candidates).

Second, the Commission considered the extent to which, if any, 11 CFR §106.8 provides
guidance regarding the proper allocation for these hybrid ads. Section 106.8 of the
Commission’s regulations provides that a flat 50% allocation is appropriate for the costs
of a phone bank conducted by a political committee that refers to one clearly identified
federal candidate and “generically refers to other candidates of the Federal candidate’s
party without clearly identifying them,” regardless of the space or time devoted to the
clearly identified Federal candidate.

Third, the Commission considered the extent to which, if any, the Commission’s advisory
opinion issued to Washington State Democratic Central Committee (AO 2006-11)
regarding mass mailings provides guidance regarding the proper allocation for these
hybrid ads. In AO 2006-11, the Commission noted that although there are no
Commission regulations specifically addressing cost allocation for “hybrid ads” (other
than for phone banks), “nonetheless an appropriate method for allocating the costs of”
such ads (involving mass mailing costs) is to “apply analogous ‘space or time’
principles” as set out in the Commission’s rules that address ads featuring more than one
clearly identified candidate. In advising the Washington State Democratic Central
Committee that a “space or time” analysis is relevant, the Commission explained that for
mass mailing “hybrid ads” where only one candidate is clearly identified, the ad “serves
in large measure the purpose of influencing the election of [that] clearly identified


assets. Further, the General Committee stated additional costs should have also
been included if Standard No. 6 was applied which would cause “widespread
complexity and uncertainty” to the capital asset valuation process. Finally, it was
the General Committee’s opinion that including labor and engineering costs in the
definition of capital assets would require new rulemaking under 11 CFR §
112.4(e), and ultimately revisions to 11 CFR § 9003.5(d) before they could be
applied. The General Committee stated by “explicitly adopting the 60% valuation
rule in 11 CFR §9004.9(d), the Commission moved away from the time-
consuming inquiries into the useful life of assets that could tie up Commission
resources for years. It further stated:

“In accordance with 11 C.F.R. § 9004.9(d)(1), the Committee
determined the purchase price of the property owned by the
primary committee that was subsequently transferred to the
Committee, and treated those assets with purchase prices above the
$2000 threshold set forth in 11 C.F.R. §§ 9003.5(d) and
9004.9(d)(1) as ‘capital assets.’ Because the definition of capital
asset refers to ‘property’ and gives common examples of property
that might be owned by a committee, the Committee did not
believe that labor or engineering costs associated with leased
equipment belonged in the category of property owned by the
primary committee. Indeed, neither the Commission’s regulations
and related Explanation and Justification, nor any Commission
precedent on the public record, define the ‘property’ which a
candidate committee owns as a ‘capital asset’ to include labor and
engineering.”

As previously stated, the Audit staff disagrees with the General Committee’s
valuation of the assets for the following reasons:
o While all assets were sold to the plane’s owner, the General
Committee did not include all assets in its valuation.
o The General Committee reduced the original cost of each asset by 25%
before applying the standard capital asset depreciation rate of 40%.
o The General Committee did not include the cost of labor that the
Primary Committee paid to have the assets assembled into a useful
aircraft configuration.

Reduction for Engineering Cost 25% - This reduction was applied only to the
assets used during the reconfiguration of the Boeing 757. However, the General

Committee did not apply this reduction to other assets it purchased from the
Primary Committee. The General Committee paid the Primary Committee
$256,282 for other capital assets. The original cost to the Primary Committee was
$427,137. This amount was supported by vendor invoices. The General
Committee paid the Primary Committee 60% of the original cost ($427,137 x
60% = $256,282). As can be seen, the original costs of these assets were not
reduced by 25% prior to applying the standard depreciation rate. In effect the


23

in full See Exhibit A. It is not based upon any statement of
Riverfront Media — they submitted a sworn affidavit saying that it
had been paid in full for its services. See Riverfront Affidavit, 10,
21-23. The Committee concedes that when the amount the
Committee paid to Riverfront Media [$45,911,385] is subtracted
from the Committee’s net media buys [$43,794,095] and media
buy and production commission fees ($2,164,713, see Riverfront
Affidavit, 21, there remains a $47,423 discrepancy.”

The preliminary audit report was anything but silent with respect to the basis for the
conclusion that the General Committee owed Riverfront in excess of $900,000. As
previously stated the chart contained in the preliminary audit report was based on records
provided by the General Committee and Riverfront.

The General Committees response discusses changes to various figures used in the
preliminary audit report calculation, the most significant being the amount of refunds
received by the General Committee, and provides a new calculation showing an
underpayment of $47,423. All of the individual components of the General Committee’s
calculation are accepted.

The difference between the amount calculated by the General Committee and the amount
calculated by the Audit staff continues to be the treatment on refunds received or due the
General Committee from Riverfront Media. Even though refunds received by the
General Committee, deposited in its checking accounts, and reported to the Commission
are netted against the cost of media purchased, the amount is not netted against the
amount the General Committee paid. Prior to the issuance of the preliminary audit
report, the matter of refunds was discussed with the General Committee and
representatives of Riverfront, including the author of the Riverfront affidavit. At that
time, representatives of Riverfront agreed that refunds received by Riverfront and
forwarded to the General Committee should be deducted from the amount of funds paid
by the General Committee and from the amount of the media purchased. The calculation
submitted in response to the preliminary audit report again excludes these refunds
without explanation or comment.


In the preliminary audit report, the Audit staff cited Standard No. 6. The
information contained within that standard, promulgated by the Federal
Accounting Standards Advisory Board (FASAB), is based upon GAAP. Any
accounting regulatory body, such as the FASAB, the Government Accounting
Standards Advisory Board (GASB), or the Financial Accounting Standards Board
(FASB) base their regulatory guidance on GAAP.

The General Committee believes calculating the amount of costs associated with
the purchase of plant, property or equipment is a daunting task. In the matter at
hand, the information was detailed on invoices in possession of the General
Committee. Rather, the more daunting task would be requiring a committee to
dissect a vendor’s invoice. A committee is not required to determine how much
of the cost is associated with engineering or how much of the cost is associated
with labor.

It remains the Audit staff's position that the General Committee should have paid
$555,598 ($925,997 x 60%) to the Primary Committee for the reconfiguration
assets it purchased.

Leased Equipment - Included in the original reconfiguration costs paid by the
Primary Committee was the cost of leased equipment. The equipment was leased
for 8 months. Since four months of the lease period extended into the general
election period, lease payments totaling $152,680 should have been paid by the
General Committee. General Committee representatives agreed to reimburse the
Primary Committee but provided an e-mail from the vendor that reflected the
leasing cost had since been recalculated and should have been less than the
Primary Committee paid. Based upon this e-mail, the General Committee only
agreed to reimburse the Primary Committee $60,680, but did not provide any
additional information that would explain the difference.

In response to the preliminary audit report, the General Committee has indicated
that the difference between the amount determined by the Audit staff ($152,680)
and the amount calculated by the General Committee ($60,680) represent the cost
of labor and engineering. Again the General Committee objects to including
these costs.

For the reasons discussed above, it remains the opinion of the Audit staff that the
cost of labor and engineering should be included in the value of this asset.

Exterior Decals - In the latter part of July 2004, the Primary Committee paid
$63,103 in costs for exterior decal work. These decals identified the aircraft as
that of the Kerry/Edwards campaign. The General Committee representatives
stated that the “bright line” test found in 11 CFR §9034.4(e) permits these costs to
be paid by the Primary Committee. The Audit staff disagrees. As noted above,
the general rule at 11 CFR §9034.4(e) states that expenditures for goods and
services that are used for the primary campaign shall be allocated to the primary


32

candidate” and therefore the Commission set a floor, that is, a minimum, of 50 percent
that must be attributed to the clearly identified candidate, “no matter how much of the
space in the mailing is devoted to that candidate.” AO 2006-11 did not, however, involve
a presidential candidate; additionally, AO 2006-11 was issued after the 2004 election.

Fourth, the Commission considered the application of 11 CFR §109.21 and AO 2004-01,
issued to Bush-Cheney ‘04, Inc. and Alice Forgy-Kerr for Congress, which provided
guidance on attribution of coordinated communications between two authorized
committees.

There were not the minimum four affirmative votes among the Commissioners required
to make a finding as to whether or not the 50% allocation complied with the Act and
Commission regulations. Some Commissioners considered the 50% allocation to be in
accord with past precedent and relevant FEC regulations, so there was no adjustment
required against the expenditure limitation applicable to the General Committee. Some
Commissioners were of the opinion that the Act and the Commission regulations
regarding hybrid ads require the General Committee to pay more than 50%, in which
event any adjustment above 50% would apply against the expenditure limits applicable to
the General Committee and a finding by the Audit staff of increased expenditures over
allowable limits.

|Issue 2. Sale of an E-mail Address List

Summary

The General Committee sold a database of e-mail addresses to Friends of John Kerry,
Inc. (Senate 08), Senator Kerry’s authorized committee for his 2008 Senate re-election
campaign for $2,000,000 on January 3, 2005. The database was made up of
approximately 1,000,000 names along with other information, including e-mail addresses
and often postal addresses, as a result of individuals “opting in” to the campaign website.
The Commission discussed whether the General Committee received a contribution or
income from this sale. After considering the available information, the Commission
could not reach consensus on this issue.

Legal Standard

Investment of Public Funds; Other Uses Resulting in Income. Investment of public
funds or any other use of public funds that results in income is permissible, provided that
an amount equal to all net income derived from such a use, less Federal, State and local
taxes paid on such income, shall be paid to the Secretary. 11 CFR §§9004.5 and
9007.2(b)(4).

Contribution Defined. A gift, subscription, loan (except when made in accordance with
11 CFR §§100.72 and 100.73), advance, or deposit of money or anything of value made
by any person for the purpose of influencing any election for Federal office is a
contribution. Unless specifically excepted under 11 CFR part 100, subpart C, the
provision of any goods or services without charge or at a charge that is less than the usual


General Committee further states that it received additional information about these
figures from the Audit staff on December 22, 2006, the deadline for the response and that
it did not have a chance to incorporate that information into the response.

During the course of the audit, the General Committee was provided the Audit staff's
calculation of the amount paid for transportation for the United States Secret Service
($2,285,385). At that time, the General Committee believed the amount charged was
$2,287,093, a difference of $1,708. The General Committee was asked to provide
documentation to support its calculation; it did not. The General Committee has also not
provided any documentation in response to support their current calculation.

At the General Committee’s request, a meeting was scheduled in November 2006 in
order to discuss the open matters addressed in the preliminary audit report. The General
Committee did not question this matter at that meeting. Further, it was not until
December 19, 2006, that the General Committee requested documentation supporting the
Audit staffs calculation.

Since, the General Committee has not provided documentation in support of either of its
calculations, no adjustment is warranted.

Explanation of Other Audit Adjustments

Due to the Primary Committee — In the preliminary audit report, the Audit staff
determined that the Primary Committee paid $1,310,394 to vendors for general election
expenditures. Of this amount, $1,277,186 related to the reconfiguration and other costs
for both Senators Kerry and Edwards’ aircraft. The remaining $33,208 related to media
production costs for ads that aired in the general election period ($5,395) and additional
costs‘ reimbursed by the General Committee ($27,813).

Reconfiguration and Lease Costs

Boeing 757
The Primary Committee leased a Boeing 757 for Senator Kerry for the period April 2,

2004 through November 2, 2004, a period of 7 months. The aircraft interior was |
reconfigured to accommodate the campaign’s needs and the exterior was marked to
identify it as the campaign’s aircraft.

e Sale of Reconfiguration Assets - The Primary Committee paid $925,997 to
reconfigure this aircraft to suit its needs. The cost of the reconfiguration includes
$679,237 for material and equipment with the remainder being the labor
necessary to assemble that material and equipment into a useful aircraft
configuration. The lease agreement required the General Committee to restore the
aircraft to its original configuration. A subsequent agreement between the
General Committee and the plane’s owner stated that in lieu of paying this cost,

* Represents additional capital assets purchased by the General Committee (from the Primary Committee)
and chargeable to the limitation.


the General Committee. After a discussion of this issue, no repayment was required.
(For more detail, see p. 33)

Issue 4. Non-Qualified Campaign Expense - Candidate
Biographical Film

The cost of a biographical film ($207,000), produced for use at the Democratic National
Convention, was split between the Democratic National Campaign Committee (DNCC),
the DNC and the General Committee. The Commission considered whether the
allocation percentages used by the three committees were reasonable. After considering
the available information the Commission concluded that the cost of the film had been
reasonably allocated. (For more detail, see p. 34)

Issue 5. Receipt of Impermissible Contribution/Loans

The Audit staff concluded that the General Committee received a contribution from the
Primary Committee ($555,598) and received two loans from the Compliance Fund
($1,216,262) that were not permissible. The contribution from the Primary Committee
resulted from primary assets being made available for use by the General Committee
without prompt or full payment. The loans from the Compliance Fund were relative to
press ($250,000) and United States Secret Service ($966,262) travel reimbursements.

The Commission voted to receive this finding, without any determination on the merits of
the analysis, or the facts, or interpretation of the law contained therein. (For more detail,
see p. 35)

Findings and Recommendations -
Compliance Fund

Finding 1. Receipt of Impermissible Contributions

The Compliance Fund failed to provide evidence that 160 excessive contributions
received by the Primary Committee, totaling $177,556, were properly redesignated to the
Compliance Fund. In response to the recommendation, the Compliance Fund provided
copies of presumptive redesignation letters sent to the contributors whose excessive
contributions totaled $167,006. With respect to the remaining excessive contributors, the
Compliance Fund notes that it is unable to locate the contributors. Therefore, $10,550 is
payable to the U.S. Treasury. (For more detail, see p. 38)

Finding 2. Stale-dated Checks - Compliance Fund

The Audit staff identified 14 stale-dated checks totaling $14,800. In response to the
preliminary audit report, the Compliance Fund provided additional information for some
of the checks and made a payment to the U.S. Treasury in the amount of $13,800. These
actions materially complied with the recommendation. (For more detail, see p. 39)


29

Legal Standard

Continuous Reporting Required. A political committee must disclose the amount and
nature of outstanding debts and obligations until those debts are extinguished. 2 U.S.C.
§434(b)(8) and 11 CFR §§104.3(d) and 104.1 1(a).

Itemizing Debts and Obligations.

e A debt of $500 or less must be reported once it has been outstanding 60 days from
the date incurred (the date of the transaction); the committee reports it on the next
regularly scheduled report.

e — If the exact amount of a debt is not known, the report shall state that the amount
reported is an estimate. Once the exact amount is determined, the political
committee shall either amend the report(s) containing the estimate or indicate the
correct amount on the report for the reporting period in which such amount is
determined.

e A debt exceeding $500 must be disclosed in the report that covers the date on
which the debt was incurred. 11 CFR §104.11(b).

Facts and Analysis

The Audit staff identified material errors in the reporting of debts. The General
Committee failed to disclose or incorrectly disclosed the amount for 361 debts totaling
$1,590,248.

General Committee representatives indicated that accounts payable were not consistently
recorded in its accounting system. In a majority of cases, payables that were entered into
the accounting system had the check date entered as the invoice date. In other instances,
certain payables were never entered into the accounting system. These factors
contributed to the lack of disclosure.

This matter was discussed at the exit conference. General Committee representatives
were provided schedules and agreed to amend their reports.

Preliminary Audit Report Recommendation and Committee
Response : :

The Audit staff recommended that the General Committee file amended reports to
disclose the above debts on Schedule D (Debts and Obligations). In response to the
recommendation, the General Committee again agreed to file the amended reports and
disclose the debts. At the same time, it did not concede that it was necessary to do so for
all of the debts identified by the Audit staff. However, the General Committee did not
file the amended reports

On May 31, 2007, the Commission considered the final audit report. On May 30, 2007,
the General Committee filed the necessary amended disclosure reports that materially
complied with the Audit staff's recommendation.


26

Shown below is the Audit staff's revised analysis of expenditures subject to the
limitation:

1 Reported Expenditures Subject to Limitation at June 30, 2005 $74,788,665

Audit Adjustments to Reported Amounts:

2 Excess Compliance Fund Reimbursement for 19,656
Shared Overhead
3 Less: Unreimbursed Costs Incurred for Providing (632,551
Transportation to the U.S. Secret Service
4 Adjusted Reported Expenditures Subject to Limitation at 74,175,770
June 30, 2005
Audit Adjustments:
5 Add: Due to the Primary Committee 1,285,153
6 Due to Media Vendor 934,699
7 Accounts Payable as of June 30, 2005 53,512
8 Less: Refunds of Expenditures Subject to the
Limitation Received after June 30, 2005 (579,725)
Reimbursement from the Compliance Fund (6.585
9 Total Expenditures Incurred Chargeable to the Limitation at $75,862,824
September 30, 2005
10 Expenditure Limitation 74,620,000
11 Amount in Excess of Limitation $1,242,824
Recommendation

The Audit staff recommends that the Commission make a determination that the General
Committee exceeded the spending limitation by $1,201,547 ($1,242,824 - $41,277 [see
Finding 1. for the repayment of this amount]), and that an equal amount is repayable to
‘the United States Treasury:


Overview of Financial Activity
(Audited Amounts)

General Compliance

Committee Committee
Opening Cash on Hand $0 $0
Receipts
¢ Contributions $0 $ 8,571,621
e — General Funds 74,620,000 0
e Transfers from Other Authorized 0 2,372,066

Committees

¢ Offsets 10,676,685 483,857
e Loan Received 2,561,925 0
¢ Other Receipts 0 500,000
e Total Receipts $ 87,858,610 | $ 11,927,544
Disbursements
¢ Operating Expenses $ 86,541,761 | $ 3,465,611
e _ Loan Repayments Made 500,000 0
e Refunds to Contributors 0.00 280,707
e Other Disbursements 0.00 2,562,027
e Total Disbursements $ 87,041,761 $ 6,308,345
Closing Cash Balance @12/31/2004 $ 816,849 $ 5,619,199


Part II

Overview of Campaign
Campaign Organization

General Committee

Compliance Fund

Important Dates

¢ Date of Registration _| 07/30/2004 02/20/2003
¢ Audit Coverage Dates | 07/28/2004 thru 02/18/2003 thru
12/31/2004 12/31/2004

Headquarters

Washington, DC

Washington, DC

Bank Information

¢ Bank Depositories

1

1

¢ Bank Accounts

6 Checking Accounts

1 Checking Account

Treasurer

Robert Farmer
07/29/2004 — 07/21/2005
David Thorne
07/22/2005 - Present

Matthew Butler
02/20/2003 — 05/19/2004
Peter D. Nichols
05/20/2004 — 07/21/2005
David Thorne
07/22/2005 — Present



the plane’s owner would purchase the hard assets® (assets) used in the original
reconfiguration from the General Committee.

The General Committee received $60,000 from the sale of these assets.°
However, the assets were originally purchased by the Primary Committee. The
General Committee determined that the assets had a value of $260,798.
Therefore, the General Committee disclosed this amount as a debt owed to the
Primary Committee. On September 29, 2005, the General Committee paid the
Primary Committee $260,798.

The Audit staff disagreed with the General Committee’s valuation of the assets
for the following reasons:

o While all assets were sold to the plane’s owner, the General
Committee did not include all assets in its valuation.

o The General Committee reduced the original cost of each asset by
25%’ before applying the standard capital asset depreciation rate of
40%.

o The General Committee did not include the cost of labor that the
Primary Committee paid to have the assets assembled into a useful
aircraft configuration.

The original reconfiguration of the aircraft cost the Primary Committee, including
labor, $925,997. That is the cost of the asset that was sold to the General
Committee. Without the labor required to assemble materials and equipment into
a configured aircraft, the General Committee would have had to incur the cost to
assemble a collection of material and equipment into a usable asset. That was
done by the Primary Committee. The purpose of depreciation is to allocate a
portion of an asset’s costs over the estimated useful life of the asset ina
systematic and rational manner. Excluding a portion of the cost of an asset
defeats the purpose of the depreciation and fails to match the use of the asset with
the cost of the asset. The General Committee should have paid the Primary
Committee 60% of its cost or $555,598. Instead, the General Committee paid
$260,798, a difference of $294,800.

The General Committee representatives stated that there is no legal basis for the
auditors’ calculation of the purchase price beyond what was calculated by the
General Committee. The General Committee representatives do not believe the
25% engineering costs should be included in the asset, nor do they believe that the
cost of labor should be included.

> Hard asset is a term used in the lease agreement.

© In addition the General Committee was relieved of an obligation to have the Boeing 757 returned to its
original state, and to pay a $10,000 per day for each day the aircraft was not available to the owner.

7 General Committee representative stated that included in the purchase price of material and equipment
used in the configuration was a manufacturer’s built-in engineering cost of 25%.


adjustments. However, the General Committee’s spending still remains over the
limitation. Therefore, the Audit staff recommends that the Commission make a
determination that $1,201,547 ($1,242,824 - $41,277 [see Finding 1 for the repayment of
this amount]) is repayable to the United States Treasury. (For more detail, see p. 11)

Finding 3. Undocumented Media Disbursements

The General Committee did not maintain station affidavits for media buys totaling
$893,432. In response to the preliminary audit report, the General Committee provided
additional documentation that materially completed the media records. (For more detail,
see p. 27)

Finding 4. Failure to Disclose Outstanding Debts

The General Committee did not correctly disclose 361 debts totaling $1,590,248 on
Schedule D. The Commission considered the final audit report on May 31, 2007. On
May 30, 2007, the General Committee filed the necessary amended disclosure reports and
materially complied with the Audit staff's recommendation. (For more detail, see p. 28)

Finding 5. Stale-dated Checks ~ General Committee

The Audit staff identified 104 stale-dated checks totaling $50,334. The Audit staff
recommended that the General Committee provide evidence that the checks were not
outstanding or make a payment to the United States Treasury. The General Committee
contends that stale-dated checks equal $39,331 but has neither provided any support for
that figure or made a payment to the U.S. Treasury. (For more detail, see p. 30)

Additional Issues — General Committee

Issue 1. In-Kind Contributions - Democratic National
Committee Hybrid Ads

See page 31 for a discussion of this issue.

Issue 2. Sale of an E-mail Address List

The General Committee sold a database of e-mail addresses to Friends of John Kerry,
Inc. (Senate 08), Senator Kerry’s authorized committee for his 2008 Senate re-election
campaign for $2,000,000. The database was made up of approximately 1,000,000 names
along with other information, including e-mail addresses and often postal addresses, as a
result of individuals “opting in” to the campaign website. The Commission discussed
whether the General Committee received a contribution or income from this sale. After
considering the available information, the Commission could not reach consensus on this
issue. (For more detail, see p. 32)

Issue 3. Interest Earned
The General Committee’s media firm used funds transferred to it for media buys, to make
loans to its parent company. Interest earned of $159,446 was calculated but never paid to


21

Boeing 727

The General Committee leased a Boeing 727 for Senator Edward’s travel for the period
August 1, 2004, through November 2, 2004. In July 2004, the Primary Committee paid
$401,760 in reconfiguration costs for this aircraft. The General Committee has agreed to
reimburse the Primary Committee $149,206 for work performed after the convention, but
disagrees that the remaining cost ($252,553) should be paid by the General Committee.

The $252,553 represents part of the overall reconfiguration that occurred between July
11, 2004 and July 18, 2004 in Oklahoma City. It included $224,894 to have a telephone
system installed and $27,659 for exterior decal work. Since the reconfiguration of the
aircraft was an asset of the Primary Committee and transferred to the General Committee,
it is the opinion of the Audit staff that the asset should have been transferred to the
General Committee at 60% of the original cost, or $151,532 (252,553 X 60%). 11 CFR
9004.9(d)(1).

As a result, General Committee should have reimbursed the Primary Committee
$300,738 ($151,532 + $149,206) for the reconfiguration of this aircraft.

In response to the preliminary audit report, the General Committee stated it does not
agree that labor and engineering costs associated with installing leased phone equipment
on a leased airplane during the primary are attributable to the General Committee under
the Commission’s regulations. However, the General Committee appears to have agreed
that the General Committee should reimburse the Primary Committee $56,923 or 60% of
the cost of the phone system (absent labor and engineering cost). Further, the General
Committee disagrees with the treatment of exterior decals as a capital asset and believes
that the bright line test for primary and general expenses at 11 CFR §9034.4(e) applies.

As previously stated, the Primary Committee purchased (not leased) a phone system that
was part of the reconfiguration costs of the Boeing 727. The purchase price, including
installation was $224,894. The Primary Committee also paid $27,659 for decals,
including installation.

It should be noted that the General Committee has indicated that phone system was sold
to the Compliance Fund. Therefore, as discussed with respect to the reconfiguration of
the Boeing 757 above, and for the same reasons, the Audit staff applied 60% of the cost
of the phone system, including labor and engineering, and decals to the General
Committee.

Media Production Costs - The Primary Committee paid $5,395 in production costs for a
media ad that aired only in the general election period. The General Committee
representatives agreed the ad aired only in the general election period, and the production
cost should have been paid by the General Committee. The General Committee did not
address this matter in its response.

'S The final invoices for plane decals and installation were paid in September 2004.


FEDERAL ELECTION COMMISSION
Washington, DC 20463

June 26, 2007

MEMORANDUM
To: Robert W. Biersack
Press Officer
From: Joseph F. Stoltz
Assistant Staff irector
Audit Division
Subject: Public Issuance of the Report of the Audit Division on Kerry-Edwards

2004, Inc. and the Kerry-Edwards 2004 Inc. General Election Legal and
Accounting Compliance Fund

Attached please find a copy of the audit report which was approved by the
Commission on June 14, 2007. Also attached is a statement of Vice Chairman David M.
Mason and Commissioner Hans A. von Spakovsky concerning this report, dated May 31,
2007.

The report and statement may be released to the public on June 26, 2007.

Attachment as stated

ce: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
C Library
DSDD Website


Part IV
Findings and Recommendations -
General Committee

|Finding 1. Interest Earned

Summary

The General Committee’s media vendor, Riverfront Media SMLLC (Riverfront),
invested public funds on behalf of the General Committee and earned interest on these
investments totaling $41,277. It appears that the interest earned was used to pay for
media buys and/or to offset amounts owed to Riverfront. The Audit staff recommended
that the General Committee provide evidence to demonstrate that either no interest or a
lesser amount of interest was earned on public funds; and, what federal, state and local
taxes were paid by the General Committee, if any, or that the General Committee did not
benefit from the interest earned. In response to the recommendation, the General
Committee contends that it did not benefit from any interest earned. It is further stated
that if it is determined that interest was earned; the correct amount was $6,632, not
$41,277. The General Committee also provided an affidavit from Mr. Brad Perseke,
Partner and Media Director of Riverfront.

The General Committee did not demonstrate that the amount of interest calculated was
incorrect or that the interest was not used to pay for media buys and/or offset amounts
owed to Riverfront. Therefore, the Audit staff recommends that the Commission make a
determination that $41,277 is repayable to the United States Treasury.

Legal Standard

Investment of Public Funds - Other Uses Resulting in Income. Investment of public
funds or any other use of public funds that results in income is permissible, provided that
an amount equal to all net income derived from such a use, less Federal, State and local
taxes paid on such income, shall be paid to the United States Treasury. 11 CFR §§9004.5
and 9007.2(b)(4).

Facts and Analysis

During a review of media activity, the Audit staff requested that the General Committee
provide bank statements that supported media buy transactions performed by Riverfront.
Riverfront provided statements for three accounts. These accounts all identified
Riverfront as the account holder. The accounts were used to purchase media for both the
General Committee and the DNC.

One of these accounts had posted to its statements interest of $61,607. Since Riverfront
commingled General Committee funds with DNC funds it is not possible to determine the


Summary of Amounts Owed to the U.S.
Treasury

Finding 1. | Interest Income : 41,277

Finding 2. | Expenditure Limitation —_ 1,201,547
Finding 5. _| Stale-dated checks — General Committee 50,334
_ Total due United States Treasury — General Committee: $1,293,158
Finding 1. Receipt of Impermissible Contributions I 10,550
Finding 2. | Stale-dated checks - Compliance Fund 13,800
Total due United States Treasury — Compliance Fund: $24,350



40

of the checks and made a payment to the U.S. Treasury in the amount of $13,800. These
actions materially complied with the recommendation.

Legal Standard

Handling Stale-dated (Uncashed) Checks. If a committee has issued checks that the
payees (creditors or contributors) have not cashed, the committee must notify the
Commission of its efforts to locate the payees and encourage them to cash the
outstanding checks. The committee must also submit a check payable to the U. S.
Treasury for the total amount of the outstanding checks. 11 CFR §9007.6.

Facts and Analysis

The Audit staff identified 14 stale-dated checks totaling $14,800. The checks were dated
between June 20, 2004, and November 18, 2004, and had not cleared the bank as of
August 31, 2005.

The Audit staff provided the Compliance Fund representatives with a schedule of stale-
dated checks subsequent to the exit conference. The Compliance Fund representatives
agreed to repay the U.S. Treasury for any checks that had not been voided.

Preliminary Audit Report Recommendation and Committee
Response
The Audit staff recommended that the Compliance Fund provide evidence that:
e The checks are not outstanding by providing copies of the front and back of the
negotiated checks along with bank statements; or
e The checks have been voided by providing copies of the voided checks with
evidence that no obligation exists.
Absent such evidence, the Audit staff recommended that the Compliance Fund pay
$14,800 to the United States Treasury.

In response to the recommendation, the Compliance Fund provided evidence that it
disgorged $13,800 to the United States Treasury. The difference of $1,000 is a
combination of two factors, voided checks and an additional disgorgement of a check not
on the Audit staff schedule.

The Compliance Fund materially has complied with the recommendation.


28

With respect to Riverfront, station affidavits for media buys totaling $1,129,078 were not
available for review. The General Committee paid for 76% ($44,187,536 / $58,331,691)
of the net media buys. Therefore, the Audit staff applied that percentage to the total
dollar value of missing station affidavits. As a result, missing station affidavits for
General Committee media buys with respect to Riverfront totaled $858,099 ($1,129,078
x 76%).

With respect to CLG, the General Committee’s portion of the media buys was $455,092.
Media buys totaling $126,189 were not supported by station affidavits. The General
Committee allocable portion of this activity was 28% ($455,092/ $1,617,582). The
General Committee's ratio (28%) was applied to the total undocumented media buys
($126,189). Asa result, $35,333 in General Committee media buys was not supported by
station affidavits.

This matter was discussed at the exit conference. Subsequent to the exit conference, the
General Committee provided additional affidavits pertaining to media buys made by
CLG which were considered in the above analysis. No additional affidavits were
provided pertaining to the missing Riverfront affidavits.

Preliminary Audit Report Recommendation and Committee
Response

The Audit staff recommended that the General Committee provide station affidavits for
the Riverfront and CLG media buys. Absent such documentation, the Audit staff would
recommend that the Commission make a determination that $893,432 ($858,099 +
$35,333) was repayable to the United States Treasury.

In response to the recommendation, the General Committee provided additional affidavits
and evidence of vendor refunds due from media stations pertaining to Riverfront and
CLG media buys. Asa result, the General Committee has materially complied with the
Audit staff's recommendation.

|Finding 4. Failure to Disclose Outstanding Debts

Summary

The General Committee did not correctly disclose 361 debts totaling $1,590,248 on
Schedule D. The Commission considered the final audit report on May 31, 2007. On
May 30, 2007, the General Committee filed amended disclosure reports that materially
complied with the Audit staffs recommendation.


27

|Finding 3. Undocumented Media Disbursements

Summary

The General Committee did not maintain station affidavits for media buys totaling
$893,432. In response to the preliminary audit report, the General Committee provided
additional documentation that materially completed the media records.

Legal Standard
Qualified Campaign Expense. Each of the following expenses is a qualified campaign
expense.

« An expense that is:

« — Incurred to further a candidate’s campaign for election to the office of President
or Vice President of the United States;

e — Incurred within the expenditure report period or before the beginning of the
expenditure report period to the extent that property, services or facilities will be
used during that period; and

¢ Not incurred or paid in violation of any federal law or the law of the state where
the expense was incurred or paid. 11 CFR §9002.11(a).

Expenditure Report Period. The period begins on September 1 before the election or
on the date on which the major party’s presidential nominee is chosen, whichever is
earlier, and ends 30 days after the Presidential election. 11 CFR §9002.12(a).

Non Qualified Campaign Expense. Each candidate shall have the burden of proving
that disbursements made by the candidate or his authorized committee are qualified
campaign expenses. 11 CFR §9003.5(a).

Repayments. A candidate who has received public funds for a General Election
campaign must repay the United States Treasury those funds under any of the
circumstances described below:

¢ If the candidate or candidates authorized committee incurs expenses in excess of

the aggregate payments to which it was entitled, or

e If funds were used to pay for non-qualified campaign expenses
One example of the basis for a Commission repayment determination is a determination
that amounts spent by a candidate, the candidate’s authorized committee or agent were
not adequately documented. 11 CFR §9007.2(b)(1) and (2).

Preserving Records and Copies of Reports. The treasurer of a political committee
must preserve all records and copies of reports for 3 years after the report is filed.
2 U.S.C. §432(d).

Facts and Analysis

Media buys for the General Committee, including hybrid ads, were placed by both
Riverfront and Chambers Lopez & Gaitan LLC (CLG). Net media buys placed by
Riverfront and CLG totaled approximately $58,331,691 and $1,617,582 respectively.


Part III
Summaries

Findings and Recommendations - General
Committee

Finding 1. Interest Earned

The General Committee’s media vendor, Riverfront Media SMLLC (Riverfront),
invested public funds on behalf of the General Committee and earned interest on these
investments totaling $41,277. It appears that the interest earned was used to pay for
media buys and/or to offset amounts owed to Riverfront. The Audit staff recommended
that the General Committee provide evidence to demonstrate that either no interest or a
lesser amount of interest was earned on public funds; and, what federal, state and local
taxes were paid by the General Committee, if any, or that the General Committee did not
benefit from the interest earned. In response to the recommendation, the General
Committee contends that it did not benefit from any interest earned. It is further stated
that if it is determined that interest was earned; the correct amount was $6,632, not
$41,277. The General Committee also provided an affidavit from Mr. Brad Perseke,
Partner and Media Director of Riverfront.

The General Committee did not demonstrate that the amount of interest calculated was
incorrect or that the interest was not used to pay for media buys and/or offset amounts
owed to Riverfront. Therefore, the Audit staff recommends that the Commission make a
determination that $41,277 is repayable to the United States Treasury. (For more detail,
see p. 8)

Finding 2. Expenditure Limitation

The expenditure limitation for the 2004 general election for the office of the President of
the United States was $74,620,000. The Audit staff's review of financial activity through
September 30, 2005 indicated that the General Committee incurred expenditures totaling
$75,862,824 or $1,242,824? in excess of the limitation. In response to the preliminary
audit report, the General Committee addressed several issues concerning adjustments
made by the Audit staff. Where appropriate, the Audit staff has made the necessary

2 As discussed in Part V, below, some Commissioners are of the opinion that the 50% allocation of the
cost of hybrid ads between the DNC and the General Committee was not in compliance with the Act and
Commission regulations and that, therefore, the General Committee should have paid more than 50% of
these costs. Approval of this FAR does not reflect approval by those Commissioners of a S0%
allocation. The Audit Staff notes that, had the Commission taken action on the issues raised in Part V,
such action would have resulted in an adjustment of the expenditure limit calculations, and therefore, a
finding of increased expenditures over allowable limits. Some Commissioners considered the 50%
allocation to be in accord with past precedent and relevant Commission regulations, so there was no
adjustment required to the amount applied to the expenditure limits applicable to the General
Committee.


18

General Committee contends that if it purchased a finished aircraft seat to be used
in the reconfiguration, it should be able to reduce the purchase price of the seat by
25% to account for the manufacturer’s labor and engineering costs when
considering the value of that seat as a capital asset. There no Commission
Regulation or precedent? to support this novel calculation. As will be discussed
below, standard accounting practice leads to the opposite conclusion and adds the
cost of freight and installation when valuing the asset.

Reduction for Labor Cost — The General Committee excluded the cost of labor
associated with the reconfiguration it purchased ($246,760). It is the Audit staff's
opinion that the inclusion of labor (and engineering) in the cost of a capital asset
is not a new or unique legal theory, but rather, it is a generally accepted
accounting principle that has been applied for decades. Under GAAP, capitals
assets can be either tangible or intangible. Tangible capital assets include
property, plant and equipment. Intermediate accounting texts with copyright
dates as far back as 1986 (and more than likely earlier) include labor and
installation as the cost of a capital asset.

A more recent accounting text states:

[t]he cost of equipment includes the purchase price plus any sales
tax (less any discounts received from the seller), transportation
costs paid by the buyer to transport the asset to the location in
which it will be used, expenditures for installation, testing, legal
fees to establish title, and any other costs of bringing the asset to its
condition and location for use. To the extent that these costs can
be identified and measured, they should be included in the asset’s
initial valuation rather than expensed currently.°

Further, a reference book pertaining to the interpretation and application of GAAP
relates that costs that should be capitalized include any reasonable costs involved
in bringing the asset to the buyer and incurred prior to using the asset in actual
production, to include freight costs, installation costs, and setup costs. u

It is the Audit staff's opinion that the definition of a capital asset is well
established in accounting literature. GAAP advises profit and non-profit entities
to establish a specific threshold cost to identify when an asset will be capitalized.
The Commission established a threshold of $2,000. The determinations of the
costs that are associated with a capital asset are already well-defined.

° There is no Commission precedent on this matter because this is the first time any committee (primary
or general) reduced the cost of its assets in this manner prior to applying the standard depreciation rate.

10). David Spiceland, James F. Sepe, Lawrence A. Tomassini, Intermediate Accounting, 4th ed., vol. 1.
New York: The McGraw-Hill Companies, Inc., 2007, 455.

" Barry J. Epstein, Ralph Nach, Steven M. Bragg, Wiley GAAP 2006 Interpretation and Application of
Generally Accepted Accounting Principles. Hoboken, NJ: John Wiley & Sons, Inc., 2005, 340.



35

materials, it shall pay the convention committee for the reasonably allocated cost of the
films. 11 CFR §9008.7(a)(4)(xiii).

Qualified Campaign Expense. Each of the following expenses is a qualified campaign
expense.

e An expense that is:

e Incurred to further a candidate’s campaign for election to the office of President
or Vice President of the United States;

e Incurred within the expenditure report period or before the beginning of the
expenditure report period to the extent that property, services or facilities will be
used during that period; and

¢ Not incurred or paid in violation of any federal law or the law of the state where
the expense was incurred or paid. 11 CFR §9002.11(a).

Repayments. A candidate who has received public funds for a General Election
campaign must repay the United States Treasury those funds under any of the
circumstances described below:
e Ifthe candidate or candidates authorized committee incurs expenses in excess of
the aggregate payments to which it was entitled, or
e If funds were used to pay for non- qualified campaign expenses. 1] CFR
§9007.2(b)(1) and (2).

Facts and Analysis

The Audit staff reviewed the cost allocation of a biographical film, A Remarkable
Promise, about Senator John Kerry. The DNCC showed the film during the 2004
Democratic National Convention. The General Committee represented that they utilized
excerpts in ads. The cost of the film was allocated 29% to the DNC, 29% to the General
Committee and 42% to the DNCC.

The Commission considered whether the derivation of the allocation percentages was
reasonable. It concluded that the cost of the biographical film had been reasonably
allocated among the DNC, DNCC and the General Committee. As such, the payment by
the General Committee was not considered a non-qualified campaign expense.

Issue 5. Receipt of Impermissible Contribution/Loans

Summary

The Audit staff concluded that the General Committee received a contribution from the
Primary Committee ($555,598) and received two loans from the Compliance Fund
($1,216,262) that were not permissible. The contribution from the Primary Committee
resulted from primary assets being made available for use by the General Committee
without prompt or full payment. The loans from the Compliance Fund were relative to
press ($250,000) and United States Secret Service ($966,262) travel reimbursements.

The Commission voted to receive this finding, without any determination on the merits of
the analysis, or the facts, or interpretation of the law contained therein.


Legal Standard

Definition of a Contribution. The term contribution includes the payments, services or
other things of value. A gift, subscription, loan (except for a loan made in accordance
with 11 CFR §§100.72 and 100.73), advance, or deposit of money or anything of value
made by any person for the purpose of influencing any election for Federal office is a
contribution. 1] CFR §§100.51(a) and 100.52(a).

Definition of a Loan. A loan is a contribution at the time it is made and is a contribution
to the extent that it remains unpaid. The aggregate amount loaned to a candidate or
committee by a contributor, when added to other contributions from the individual to that
candidate or committee, shall not exceed the contributions limitations set forth at 11 CFR
part 110. A loan, to the extent it is repaid, is no longer a contribution. 11 CFR
§100.52(b)(2).

Definition of a Person. Person means an individual, partnership, committee, association,
corporation, labor organization, and any other organization, or group of persons, but does
not include the Federal government or an authority of the Federal government. 11 CFR
§100.10.

Facts and Analysis

Contribution From the Primary Committee — As previously stated the assets used in
the reconfiguration of the Candidate’s aircraft were sold by the General Committee to the
owner of the aircraft on November 5, 2004. The General Committee took possession of
the assets on July 30, 2004, the start of the general election expenditure report period. It
was not until September 29, 2005, that the General Committee paid the Primary
Committee $260,798 for these assets; 14 months after taking possession and
approximately 11 months after selling them. Further, the General Committee did not pay
the Primary Committee the fair market value for the assets. It should have paid
$555,598.

It is the opinion of the Audit staff that the Primary Committee made a contribution to the
General Committee for the period of time the assets were used and no payment was
made.

Loans From the Compliance Fund — On December 10, 2004, the Compliance Fund
loaned the General Committee $966,262. This loan was secured by outstanding
receivables due the General Committee from the United States Secret Service (Secret
Service). Further, on December 14, 2004, the Compliance Fund loaned the General
Committee an additional $250,000. This loan was secured by outstanding press
receivables due the General Committee.

Advisory Opinion 1992-38 addressed the issue of a compliance fund loan secured by
Secret Service receivables.'* The Clinton/Gore 92 Campaign Committee asked if it
could receive “a one time loan” of $1 million after the general election from the

'S The Advisory Opinion does not address compliance fund loans secured by outstanding press receivables.


24

Based on the General Committee’s response the chart below was revised to reflect the
new amount owed to Riverfront.

Line Description Audit Staff General
Calculation Committee
Calculation
1 Funds transferred to Riverfront Media $45,911,385 $45,911,385 a
2 | Less - Refunds Made to the General 887.276 0 b
Committee (Excluded by the General
Committee) |
3 | Funds Transferred to Riverfront Media Net 45,024,109 $45,911,385
of Refunds _ }
i |
4 __| General Committee Media Buys $44,681,371 $44,681,371 c |
__|
5 Less - Refunds Made to the General 727,333 | 887,276 d
Committee for buys that did not run.
6 | Less - Additional Refunds Due the General 159,943
Committee |
|
7 Media Buys Net of Refunds $43,794,095 $43,794,095 e
|
8 | Add ~ Commissions Earned by Media 2.164.713 2,164,713 f
Vendor
9 Cost of Media Buys to the General 45,958,808 45,958,808
Committee
| __|
10 | Amount Due from the General Committee $934,699 $47,423
| (Line 9 — Line 3)

a— Riverfront and the General Committee agree with this amount.

b - Riverfront issued and the General Committee reported receiving $727,333 in refunds.

Riverfront has indicated that additional refunds of $159,943 are due the General
Committee.
c ~ Riverfront affidavit provided this amount.
d — Riverfront affidavit provided this amount.
e— Based upon the Riverfront affidavit, the General Committee calculated this amount.
f- Riverfront affidavit provided this amount.

As the chart indicates the General Committee owes Riverfront $934,699. The basis for
this conclusion, similar to the basis for the conclusion in the preliminary audit report, is
documents provided by the General Committee and Riverfront. The General Committee


Table of Contents

Page
Part I. Background
Authority for the Audits 1
Scope of the Audits 1
Inventory of Campaign Records 1
Part II. Overview of Campaign
Campaign Organization 2
Overview of Financial Activity 3
Part III. Summaries
Findings and Recommendations 4
Additional Issues - General Committee 5
Findings and Recommendations — Compliance Fund 6
Summary of Amounts Owed to the United States Treasury 7
Part IV. Findings and Recommendations -— General
Committee
Finding 1. Interest Earned 8
Finding 2. Expenditure Limitation 1]
Finding 3. Undocumented Media Disbursements 27
Finding 4. Failure to Disclose Outstanding Debts 28
Finding 5. Stale-Dated Checks — General Committee 30

Part V. Additional Issues

Issue 1. In-Kind Contributions — Democratic National Committee Hybrid Ads 31

Issue 2. Sale of an E-mail Address List 32
Issue 3. Interest Earned 33
Issue 4. Non-Qualified Campaign Expense — Candidate Biographical Film 34
Issue 5. Receipts of Impermissible Contributions/Loans 35.

Part VI. Findings and Recommendations - Compliance
Fund

Finding 1. Receipt of Impermissible Contributions 38
Finding 2. Stale-Dated checks - Compliance Fund 39


FEDERAL ELECTION COMMISSION
Washington, D. C. 20463

OFFICE OF THE VICE CHAIRMAN

STATEMENT OF VICE CHAIRMAN DAVID M. MASON
AND
COMMISSIONER HANS A. von SPAKOVSKY
ON
FINAL AUDIT REPORT ON KERRY-EDWARDS 2004, INC.

The Commission voted today to approve, 5-0, a Final Audit Report on Kerry-Edwards
2004, Inc. and Kerry-Edwards 2004, Inc. General Election Legal and Accounting Compliance
Fund.' We write separately to address briefly the issue of “hybrid advertisements.” This issue
was raised in the Bush-Cheney ‘04, Inc. Final Audit Report, and addressed extensively in the
Commissioners” separate statements.” Kerry-Edwards 2004, Inc. aired materially
indistinguishable “hybrid advertisements,” sharing the costs equally with the Democratic
National Committee, shortly after Bush-Cheney °04, Inc. and the Republican National
Committee did so.

In a previous statement, we explained why the Bush-Cheney/RNC advertisements were
consistent with Commission regulations and precedent and in complete compliance with the
Federal Election Campaign Act (“FECA”). Three of our colleagues disagreed, believing that the
50% - 50% cost allocation was contrary to law.

For the same reasons expressed in our earlier statement, the Kerry-Edwards/DNC
advertisements were also consistent with Commission regulation and precedent. Had the
opposing view carried the day, the Kerry-Edwards 2004 campaign would today be deemed to
have improperly accepted over $11,000,000 in in-kind contributions from the Democratic

‘The Audit Division's report is available at http: www. fec.gow'agenda:2007-migdoc)7-37.pdf, The Commission
did not accept all recommendations made by the Audit Division. and made four revisions at the table.

> ‘The Bush/Cheney ‘04 Final Audit Report is available at:
hup: www. fec.gov-audits’2004/20070322bush_cheney_compliance_O4.pdf. The Statement of Vice Chairman
Mason and Commissioner von Spakovsky is available at:

hip: www gow/membets/von_Spakovsky/speeches’statemem20070322.pdf, The Statement of Chairman

Lenhard and Commissioners Walther and Weintraub is available at:
2ov members/lenhard‘speeches’statement20070321 pdf. An additional Staement of Commissioner

ailable at: bup: www.fec.gov- members: weintraub/audits’statement20070322.pdf.

hitp: www,
Weintraub i



11

“It is true that to create a perfect match between individual
Riverfront Media invoices and particular media buys would require
a massive, time-consuming and laborious undertaking to integrate
the Committee’s media buy spreadsheet and Riverfront Media’s
Campaign Master Spreadsheet ....”

On the Omnicom Capital Inc. - Statements of Account, the interest is credited as earned,
along with payments from the General Committee and the DNC. Likewise, charges for
media buys and commissions are posted as they occurred and a running balance
maintained. Interest payments are treated the same as any other amount credited to the
account.

Payments for media buys were made by checks issued from the JP Morgan Chase, Chase
Manhattan Bank USA (Chase) bank account. As these checks cleared this account on a
daily basis, an equal amount was debited against General Committee funds represented in
its Omnicom account to cover the checks. As a result, it is likely that the interest earned
at some point was used to pay for General Committee media buys. Further, the Audit
staff has determined that the General Committee owes Riverfront in excess of $900,000.
Even if the interest was not used to pay for media buys it remains part of the balance
posted to the Omnicom account; as such, these funds would be used to pay a portion of
the amount owed Riverfront.

The General Committee did not demonstrate that the amount of interest calculated was
incorrect or that the interest was not used to pay for media buys and/or offset amounts
owed to Riverfront. It remains the Audit staff's opinion that the General Committee’ s
share of the interest earned ($41,277) on public funds is repayable to the United States
Treasury.

Recommendation

The Audit staff recommends that the Commission make a determination that interest
earned on public funds ($41,277) is repayable to the United States Treasury.

|Finding 2. Expenditure Limitation

Summary

The expenditure limitation for the 2004 general election for the office of the President of
the United States was $74,620,000. The Audit staff's review of financial activity through
September 30, 2005 indicated that the General Committee incurred expenditures totaling
$75,862,824 or $1,242,824 excess of the limitation. In response to the preliminary audit
report, the General Committee addressed several issues concerning adjustments made by
the Audit staff. Where appropriate, the Audit staff has made the necessary adjustments.
However, the General Committee’s spending still remains over the limitation. Therefore,
the Audit staff recommends that the Commission make a determination that $1,201,547
($1,242,824 - $41,277 [see Finding 1 for the repayment of this amount]) is repayable to
the United States Treasury.


Generally Accepted Accounting Principles (GAAP)

Fixed Assets — Initial Acquisition Cost. Costs that are capitalized upon acquisition are
any reasonable cost involved in bringing the asset to the buyer and incurred prior to using
the asset. Examples include sales taxes, finders’ fees, freight costs, installation costs, and
setup costs. Barry J. Epstein, Ralph Nach, Steven M. Bragg, Wiley GAAP 2007
Interpretation and Application of Generally Accepted Accounting Principles. Hoboken,
NJ: John Wiley & Sons, Inc., 2006, p. 376.

Facts and Analysis

The General Committee received $74,620,000 to finance its election activity. In the
preliminary audit report, the Audit staff concluded that the General Committee exceeded
the limitation by $1,632,442. Each adjustment is discussed below; followed by the
General Committee’s response to the preliminary audit report and the Audit staff's
assessment of the response. A revised limitation calculation follows the discussion.

Explanation of Audit Adjustments to Reported Amounts
The General Committee reported expenditures subject to Limitation at June 30, 2005 of

$74,788,665.

Excess Compliance Fund Reimbursement for Shared Overhead — The Audit staff
increased the reported amount by $36,950. The General Committee agrees that the

reported amount should be increased by $19,656 (rent $18,956 and computer expenses of
$700) but disagrees with the remaining adjustment of $17,294. The General Committee
believes that the Commission’s Compliance Manual allows computer expenses
associated with the accounting office to be allocated 85% compliance and 15% operating.
The Compliance Manual states that a committee may allocate 85% of payroll, payroll
taxes, overhead, and other costs which relate to the operations of the accounting office
and 50% of computer expense as exempt compliance.

The Commission agreed that the General Committee could allocate computer expenses
associated with the accounting office on an 85% compliance and 15% operating basis.

Secret Service Travel - The General Committee charged to the expenditure limitation
payments it made for transportation for members of the United States Secret Service
($2,285,385). The General Committee also reduced the expenditure limitation for
reimbursements it received ($1,652,834). The unreimbursed amount as of June 30, 2005
was $632,551. This amount is exempt from the limitation. A portion of the amount was
subsequently reimbursed by the United States Secret Service. Any remaining amount
will be reimbursed by the Compliance Fund.

The General Committee stated that the unreimbursed amount as of June 30, 2005 was
$644,441, which would require an additional adjustment of $11,890. The General
Committee further stated that it provided comprehensive documentation for its United
States Secret Service reimbursement calculations during the course of the audit, and the
preliminary audit report presents no analysis or explanation to dispute those figures. The


About the Compliance Fund

Kerry-Edwards 2004 Inc. General Election Legal and Accounting Compliance Fund
(Compliance Fund) was established pursuant to 11 CFR. §9003.3(a)(1)(i). Contributions
to the Compliance Fund shall be used to defray the cost of legal and accounting services
provided solely to ensure compliance with the Federal Election Campaign Act (Act).
Contributions may also be used to defray other expenditures as defined at 11 CFR
§9003.3(a)(2)(i). The Compliance Fund is also headquartered in Washington, DC. For
more information, see chart on the Campaign Organization, p 2.

Financial Activity (p. 3)

Receipts
e Individual Contributions $ 8,571,621
e From Authorized Committees 2,372,066
e Offsets to Operating Expenditures 483,857
e Other Receipts 500,000
Total Receipts $11,927,544
Disbursements
e Operating Expenditures $ 3,465,611
e All Other Disbursements 2,842,734

Total Disbursements $ 6,308,345

Findings and Recommendations (p. 6)
e Receipt of Impermissible Contributions (Finding 1)
e Stale-Dated Checks — Compliance Fund (Finding 2)


34

website; it is part of Omnicom Group Inc., a leading global advertising. marketing and
corporate communications company.

Facts and Analysis

In addition to the interest earned discussed in Finding 1, the Commission considered
whether additional interest earned on public funds was repayable to the United States
Treasury.

According to GMMB representatives, intracompany transfers, or “demand loans” were
made by Riverfront to Fleishman-Hillard, Inc. (Fleishman-Hillard) to cover Fleishman-
Hillard operating expenses. During the period, October 1, 2004, to June 22, 2005, 11
loans were made to Fleishman-Hillard totaling $17,250,000. These loans were
outstanding between 9 and 250 days. Interest was calculated and recorded by GMMB
each month, but was not transferred back to a Riverfront Omnicom account. The total
calculated interest was $159,446. Unlike the interest discussed in Finding 1, this interest
was retained by the vendor. GMMB representatives stated if funds were needed for
media buys, an intracompany transfer was made immediately to return the funds to
Riverfront.

The Commission discussed whether the $159,446 in interest would be subject to
repayment pursuant to 11 CFR §9007.2(b)(4). See 11 CFR §9004.5. Some
Commissioners held the view that the standard for repayment should be whether the
General Committee actually received or benefited from the interest earned by having the
interest used to make media buys or offset commissions. They concluded that because
the General Committee did not receive or benefit from the interest earned, no finding or
repayment determination would be appropriate. Other Commissioners considered that
the purpose for repayment of interest or income was to ensure that any income received
through the use of public funds benefits the public financing system. They concluded
that repayment under these circumstances may be appropriate. As a result, no repayment
is required.

Issue 4. Non-Qualified Campaign Expense — Candidate
Biographical Film

Summary

The cost of a biographical film ($207,000), produced for use at the Democratic National
Convention, was split between the Democratic National Campaign Committee (DNCC),
the DNC and the General Committee. The Commission considered whether the
allocation percentages used by the three committees were reasonable. After considering
the available information the Commission concluded that the cost of the film had been
reasonably allocated.

Legal Standard

Cost of Biographical Films. The convention committee is permitted to produce
biographical films, or similar materials, of the candidate for nomination for use during
the convention. However, if any other committee uses part or all of the films or similar


22

Recap — Due to Primary Committee
Boeing 727
Reconfiguration Costs $300,738
Total Boeing 727 $300,738

Boeing 757
Lease Payments $152,680
Reconfiguration Costs 37,862
Banked Flight Hours 205,067
Sale of Reconfiguration Assets 555.598
Total Boeing 757 951.207

Total Aircraft Costs $1,251,945
Media Production and Other Costs 33,208
Total Due to Primary Committee $1,285,153

Due to Media Vendor — The General Committee transferred $45,911,385 to its media
vendor and, at the time of the preliminary audit report had received $462,619 in refunds.
Therefore, the media vendor could have disbursed $45,448,766 for media buys. As
previously stated, the DNC also transferred funds to the same media vendor; both
General Committee and DNC funds were deposited into the same account. A number of
meetings were held with both General Committee and media vendor representatives.
During those meetings, representatives of the media firm provided worksheets detailing
100% General Committee media buys, General Committee/DNC hybrid media buys, and
media buys paid for by the DNC pursuant to 2 U.S.C. §441a(d).

Using these worksheets, the Audit staff determined that the General Committee did not
pay the correct amount for its media buys. The preliminary audit report contained a chart
that indicated that the General Committee owed Riverfront $944,768.

In its response submitted subsequent to the exit conference, the General Committee stated
that every invoice received from the vendor was paid; therefore, they do not believe that
the General Committee owes the media vendor any additional funds. The Audit staff
agrees that the General Committee paid the invoices it received. The Audit staff
calculations were reviewed with representatives of the media vendor who could not point
to any error. The same vendor worksheets indicate that the DNC appears to have
overpaid its share of media buys and is due a refund.

In response to the preliminary audit report, the General Committee stated:

“The PAR is silent as to the basis for this opinion. It is clearly not
based upon the records of the Committee — which demonstrate that
Riverfront Media was paid in full. It is not based upon the written
contract between the parties, under which Riverfront has been paid


Report of the Audit Division on the
Kerry-Edwards 2004, Inc. and the
Kerry-Edwards 2004 Inc. General
Election Legal and Accounting
Compliance Fund

February 18, 2003 - December 31, 2004

Why the Audits

Were Done
Federal law requires the
Commission to audit
every political
committee established
by a Presidential
candidate who receives
general funds for the
general campaign.’ The
audits determine
whether the candidate
was entitled to all of the
general funds received,
whether the campaign
used the general funds in
accordance with the law
and whether the
campaign otherwise
complied with the
limitations, prohibitions,
and disclosure
requirements of the
election law.

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 Campaign

Kerry-Edwards 2004, Inc. (General Committee) is the principal
campaign committee for Senator John F. Kerry, the Democratic
Party’s nominee for the office of President of the United States.
The Committee is headquartered in Washington, DC. For more
information, see chart on the Campaign Organization, p 2.
Financial Activity (p. 3)

Receipts

e Federal Funds Received $ 74,620,000
e Offsets to Operating Expenditures 10,676,685
e Loans Received 2,561,925

Total Receipts $ 87,858,610

Disbursements

© Operating Expenditures $ 86,541,761
e« Loan Repayment 500,000

Tota) Disbursements $ 87,041,761

Findings and Recommendations (p. 4)
¢ — Interest Earned (Finding 1)
¢ Expenditure Limitation (Finding 2)
¢ Undocumented Media Disbursements (Finding 3)
¢ — Failure to Disclose Outstanding Debts (Finding 4)
¢ — Stale-Dated Checks — General Committee (Finding 5)

Additional Issues (p. 32)

e In-Kind Contributions — Democratic National Committee
Hybrid Ads (Issue 1)

e — Sale of an E-mail Address List (Issue 2)

e Interest Earned (Issue 3)

e¢ Non-Qualified Campaign Expense — Candidate
Biographical Film (Issue 4)

e Receipt of Impermissible Contribution/Loans (Issue 5)

"26 U.S.C. §9007(a)


30

Finding 5. Stale-dated Checks - General Committee

Summary

The Audit staff identified 104 stale-dated checks totaling $50,334. The Audit staff
recommended that the General Committee provide evidence that the checks were not
outstanding or make a payment to the United States Treasury. The General Committee
contends that stale-dated checks equal $39,331 but has neither provided any support for
that figure or made a payment to the U.S. Treasury.

Legal Standard

Handling Stale-dated (Uncashed) Checks. If a committee has issued checks that the
payees (creditors or contributors) have not cashed, the committee must notify the
Commission of its efforts to locate the payees and encourage them to cash the
outstanding checks. The committee must also submit a check payable to the U. S.
Treasury for the total amount of the outstanding checks. 11 CFR §9007.6.

Facts and Analysis

The Audit staff identified 104 stale-dated checks totaling $50,334. The checks were
issued between August 19, 2004. and February 9, 2005, and had not cleared the bank as
of September 30, 2005.

The Audit staff provided General Committee representatives with a schedule of the stale-
dated checks at the exit conference. Even though the General Committee was advised
not to reissue the stale-dated checks, it reissued 7 checks, totaling $7,521. As of the end
of fieldwork, the General Committee had not demonstrated that the reissued checks had
cleared the bank.

Preliminary Audit Report Recommendation and Committee
Response
The Audit staff recommended that the General Committee provide evidence that:
¢ The checks were not outstanding by providing copies of the front and back of the
negotiated checks along with bank statements; or
e The checks had been voided by providing copies of the voided checks with
evidence that no obligation exists.
Absent such evidence, the General Committee was to repay $50,334 to the United States
Treasury.

In response to the recommendation, the General Committee indicated its stale-dated
checks totaled only $39,331. However, the Genera] Committee has neither provided
documentation that it issued a check to the United States Treasury in the amount of
$39,331 nor provided documentation that demonstrated that the remaining stale-dated
checks ($11,003) had either cleared the bank or were voided because no obligation
existed.

Asa result, the General Committee has not complied with the recommendation.


39

Facts and Analysis

The Primary Committee transferred the excessive portions of contributions it received to
the Compliance Fund. The Audit staff reviewed supporting documentation relative to the
excessive contributions. As a result, the Audit staff identified 160 excessive
contributions, totaling $177,556, that were not supported by letters or other notices to the
contributors notifying them that their contributions were being redesignated to the
Compliance Fund.

Subsequent to the exit conference, representatives of the Compliance Fund were given a
list of contributions that were missing evidence of the redesignation notice. The treasurer
stated he would continue searching for the missing documentation.

Preliminary Audit Report Recommendation

The Audit staff recommended that the Compliance Fund provide evidence that the
excessive contributions were properly redesignated. Absent such evidence, the
Compliance Fund should have refunded the excessive contributions to the contributor and
provide evidence of such refunds (photocopies of the front and back of the negotiated
refund checks). If any contributors could not be located, or if any refund check was not
negotiated by the contributors at the time of the final audit report, the sum of the
excessive contributions was to be paid to the United States Treasury.

Representatives of the Compliance Fund were later advised that in lieu of refunding the
excessive contributions to the contributors they could send each contributor a
presumptive redesignation letter which offered a refund. Copies of such letters were to
be provided to the Audit staff. If any contributors could not be located, or if any refund
check issued was not negotiated by the contributors at the time of the final audit report,
the sum of the remaining excessive contributions was to be paid to the United States
Treasury.

Committee Response to Recommendation and Audit Staff's
Assessment

In response to the recommendation, the Compliance Fund provided copies of
presumptive redesignation letters sent to the contributors whose excessive contributions
totaled $167,006. The Compliance Fund stated that the mailing address for the remaining
9 contributor’s (excessive contributions totaling $10,550) could not be located. Counsel
for the Compliance Fund stated it materially complied with the recommendation.

With respect to the remaining unresolved excessive contribution, $10,550 is payable to
the U.S. Treasury.

Finding 2. Stale-dated Checks - Compliance Fund

Summary
The Audit staff identified 14 stale-dated checks totaling $14,800. In response to the
preliminary audit report, the Compliance Fund provided additional information for some


25

calculated that it owed Riverfront $47,423. Had the General Committee correctly applied
the $887,276 in refunds received and/or due from Riverfront, it, like the Audit staff,
would have concluded that it owed Riverfront $934,699 ($47,423 + $887,276).

Asa result, the General Committee owes Riverfront $934,699. Absent some explanation
of the shortfall, this imbalance results in a potential contribution from the DNC. Since
the $934,699 is being added to expenditures subject to the limitation, there is no need to
seek a repayment for the potential contribution.

Accounts Payable as of June 30, 2005 - The General Committee disagrees with the
inclusion of $100,000 due Riverfront for reconciliation and recordkeeping services. In
response to the preliminary audit report, the General Committee stated these were wind
down expenses that were paid by the Compliance Fund.

The Riverfront agreement, paragraph 2.3 states that $100,000 was due to Riverfront for
costs incurred by the consultant to complete the required reconciliation and other related
recordkeeping requirements set forth in Section 10.3(b), (d) and (e)'* by November 2,
2005. As described in the footnote, costs incurred for reconciliation of media buys,
calculations of commissions earned, collection of affidavits relating to media buys and
application of refunds, all relate to activities that occurred during the campaign.

In addition, paragraph 9 of this agreement stated that the General Committee agreed to
reimburse Riverfront for reasonable attorneys’ and accountants’ fees, up to a maximum
of $400,000, including attorneys’ and accountants’ fees, incurred in connection with any
audit or investigation of the Campaign.

As the agreement specifies, any fees for attorneys or accountants incurred in connection
with the audit would qualify as a wind down expense. None of these fees were charged
to the limitation by the Audit staff. In October 2006, the Compliance Fund reported
paying Riverfront $100,000 for audit services.

The General Committee demonstrated that $63,710 in payables were paid by the DNC
pursuant to 2 U.S.C. §441a(d). In addition, the Commission determined that the General
Committee properly classified the $100,000 as a winding down expense. As a result,
accounts payable have been reduced $163,710 ($100,000 + $63,710).

Refund of Expenditures Subject to the Limitation Received after June 30, 2005 and
GELAC Reimbursements- In response to the preliminary audit report, the General
Committee demonstrated that it received $579,725 in additional refunds. In addition, the
General Committee demonstrated that the Compliance Fund reimbursed it $6,585, for
expenditures that were charged to the limitation but reimbursable by the Compliance
Fund. The necessary adjustments have been made.

TM Section 10.3 (b) stated Riverfront should provide a complete and sufficient itemization for each time buy of all
commissions, including, but not limited to, the amounts paid, methodology of calculating the commissions, the
identity of the recipients and the date of the commission payment. Section 10.3(d) related to collection of affidavits
and other documents and Section 10.3(e) related to the collection of refunds


ownership of the funds that earned interest.’ Therefore, the Audit staff allocated interest
earned based on the ratio of funds provided by the General Committee and the DNC.
The amounts transferred to the account by the General Committee and the DNC were
reduced by the amount of commissions earned. General Committee funds, net of
commissions earned, totaled $43,576,252 (of a total of $64,619,743), or 67%. Applying
this percentage to the total interest earned, the Audit staff calculated that $41,277
($61,607 x 67%) in interest was earned on General Committee funds. Funds in this
account, including interest earned, were used to cover checks issued for media buys. As
a result, the General Committee received interest income in the form of additional
disbursements by the media company.

This matter was discussed in several meetings with representatives of both the General
Committee and Riverfront. During those meetings General Committee representatives
maintained that they had no knowledge of any interest being earned on funds maintained
in the Riverfront account.

Subsequent to the exit conference, General Committee representatives stated that to treat
interest earned by the media vendor as interest earned by the General Committee requires
one to assert that either Riverfront paid the interest to the General Committee or that
Riverfront’s bank accounts were actually the General Committee’s bank accounts.

The General Committee continued by stating that the first assertion is incorrect because
Riverfront did not make any interest payment to it. Further, the second assertion is
incorrect as a matter of fact and law. The General Committee stated Riverfront is a
separate, independent legal entity. It conducted all of its dealings with the General
Committee on an arms’ length basis as a vendor. It provided services not simply to the
General Committee but to the DNC as well; and is a subsidiary of GMMB, a premier
Democratic media firm with a myriad of other clients. After the General Committee paid
funds to Riverfront for services to be rendered, it had no legal right to access those funds.

Finally, the General Committee stated that the Commission dealt with a virtually
identical situation in a 1984 campaign, finding that a publicly funded presidential
campaign and its specially formed media vendor were separate entities (Advisory
Opinion 1983-25). Asked to review the relationship between Mondale for President, Inc.
and the Consultants 84, a corporation formed by two principals who had previously
provided consulting services in their individual capacities to the campaign, the
Commission concluded that the firm had “a legal existence that is separate and distinct
from the operations of the Committee,” and did not require the Committee to report the
payments made by the firm to sub-vendors on the Committee’s behalf.

In the preliminary audit report the Audit staff concluded that interest earned on public
funds by Riverfront was repayable to the United States Treasury. This potential

3 These same accounts were used to pay the Primary Committee’s media expenses, and on occasion there
were primary funds in the account. The exact amounts were difficult to determine, however, they are
not believed to have been significant during the general election period.


Legal Standard

Expenditure Limitation. No candidate for the office of President of the United States,
eligible under 26 U.S.C. 9003 to receive payments from the Secretary of the Treasury
may make expenditures in excess of $20,000,000 as adjusted for the increases in the
Consumer Price Index. 2 U.S.C. §441a(b)(1)(B) and (c).

The expenditure limitation for the 2004 general election for publicly funded candidates
for the office of President of the United States was $74,620,000.

Attribution of Expenditures. General Rule — Any expenditure for goods and services
that are used for the primary election campaign, other than those listed in paragraphs
(e)(2) through (e)(7) of this section, shall be attributed to the primary election. Any
expenditure for goods and services that are used for the general election campaign, other
than those listed in paragraphs (e)(2) through (e)(7) of this section, shall be attributed to
the general election. 1] CFR §9034.4(e)(1).

Attribution of Travel Costs. Expenditures for campaign-related transportation, food,
and lodging by any individual, including a candidate, shall be attributed according to
when the travel occurs. If the travel occurs on or before the date of the candidate’s
nomination, the cost is a primary election expense. Travel to and from the conventions
shall be attributed to the primary election. Travel by a person who is working exclusively
on general election campaign preparations shall be considered a general election expense
even if the travel occurs before the candidate’s nomination. 11 CFR §9034.4(e)(7).

Repayments. If the Commission determines that eligible candidates of a political party
and their authorized committees incurred qualified campaign expenses in excess of the
aggregate payments to which the candidates were entitled, it shall notify such candidates
of the amount of such excess and such candidates shall pay to the United States Treasury
an amount equal to such an amount. 26 U.S.C. §9007(b)(2).

Net Outstanding Qualified Campaign Expenses (NOQCE). Within 30 days after the
end of the expenditure reporting period, the candidate must submit a statement of net
outstanding qualified campaign expenses. The statement must contain:
e = The total of all committee assets including cash on hand, amounts owed to the
committee and capital assets listed at their fair market value;
e — The total of all outstanding obligations for qualified campaign expenses; and
e An estimate of necessary winding-down costs. 11 CFR §9004.9(a)(1) and (b).

Expenditure Report Period. In the case of a major party, the expenditure report period
begins on the earlier of September 1 before the election or the date on which the major
party’s nominee is chosen. The period ends 30 days after the Presidential election.

11 CFR §9002.12(a). For Senator John F. Kerry the expenditure report period ran from
July 30, 2004 to December 2, 2004.