Final Audit Report of tlie 

Commission on the Califomia 

Republican Party/V8 

January 1, 2007 - December 31, 2008 

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 

(die Act). The 

Commission generally 

conducts such audits 

when a committee 

appears not to have met 

the threshold 

requirements for 

substantial compliance 

with the Act.' TTie audit 

determines whether the 

conimittee complied with 

the limitations, 

prohibitions and 

disclosure requirements 

of die Act. 

Future Action 

The Commission may 

initiate an enforcement 

action, at a later time, 

with respect to the matter 

discussed in diis report. 

About the Conunittee (p. 2) 

The Califomia Republican Party/V8 is a state party conimittee 

headquartered in Burbank, Califomia. For more information, 

see the chart on the Committee Organization, p. 2. 

Financial Activity (p. 2) 

e Receipts 

o Contributions from Individuals 

o Contributions from Other Political 

Committees 

o Transfers from Affiliated Party Committees 

o Transfers from Non-federal and Levin 

Accounts 

o Other Receipts 

Total Receipts 

e Disbursements 

o Operating Expenditures 

o Transfers to Affiliated/Other Party 

Committees 

o Contributions to Federal Candidates 

o Coordinated Party Expenditures 

o Federal Election Activity 

o Contribution Refunds 

Total Disbunements 

e Levin Receipts 

• Levin Disbursements 

$ 6,367,753 

87,646 

7,557,282 

3.389,660 

188.928 

$ 17,591,269 

$ 11,110,199 

3.968,892 

30,000 

41,660 

2,392,956 

33,688 

$ 17,577,395 

$ 620,349 

$ 624,378 

Commission Finding (p. 3) 

e Misstatement of Levin Financial Activity 

Additional Issues (p. 3) 

e Reporting of Debts & Obligations (Issue 1) 

• Extension of Credit by a Commercial Vendor (Issue 2) 

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

Commission on the 

Califomia RepubUcan Party/V8 

January 1, 2007 - December 31, 2008 
Table of Contents 

Page 

Part I. Background 

Autiiority for Audit 1 

Scope of Audit 1 

Audit Hearing 1 

Part II. Overview of Committee 

Committee Organization 2 

Overview of Financial Activity 2 

Part III. Summaries 

Commission Finding 3 

Additional Issues 3 

Part IV. Conunission Finding 

Misstatement of Levin Financial Activity 4 

Part V. Additional Issues 

Issue 1. Reporting of Debts & Obligations 6 

Issue 2. Extension of Credit by a Conunercial Vendor 8 
Parti 

Background 

Authority for Audit 

This report is based on an audit of the Califomia Republican Party/V8 (CRP), undertaken 

by die Audit Division bf the Federal Election Conunission (tiie Commission) in 

accordance with the Federal Election Campaign Act of 1971, as amended (the Act). The 

Audit Division conducted die audit pursuant to 2 U.S.C. §438(b), which permits die 

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 intemal review of reports filed by selected 

committees to determine whether 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 

Following Conunission-approved procedures, die Audit staff evaluated various risk 

factors and as a result, this audit examined: 

1. the disclosure of individual contributors' occupation and name of employer; 

2. the disclosure of disbursements, debts and obligations; 

3. the disclosure of expenses allocated between federal, non-federal, and Levin 

accounts; 

4. the consistency between reported figures and bank records; 

5. the completeness of records; and 

6. other committee operations necessary to the review. 

Audit Hearing 

CRP declined the opportunity for an audit hearing before die Commission on matters 

presented in diis report. 
Part II 

Overview of Committee 

Committee Organization 

Important Dates 

• Date of Registration March 5,1981' 

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

Headquarters Burbank, Califomia 

Bank Information 

• Bank Depositories One 

• Bank Accounts Four Federal, Two Levin & Ten Nonfederal Accounts 

Treasurer 

• Treasurer When Audit Was Conducted Keith Carlson 

• Treasurer During Period Covered by Audit Keith Carlson 

Management Information 

• Attended Commission Campaign Finance Seminar Yes 

• Who Handled Accounting and Recordkeeping Tasks Paid Staff 

Overview of Financial Activity 

(Audited Amounts) 

Cash-on-hand @ January 1,2007 | $ 66,827 

o Contributions from Individuals 6,367,753 

o Contributions from Other Political Committees 87,646 

o Transfers from Affiliated Party Committees 7,557,282 

o Transfers from Non-federal and Levin Accounts 3,389,660 

o. Other Receipts 188.928 

Total Receipts $ 17,591,269 

o Operating Expenditures 11,110.199 

o Transfers to Affiiiated/Other Party Committees 3,968,892 

o Contributions to Federal Candidates 30,000 

o Coordinated Party Expenditures 41.660 

o Federal Election Activity 2,392,956 

o Contribution Refunds 33,688 

Total Disbursements $ 17,577,395 

Cash-on-hand @ December 31,2008 $ 80,701 

Levin Cash-on-hand @ January 1,2007 $ 11,321 

Total Levin Receipts $ 620,349 

Total Levin Disbursements $ 624,378 

Levin Cash-on-hand @ December 31,2008 $ 7,292 

^ CRP originally registered witii tiie Secretary of the Senate on August 7,1974, as tiie Republican State Central 

Committee of Califomia Federal Election Account, under a different identification number. This previous 

committee terminated on August S, 1981, shortiy after the formation of the current Committee. On April 8,2011, 

CRP filed an amended Statement of Organization changing its name to the Califomia Republican Party. 
Part III 

Summaries 

Commission Finding 

Misstatement of Levin Financial Activity 

During audit fieldwork, a comparison of CRP's reported Levin activity with bank records 

revealed a material misstatement of receipts and disbursements in 2008. CRP 

understated receipts and disbursements by $50,071 and $54,000, respectively. In 

response to the Interim Audit Report recommendation, CRP filed amended reports to 

correct the misstatements. 

The Commission approved die finding that CRP misstated its Levin fund activity for 

calendar year 2008. (For more detail, see p. 4.) 

Additional Issues 

Issue 1. Reporting of Debts & Obligations 

Audit fieldwork indicated diat CRP did not accurately disclose debts and obligations for 

28 vendors totaling $2,188,950 on Schedule D (Debts and Obligations) of diose reports 

reviewed during the audit. In response to the Interim Audit Report recommendation, 

CRP filed amended disclosure reports to correct die debt reporting. 

The Conunission did not approve, by the required four votes, the Audit staff's 

recommendation that CRP did not accurately disclose debts and obligations for 28 

vendors totaling $2,188,950. Pursuant to Commission Directive 70, this matter is 

discussed in the "Additional Issues" section. (For more detail, see p. 6.) 

Issue 2. Extension of Credit by a Commercial Vendor 

The Audit staff noted that an incorporated vendor appeared to have made a prohibited 

contribution to CRP by extending credit beyond its normal course of business and by not 

making commercially reasonable attempts to collect $1,171,002 for services rendered. In 

response to the Interim Audit Report and Draft Final Audit Report recommendations, 

CRP and the vendor presented a detailed analysis of the circumstances that led to the 

incurred debt, their attempts to devise payment plans to resolve the debt, and why the 

extension of credit was beneficial to both parties. 

The Conimission could not reach consensus on whether CRP had demonstrated that the 

vendor terms were in its normal course of business or whether the vendor had made 

commercially reasonable attempts to collect the CRP debt. Thus, the Commission did 

not approve, by the required four votes, the Audit staff's recommendation that CRP 

accepted a prohibited contribution from the vendor. Pursuant to Conimission Directive 

70, this matter is discussed in the "Additional Issues" section. (For more detail, see p. 8.) 

Available at http://www.fec.gov/directives/directive_70.pdf. 
Part IV 

Commission Finding 

Misstatement of Levin Financial Activity 

Summary 

During audit fieldwork, a comparison of CRP's reported Levin activity widi bank records 

revealed a material misstatement of receipts and disbursements in 2008. CRP 

understated receipts and disbursements by $50,071 and $54,000, respectively. In response 

to the Interim Audit Report recommendation, CRP filed amended reports to correct the 

misstatements. 

The Commission approved the finding that CRP misstated its Levin fund activity for 

calendar year 2008. 

Legal Standard 

A. Reporting. If a state, district or local party committee's combined annual receipts 

and disbursements for federal election actiyity (FEA) are $5,000 or more during the 

calendar year, dien it must disclose receipts and disbursements of federal funds and Levin 

funds used for FEA. 11 CFR §300.36(b)(2). 

B. Contents of Levin Reports. Each report must disclose: 

• The amount of cash-on-hand for Levin funds at the beginning and end of the 

reporting period; 

• The total amount of Levin fund receipts and disbursements (including allocation 

transfers) for the reporting period and for die calendar year; and 

e Certain transactions that require itemization on Schedule L-A (Itemized Receipts of 

Levin Funds) or Schedule L-B (Itemized Disbursements of Levin Funds). 

11 CFR §300.36(b)(2)(B). 

Facts and Analysis 

A. Facts 

As part of fieldwork, die Audit staff reconciled CRP's reported Levin activity widi bank 

records for 2008. The following chart outiines the discrepancies conceming the 

beginning cash-on-hand balance, receipts, disbursements and the ending cash-on-hand 

balance. The succeeding paragraph addresses die reasons for the misstatements. 
2008 Committee Activity 

Reported Bank Records Discrepancy 

Beginning Cashron-Hand 

Balance @ January 1, 2008 

$14,988 $14,443 $545 

Overstated 

Receipts $556,470 $606,541 $50,071 

Understated 

Disbursements $559,692 $613,692 $54,000 

Understated 

Ending Cash-on-Hand 

Balance @ December 31,2008 

$11,766 $7,292 $4,474 

Overstated 

CRP overstated the beginning cash-on-hand balance by $545. CRP did not explain the 

reason for the overstatement but it likely resulted from prior-period discrepancies. The 

$50,071 understatement of receipts resulted mostly from contributions from individuals 

that CRP did not report; die understatement of disbursements by $54,000 resulted from a 

vendor payment that CRP did not report, and the $4,474 overstatement of the ending 

cash-on-hand balance was the result of the misstatements previously described. 

B. Interim Audit Report & Audit Division Recommendation 

The Audit staff discussed the reporting errors and presented relevant work papers to the 

CRP representative at die exit conference. The representative stated that he would 

review the matter. 

The Interim Audit Report recommended diat CRP amend its reports to correct die 

misstatement for 2008 and amend its most recently filed report to correct the cash-onhand balance with an explanation diat die change resulted from a prior-period audit 

adjustment. Further, CRP should have reconciled die cash balance of its most recent 

report to identify any subsequent discrepancies diat may have had an impact on the 

$4,474 adjustment recommended. 

C. Committee Response to Interim Audit Report 

In response to the Interim Audit Report reconunendation, CRP amended its reports to 

correct die misstatements. Specifically, CRP amended Schedule A to disclose receipt of 

$50,000 from five individuals and payment to a vendor on Schedule B for $54,000. Prior 

to die issuance of this report, CRP transferred the remaining funds in its Levin account to 

a non-federal account, resolving the remaining discrepancies. 

D. Draft Final Audit Report 

In the Draft Final Audit Report, Audit staff acknowledged diat CRP filed amended 

disclosure reports that corrected the misstatements. CRP did not address this matter in its 

response to the Draft Final Audit Report. 

Commission Conclusion 

On April 11,2013, die Commission considered die Audit Division Recommendation 

Memorandum in which the Audit staff recommended that the Commission adopt a 

finding diat CRP misstated its Levin fund activity for calendar year 2008. The 

Conunission approved the Audit staffs reconunendation. 
Partv 

Additional Issues 

Issue 1. Reporting of Debts & Obligations 

Simimary 

Audit fieldwork indicated that CRP did not accurately disclose debts and obligations for 

28 vendors totaling $2,188,950 on Schedule D (Debts and Obligations) of those reports 

reviewed during the audit. In response to the Interim Audit Report recommendation, 

CRP filed amended disclosure reports to correct die debt reporting. 

The Commission did not approve, by the required four votes, the Audit staffs 

recommendation diat CRP did not accurately disclose debts and obligations for 28 

vendors totaling $2,188,950. Pursuant to Commission Directive 70, this matter is 

discussed in the "Additional Issues" section. 

Legal Standard 

A. 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 104.11(a). 

B. Separate Schedules. A political committee must file separate schedules for debts 

owed by the conunittee 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 die debt was incurred. 11 CFR § 104.11(b). 

Facts and Analysis 

A. Facts 

During fieldwork, the Audit staff reviewed disbursement records and disclosure reports 

for proper reporting of debts and obligations. This review identified debts owed to 28 

vendors totaling $2,188,950 diat required disclosure. Most of die identified debts were 

greater dian $500, and all remained outstanding during the reporting period in which diey 

were incurred. 

B. Interim Audit Report & Audit Division Recommendation 

At the exit conference, the Audit staff discussed these debts widi a CRP representative 

and provided relevant work papers. The representative stated that he would review the 

matter. 
The Interim Audit Report recommended diat CRP amend its reports to disclose diese 

debts and obligations on Schedule D. 

C. Committee Response to Interim Audit Report 

In response to the Interim Audit Report, CRP commented,".. .Finding No. 2 does not 

conclude diat die CRP failed to report debts and obligations; ratiier diat the reported debts 

and obligations by period were inaccurate. Some of these debts and obligations were 

reported on a later monthly report than the one the FEC auditor found it should have been 

reported." CRP also commented, "We would like to point out that CRP's largest vendor 

(Strategic Fundraising (SFI)) was disclosed properly every month." 

Commission regulations require continuous reporting of debt and obligations until the 

debt is extinguished. The review by die Audit staff concluded that CRP did not 

continuously disclose several Obligations as required on Schedule D, while CRP never 

disclosed other obligations on Scheduie D. The Audit staff agrees that SFI was not one 

of the vendors cited in this review. 

In response to the Interim Audit Report recommendation, CRP amended its reports to 

correct the disclosure of debts and obligations on Schedule D. 

D. Draft Final Audit Report 

In the Draft Final Audit Report, Audit staff acknowledged tiiat CRP amended its reports 

to correct the disclosure of debts and obligations on Schedule D. 

Commission Conclusion 

On April 11,2013, die Conunission considered die Audit Division Recommendation 

Memorandum in which the Audit staff reconunended that tiie Commission adopt a 

finding diat CRP failed to disclose debts and obligations totaling $2,188,950 on Schedule 

D of its reports. 

The Commission could not reach a consensus on whether CRP had failed to disclose 

these debts and obligations. Some Commissioners voted to approve the recommended 

finding. Other Commissioners believed that a finding was Unnecessary given that die 

payments to vendors were reported after they were made and CRP complied with die 

Interim Audit Report recommendation to file amended disclosure reports for the relevant 

debts and obligations. The Conunission did not approve the Audit staffs recommended 

finding by the required four votes. 

Pursuant to Commission Directive 70, matters not approved by the required four votes 

are discussed in die "Additional Issues" section. 
Issue 2. Extension of Credit by a Commercial Vendor 

Summary 

The Audit staff noted that an incorporated vendor appeared to have made a prohibited 

contribution to CRP by extending credit beyond its normal course of business and by not 

making commercially reasonable attempts to collect $1,171,002 for services rendered. In 

response to the Interini Audit Report and Draft Final Audit Report recommendations, 

CRP and die vendor presented a detailed analysis of die circumstances diat led tb die 

incurred debt, their attempts to devise payment plans to resolve the debt, and why the 

extension of credit was beneficial to both parties. 

The Commission could not reach consensus on whether CRP had demonstrated that the 

vendor terms were in its normal course of business or whether the vendor had made 

commercially reasonable attempts to collect the CRP debt. Thus, the Conimission did 

not approve, by the required four votes, the Audit staffs recoinmendation that CRP 

accepted a prohibited contribution from the vendor. Pursuant to Conunission Directive 

70, this matter is discussed in the "Additional Issues" section. 

Legal standard 

A. Corporate Contributions Impermissible. A corporation is prohibited from making 

any contribution in connection with a federal election. 2 U.S.C. §441b(a). 

B. Definition of Commercial Vendor. A commercial vendor is any person who 

provides goods or services tp a candidate or political committee and whose usual and 

normal business involves the sale, rental, lease or provision of those goods or services. 

11 CFR §116.1(c). 

C. Extension of Credit by Commercial Vendor. A conunercial vendor, whether or not 

it is a corporation, may extend credit to a candidate or political committee provided that: 

e The credit is extended in the vendor's ordinary course of business; and 

• The terms of the credit are similar to the terms the vendor observes when 

extending a similar amount of credit to a nonpolitical client of similar risk. 

11 CFR §116.3(a) and (b). 

Facts and Analysis 

A. Facts 

During fieldwork, the Audit staff identified an incorporated vendor that appeared to have 

made a prohibited contribution to CRP by impermissibly extending credit beyond its 

normal course of business and by not providing documentation demonstrating that the 

vendor made commercially reasonable attempts to collect the debts. The vendor. 

Strategic Fundraising, Inc. (SFI), performed voter/donor file prospecting and telephone 

fundraising services for CRP. There are 297 invoices, totaling $1,171,002, which were 

outstanding between 121 and 757 days. Several of diese invoices, dated between October 

and December 2006, were outstanding for services rendered during the 2006 election 

cycle. CRP paid all invoices between March and October 2007 and also in November 

2008. Other than die invoices, CRP initially made no other documentation available to 

demonstrate that SFI made further attempts to collect these debts. 
B. Interim Audit Report & Audit Division Recommendation 

At the exit conference, die Audit staff discussed diis matter widi a CRP representative 

and provided relevant work papers for review. The representative stated that he would 

review the matter. 

The Audit staff had questions regarding SFI's billing and payment practices; therefore, a 

copy of the SFI vendor contract was requested. In response, CRP provided the contract 

and a letter from SFI addressing the extension of credit. The contract contained the 

following pertinent provisions: 

e While SFI was responsible for planning, preparing, managing and conducting all 

telephone fundraising efforts directed at bodi previous and prospective donors, 

CRP was responsible for collecting, depositing and recording all contributions 

generated by SFI and providing SFI with regular reports "identifying all 

individuals who contributed to the Committee as a result of SFI's efforts, along 

with the amount and date of each contribution." 

e SFI was to invoice CRP weekly, and CRP was to pay all invoices within 30 days 

of the invoice date and pay all prospecting invoices upon receipt. 

• Outstanding balances 30 days past due were to accme interest of 1 % 

compounded monthly, 

e The prospective donor fimdraising section included a "Break-Even Guarantee," 

whereby in exchange for the right to be CRP's exclusive telephone fundraising 

firm, SFI agreed to cover the costs of all calls to prospective contributors. As 

such, CRP was not expected to pay more for prospecting calls than the sum of all 

actual contributions generated by those calls. The guarantee included a provision 

in which the parties acknowledged diat SFI was "accepting significant business 

risk" by extending the guarantee to CRP and provided partial mitigation of the 

risk by granting SFI the exclusive right to conduct CRP's fimdraising programs 

over the course of an entire year, 

e SFI would be paid for its prospecting services at "an amount equal to the gross 

receipts generated by each prospecting project." In addition, if the "cumulative 

gross proceeds from all Prospecting campaigns performed in a calendar year 

exceeded the total of all prospecting calls.. .die positive difference [would] be 

credited to the Committee." 

The letter from SFI stated diat credit was extended to CRP because it, along with many 

other Republican Party clients of SFI, was unable to engage in sustainable new donor 

acquisition, renewal and reactivation of old donors as a result of the extemal political 

climate at the time. SFI further stated diat it believed at all times that this extension of 

credit would further CRP's receipt of new funding, and that at no time did it intend to 

make a contribution by virtue of its extension of credit. SFI contended that the extension 

of credit was in its ordinary course of business, and that it followed its established 

procedures and its past practice with other telephone fundraising clients in the political 

arena in approving the extension of credit. SFI fiirther added that CRP and SFI 

negotiated a resolution of disputed billing items by devising a payment plan that involved 

its continued telephone fundraising for CRP and retention against the outstanding but 

unpaid balances of receipts until the obligation was satisfied in 2009. SFI contended that 

it received reasonable, prompt payment in full from CRP based on this extension of 

credit. 
10 

After consideration of all the aspects of diis matter, the Audit staff suggested that there 

were two separate and distinct issues to be considered. First, in the view of the Audit 

staff, CRP should have established that SFI's extension of credit was in its ordinary 

course of business. Second, if the first provision was met, in the view of the Audit staff, 

CRP should have demonstrated that SFI made commercially reasonable attempts to 

collect the debts. If CRP did not establish either provision, a prohibited contribution 

would have resulted. 

Ordinary Course of Business 

In determining whether an extension of credit was in the ordinary course of business, the 

Commission considers whether the vendor followed established procedures and past 

practices, whether die vendor received prompt payment in full for previous extensions of 

credit, and whether the extension of credit conformed to the usual and normal practice in 

die industry (11 CFR §116.3(c)). 

In the view of the Audit staff, in considering similar fundraising agreements, the 

Commission has sought to determine whether an extension of credit was in a vendor's 

ordinary course of business by considering the presence of adequate vendor safeguards. 

The Commission has required committees to have safeguards in place to ensure that 

committees, in fact, pay for all the costs of the fundraising programs. See MUR 5635 

(Conservative Leadership PAC); AO 1991-18 (New York State Democratic Committee); 

AO 1979-36 (Conunittee for Fauntroy). Safeguards proposed by die Conunission have 

included requiring advance deposits by a committee to reimburse vendors for potential 

shortfalls, limiting the term of the contract, or allowing vendors to terminate the contract 

early and demand full payment as a result of poor fundraising performance. 

In die view of die Audit staff, die terms of die "Break Even Guarantee" and the 

exclusivity clause in the contract raise the question of whether SFI's extension of credit 

to CRP was in its ordinary course of business. The guarantee appeared very similar to 

the type of "no-risk" or "limited-risk" provisions that, in previous matters, the 

Goinmission has found could constitute in-kind contributions in the absence of 

safeguards ensuring diat (1) die committee would pay for all of the costs of the 

fundraising programs and (2) the vendor would bear all of the financial risk of programs 

not paying for diemselves. MUR 5635; AO 1991-18; AO 1979-36. However, unlike die 

previous cases, SFI was not responsible for the "caging" of contributions resulting from 

its fundraising activity. The contract outlines that contributions were to be sent to CRP, 

which was supposed to deposit them in its own accoimt and then pay the mvoiced 

amounts to SFI. This provision, in combination with the guarantee, raised questions as to 

whether the arrangement between CRP and SFI was one in which "the committee 

retainfed] contribution proceeds while giving up little, or assum[ing] littie to no risk with 

die vendor bearing all, or nearly all die risk." See AO 1991-18 (New York State 

Democratic Party). It appeared that the exclusivity clause was included to offset any risk 

that prospecting calls would not generate contributions sufficient to cover SFI's costs in 

making ihem. This raised a question regarding whether this clause provided sufficient 

financial value to SFI such that it negated SFI's assumption of the risk that it would lose 

money on the prospecting calls. However, without additional information showing that 

die value of the exclusivity clause was comparable to SFI's financial risk or that "norisk" or "limited-risk" agreements such as the guarantee between CRP and SFI conform 
11 

to die usual and normal practices in die telemarketing industry, die Audit staff concluded 

diat SFI did not extend credit to CRP in its ordinary course of business. 

Conunerciallv Reasonable Debt Collection 

Even where an extension of credit by a commercial vendor is legally permissible when 

made, it may evolve into a contribution over time through the lack of commercially 

reasonable attempts on the part of the vendor to collect the resulting debt. The 

Conunission has determined that diese attempts are conunercially reasonable if the 

vendor has pursued its remedies as vigorously as it would have pursued its remedies 

against a non-political debtor in similar circumstances (11 CFR §116.4(d)(3)). In this 

matter, die Audit staff concluded that die parties did not fulfill many of the debt 

collection provisions outiined in their contract. 

As previously mentioned, other than initial invoices, the Audit staff noted that CRP 

initially made no other documentation available to demonstrate that CRP was billed 

weekly or that SFI had made any further attempts to collect these debts. The Audit staff 

also noted diat CRP did not present documentation to the Audit staff to demonstrate diat 

CRP was billed the required 1 ^2% interest, compounded monthly, for its debts 

outstanding more than 30 days. 

In regard to the letter submitted by SFI, SFI confirmed that credit was extended to CRP 

and other political clients. It also mentioned a negotiated repayment plan; however, the 

Audit staff noted that CRP never discussed diis plan widi the Audit staff or presented it to 

die Audit staff for review. 

The Interim Audit Report reconunended that CRP provide documentation or any other 

comments to demonstrate that SFI had extended credit to CRP in its ordinary course of 

business. In the view of the Audit staff, the documentation should have included, but was 

not limited to, evidence that (1) the "Break Even Guarantee" within the SFI contract is 

common industry practice, (2) verification that die value of the exclusivity clause 

provided sufficient financial value to SFI such that it negated SFI's assumption of the risk 

that it would lose money on the prospecting calls, and (3) confirmation that the terms of 

the credit are similar to the terms SFI observes when extending a similar amount of credit 

to a nonpolitical client of similar risk. 

In addition, the Interim Audit Report recommended diat CRP provide documentation or 

any odier comments to demonstrate diat SFI had made commercially reasonable attempts 

to collect these debts. In the view of the Audit staff, the documentation should haye 

included, but not been limited to, evidence supporting the negotiated payment plan and 

examples of other SFI customers or clients of similar risk for which similar services had 

been provided and similar billing arrangements had been used. CRP also should have 

provided documentation conceming SFI's billing policies for similar clients and work, 

advance payment policies, debt collection policies, and billing cycles. 

Absent such a demonstration, the Audit staff would consider the $1,171,002 an 

impermissible contribution from SFI. 
12 

C. Committee Response to Interim Audit Report 

In response to die Interim Audit Report recommendation, CRP and SFI disputed that the 

extension of credit by SFI resulted in a corporate contribution. 

CRP discussed die many factors diat led to its incurrence of the debts to SFI. CRP's 

specific explanations follow. 

1. Fundraising is Cyclical - CRP stated diat it had incurred most of its SFI debt 

during its traditional drought period, the off-election year (2007). CRP stated that 

"the CRP's traditional fundraising cycle has peaks and valleys, and the valley in 

2007 after die big Califomia gubematorial election of 2006 and die decline of 

national Republican fortunes in the 2006 Congressional elections, was especially 

large and problematic." 

2. CRP Organizational Changes and the Decline in Direct Mail and TeleFundraising Rates - CRP stated that like many organizations that engage in direct 

mail and tele-fundraising efforts, it had suffered a decline in fundraising receipts 

from these activities. CRP also discussed the tumover in key upper management 

positions (Chairman and Chief Operating Officer) and how diis affected its ability 

to resolve some of its debt issues. 

3. National and State Decline in Republican Fortunes - CRP stated, "Like other 

Republican organizations that engage in direct mail and tele-fundraising, the CRP 

also suffered a loss of brand identification and support that was related to die 

declining popularity of the national administration and special conditions in 

Califomia, where in 2006, Republicans had suffered a loss of all but two 

statewide Republican officeholders." CRP added further, "the CRP suffered a 

loss of larger dollar donors in part because its major statewide officeholder, 

Govemor Schwarzenegger, had declared after his re-election in 2006 diat he no 

longer considered himself as a partisan Republican govemor, and he described his 

party as a damaged brand." CRP stated diat, beginning in early 2007, Govemor 

Schwarzenegger stopped helping CRP in fundraising. 

CRP contended that SFI had made commercially reasonable efforts to collect the CRP 

debt. As evidence of diese attempts, CRP stated that it engaged in good-faith discussions 

and negotiations to resolve die debt to SFI. CRP added diat many of its officers and key 

employees were in constant, regular communications with SFI. In addition, CRP's Board 

of Directors received regular briefings at each board meeting regarding the growing debt, 

and key CRP staff visited SFI offices in Minnesota to negotiate a strategy to resolve the 

debt. 

As further evidence that SFI had made commercially reasonable efforts to collect the 

CRP debt, CRP stated diat SFI billed it mondily on all telemarketing and direct mail 

mattera, diat it had hundreds of separate commimications by telephone, email and face-toface with SFI representatives relating to the debt matter, and that SFI's invoices included 

finance charges. 

CRP said that an agreement negotiated widi SFI in July 2008, "(1) resolved disputes 

about billing items; (2) negotiated a set aside of SFI-generated tele-fundraising receipts 

that were dedicated and credited to pay-down of the CRP debt; and (3) extended the SFICRP fundraising agreement into 2009-2010." 
13 

CRP contended that the fundraising agreement was. in SFI's ordinary course of business. 

In response to the concem that the agreement widi SFI did not provide for it to cage and 

sequester funds necessary to pay its bills, CRP stated diat it chose to separate caging 

functions from all its fundraising vendors and that it had a separate caging vendor and 

agreement. CRP points out two critical facts. First, CRP was one of the largest, if not die 

largest, of SFI's clients. CRP stated diat diis better ensured compliance widi FEC and 

non-federal campaign reporting requirements. Second, CRP's financial situation during 

2007 and 2008 resulted in delayed payments to vendors. The separate caging agreement 

allowed for it to balance payments to vendors with "keeping its doors open." 

To supplement its Interim Audit Report response, CRP provided conunents from SFI to 

address its contention that it extended credit in the normal courae of business. SFI 

contended that extending credit was in the best interest of CRP from a prospecting and 

fundraising perspective, and in the best interest of SFI from the perspective of helping a 

valued, long-term client by working out a mutually beneficial payment plan. SFI stated 

diat it believed that by continuing to prospect and fundraise for CRP, in spite of the debt, 

not only would CRP eventually realize its fundraising goals but its donor base also would 

not decline or lose value and CRP would possibly acquire new donors. SFI stated that 

the result of extending credit to CRP would be CRP gaining new or lapsed donors and 

SFI eventually being paid. Therefore, SFI extended credit to CRP. SFI noted that at no 

time had it intended to make a contribution to CRP by virtue of an extension of credit. 

Regarding die "Break Even Guarantee" and the exclusivity provision within the CRP and 

SFI agreement, SFI stated, "Without disclosing too much of the details of our business 

model or explaining how fundraising works, SFI will stress diat our standard fundraising 

agreements widi all political clients call for exclusivity. As a company, we understand 

die need to acquire new donors for the long-term health of our partners like the CRP and 

we have a 20 year history which allows us to mitigate our intemal 'risk'. All otiier telefundraising firms offer the exact or similar 'break-even guarantee'. As pointed out above, 

we issue credit to non-political clients as well in the exact same fashion." 

Regarding SFI's commercially reasonable attempts to collect the CRP debt, SFI 

contended that besides its normal weekly invoices, it also sends out via an e-mail link biweekly summaries and open invoice reports which contain the 'aging* for each client. 

SFI added that this was done for all its clients, political and non-profit. As furdier 

evidence, SFI stated, "SFI requested and was presented with several informal payment 

plans in die fall/winter of 2007. They would be adhered to for a while, and dien the CRP 

would be unable to keep up with the payments..." SFI concurred with CRP that a new 

agreement was created in 2008 that resulted in the debt being paid off in early 2009. 

Assessment bv the Audit Staff 

After reviewing the responses submitted by CRP and SFI, the Audit staff made die 

following observations regarding CRP's adherence to the Interim Audit Report 

recommendation. 

1. Other than providing written comments, CRP did not submit any documentation 

to demonstrate that SFI had extended credit to CRP in its ordinary course of 

business. SFI stated diat die "Break Even Guarantee" and die exclusivity clause 

within its contract is common industry practice, but neither CRP nor SFI provided 
14 

any examples of odier client contracts or supporting documentation to validate 

this statement. SFI cited confidentiality clauses in contracts with its non-profit 

clients that do not fall under the purview of the Commission. In addition, neither 

CRP nor SFI provided confirmation that the terms of the credit issued to CRP are 

similar to the terms SFI observed when extending a similar amount of credit to a 

nonpolitical client of similar risk. 

Furdier research by die Audit staff indicated the "Break Even Guarantee" and the 

exclusivity clause were not unusual in the fundraising industry. SFI did not 

"cage" the contributions resulting from the fundraising activity. Under its 

contract, contributions were to be sent directiy to CRP, which was to deposit the 

contributions in its own account and then pay the invoiced amounts to SFI. This 

provision, in combination with the Guarantee, raised questions in the Audit staffs 

view as to whether die arrangement between CRP and SFI was one in which CRP 

retained contribution proceeds while giving up little, or assuming little to no risk 

with SFI bearing all or nearly all the risk. The Audit staffs research also 

indicated this provision is not unusual. 

CRP did not provide documentation to demonstrate any particular financial value 

of the exclusivity clause. If the exclusivity clause provided value to SFI sufficient 

to negate SFI's assumption of the risk that it would lose money on the prospecting 

calls, the extension of credit would result in no contribution. Further research by 

the Audit staff indicated that when a contract contdned an exclusivity clause as a 

safeguard against losses by the vendor, it was not the only safeguard. In contrast, the 

Audit staff believed that the exclusivity clause was the only safeguard in CRP's 

contract with SFI. 

2. CRP and SFI bodi detailed SFI's attempts to collect die CRP debt. However, 

neither provided any evidence to support the various negotiated payment plans, 

the bi-weekly summaries or open invoice reports, the meetings between CRP and 

SFI officials, the hundreds of conununications between the two parties, etc. In 

addition, neidier CRP nor SFI provided any examples of other SFI customers or 

clients of similar risk for which similar services had been provided and similar 

billing arrangements had been utilized. 

In the view of the Audit staff, SFI's effort to convince the CRP to resume the 

fundraising program and SFI's continued provision of services when CRP had 

repeatedly failed to pay raised the question of whether SFI's debt collection 

efforts were conunercially reasonable. Among the debt collection practices that the 

Audit staff might have regarded as evidence of commercial reasonableness was the 

withholding of additional services until overdue debts were satisfied. Here, the 

Audit staff concluded diat the opposite happened: CRP, concemed about the 

level of debt it had accumulated, sought to suspend delivery of services from SFI, 

and it was SFI that convinced CRP that the only viable way for CRP to get out of 

debt to SFI was for it to continue the fundraising program. If this is correct, it 

may be that SFI's decision to give CRP additional time to pay and SFI's decision 

to continue providing services was commercially reasonable. However, the Audit 

staff believed that additional information was necessary to reach this conclusion. 

SFI asserted in its response that, as part of its effort to convince the CRP, it met 
15 

widi CRP and presented a detailed house file analysis that included details on 

historical fundraising trends and renewal rates. In addition, SFI contended that 

this meeting led to a better understanding of the need to prospect and fundraise to 

help CRP out of the situation it found itself in. Information supporting this 

contention by SFI would be precisely the type of information that would have 

demonstrated the conunercial reasonableness of SFI's course. In addition, the 

specifics of the negotiated payment plans and how the plans compare to the terms 

SFI had provided to similarly situated nonpolitical clients may have dso 

demonstrated the commercial reasonableness and reasonable debt collection 

efforts by SFI. However, while bodi CRP and SFI said that SFI provided such 

information to CRP in 2008, neidier provided a copy of the detailed house file 

andysis or the specifics of the negotiated payment plans to the Audit staff. 

After review of the responses to the Interim Audit Report submitted by CRP and SFI, the 

Audit staff concluded that CRP had not demonstrated that SFI had extended credit within 

its ordinary course of business or made commercially reasonable attempts to collect the 

CRP debt. Pending CRP's provision of fiirther documentation, the Audit staff still 

considered diis matter an impermissible contribution of $1,171,002 to CRP. 

D. Draft Final Audit Report 

In response to the DFAR, CRP and SFI submitted letters disputing the Audit staffs 

contention diat CRP has not demonstrated diat SFI extended credit within its ordinary 

course of business or made commercially reasonable attempts to collect the CRP debt. 

CRP Response to DFAR 

In its response, CRP responded to some questions raised by the Audit staff in the DFAR 

and die Office of General Counsel (OGC) in its DFAR legal analysis. CRP stated diat: 

1. ".. .die CRP believes diat SFI did not suffer actual financial losses from 

die 'no risk guarantee' " and ".. .SFI was paid nearly in full for die 

amounts it had initially billed for services." 

2. "Based upon its additional submission, SFI believes diat it made a profit, 

and continues to make a profit on its fundraising relationship widi the 

CRP." CRP wrote further diat die best evidence of diis is tiiat tiie 

relationship between CRP and SFI has continued for another four years. 

In addition, CRP suggested that the Commission should consider revising its debt 

settlement provisions fpr ongoing committees such as CRP since its debt situations are so 

different than those for terminating committees. CRP contended that, unlike a candidate 

committee, a party committee is an ongoing entity that must fundraise to remain in 

existence, and often extemal conditions affect its ability to fundraise. As such, party 

committees must enter into contractual obligations with fundraising entities in a manner 

that will ensure their existence. 

CRP also included a memorandum to SFI (dated July 3,2008) diat discussed a partial 

payment of $250,000 to SFI".. .on a currentiy unresolved account payable..." The 

memorandum also stated that CRP is currentiy undertaking a comprehensive review of 

die SFI bills, from an accuracy and performance standpoint. In addition, the 

memorandum stated, "[die enclosed payment] should be viewed solely as a good faidi 

effort on CRP's part to reduce die outstanding bdances subject to the completion of the 
16 

comprehensive review and a determination of what is the appropriate amount due under 

these contracts." 

CRP provided more details of the 2008 negotiated settiement between SFI and CRP. In 

one of die provisions, which the Audit staff had not seen previously, SFI agreed to waive 

accmed interest on unpaid balances if CRP agreed to meet its obligations to pay the 

balance of amounts outstanding or that which would be accmed in the fundraising efforts 

tiiat SFI and CRP undertook from the late summer of 2008 tiirough tiie beginning of 2009 

to extinguish the past debt. In addition, CRP and SFI were to negotiate an extension of 

the fundraising agreement for the 2009-2010 cycle. CRP and SFI also made payment 

agreements for future fundraising. However, CRP did not present the formal agreements 

to the Audit staff. 

Information Provided bv SFI 

CRP also provided the information below from SFI. 

1. Regarding some of the safeguards proposed by the Commission, SFI 

stated that "[t]he CRP has bylaws that forbid it from entering into 

agreements that span across two board terms essentially limiting the 

contract to approximately two years." SFI also contended that all of its 

contracts, with both political and non-profit clients, contain a termination 

clause that either party can execute for any reason. 

2. Regarding die caging of contributions by CRP, SFI stated tiiat it has 

control over "risk" in all of its fundraising agreements. SFI contended 

diat, as part of the fundraising agreement widi CRP, SFI routinely audits 

the "caged" data to verify every donation is being accurately and timely 

reported to SFI. SFI also added that "[w]hile some fundraising/donor 

acquisition is low margin work, it goes without saying.that through our 20 

years of experience we are able to avoid 'losing money.' " SFI stated that 

die fact that CRP was able to fundraise out of the financial situation and 

pay off its balance owed to SFI contradicts die DFAR conclusion and 

demonstrates it is without basis. 

3. Regarding its commercially reasonable debt collection efforts, SFI stated 

that it has had other clients that found themselves in similar debt 

situations, which were resolved under similar verbal agreements. In 

addition, SFI stated that "[o]ther documentation to demonstrate SFI's full 

efforts to collect the debt is difficult to come by as this occurred 4-5 years 

ago, the CRP staff and treasurer involved have moved on and our CEO at 

the time has since retired." 

SFI maintained that the debt settiement agreement "worked as planned" and".. .that the 

CRP paid off the debt and is a continued partner of SFI's to this day." SFI furdier stated 

diat "[o]ur experience tells us that 'withholding of additional services until overdue debts 

are satisfied' doesn't work. I have been made aware of several state parties having their 

vendors stop doing work for them only to 1) not get paid, 2) get paid more slowly or 3) 

end the relationship permanently. We sought a win-win solution and achieved it." SFI 

expressed a concem regarding the provision of additional documentation to the Audit 
17 

staff. SFI stated diat "[i]t does not seem appropriate however to disclose private (to the 

CRP) and proprietary (to SFI) information that could/would end up on the public record. 

Sharing LifeTime Value data, inception donor counts, renewal rates, fundraising plans, 

etc [sic] does not appear to be in die purview of die Conimission." 

In response to the memorandum sent to SFI by CRP (previously discussed on p. 17), SFI 

sent a letter to CRP dated July 9,2008. The letter indicated diat CRP had nearly a 

$900,000 balance that had accmed over the last 12-14 months. SFI also wrote diat 

communication between CRP and SFI never mentioned any "unresolved payables" and 

that during a meeting held in Minnesota between CRP and SFI, there was no mention of 

CRP undertaking a comprehensive review from an accuracy and performance standpoint. 

However, SFI did indicate that CRP was going to provide a list of questions regarding 

small billing issues but that SFI never received the list. 

The Audit staff concluded that CRP received a prohibited contribution from SFI. The 

Audit staff believed that SFI's initial extension of credit to CRP was not in its ordinary 

course of business and diat SFI did not engage in commercially reasonable debt 

collection efforts in seeking repayment from CRP. 

Commission Conclusion 

On April 11, 2013, the Commission considered the Audit Division Recommendation 

Memorandum in which the Audit staff recommended diat the Commission adopt a 

finding diat CRP accepted a prohibited contribution from SFI totaling $1,171,002 as 

SFI's initial extension of credit to CRP was not in its ordinary course of business and SFI 

did not engage in commercially reasonable debt collection efforts in seeking repayment 

from CRP. 

The Commission did not approve die Audit staffs reconunended finding by die required 

four votes. Some Commissioners voted to approve the recoinmendation of the Audit 

staff. Odier Commissioners believed diat there was consideration for the forgiveness of 

outstanding interest payments, diat SFI took sufficient steps and had adequate safeguards 

in place to ensure its repayment, and that the initial extension of credit was in SFI's 

ordinary course of business. Some Commissioners further expressed concems with the 

Audit staffs requests for SFI to provide additional documentation from SFI clients 

detailing services and billing arrangements. Pursuant to Commission Directive 70, this 

matter is discussed in the "Additional Issues" section.