Trust, But Verify

No one ever hires a campaign consultant thinking that the consultant might embezzle from the committee.  And yet it happensAgain.  And again.

Following a spate of high-profile political embezzlement cases, the Federal Election Commission and campaign finance lawyers rightfully are placing renewed emphasis on the FEC’s recommended best practices and internal controls as an important safeguard against embezzlement.  Moreover, if adopted and implemented by the committee, the internal controls provide a safe harbor for an innocent treasurer who otherwise could be held personally liable as a result of an embezzlement that happened on his or her watch.

These recent embezzlement cases point up more than the importance of adopting the FEC’s best practices and internal controls, however.  They also demonstrate the need to run a political campaign like a business—and in the case of many House and Senate campaigns, these are multi-million dollar annual businesses.

It’s difficult to envision any new business forming up and launching a product or service into the marketplace without first taking on some type of corporate form to shield the individuals behind the company from personal liability.  But a quick review of public records indicates that a vast majority of political campaigns decline to undertake this simple step.

It’s similarly hard to imagine a company hiring an employee who immediately will be privy to reams of sensitive information, or retaining a vendor to provide hundreds of thousands of dollars in services, without putting a contract in place to memorialize specific points of the parties’ agreement and to protect the company’s assets and interests.  Campaigns routinely hire employees and retain vendors, however, and expose them to the campaign’s research, strategic, financial and operational information, without putting so much as a confidentiality agreement in place.

What could go wrong?  How about unlimited personal exposure on the part of the candidate for the committee’s debts and liabilities, for starters?  Karl Rove taught that lesson to, of all pupils, a former Attorney General of the United States, Dick Thornburgh, after Thornburg failed to incorporate his U.S. Senate campaign.  Still not convinced?  How about having your campaign account frozen by a federal bankruptcy court to satisfy the candidate’s personal and business obligations?  Georgia State Representative Jill Chambers learned that one the hard way after she, too, neglected to incorporate her campaign committee.  (An abominable decision by the bankruptcy court in that case, by the way.)  And then, of course, there are the embezzlement cases, in which campaign treasurers could be held personally liable by the FEC because of diversions of funds they had nothing to do with.

Personal relationships are foundational to politics.  Political candidates tend to surround themselves with people they know and trust.  Florida Congresswoman Corrine Brown probably trusted her fundraisers, too.  Then they sued her for $44,495.

Perhaps candidates who decline to incorporate their campaigns are looking to save a bit of time and money for another round of GOTV robocalls.  Perhaps campaigns that fail to use contracts don’t want to risk offending trusted advisers, vendors and consultants by making them sign a legal document.

Whatever the reason, it’s bad business practice. And in an age when the average House race costs $1.163 million and the average Senate race costs over $8 million, there’s a lot at stake.  So candidates, heed the old Russian proverb and “trust, but verify”:  incorporate your campaign committees; implement the FEC’s best practices and internal controls; and sign contracts with your employees, consultants and vendors.  Your campaign is, after all, a business—with a bank account, office space, employees, assets and liabilities—you should run it like one.

Copyright 2011 – Chris Ashby and Ashby Law PLLC – All Rights Reserved.

An End Run on the Campaign Finance Laws

When the government indicted John Edwards for campaign finance violations stemming from the extra-marital affair he conducted and covered-up during his 2008 presidential campaign, his attorneys assailed the charges as “novel” and “unprecedented.”  They were quick to condemn their client for cheating on his cancer-stricken wife and lying to the American people, but protested that the payment of nearly $1 million in hush money by wealthy Edwards donors to his mistress and mother of his youngest child was not illegal.

Prominent Washington lawyers, law professors and national Democrat surrogates parroted the Edwards talking points and all but predicted dismissal of the charges or a “not guilty” verdict.  Apparently, many of the same people who can’t stand the thought that the Constitution permits a corporation to fund a political ad independently of a candidate can see no crime in the payment of $1 million in hush money to the paramour of a would-be president.

But here’s why Team Edwards shouldn’t print invitations for the acquittal barbecue just yet:

First, of course the charges are unprecedented.  That’s because the conduct itself is unprecedented.  So unprecedented, in fact, that the only person ever before to have conceived of such a scheme had the good sense to ask the Federal Election Commission for permission before implementing it.  The FEC said no, by the way, in a public advisory opinion of the type that campaign finance lawyers cite to their clients as precedent every day.

Just because the charges are unprecedented doesn’t mean they can’t stick.  There is—unfortunately, in this case—a first time for everything.

Second, a general principle of law prohibits one from doing indirectly what one could not achieve directly.  Here, Fred Baron and Bunny Mellon could not have contributed the hundreds of thousands of dollars at issue directly into Edwards’ presidential campaign, because illegal excessive contributions would have resulted.  Neither could Edwards’ campaign have spent that money to pay Rielle Hunter’s rent, car payment, utilities, household food and other similar expenses, because federal campaign finance law prohibits the conversion of campaign funds for personal use.

So instead, Baron and Mellon allegedly made an end run on the law and gave the money directly to Rielle Hunter.  Accomplishing an illegal result through the use of incremental lawful steps, however, does not automatically render the result legal.  Just ask the many individuals the IRS has jailed as a result of tax shelter litigation over the past three decades.

Indeed, no campaign finance lawyer worth his or her hourly rate would have signed off on a plan to divert hundreds of thousands in cash from several max donors to place a roof over the head of the candidate’s secret love child.  Such a ploy would constitute a knowing and willful attempt to evade the limitations and prohibitions of the Federal Election Campaign Act—a matter that is and always has been properly the subject of the federal criminal laws, not the FEC’s civil conciliation process, as Edwards’ lawyers have begged for.

Third, Edwards apparently intends to argue that the donors paid off Hunter not to further his presidential campaign, but rather to conceal the affair from Edwards’ wife. This, they contend, means that the funds never were campaign contributions, because they instead were gifts of a personal nature, if not to Edwards himself then to his lover or her creditors.*

If accepted, this argument would permit wealthy political donors to underwrite presidential and other federal candidates’ living and personal expenses with unlimited and undisclosed cash contributions merely by denominating the payments as “gifts” to a “friend,” paying them to the candidate and his or her family or creditors instead of running them through the campaign.

This type of payment is exactly what the campaign finance law’s “irrespective of” test forbids.  That is, the law prohibits the use of campaign funds to cover personal expenses, defined as those obligations that would exist “irrespective of” the individual’s status as a federal candidate.  Those types of obligations include mortgage payments, tuition bills, utility charges, health and country club memberships—and, as Edwards apparently will argue, the desire to conceal an extra-marital affair from an unknowing spouse.

If the definition of campaign contribution is broad enough to encompass indirect payments and expenditures such as those at issue in the Edwards case—and it is—then the use of such funds to help conceal an affair from a spouse is per se illegal personal use.  This is particularly true if the candidate or his campaign conceived, directed, facilitated or assented to the scheme.  In this case, it is hard to believe that everyone involved did not know exactly what was going on.

All of this is not to say that the prosecution of John Edwards will be easy, let alone successful.  His legal team is stacked with brilliant, experienced, media savvy trial lawyers.  For all of Edwards’ own flaws as a witness, reports have suggested that the government’s star witnesses may have credibility problems, as well.  And the government will have to prove beyond reasonable doubt that Edwards orchestrated or at least permitted the hush payments.

But to the extent the prosecution of Edwards is, like the conduct the indictment alleges, unprecedented, the case against him is not unsound.  The law limits the amount of money that any single donor can contribute to a candidate, and defines contributions to include both direct and indirect payments and expenditures. Moreover, the law prohibits the use of contributions for personal purposes.  John Edwards should not be able to escape liability merely because his donors funneled their contributions around the system rather than through it.

*  Much of the public debate about this case has centered on whether Baron and Mellon’s payments were made “for the purpose of influencing a federal election.”  It appears most have concluded they were not, such that the payments would not be campaign contributions as a matter of law.  I think Edwards’ attorneys will have a tough time convincing a jury of that underlying fact, especially in light of Bunny Mellon’s widely-reported note.  (“From now on, all haircuts, etc., that are necessary and important for his campaign – please send the bills to me . . . . It is a way to help our friend without government restrictions.”)

More fundamentally, however, there can be no doubt that if Baron and Mellon had sent the money to the campaign instead of directly to Hunter, those funds would have been deemed contributions (albeit excessive ones).  I don’t think, as stated above, they can or should escape liability for that merely by funneling the money around the system rather than through it, and I have a hard time believing any campaign finance attorney would have advised a client that he or she could get away with it.

Note:  The original version of this post, dated June 10, 2011, can be found here: http://ashbylog.tumblr.com/post/6386827987/an-end-run-on-the-campaign-finance-laws.

Winegate

“Tracking” is a distinctly 21st Century political phenomenon in which a campaign arms one or more volunteers with video cameras and assigns them to follow an opposing candidate with the hope of recording a misstep, misstatement, or other mistake.  Until now, tracking generally has been confined to campaign ralliespost-debate spin roomstown hall meetings and, occasionally, the halls of Congress and the streets of Washington, D.C.

Not anymore.  Earlier this week, tracking crossed a new threshold when a Rutgers University professor stalked Congressman Paul Ryan as he was having dinner at the Capitol Hill power restaurant Bistro Bis.  As the professor slurped down half a bottle of expensive wine in celebration of her birthday, she eavesdropped on the discussion between the Congressman and his two dining companions, and used her smartphone to snap a picture of an even more expensive bottle of wine sitting on Congressman Ryan’s dinner table.  Looking the bottle up on the restaurant’s wine list, the professor determined that it sold for $350.

After dinner, the professor turned tracker angrily confronted Congressman Ryan and asked him—incongruously—“how he could live with himself” for drinking from a $350 bottle of wine in light of his calls for cuts in federal spending.  She also accused his dining companions of the ultimate Washington crime, lobbying, before a waiter intervened and caused the professor to leave.

If the men dining with Congressman Ryan were lobbyists, then they could not have paid for his meal or his wine.  As it turns out, the Congressman’s guests were not lobbyists, but rather economists.  Nevertheless, Congressman Ryan paid for his own meal, and he also paid for an entire bottle of wine despite having consumed only one glass.  He has even produced the receipt.

From a legal perspective, Congressman Ryan did all the right things.  He avoided not only impropriety, but also the appearance of impropriety.  At the end of the day, all that is left of this ridiculous, non-newsworthy story is a very simple but important lesson for all Members, staffers and lobbyists.  Know the ethics and gift rules, follow them scrupulously, and keep your receipts.  In this day and age, you never know who is lurking at the next table.  With a smartphone.  And an 8-megapixel camera.  And an axe to grind.

Unfriending the FEC

Only 18 people like the FEC on Facebook.  It is, perhaps, the federal government agency with the fewest Facebook friends.  And a new draft Advisory Opinion from the Federal Election Commission won’t win it anymore.

In Draft AO 2011-09, the FEC would deny Facebook’s request for recognition that small, character-limited advertisements purchased by federal candidates are excepted from the authorization disclaimer requirement because either the ads are too small to include the disclaimer or because including the disclaimer would be impractical.  The FEC still would permit Facebook to display the ads, however, provided that the ads link to a site that contains the proper disclaimer, and that each ad and the site it links to were paid for and authorized by the same person.

Perhaps Facebook’s team will take this half loaf of an opinion because the end result is the same:  an “Authorized by John Citizen for Congress” disclaimer will not eat up precious letters in a 100- or 160-character ad, but instead will appear on the candidate’s webpage where space is virtually unlimited.

In a world of technological possibility, however, the reasoning behind the draft AO is troublesome and problematic, if not for Facebook, then for others.  Consider the humble No. 2 Pencil, long a favorite of candidates campaigning at county fairs and high school football games across the country.  Former Virginia Fifth District Congressman Virgil Goode handed these pencils out to young and old alike long after the rest of the world had upgraded to mechanical pencils, erasable pens and, eventually, computer keyboards.  A vintage Goode for Congress pencil is practically a collector’s item now in Southside Virginia.

A pencil large enough to bear a “Goode for Congress” message would have to be large enough to include an “Authorized by Goode for Congress” disclaimer, would it not?  Technology certainly would not prohibit it.  If you can print on one side or facet of a pencil, you certainly can do it on another side or facet, right?*

Well perhaps the pencil is too small, or Goode’s message too large, to fit the disclaimer.  Couldn’t Goode’s message be printed smaller, to make room for the important authorization disclaimer?  Alternatively, couldn’t the pencil manufacturer simply make the pencil larger?  Is it not just a business decision by the manufacturer to limit its pencil to a certain size that research and experience have proven consumers are most likely to purchase and use?  Aren’t manufacturers of novelty items still making jumbo pencils?

These questions are important because these two facts — (1) the fact that technology would permit inclusion of the disclaimer, but for (2) the fact that Facebook had made a business decision to limit the size of its ads — appear to have sunk Facebook’s request for an exception.  Indeed, according to the draft AO:

“The limitation on the size or the number of characters that Facebook allows to be included in a Facebook ad is not mandated by the physical limitations of the display medium or Internet technology.  Neither is the limitation on the size of the ad set by a third party who established the technological medium and its use.  Rather, Facebook indicates that it has set the small sizes for its ads because of Facebook’s business decision that ‘larger ads would disrupt the social networking experience for Facebook users.’  Facebook’s business decision in favor of small ads does not justify elimination of the statutory disclaimer requirement given that it remains physically and technologically possible for Facebook to increase both the size of its ads and the number of characters that may be included in its ads.”

Is the FEC preparing to take away the long-standing regulatory exceptions to the disclaimer requirement in 11 CFR 110.11 for “bumper stickers, pins, buttons, pens, and similar small items” and “skywriting, water towers [and] wearing apparel”?**  Of course not, although I bet there are some whose hearts flutter at the very thought of it.  Should former Rep. Goode go into hiding until the statute of limitations runs on his disclaimerless pencils?  No.  But at the same time, Draft AO 2011-09 (and 2010-19 (Google) before it) easily could have opined that, like a lapel pin or a small campaign button, a Facebook ad is simply too small to include a disclaimer, or that inclusion would be impractical in light of the 100- to 160-character limit.  (In fact, one draft (Draft B) of the Google AO reached just that conclusion, but failed to obtain four votes.)  Instead, what Draft AO 2011-09 shows is that even as Congress refuses to expand it and courts are slashing away at it, there are those at the FEC who still take the most expansive view of the agency’s regulatory jurisdiction and aren’t prepared to cede an inch — or in this case even a character — of it.

* Have a hard time getting upset about a disclaimerless “Goode for Congress” pencil?  What about a pencil printed with the following — disclaimerless — message:  “John Smith lied. Write in Jane Doe on Nov. 5.”

** The “wearing apparel” exception has always struck me as especially curious.  It seems that all but the tiniest item of apparel would have ample room for a small disclaimer, and that a disclaimer on a piece of clothing bearing a political message would serve the same interest as a disclaimer on any other item, and in fact would be especially important if the clothing item bore a negative message.  Nevertheless, as it stands, an extra-large t-shirt with a negative message is excepted from the disclaimer requirement, but a tiny Facebook ad with a positive message is not.

Just Because You Can Doesn’t Mean You Should.

Just because you can doesn’t mean you should.  Just ask the several Members of Congress who are facing a potential Ethics Committee investigation based upon campaign fundraisers they held around the time of a House Financial Services Committee vote on the Dodd-Frank financial services reform bill in December 2009.

Federal campaign finance law does not address the timing of campaign contributions to Members of Congress.  The federal criminal code, however, would prohibit the making or acceptance of a campaign contribution in exchange for official action, and congressional ethics rules require Members to avoid even the appearance of impropriety.  And it is those provisions, not the Federal Election Campaign Act and FEC regulations, that are at issue here.

Indeed, according to the Office of Congressional Ethics, which has referred the matter to the Ethics Committee, fundraising around committee votes creates the appearance of special treatment or access, and makes it look as if contributions to the event were linked to an official act.  This position no doubt came as news to the targeted Members — who likely scheduled their fundraisers based upon long-standing congressional fundraising practices and the absence of any prohibition in the Federal Election Campaign Act or FEC regulations against them.

But the federal government has a long history of prosecuting public officials and others who engaged in lawful acts with allegedly illicit motives.  The IRS, for instance, has aggressively pursued taxpayers who combine lawful instruments, vehicles and transactions to avoid paying taxes.  More recently, the DOJ has utilized the so-called “Honest Services” statute to prosecute, among others, an Alaska State Senator for not disclosing employment negotiations Alaska law did not require him to disclose.

Now, the investigation of congressional fundraising is especially troublesome.  Federal law limits the amount of money any donor can give to $2,400 per candidate per election.  Congress put that limit in place to combat corruption and the appearance of corruption, and the $2,400 cap represents Congress’ judgment that contributions equal to or less than that amount are too small to corrupt or appear to corrupt the recipient.  Moreover, while the federal campaign finance regulatory scheme fills hundreds of pages in the Federal Register, Congress has not seen fit to include in that scheme a limit on the timing of fundraisers or contributions.

The Ethics Office’s referrals ignore and undermine Congress’ judgment on this matter.  Nevertheless, they illustrate that when it comes to the intersection of law and politics, it is important to consider not only what is legal and illegal, but also what is likely to draw the attention of federal investigators, the media and reform advocates — some of whom are not as interested in what the law says as they are in what they think it should say, and in using your case to make new law.

The best political law attorneys recognize this dynamic and help their clients structure their activities accordingly — saving their clients legal costs, opportunity costs and reputation costs in the process.