11

The non-federal accounts paid disbursements for 100% federal activity totaling $6,000.
These expenses included:

© $1,000 - Contribution to Rhode Island Democratic Party.
© $2,500 - Contribution to South Carolina Democratic Party.
© $2,500 - Contribution to the Democratic Congressional Campaign Committee.

These contributions were reported on the recipient committee’s federal disclosure reports
and the NDN contribution check did not indicate it was from a non-federal account.
Rather, the imprint on the NDN check stated “The New Democrat Network, FEC
#C00319772.” The Audit staff requested documentation showing NDN’s intent for these
contributions to be deposited into the non-federal accounts of these committees. In
response, Counsel stated that the political parties maintain both federal and non-federal
accounts.

Interim Audit Report Recommendation and Committee Response

The Audit staff recommended that NDN demonstrate that the identified disbursements
paid from non-federal accounts were not 100% federal expenses. Absent such a
demonstration, NDN should have filed Schedules B (Itemized Disbursements) disclosing
as memo entries the expenditures paid from the non-federal accounts.

In response, Counsel states that “the information available to the Committee lead it to
conclude that the donations were intended as nonfederal donations, but because of an
administrative error, were made under circumstances that led the recipients to believe that
the donations could be deposited in a federal account.” Furthermore, Counsel states that
these contributions were made at the end of the 2002 cycle when they were making non-
federal contributions and these contributions were disclosed on reports of its non-federal
activity filed with the Internal Revenue Service (IRS).

These explanations do not demonstrate that these contributions were intended for the
non-federal accounts. Counsel fails to explain the details of the ‘administrative error’
that caused the recipient committees to believe that these contributions could be
deposited into the federal account. Also, NDN made both federal and non-federal
contributions at the end of the 2002 cycle. Finally, other disbursements paid from the
federal account were also disclosed on IRS reports. Schedules B disclosing memo entries
were not filed.

Counsel did not address the $1,000 check to the unknown payee.

5 NDN did not provide information about who the payee was on a $1,000 disbursement from its non-federal
account.


Changes to the Law

On March 27, 2002, President Bush signed into law the Bipartisan Campaign Reform Act
of 2002 (BCRA). The BCRA contains many substantial and technical changes to the
federal campaign finance law. Most of the changes became effective November 6, 2002.
Except for the period November 6, 2002, through December 31, 2002, the period covered
by this audit pre-dates these changes. Therefore, the statutory and regulatory
requirements cited in this report are those that were in effect prior to November 6, 2002.


The understatement of receipts resulted from the following:

e Transfers from non-federal accounts not reported $ 95,354
¢ Contributions from individuals not reported 17,035
¢ Unexplained Difference 7,641

Total understatement of receipts $120,030

The net understatement of disbursements resulted from the following:

¢ Operating disbursements not reported $ 54,581
e Transfers to non-federal accounts not reported 83,059
e Payroll not reported 6,729
¢ Contributions to Federal Candidates not reported 1,875
¢ Reported disbursements not associated with checks (374)
e Unexplained Difference (2,334

Total net understatement of disbursements $143,536

As a result of the misstatements detailed above, the ending balance was understated by
$329.

Contributions not reported were contribution checks totaling $51,535 that were deposited
into the federal account and then portions of these contributions ($17,035) were
transferred to the non-federal accounts. NDN did not report the contribution amounts
transferred to the non-federal accounts on Schedule A or the transfers on Schedule B.

Included in operating disbursements not reported is $39,804 of expenses that appear to be
associated with the 2002 NDN East Coast Retreat (See Finding 4). Although NDN
Counsel states that only non-federal funds were received for this event and the expenses
were paid entirely from the non-federal account, this amount was paid from a federal
account and not reported.

NDN did not explain why transfers from the non-federal account and the remaining
transfers to the non-federal accounts were not reported.

The Audit staff discussed this finding with NDN’s Counsel (Counsel) during the exit
conference and provided him with schedules detailing the discrepancies. Counsel did not
provide an explanation for the discrepancies.

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that NDN amend its reports to correct the misstatements
noted above and amend the most recent report to show the adjusted cash on hand balance
with an explanation that it resulted from audit adjustments from a prior period. In
response, NDN filed amended disclosure reports that materially corrected the
misstatements noted above.


Part III
Summaries

Findings and Recommendations

Finding 1. Misstatement of Financial Activity

A comparison of NDN’s reported figures to its bank records revealed that receipts,
disbursements and the beginning cash balance for calendar year 2002 were misstated.
The Audit staff recommended that NDN amend its disclosure reports to correct the
misstatements. In response to the interim audit report, NDN filed amended reports that
materially corrected the misstatements. (For more detail, see p. 5)

Finding 2. Itemization of Disbursements

A review of credit card statements showed that NDN failed to itemize 31% ($52,277) of
the ultimate payees” as memo entries on these disbursements. Additionally, of the memo
entries that were disclosed, 13% ($22,265) were not adequate because they failed to
provide the full address of the payee. The Audit staff recommended that NDN amend its
reports. In response to the interim audit report, NDN filed amended reports correctly
disclosing the required information. (For more detail, see p. 7)

Finding 3. Reporting of Debts and Obligations

The Audit staff identified debts and obligations totaling $140,613 that were not reported
on Schedules D (Debts and Obligations). The Audit staff recommended that NDN file
amended reports disclosing these debts and obligations. In response, NDN filed amended
reports disclosing the requested information. (For more detail, see p. 8)

Finding 4. Contributions Made by the Non-federal

Accounts
NDN made a number of contributions from its non-federal accounts that were deposited
into the recipients’ federal account. The checks from the non-federal accounts did not
make it clear that the accounts were non-federal accounts nor did they appear to be
accompanied by correspondence or other documentation indicating NDN’s intent for the
contribution to be deposited in the recipient’s non-federal account. The Audit staff
recommended that NDN either demonstrate that the contributions were not federal
expenditures or disclose them on a memo Schedule B. In response, Counsel stated that
due to an administrative error it appeared that NDN did not make it clear to recipient
committees that the contributions were intended for their non-federal accounts. The
requested amended reports were not filed. (For more detail, see p. 10)

? The provider of goods or services purchased with the credit card.


Part II
Overview of Committee

Committee Organization

Important Dates

New Democrat Network

e Date of Registration

June 18, 1996

e Audit Coverage

January 1, 2001 — December 31, 2002

Headquarters

Washington, DC

Bank Information

¢ Bank Depositories

Two

e Bank Accounts

Two Federal Accounts and Nine Non-
Federal Accounts

Treasurer

e Treasurer When Audit Was Conducted

Simon Rosenberg

e Treasurer During Period Covered by Audit

Simon Rosenberg

Management Information

e Attended FEC Campaign Finance Seminar _| Yes

¢ Used Commonly Available Campaign Yes
Management Software Package

¢ Who Handled Accounting and Paid Staff

Recordkeeping Tasks

Overview of Financial Activity

(Audited Amounts)
Cash on hand @ January 1, 2001 $ 26,357
o Contributions from Individuals 758,329
o Other Political Committees 816,545
o Transfers from Non-federal Accounts 2,930,831
o Other Receipts 126,545
Total Receipts $ 4,632,250
o Operating Disbursements 4,139,717
o Contributions to Federal Candidates 318,470
o Transfers to Non-federal Accounts 200,091
Total Disbursements $ 4,658,278
Cash on hand @ December 31, 2002 $ 329


Part IV
Findings and Recommendations

| Finding 1. Misstatement of Financial Activity

Summary

A comparison of NDN’s reported figures to its bank records revealed that receipts,
disbursements and the beginning cash balance for calendar year 2002 were misstated.
The Audit staff recommended that NDN amend its disclosure reports to correct the
misstatements. In response to the interim audit report, NDN filed amended reports that
materially corrected the misstatements.

Legal Standard

Contents of Reports. Each report must disclose:

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

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

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

e Certain transactions that require itemization on Schedule A (Itemized Receipts),
Schedule B (Itemized Disbursements) or Schedule H-4 (Joint Federal/Non-federal
Activity Schedule).
2 U.S.C. §434(b)(1), (2) and (4).

Facts and Analysis

The Audit staff reconciled NDN’s reported activity to bank records for calendar year
2002. The following chart outlines the discrepancies for the beginning cash balance,
receipts, disbursements and the ending cash balance. Succeeding paragraphs address the
reasons for the misstatements.

2002 Committee Activity
Reported Bank Records Discrepancy
Opening Cash Balance $29,596 $53,431 $23,835
@ January 1, 2002 Understated
Receipts $2,078,011 $2,198,041 $120,030
Understated
Disbursements $2,107,607 $2,251,143 $143,536
Understated
Ending Cash Balance @ $0 $329 $329
December 31, 2002 Understated.

The $23,835 understatement of the beginning cash balance on January 1, 2002 was due to
minor prior period reporting errors. NDN officials were made aware of these errors.


FEDERAL ELECTION COMMISSION
Washington, DC 20463

September 13, 2006

MEMORANDUM
To: Robert W. Biersack
Press Officer
From: Joseph F. Stoltz ty
Assistant Staff, ‘or
Audit Divisio’
Subject: Public Issuance of the Audit Report on New Democrat Network

Attached please find a copy of the audit report and related documents on
New Democrat Network, which was approved by the Commission on September 1, 2006.

Informational copies of the report have been received by all parties involved and
the report may be released to the public.

Attachment as stated

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


The Audit staff presented these matters to Counsel during the exit conference along with
workpapers to show the credit card disbursements in question. Counsel made no
comment.

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that NDN submit amended reports for the applicable
reporting periods to correct the itemization and disclosure errors. In response, NDN filed
amended reports correcting the errors noted above.

| Finding 3. Reporting of Debts and Obligations

The Audit staff identified debts and obligations totaling $140,613 that were not reported
on Schedules D (Debts and Obligations). The Audit staff recommended that NDN file
amended reports disclosing these debts and obligations. In response, NDN filed amended
reports disclosing the requested information.

yoga 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) and104.11(a).

B. Separate Schedules. A political committee must file separate schedules for debts
owed by the committee and debts owed to the committee, together with a statement
explaining the circumstances and conditions under which each debt and obligation
was incurred or extinguished. 11 CFR §104.11(a).

C. 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 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
During a review of NDN’s operating expenditures, the Audit staff identified credit card

statements from Advanta MasterCard, American Express and Bank of America Visa
totaling $137,270 that were not reported as debts on Schedules D. NDN did not disclose
any of the debt owed to Advanta MasterCard or American Express. NDN disclosed debt
to Bank of America Visa for only four of the required reporting periods.

Additionally, $3,343 was not reported as debt to an internet company.

The Audit staff discussed this matter with Counsel at the exit conference and provided
them with a schedule of the items noted above. Counsel made no comment.


| Finding 2. Itemization of Disbursements

Summary

A review of credit card payments showed that NDN failed to itemize 31% ($52,277) of
the ultimate payees® as memo entries on these disbursements. Additionally, of the memo
entries that were disclosed, 13% ($22,265) were not adequate because they failed to
provide the full address of the payee. The Audit staff recommended that NDN amend its
reports. In response to the interim audit report, NDN filed amended reports correctly
disclosing the required information.

Legal Standard
A. Reporting Operating Expenditures. When operating expenditures to the same
person exceed $200 in a calendar year, the committee must report the:

e Amount;

e Date when the expenditures were made;

e Name and address of the payee; and

¢ Purpose (a brief description of why the disbursement was made).

2 U.S.C. §434(b)(5)(A) and 11 CFR §104.3(b)(3)(i).

B. Reporting Allocable Expenses. A political committee that allocates federal/non-
federal expenses must report each disbursement it makes from its federal account (or
separate allocation account) to pay for a shared federal/non-federal expense. Committees
report these kinds of disbursements on Schedule H-4. 11 CFR §104.10(b)(4).

C. Credit Card Transactions. In the case of operating expenditures charged on a credit
card, a committee must itemize all payments to a credit card company in accordance with
11 CFR §104.10(a)(4). The committee must also itemize, as a memo entry, any specific
transaction charged on a credit card for all payments to the actual vendor. The memo
entry must include the name and address of the vendor, the purpose, and the amount of
the disbursement. 11 CFR §§102.9(b)(2) and 104.9.

Facts and Analysis

The Audit staff reviewed payments totaling $167,313, made to three committee credit
card companies: Advanta MasterCard, American Express and Bank of America Visa.
NDN failed to itemize, as memo entries, the ultimate payee for 31% ($52,277) of these
disbursements. NDN itemized the credit card company as the payee for these items. The
credit card disbursements were for such items as meals, travel, hotels, subscriptions,
transportation, internet service, and various other expenses.

Additionally, of the memo entries itemized, 13% ($22,265) were not adequately disclosed
because the payee’s address was missing from the disclosure reports.

> The provider of goods or services purchased by the credit card.


Finding 5. Disclosure of Event Expense Paid by the Non-

federal Accounts
NDN made payments from its non-federal accounts that were questioned as possible
allocable expenses related to an event. Membership fees and event registration fees were
solicited at the event. The Commission concluded that the expenses for the event were
properly paid from the non-federal accounts. (For more detail, see p. 12)


Part I
Background

Authority for Audit

This report is based on an audit of the New Democrat Network (NDN), undertaken by the
Audit Division of the Federal Election Commission (the Commission) in accordance with
the Federal Election Campaign Act of 1971, as amended (the Act). The Audit Division
conducted the audit pursuant to 2 U.S.C. §438(b), which permits the Commission to
conduct audits and field investigations of any political committee that is required to file a
report under 2 U.S.C. §434. Prior to conducting any audit under this subsection, the
Commission must perform an internal review of reports filed by selected committees to
determine if the reports filed by a particular committee meet the threshold requirements
for substantial compliance with the Act. 2 U.S.C. §438(b).

Scope of Audit

This audit examined:

The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The disclosure of disbursements, debts and obligations.

The disclosure of expenses allocated between federal and non-federal accounts.
The consistency between reported figures and bank records.

The completeness of records.

Other committee operations necessary to the review.

PADWPHONE

Limitations

NDN supported Federal candidates through various fundraisers and by providing
information on its website. NDN hosted events throughout the 2002 cycle on behalf of
Federal candidates and collected earmarked contributions they later forwarded to the
respective campaigns. Solicitations relating to these events were paid for by NDN and
staff was provided to organize the events. The Audit staff reviewed disbursement
documentation to determine costs associated with the events. Due to incomplete records,
the Audit staff was unable to ascertain costs for all events. Numerous requests were
made to NDN for these records during fieldwork, at the exit conference and after
fieldwork concluded. The Commission issued subpoenas to NDN on October 5, 2005
and to various other vendors on January 31, 2006. NDN submitted incomplete records in
response to the subpoenas.

NDN stated they were “unable to locate some of the details of the proposed and actual
events which were the subject of the subpoenas.” Furthermore, they believe that despite
their inability to clarify the costs associated with the events they have responded in good
faith.

Not all of the various other vendors subpoenaed by the Commission have responded to
date.


12

Finding 5. Disclosure of Event Expenses Paid from Non-
federal Accounts

Summary

NDN made payments from its non-federal accounts that were questioned as possible
allocable expenses related to an event. Membership fees and event registration fees were
solicited at the event. The Commission concluded that the expenses for the event were
properly paid from the non-federal accounts.

Legal Standard

Allocation Ratio for Shared Fundraising Expenses. If a committee raises both federal
and non-federal funds through the same fundraising program or event, it must allocate the
direct cost of the fundraising event based upon the ratio of funds received by the federal
account to the total amount raised for the event. 11 CFR §106.5(f)(1).

Facts and Analysis

As noted above, the Audit staff reviewed disbursements from NDN’s non-federal
accounts. The review identified disbursements associated with a NDN event. NDN
Counsel stated that only non-federal funds were received for this event and the expenses
were paid from the non-federal account. Given the nature of the event, a NDN sponsored
conference, the Commission considered if it should be categorized as a shared activity
rather than a fundraising event and the expenses allocated accordingly. The Commission
concluded that since funds were received in connection with the event, it could properly
be considered a fundraiser and the expenses allocated accordingly. Therefore, given that
all receipts were deposited into a non-federal account, NDN’s payment of the expenses
from the non-federal account was proper.


Table of Contents

Page

Part I. Background

Authority for Audit 1

Scope of Audit 1

Limitations 1

Changes to the Law 1
Part II. Overview of Committee

Committee Organization 2

Overview of Financial Activity 2
Part III. Summaries

Findings and Recommendations 3
Part IV. Findings and Recommendations

Finding 1. Misstatement of Financial Activity 6

Finding 2. Itemization of Disbursements 8

Finding 3. Reporting of Debts and Obligations 9

Finding 4. Contributions Made by the Non-federal Accounts 10

12

Finding 5. Disclosure of Event Expenses Paid from Non-federal Accounts


Report of the
Audit Division on the

New Democrat Network
January 1, 2001 - December 31, 2002

Why the Audit
Was Done

Federal law permits the
Commission to conduct
audits and field
investigations of any
political committee that is
required to file reports
under the Federal
Election Campaign Act
(the Act). The
Commission generally
conducts such audits
when a committee
appears not to have met
the threshold
requirements for
substantial compliance
with the Act.' The audit
determines whether the
committee complied with
the limitations,
prohibitions and
disclosure requirements
of the Act.

Future Action
The Commission may
initiate an enforcement
action, at a later time,
with respect to any of the
matters discussed in this
report.

' 2 U.S.C. §438(b).

About the Committee (p. 2)

The New Democrat Network (NDN) is a non-connected
committee. NDN qualified for multi-candidate status on
December 18, 1996, and is headquartered in Washington, DC.
For more information, see chart on the Committee Organization,
p. 2.

Financial Activity (p. 2)
« Receipts

o Contribution from Individuals $ 758,329
o Other Political Committees 816,545
o Transfers from Non-Federal
Accounts for Joint Activity 2,930,831
o Other Receipts 126,545
o Total Receipts $ 4,632,250
« Disbursements
o Operating Disbursements $ 4,139,717
o Contributions to Federal 318,470
Candidates
o. Transfers to Non-federal 200,091
Accounts
o Total Disbursements $ 4,658,278

Findings and Recommendations (p. 3)
Misstatement of Financial Activity (Finding 1)

Itemization of Disbursements (Finding 2)

Reporting of Debts and Obligations (Finding 3)
Contributions Made by the Non-federal Accounts (Finding 4)
Disclosure of Event Expenses Paid from Non-federal
Accounts (Finding 5)


10

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that NDN file amended reports, including Schedules D,
teporting these debts and obligations. In response to the interim audit report, NDN
correctly filed amended reports* disclosing the debts and obligations noted.

Finding 4. Contributions Made by the Non-federal
Accounts

Summary

NDN made a number of contributions from its non-federal accounts that were deposited
into the recipients’ federal account. The checks from the non-federal accounts did not
make it clear that the accounts were non-federal accounts nor did they appear to be
accompanied by correspondence or other documentation indicating NDN’s intent for the
contribution to be deposited in the recipient’s non-federal account. The Audit staff
recommended that NDN either demonstrate that the contributions were not federal
expenditures or disclose them on a memo Schedule B. In response, Counsel stated that
due to an administrative error it appeared that NDN did not make it clear to recipient
committees that the contributions were intended for their non-federal accounts. The
requested amended reports were not filed.

Legal Standard

Accounts for Federal and Non-federal Activity. A committee that finances political
activity in connection with both federal and non-federal elections must establish at least
two accounts (federal and non-federal) and allocate shared expenses--those that
simultaneously support federal and non-federal election activity—between the two
accounts. Alternatively, the committee may pay for its federal and non-federal activity
from a single federal bank account 11 CFR §102.5(a)(1)(i).

Federal vs. Non-federal Account. The federal account may contain only those funds
that are permissible under the federal election law. The non-federal account may contain
funds that are permissible under state law, regardless of whether they are also permitted
under the federal law. Examples include contributions that exceed the limits of the
federal law and contributions from sources prohibited from making contributions and
expenditures in federal elections, such as corporations and labor organizations. 11 CFR

§102.5(a)(1)@) and (a)(3).

Facts and Analysis
NDN maintained several federal and non-federal bank accounts. The Audit staff
reviewed disbursements from both the federal and non-federal accounts.

* Due to outdated software, NDN was not able to file electronic Schedules B and D for calendar year 2001.
NDN disclosed the required information on Form 99 (Miscellaneous Text).