UTRECHT & PHILLIPS, PLLC 

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RESPONSE OF JOHN EDWARDS FOR PRESIDENT TO THE PRELIMINARY AUDIT 

REPORT 

A Preliminary Audit Report (TAR') regarding tiie John Edwards for President ("JEFP" or 

"Committee") has been provided to the Committee. JEFP submits the following response to the 

four Findings in that PAR. 

Findmg 1 

NOCO: There are no major discrepancies with regard to the NOCO.' 

Cash in Bank: JEFP objects to the statement by Audit Staff in the PAR that the Committee 

understated its cash figure. JEFP continues to maintain that general election contributions should 

never have been included in the cash in bank balance for the primary campaign. As stated in the 

PAR, JEFP and Audit Staff is currently in agreement as to cash balances. 

Accounts Payable for Qualified Campaign Expenses - Payroll: Analysis of February 7, 

2008 Payroll 

• Entire amount of February 7,2008 payroll was qualified campaign expense 

Attempts by Audit Staff to characterize any portion of JEFP's final payroll as bonuses to 

employees are not justified.^ JEFP salary payments to employees in its final payroll were 

qualified campaign expenses either as salary payments made to staff for work prior to the date of 

' Audit staff asserts in the PAR that JEFP significantly understated its assets on its NOCO statement. In 

&ct, JEFP valuation of its assets was only approximately $6,000.00 less than Audit's evaluation, hardly a large 

discrepancy given that total assets were nearly $8 million. In addition, JEFP continues to take the position that 

general election funds and interest eamed on them should not be stated on the NOCO statement for the primary 

campaign. 

^ Regulatory provisions at 11 C.F.R. §9034.4(a)(5) state that, in order to be considered a qualified 

campaign expense, any bonus paid must be provided for pursuant to a written contract. 11 C.F.R. §9034.4(a)(5). 

JEFP did not enter written contracts with employees that specified their salaries. Rather, salaries were agreed to 

verbally by department heads and prospective employees. 
Utrecht & Phillips, PLLC 

John Edwards for President - Response to Preliminary Audit Report 

December 14, 2010 

Page 2 of6 

ineUgibility or as winding down costs paid to staff to close down campaign activities for the 

Committee.^ 

o Makeup Pay 

Audit Staff agrees that $204,322 of the January 31 payroll (paid on Febmary 7) is 

a qualified campaign expense because this amount was necessary to make up for employees 

receiving only half pay for the January 30 payroll. However, Audit Staff concludes that 

employees were paid in full from August 15,2007 through January 15,2008. The conclusion 

that employees were paid in full is incorrect. In fact, the salary of several employees was 

reduced as of August 16, 2007 and this pay cut remained in effect through January 30,2008. 

The missed pay for those employees who remained on staff as of February, 2008 totaled $44,916' 

and this amount was included in their Febmary, 2008 payroll checks. (See spreadsheet at 

Attachment 1.) Thus, total amount of makeup pay for the pay periods covering August 16,2007 

tiuii January 30,2008 was $249,238.* 

o Winding Down Costs 

The remaining portion, $511,955, of the Febmary 7 payroll was for winding down costs, 

which are qualified campaign expenses under 11 CF.R §9034.11.^ The two main components of 

these winding down costs were staff salaries and lump sum payments made to staff to reimburse 

for travel, lodging and meal expenses incurred during the month of January, and through 

Febmary 7,2008. 

Staff Salaries 

The first component ofthe Committee's winding down costs was staff salaries. At the 

date of ineligibility, JEFP had in place approximately 70 offices and volunteer sites in several 

cities. It was cmcial that JEFP retain sufficient staff to drive cars to their required rental retum 

destinations, to close offices or volunteer sites, and to retum rental equipment. In order to clean 

^ The PAR contains a number of comments which are trivial in nature conceming JEFP responses to Audit 

Staff requests regarding the February 8,2008 payroll. The alleged 5 week delay in responding to a request seems 

minor in comparison to the time span of this audit, which began over two years ago and it has taken nearly one and 

one half years since JEFP's last response (April 21,2009) for the PAR to be issued. 

* Audit Staff asserts in the PAR tiiat because JEFP had $4.2 million average daily cash balance in January, 

JEFP had the resources necessary to pay any full or increased salaries in that month. However, the Audit Staff 

assertion is fallacious in that it does not take into account that this cash balance was budgeted for other projected 

campaign expenses, such as media, field operations and other activities. Nor is there any indication that audit Staff 

took into consideration accounts payable or other pending obligations, such as bank loans. Regardless of its average 

daily cash balance, JEFP cut staff pay in 2007 and on the January payrolls because projected available cash was 

budgeted to other expenses. 

^ Note that Audit Staff uses an inflated figure of $556,871 as the portion of the payroll that is a non 

qualified campaign expense. In reality that figure could not be greater than $511,955, due to the $44,916 that was 

owed to employees whose salary had been cut since August 16,2007. 
Utrecht & Phillips, PLLC 

John Edwards for President - Response to Preliminary Audit Report 

December 14,2010 

Page 3 of6 

out and close field offices, and other sites, to retum rented equipment; and to retum rental cars, 

JEFP deployed its remaining staff to these locations, paying them for 8 days salary to do so 

(January 31 tiu-ough February 7,2008.)* 

There were several steps involved in closing out an office, a process, which, depending 

on the size of the office, could take several days. It was necessary to sort through documents 

and, where appropriate, prepare them for storage or shipping to headquarters, to retum all rented 

office equipment and to distribute office fumiture by arranging to donate it or haul it to a trash 

site. In some cases, staffers used their own cars to travel to and close campaign offices and in 

other cases, they used JEFP rental cars. 

It was also necessary to retum many rental cars that were left behind by staffers as they 

moved fi'om one campaign site to another. In several cases, staffers traveled to a State in JEFP 

rental cars, then left those rentals cars in that State, and were bussed to another primary or caucus 

state (New Hampshire, Nevada, South Carolina, Georgia, Minnesota, Oklahoma, Califomia, 

etc.). When the campaign ended on January 30, many staffers were required to travel to the 

locations where they had left JEFP rental cars in order to retum those vehicles to an appropriate 

rental car company office that in some cases was hundreds of miles away. Some staffers were 

required to use JEFP rental cars to report to an office location to close it down, and thereafter 

retum the rental car to yet another location. 

Those employees on JEFP's Febmary 7,2008 payroll were all required to perform the 

above tasks. Contrary to Audit Staffs assertion, high level staff also took part in closing down 

campaign operations. The Chief Financial Officer took charge in organizing and archiving 

financial records, and contacting vendors to shut down accounts. The Finance Director was 

responsible for properly archiving all finance documents, thanking donors and coordinating with 

the candidate to set up conference calls to donors. The Chief of Staff was in charge of all state 

offices and maldng sure proper close down occurred, including tracking equipment, as well as 

organizing material in the headquarters for review by the candidate. All of these individuals also 

took part in organizing records for audit. ^ 

^ Audit Staff apparently takes the position that employee salaries must remain frozen at a certain level and 

can never be increased. Hence, Audit Staff is willing to treat $204,322 of the January 31 payroll (paid on Februaiy 

7) as necessary to make up for employees receiving only half pay for the January 30 payroll. There is no regulation 

or other provision that gives Audit Staff the authority to bar JEFP &om paying employees more than the half pay 

that was missed by increasing their pay for that January 30 payroll period. JEFP had the full right and ability to give 

a retroactive pay increase for the payroll in which it did not make fUll pay, as well as for any previous payroll in 

December, 2007 or January, 2008. 

^ Audit Staff makes an arbitrary statement in the PAR that the closeout took place after DOI and that only 

14 people remained on the payroll for the closeout process. The February 7,2008 payroll was in part to pay 99 

staffers for closeout work performed January 31 thru approximately Februaiy 7. The Audit staff statement in the 

PAR regarding 14 employees on payroll for the closeout process apparently refers to the February 15 payroll. These 

individuals were mostly working in JEFP headquarters to prepare materials for the audit and to organize clean out 

and close down of those offices. 
Utrecht & Phillips, PLLC 

John Edwards for President - Response to Preliminary Audit Report 

December 14,2010 

Page 4 of 6 

Reimbursements for Lodemg. Fuel and Meal Costs 

Staffers obviously incurred lodging, fiiel and meal costs in the course of closing offices 

and returning rental vehicles. In addition, when the campaign ended abmptly, staff in the field 

had not turned in expenses incurred in January for reimbursement. Hence, to encourage staffers 

to remain with JEFP to complete the wind down tasks, the Committee paid each staffer lump 

sum payment for lodging, fuel and meal costs. JEFP opted to make a lump sum payment in lieu 

of going through a reimbursement process which would have entailed cumbersome accounting 

procedures. 

Audit staff in the PAR infers that because JEFP had procedures in place for handling 

travel reimbursements, the Committee did not have the option to choose to provide employees a 

lump siun salary payment in lieu of requiring them to go through the process of presenting 

receipts and obtaining reimbursements. The Committee clearly did have the right to do so, as 

well as the right to pay an increased salary to those willing to complete the tasks. For JEFP, this 

was the most sensible solution to retaining employees to close out JEFP operations, given that 

these employees were anxious to find positions with other campaigns. The Audit Staffs 

anecdotal statements regarding payroll taxes for the Committee and employees do not belong in 

the PAR - increased tax burdens have no bearing on whether a campaign expense is qualified 

and the auditors have no role as watchdogs in how or whether campaign funds are used in the 

most efficient way possible to avoid tax consequences. In December of2007, JEFP determined 

that those staying through the end ofthe campaign would receive a salary increase, which would 

be paid out as permitted by committee resources. This pay increase was intended primarily to 

compensate staff for the fact that JEFP dispatched employees to many different field locations 

throughout the country for the January primaries and caucuses, placing them on an around-theclock schedule. The increase in pay was also designed to cover increased costs that staffers were 

required to incur because they were on the road in the early caucus and primary states. Although 

JEFP was not financially able to pay this increase when payrolls were issued in December and 

January, JEFP maintains it had the right to pay those amoimts at a later date if it funds became 

available. 

The followmg chart summarizes the breakdown of the final payroll of $761,193: 

Make Up Pay for Missed Salary: $249,238.00 

Salary Jan. 31 tiirough Feb. 7,2008 $ 187,567^ 

Lump Sum Payment for Expenses $320,659^ 

Estimated Winding Down Expenses: With minor exceptions. Audit Staff and JEFP's 

estimated winding down expenses are very similar. 

^ Average pay per staffer was $3,552. 

' Average reimbursement per staffer was $3,239. 
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John Edwards for President - Response to Preliminary Audit Report 

December 14,2010 

Page 5 of6 

Entitlement to Matching Funds: JEFP's Overall Objection to the Repayment of Matching 

Funds: 

Audit Staff asserts in the PAR that JEFP received more than $2.3 million in excess of its 

entitlement. In essence, the Audit Staff concludes that JEFP is not entitled to receive matching 

funds for contributions that were received while Senator Edwards was an eligible candidate and 

were clearly matchable imder stamtory provisions at 26 U.S.C. §9034(a). This result does not 

comport with the law, which premises entitlement to public fimds for eligible candidates solely 

on the source, size and timing of contributions received prior to the date of ineligibility. The 

PAR in essence imposes an additional criterion for matching contributions received by a 

candidate while he or she is an active candidate — the size of a candidate's debt at the time of 

actual payment ofthe public funds. 

Audit Staff relies on statutory provisions at 26 U.S.C. §9033(c)(2) as a basis for 

concluding that after DOI a candidate may receive matching fimds only to the extent that 

campaign obUgations exceed private contributions. However, this statutory provision does not 

support such a conclusion. In fact, the statutory provision does nothing to affect the matchability 

of contributions received before a candidate's DOI - instead, this provision extends the right of 

candidates to receive funds after ineligibility. Yet, the PAR uses this provision as support to 

deny matching funds to a candidate, interpreting the statutory language in a way that completely 

undermines the plain language ofthe statute. Under the analysis in the PAR, valid contributions 

received while tiie candidate was active and eligible will not be matched. 

Matching all contributions received by a candidate prior to the date of ineligibility is a far 

more equitable approach, particularly under the circumstances extant in early 2008 when two 

simultaneous, unforeseen events occurred at the same time: a short&ll in the Presidential 

Election Campaign Fund and the suspension of the Commission's ability to act due to the lack of 

a quomm. Audit Staff admits that the combination of these events delayed payments, but 

minimizes the impact of this delay by stating that matching fund recipients were able to obtam 

loan using the matching fund certifications as collateral. This is not entirely correct. JEFP was 

able to obtam loans, but its bank capped the overall amount that the Coinmittee could borrow at 

$10 million. This meant that once tiie cap was hit, JEFP could borrow no more, despite the fact 

that it had been certified to receive $13 million in matching fimds. Thus, during the campaign, 

JEFP was denied usage of nearly 25% of its matching fimd entitiement. 

The arbitrary denial of public funds to a candidate violates the Furst Amendment rights of 

both the candidate and those individuals who contributed to the candidate's committee. Such a 

denial creates inequities between candidates, whose entitlement to matching fimds, under Audit 

staffs approach, will be determined by extemal events not contemplated in the statute, including 

deficiencies in the Fund and the lack of a quorum at the Commission. 

'° Any interpretation of this provision to deny entitlement of public funds to a candidate for matchable contributions 

received while an active and eligible raises serious constitutional issues. 
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John Edwards for President - Response to Preliminary Audit Report 

December 14,2010 

Page 6 of 6 

The Audit Staff apparently bases its conclusion in the PAR that JEFP received over $2.3 

million in excess of its entitlement on 11 C.F.R. §9034.1(b), although this regulation is cited only 

in a foomote. (See PAR at Foomote 7.) Section 9034.1(b) premises a candidate's entitlement to 

public funds on the status of his or her net outstanding campaign obligations at the time of 

payment of public fimds. This regulation was enacted many years ago and never contemplated 

tiiie extraordinary circumstances that occurred in 2008. 

Finding 2: Misstatement of Financial Activity: Amendments will be filed by JEFP pursuant to 

Audit Staff recommendation. As explained to Audit Staff during fieldwork, this situation 

resulted from an anomaly in the software of the Committee's merchant vendor. 

Finding 3: Failure to Itemize Loan Repayments: Amendments will be filed by JEFP pursuant 

to Audit Staff recommendation. 

Finding 4: Stale-Dated Checks: The Committee has reviewed the list of stale checks provided 

by the Audit Staff and has provided documentation showing that 83 checks totaling $138,371.23 

(out of $267,529.00 identified by Audit StafQ have cleared the bank and should be removed 

from the Ust. Please see spreadsheet and attachments A-U. When this information is placed on 

the public record, all bank account information should be redacted. 

Prepared by: 

Lyn Utrecht 

Eric F. Kleinfeld 

Patricia A. Fiori 

Karen A. Zeglis 

" While die validity of 11 C.F.R. §9034.1(b) has been upheld by the Courts, it is clearly within the authority of the 

Commission to adopt a different interpretation of that regulation from that proposed in the PAR. Lvndon LaRouche 

v. Federal Election Commission. 28 F.3d 137 (1994 D.C. Cir.). This decision was issued over 15 years ago, and in 

that period, there have been a dramatic changes in the Supreme Court interpretations of the law in this area. Thus, 

the Conunission should re-examine its interpretation of Section 9034 in light of current decisions.