UTRECHT & PHILLIPS, PLLC 

ATTORNEYS AT LAW 

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RESPONSE OF JOHN EDWARDS FOR PRESIDENT TO DRAFT FINAL 

AUDIT REPORT 

This Response is submitted on behalf of John Edwards for President (**JEFP** or 

"Committee") regarding the Draft Final Audit Report of the Audit Division on John Edwards for 

President ("DFAR" or "Draft"). The Draft recommends that the Commission determine that 

JEFP make a repayment of $2,278,315. This response discusses the following issues involved in 

the Audit Division's recommendations: 1) $528,454 in payroll expenses; 2) $2,136,507 in 

excess entitlement; and 3) valuation of capital assets. 

1. PayroU Issue 

The Audit Division maintains that $528,454 of JEFP's final payroll is a non-qualified 

campaign expense. The primary issue raised here is whether it is reasonable to treat tiiis amount 

paid to staff as a qualified campaign expense related to their activities before the candidate's date 

of ineligibility ("DOP*). The Committee strongly asserts that not only is it reasonable but it is 

clear that the entire final payroll, including the $528,454 amount challenged by the Audit 

Division, should be treated as a pre-DOI qualified campaign expense. As the Committee has 

stated, this amount was paid to staff for several reasons: 

1) To compensate them for overtime and extra hours they were required to work during 

January, 2008; 

2) To compensate them for remaining with the campaign after DOI to perform fimctions 

relating to close out of campaign offices, something that was an absolute necessity for 

JEFP; and 

3) To compensate them for extra expenses they may have incurred, including assisting 

in the close out of the campaign (vacating office space, returning leased equipment, 

rental car retums, etc.). 

The final payroll amount was to compensate staff for their work prior to DOI and to deal 

with obligations (leased oflice space, rental cars, leased equipment, etc.) that were undertaken by 

the campaign prior to DOL As such, the final payroll amount that the Audit Division is 

challenging is a qualified campaign expense.^ This expenditure occurred within several days of 

^ The Audit Division recognizes that JEFP's position is "...that the February 7,2008 payroll is a qualified campaign 

expense, v^ich was due at DOI and therefore should be included in the NOCO as such." (DFAR, page 11.) 
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the end ofthe campaign, was driven by conditions and obligations in existence prior to DOI and 

should be treated on the same basis as other pre-DOI campaign expenditures. 

The Audit Division's approach in the DFAR essentially expects a committee to cease all 

expenditures at the moment a campaign ends, and presumes that staff salaries must remain static, 

despite increased workload taken on by employees or despite the fact that JEFP needed to retain 

staff at least for a few days to perform fimctions critical to closing out the campaign.^ It is 

unwarranted for the Audit Division to presume that JEFP was barred from paying staffers who 

remained with the campaign to close offices and retum rental equipment and vehicles. The 

Audit Division apparently presumes DOI is a pre-planned event, the date of which is known in 

advance, and a date by which all obligations would have been satisfied. However, actual events 

on the ground do not work that way. In the case of JEFP, the candidate's withdrawal 

announcement was sudden and unexpected. It occurred when a majority of staff was scattered 

throughout the early caucus and primary states. The abmpt change required staff to assist in 

closing down sites in over 70 far-flung locations, then retum to their home offices to close down 

those sites. If staff had not performed these fimctions, JEFP would have incunred huge costs 

with landlords, utility companies, equipment and car rental companies. It is unfathomable that 

the Audit Division refiises to treat any of the cost for staff salary to perform these functions as a 

qualified campaign expense. 

The Audit Division's rigidity is not mandated by the regulations, nor is it realistic. The 

Audit Division relies on a regulation dealing with bonuses to reach its conclusion.^ This 

regulation does not bar bonuses but specifically allows them. However, bonuses are not at issue 

here; the issue is compensation paid commensurate with work actually performed. Accordingly, 

a far more rational approach than that offered in the DFAR is to recognize that many 

expenditures occurring within several days of the end ofa campaign are driven by conditions and 

obligations set in place prior to the date of eligibility and should be treated on the same basis as 

tiiose expenditures. The Commission has a duty to administer the public financing program and 

apply its regulations in a manner that results in a rational, consistent approach to the practical 

realities facing a campaign.^ 

Moreover, as stated above, a portion of the final payroll was paid to staff to cover any 

expenses incurred in closing out the campaign operation. These expenses would have been 

incurred by staff for travel, lodging, meals and any expenses involved m moving out ofthe 

' Potentially, the Committee could have been required to pay some of these staffers overtime fbr extra hours worked 

in January 2008. 

MlC.F.R.§9034.4(a)(5). 

* General election public financing provisions recognize that campaigns need the flexibility to make expenditures 

"post-DOI" ~ or, in that case, "post expenditure report period" ~ that are nevertheless treated as "pre-DOI" qualified 

can^aign expenses because it is not possible to simply shut a campaign down on the same day a candidate d^ps out 

ofthe race. Those regulations allow campaigns to incur expenses through the end of the expenditure report period 

or 30 days after tiie election for staff salaries or other expenses. See 2 U.S.C. §§9002(12), 9004(c)(1) and 11 CF.R. 

§§9002.12,9002.11(a)(2). This is a rational, coherent approach to the practical realities fiicing a campaign at 

closing and should guide the Commission in its determination in this Audit. 
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various campaign offices or volunteer sites. As a management matter, it was easier to pay 

staffers a lump sum amount as salary than to require the departing staffers to submit expense 

reimbursements forms, a procedure that would have resulted in a lengthy and delayed payment 

process, botii in terms of getting the requests submitted and in paying them. Instead, to 

encourage staffers who remained to help with closeout, JEFP intended a portion ofthe final 

payment as a lump sum amoimt to cover such costs in lieu of going through the reimbursement 

process which would have been cumbersome for both the staffers and the committee.' 

Should the Commission determine that the disputed $528,454 or any portion of it is not a 

qualified campaign expense that was due at DOI, such amount should at least be treated as 

winding down costs, which are qualified campaign expenses. While JEFP maintains that the 

amount in question should be treated as a qualified campaign expense related to pre-DOI 

activity, treating the expenditures at issue as winding down costs would be preferable to 

determining that they are non-qualified campaign expenses. Winding down costs typically 

encompass amounts spent on compliance with the Federal Election Campaign Act and tiie 

Presidential Primaiy Matching Payment Account Act. (11 CF.R. §9034.11.) Since tiie 

expenditures questioned by the Audit Division were made to close out campaign operations, they 

could fall within the category of winding down costs. Indeed, the Audit Division seems to 

envision that the disputed $528,454 could be treated as such as the DFAR states that incurring 

salary and expenses after DOI would be considered permissible winding down expenses. 

(DFAR, page 16.) Once again, while the final payroll meets all of the requirements of a pre-DOI 

qualified campaign expense, treating this expenditure as a winding down cost is preferable to 

treating the amount as a non-qualified campaign expense. 

The DFAR includes a number of irrelevant comments that are both unnecessary and 

incorrect. In this vein, the DFAR recites the supposed number of "explanations" that JEFP has 

provided, inexplicably attaching a particular individual to each (indicating that the purported 

provider of a particular explanation was either the Assistant Treasurer or Counsel). As shown 

above, tiie final payroll was intended to deal with a variety of issues, including all of the 

explanations enumerated in the DFAR. All of these explanations are discussed in the 

Committee's Response of April 16,2009, which was prepared with the input of both staff and 

counsel. This document stands as the response ofthe committee, not the response of a particular 

mdividual. For example, the DFAR states that JEFP Assistant Treasurer explained that".. .the 

puipose of the Febmaiy 7,2008 was to reimburse employees who had not been paid theu* entire 

salary due to limited fimds available beginnmg sometime in August 2007....The review 

indicated that JEFP's explanation was incorrect." (DFAR, page 11.) The statement that JEFP's 

explanation is "incorrect" is overly broad and misleading. In fact, the Audit Division includes 

over $249,000 of that payroll as qualified campaign expenses representing either makeup salary 

for employees whose pay was reduced or who received partial pay in the August through January 

30 time fi:ame. (DFAR, pages 11 and 15.) JEFP's explanation should not be termed "incorrect" 

in tiie DFAR. 

^ Advances by staffers could be considered contributions if not paid by a committee within 30 to 60 days. (11 

C.F.R. §116.5.) Plying JEFP staffers a lump sum as salary eliminated this possibility since they would not have 

been outstanding for that period of time. 
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Moreover, the Audit Division mischaracterizes JEFP's events surrounding the payroll 

issue. The Committee's April 16,2009 Response directiy resulted from the Audit Division's 

own March 12,2009 email, in which over five weeks after tiie Exit Conference tiie Audit 

Division informed JEF?for the first time ofa potential fmding of $558,878.' This is of course 

why tiie Audit Division in that email offered JEFP a second 10-day response opportunity, in a 

belated attempt to comply with Commission regulations.^ At the time this email was received, 

JEFP actually had packed up all of its payroll records in anticipation of moving its offices to 

another location, and therefore, could not respond within the 10-day time frame outiined in the 

email. Responses were filed in April 2009. 

Accordingly, for the reasons stated above, the entire final payroll, including the $528,454 

amount challenged by the Audit Division, should be treated as a pre-DOI qualified campaign 

expense. 

2. Excess Entitlement Issues 

a. Repayment for Excess Entitlement 

The DFAR recommends tiwt tiie Commission determme that JEFP received $2,136,507 

in excess of its entitlement. Should the Commission adopt this recommendation, the Committee 

would be required to make a repayment m that amount. As discussed below, the conclusion 

reached in the DFAR is not supported by applicable statutory provisions and would lead to an 

inequitable result for JEFP. 

JEFP made a total of four timely submissions to the FEC for matching fimds (11/1/07, 

12/3/07,1/2/08 and 2/1/08)." JEFP should have received its first public fimd payment in early 

Januaiy, 2008 in the amount of $8.8 million, but tiiis did not occur due to a shortfall in the 

' §556,871, per DFAR relating to the final payroll. 

' The DFAR also includes several extraneous comments from the Audit Division conceming the payroll issue that 

are either irrelevant or factually incorrect. The Auditors unduly mischaracterize JEFP's request that regulatory 

procedures be followed: "Counsel for JEFP (CounseO objected to the notification by email and demanded a second 

exit conference" (Preliminary Audit Report, page 10 and Draft Final Audit Report, page 11 (en^ihasis added)). The 

Audit Division appears to suggest that following the required procedures presents some sort of a hardship. 

"Although not required, a second exit confisrence was held" (Preliminary Audit Report, page 10 and Draft Final 

Audit Report, page 12). Further, the Audit Division continues to cite the Committee's "average daily cash" balance 

on the misguided assumption that this resource was available for paying staff salaries in January. In fact, this was 

not the case as those funds were budgeted for foture canqiaign obligations, as well as outstanding accounts payable, 

neither of which is taken into account by the Audit Division when making blanket assertions based on daily cash 

balances. Comments such as these are misleading, and should not be repeated throughout the Audit Division Final 

Audit Report. 

' Because FEC procedures prevented the Committee from submitting its January 2008 contributions for matching 

until Februaiy 2,2008, the last of JEFP's four submissions occurred three days after the campaign ended. 
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Presidential Election Campaign Fund ("Fund"). Payments to JEFP were delayed until after DOI 

(Januaiy 30,2008). 

Under statutory provisions, public fimd payments made prior to a candidate's DOI are 

based on submission of qualifying contributions that are matched dollar for dollar, up to $250. 

(26 U.S.C §9034.) However, where the candidate does not receive payment until after DOI, the 

FEC regulations adopt a very different standard, premising a candidate's entitiement to public 

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

tiiose fimds. (11 C.F.R. §9034.1(b).) Hence, tiie Audit Division argues tiiat JEFP should be 

required to repay any amounts which are not necessary to defray qualified campaign expenses. 

This in essence denies JEFP its full matching fimd entitiement. 

The Auditors' repayment argument is essentially based on the timing of matching fund 

payments to JEFP. This timing was driven by a combination of two unprecedented and 

extraordinary events that occurred in 2008. First, there was a shortfall in the Presidential 

Election Campaign Fund, and candidates could not receive payment of public fimds to which 

they were entitied. Second, the FEC was essentially out of business for the first 7 months of 

2008 because appointments to the Commission were stalled in the Senate confirmation process. 

Due to this lack of a quomm, the Commission had no legal authority to take any official action, 

which meant that submissions for matching fimds could not be certified between January 1,2008 

and July 17,2008. 

The combination of these unforeseen events had a severe impact on the finances of the 

campaign. As a result of the shortfall in the Fund, payment of public fluids was so delayed the 

Coinmittee did not receive its first matching fund payment until February 14,2008 - after DOI -

and that payment represented a small fiaction (approximately 10%) of the amount to which JEFP 

was entitied.' Moreover, contributions received by JEFP in December 2007 and January 2008 

were not certified for matching until several months later, on July 17,2008, when the 

Commission quorum was restored. 

Normally, campaign committees are able to deal with a shortfall in the Fund by obtaining 

bank loans based on FEC certification of matching fund submissions. However, because the 

Cominission could not conduct any business, the bank curtailed the amount that the Committee 

could borrow on the basis of submissions certified by the Commission before the Coinmission 

ceased operations. Indeed, due to the conditions present in early 2008, JEFP's bank refused to 

lend the committee any more than 70% of its entitiement, 20% less than the 90% financing that 

would have been available had the Commission been in existence. The net result in fimding 

meant that the Coinmittee had $1.5 million less for operating expenses in January 2008. 

The Audit Division's literal application of the language ofthe FEC regulations premismg 

entitiement on the timing of payment of public funds is misplaced, especially under the 

conditions that existed in 2008. The Commission's regulations were written with the expectation 

that the Coinmission would be a fimctioning agency that could approve certifications in a timely 

' This payment was based on JEFP's 11/1/07 Submission, certified for $7,515,063.96. 
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fashion. This was far from the case in the first half of2008. Indeed, in the DFAR, tiie Audit 

Division admits, 'There is no question that the combination of the shortfall in the Matching 

Payment Account and the Commission's lack ofa quomm delayed payments." (DFAR, page 

14.) The Auditors' literal interpretation of the regulations is inconsistent with the dollar-fordollar entitiement established under the statute, especially in this situation. Matching all 

contributions received by a candidate prior to the date of ineligibility is not only mandated by the 

statutory provisions but it is the only equitable approach under the circumstances extant in early 

2008 when two totally unforeseen events occurred simultaneously. These circumstances were 

completely outside the control of the Coinmittee and severely curtailed the ability of the 

campaign to continue, since JEFP could not to borrow anything near its fiill entitlement. 

The Audit Division 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 funds only to the extent that 

campaign obligations exceed private contributions. (Preliminary Audit Report of the Audit 

Division, page 12.) However, this statutory provision does not support such a conclusion.'° The 

statutory provision does not to affect the matchability of contributions received before a 

candidate's DOI but rather 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 of the statute. 

Under the analysis in the PAR, valid contributions received while the candidate was active and 

eligible will not be matched. 

Accordingly, and for the reasons stated above, the Commission should reject the Audit 

Division's recommendations and conclude tiiat JEFP did not receive any matching funds in 

excess of its entitlement, and hence, no repayment is due, 

b. Qualified Campaign Expense Issue Regarding Costs Incurred In Providing 

Information to Another Agency 

In its Response to the Exit Conference Preliminaiy Audit Findings (February 20,2009), 

JEFP noted that other governmental agency activities might impact the Coinmittee. Since JEFP 

filed its Response to the Preliminary Audit Report m December 2010, JEFP has become 

involved in providing extensive information to the Department of Justice. Although the 

Committee is not under investigation, it has been necessary for JEFP to incur unanticipated 

expenses, including additional staff and legal costs. These costs do not fall within the ambit of 

typical **winding down" costs because they are not incurred for a Commission audit or 

compliance with public financing laws. RLather, these costs are actually qualified campaign 

expenses that are beyond winding down costs. Because the Committee's efforts have been more 

Indeed, the Audit Division's statement regarding that provision distorts the actual statutory language. The Audit 

Division states that "Under 26 USC §9033(c)(2), a candidate who has passed the date of ineligibility is not 

entitled to any further matching fund payments except to defray qualified campaign expenses incurred before the 

candidate became ineligible." (Emphasis added.) In fiict, the statute does not state that a candidate is "not entitied to 

any further" payments, but rather states that an ineligible candidate ".. .shall be eligible to continue to receive 

payments...." (26USC §9033(c)(2).) 
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extensive than anticipated, and have required a large financial commitment, JEFP might exceed 

tiie limit on winding down costs. (11 C.F.R. §9034.11.) Therefore, JEFP is seeking a 

determination firom the Commission that the Committee may re-allocate those costs as qualified 

campaign expenses. In the altemative, the Committee requests that the Commission determine 

that, due to unforeseen circumstances, these expenses be excluded from winding down costs for 

tiie purposes of the 10% limit on such costs. 

3. Valuation of Assets 

The NOCO as it appears in the DFAR values JEFP's capital assets at $29,134. This 

valuation is not an accurate reflection of the current value of the Committee's assets. The DFAR 

reflects valuation of assets firom 2008 - 2 1/2 years ago. Since that date, the value of these assets 

has declined dramatically. For example, electronic items substantially decrease in value with 

age. In addition, several of these items have no longer functional and should not figure in to the 

NOCO values. The attached spreadsheet reflects current value of Committee assets. Additional 

documentation will be provided to the Audit Division regarding this issue. 

Submitted: 

June 13,2011 

Prepared by: 

Lyn Utrecht 

Eric F. Kleinfeld 

Patricia A. Fiori 

Karen A. ZegUs