>> This file contains archived live captions of the open meeting of the Federal Election Commission held on March 5, 2015.  This file is not a transcript of the meeting, and it has not been reviewed for accuracy or approved by the Federal Election Commission.


>> This is a special open meeting of the Federal Election Commission. We'll come to order. The agenda today is an oral hearing on behalf of Gary Johnson 2012 Inc. Whoops. Sorry. I should turn off my phone. Um, the committee has requested this opportunity to address the Commission in open session, concerning a repayment determination, which is contained in the audit report approved on July 6, 2015. Based on the audit report, the Commission made a determination that the committee must make a proridea repayment in the amount of $332,191 for non-qualified campaign expenses to the United States Treasury, pursuant to 26-USC-9038-B-2. The sole purpose of this meeting is to give the committee an opportunity to address the Commission and to demonstrate that no repayment or a lesser repayment is required. This is not in adversarial or trial-like hearing. Council for the committee will have 30 minutes to make remarks. At the conclusion of the committee's presentation, each Commissioner will have an opportunity to ask questions. I will then ask the general council and the audit division if they have any questions of council. After this hearing, the committee will have five days in which to submit additional materials for the Commission's consideration. The Commission will then make a repayment determination following this administrative review and issue a statement of reasons in support of that determination. Representing the committee here today are Joe Lily and Dan Backer. I remind you that your presentation should not exceed 30 minutes and is limited to those matters raised in your written response to the Commission's repayment determination. Thank you very much, and welcome, and Mr. Backer, will you be making the presentation?
>> I will.
>> Okay, thank you.
>> Well, thank you for having us. Always a pleasure to be here. We got in the building easily today, which is always a plus. So, we've got a number of alternatively technical and not so technical items that we wanted to raise, and I would, of course, say at the outset that if everyone wants to just agree with me, we can all leave right now and head out. I'm guessing that's not happening, so starting right off the bat, we first want to point out that the, so, the repayment determination, and we will later take an issue with the formula and the way the formula was applied, but the repayment determination is based on the finding of non-qualified campaign expenditures, and that's based on the committee having, bluntly, messed up its disclaimers and having put a large amount of money that it thought were general election funds into its general account, which were then later found through the audit process to be primary funds. In doing so, we have, there was a finding that those resulting primaryen funds were spent on general election contributions, because they were believed to be general election contributions, and the repayment calculation is based on the ratio of matching funds with respect to, this is the fun part, the ratio of the matching funds to the amount due, I'm going to mess this up, so excuse me for a second. The amount of any repayment sought under this section shall bear the same ratio to the total amount determined to be used for non-qualified campaign expenses as the amount in matching funds certified. So, they suddenly have this 1.2, approximate, million dollars of additional primary funds that were spent on non-qualified campaign expenditures on the general election activity, and that determined the size and the scope of the primary, sorry, of the matching funds that had to be repaid. Um, and why we certainly have an issue with the formula in and of itself, there seems to be a larger issue that the repayment determination first has to be made according to 26-USC-9038.2-b-2-I. The Commission may determine that amounts of any payments made to a candidate from the matching payment account were used for purposes other than those set forth in paragraphs B, 2, I, which includes the bill of qualified campaign expenses. So, what we're getting at is that there's a determination based on the fact that you have these primary funds spent, sorry, let's see if this works a little better on this one. Does that work better?
>> I think that one doesn't work.
>> Okay. I feel like it's feeding back a bit.
>> Maybe you could pull it back a little.
>> Towards me or away from me?
>> Yeah.
>> All right, how is that? Does that sound all right?
>> It sounds fine to me. I think it's the feedback for you, so if it's problematic for you, you can keep moving it around.
>> We'll see how it goes. So, in essence, the repayment obligation was found to exist because of these general, sorry, these primary funds that were believed to be general election funds and their expenditure on non-qualified campaign activity, which was the general election activity, but the Commission must first determine whether any amounts paid from any of the matching accounts were used for non-qualified campaign expenditures. So, in essence, it's not that there's a finding of matching funds actually having been spent on this activity, it's that the finding is that, overall, there were these primary funds that were thought to be general funds that were spent on non-qualified campaign activity, and because of that, there's this ratio being applied to the overall picture, and our concern is that we think that puts the repayment calculation before the actual finding the Commission may make. In essence, the Commission has said that you have one co-mingled sum of all the funds, and of course, we're going to take issue with that in a moment, but you have one co-mingled pool of all primary funds, and here, you have some primary funds that were actually co-mingled with the general election funds and spent on general election activity, and we're going to intellectually isolate this batch off and bundle it over here with the primary account and the matching funds account, and then we're going to say that this activity was conducted out of the primary pool of money as opposed to the general pool of money, and our concern is that I don't think the Commission is, in keeping with the actual, or the reading of that, the regulation exceeds the Commission's, exceeds the language of the underlying statute in the way that this is working out. So, in essence, it's not that we spent the primary, sorry, the matching funds on any non-qualified expenditure itself, and in fact, there's, even in the audit, there's not any specific finding of anymore than, I think, $1300 having been improperly spent, the bulk of the funds, there's no allegation that they were actually physically spent on other, on non-qualified campaign activity, and it's only when you apply this ratio formula that we decide, well, now, in retrospect, they were, but I think the Commission must first determine that there was actual funds having been spent on the non-qualified campaign activity by the actual matching funds before then applies the repayment ratio, which then is looping in all these funds that are physically distinct. It's a little convoluted, trying to envision this, and unfortunately, my kids destroyed the beautiful chart that I brought in last time, but in essence, you have the finding of actual spending of funds, the actual spending of matching funds on the non-qualified campaign activity, but instead of finding that, it's a finding that, well, you had primary funds that we're saying in retrospect were spent on non-qualified campaign activity, therefore it affects how the, it affects the repayment calculation and the overall picture, but it still doesn't get at the root issue, which is that other than the $1290.14 that we've all agreed on were mis-spent, there is no actual dollars from the matching fund that were spent on non-qualified campaign expenditures without having to do the backwards math, and I think there's, that also adds this weird element, that, you know, something either is or isn't a qualified campaign expenditure when you make it. It's really hard for, I think committees in general, to have to go back and do the retroactive math. I mean, the amount of time that has been spent on this is phenomenal. So, I think that from the outside, we would say that there first needs to be a finding that actual dollars were spent on the non-qualified campaign activity, not merely that as a function of the repayment formula that we're going to apply, that there is this theoretical repayment. This, of course, gets us into the Kennedy case, where the court struck down the original repayment model the Commission used that assumed 100 percent of all matching funds were spent on non-qualified campaign activity because they were co-mingled. In Kennedy, the court essentially said, well, you have these funds, they're co-mingled, we don't know for sure which dollar is being spent on what, the Commission has the authority to come up with a repayment formula to do so, and I think there's the argument of the Office of General Council, well, our position has been that you have these funds, the matching funds, that were always in this separate account, and you have these other funds over here that were the general funds that turned out to be primary funds, and these now primary funds are being looped back in into the general account in order to determine the repayment ratio. The problem that we see with the calculation of the repayment ratio in that regard is it's not just the physical separation of the funds, and we recognize that OCG has raised the potential of gainsmanship involved there, is that there's an intellectual and mathematical separation of the funds. At no point, and I think we're all, we all can see this fairly clearly, these funds that turned out to be primary funds, they never thought of them as primary funds, they spent them as general funds, but for the disclaimer mistake, they were always in the mind that these are general funds, and, so, it's not just a physical separation which might cause the problem that the Office of General Council has identified about potential gainsmanship, it's also a conceptual separation. They never treated these as primary funds, they never thought they were primary funds, they may have been wrong in doing so, but they never intellectually conceived of it as primary funds, and, so, the separation, the problem identified by the Office of General Council doesn't really apply in this particular case, because no one's attempting to and no one's even been alleged to attempt to try to gain the system and use primary funds in a manner that is outside the scope of the repayment calculation. Um, so, when we look at the repayment formula, and by the way, this was sort of interesting, so in calculating the repayment formula, we noticed that, sorry, 20-USC-9038-2-III-A, the total deposits is defined in accordance with 11-CFR-9038.3-C-2. Well, 9038, I apologize, I meant to say 119038, it's great that these are numbered the exact same way, because there's no way that could be confusing at all, so 119038.2-B-2-III-A, total deposits is defined in accordance with 11-CFR-9038.3-C-2. Flipping over to that, that's the definition of all deposits. For purposes of this sub-section, total deposits means all deposits to all candidate accounts, transfers between accounts, refunds, reimbursements returned as checks, proceed of loans and other similar things. So, the plain language of the regulation doesn't talk about the difference between primary and general accounts at all, it just says all accounts, but clearly, the Commission is attempting to loop in general election funds into the primary election calculation here. Otherwise, that would have a completely different impact on the repayment calculation. Incidentally, it with lower the repayment calculation. So, as a backup, that's our last ditch effort, just to lower the amount, but as a practical matter, the regulation doesn't separate primary versus general, it doesn't speak about it, it just talks about all accounts, and, so, when we take a step back to the way that this, the conduct of the campaign, if you have, we've said that the physical separation of funds is inadequate because of the concerns of OCG, and for the purpose of this, let's say they are, then you still have this intellectual separation between primary and general funds in the way they're being allocated around, because otherwise, all the general funds would be included in the repayment calculation, but they're not, we don't include that, or rather, the Commission doesn't include that element in the repayment. It's limited to what are intellectually conceived of as the primary funds, and, so, when you look at that, you have a committee that made this tremendously silly mistake, but never really thought of these funds as primary funds, they were always segregated out, both physically and intellectually as a separate thing, and yet that's now being used to create a repayment formula that includes all of these funds that they never really included in the first place. Um, and that brings me to the comment about the scope of the error. So, I think if we look at it, this boils down to somebody, somewhere along the way, did not advise this client, long before I was there, that they had to update their disclaimer, and because they didn't update their disclaimer between the primary and the general election period, after the date of ineligibility, or on the date of ineligibility, they have this monumental error, and that the scope of this, the mistake that was made, obviously, it's clearly something they should have done, but had they made that change in the disclaimer, their conduct subsequently to that would have always been legal. There was no question that the post-DOI conduct was itself unlawful had they had the correct disclaimer, and of course, had they had the correct disclaimer, they wouldn't have had any of the subsequent issues related to this payment obligation. Because they had this disclaimer error, which perhaps might have been better addressed as a matter of a disclaimer error in that process and potentially an administrative find there as opposed to this rather cumbersome audit process, but because they didn't update their disclaimer, they now have this, about $1.2 million mathematical problem that causes a 330,000 some-odd payment obligation. When you think about the scope of the damage that is done to this committee, the burden that's imposed upon its actions, all in retrospect, or after the fact, it's really disproportional to the nature of what is a really small but substantial mistake, and you know, it gets to this whole problem where there's just not enough campaign finance lawyers out there, and really, we need more campaign finance lawyers, particularly for the libertarians, but because they didn't have this disclaimer updated, they didn't have that advice, they weren't advised about it, they have this huge, enormous economic burden, if they were given a fine for having the wrong disclaimer on their mailings, let's say they said you have a $3,000 contribution limit as opposed to $2500 per election, they would have been penalized for that mistake, and the economic impact of that find would have been substantially smaller than the scope of this, and, so, there's a sort of disproportionate disconnect between the nature of the underlying error that caused this ripple effect and the actual penalty and harm that's been imposed as a consequence on this committee, which, of course, at the end of the day, is simply in a position where it doesn't have any money anyway in order to be able to make this repayment, and, so, there is sort of an element of we're beating a dead horse here, and, so, I've kind of meandered through the way that we're approaching this and where we think the Commission ought to exercise its discretion within the regulations, let's say it may make the appropriate findings, and at a minimum, reduce the scope of the repayment determination to something more in keeping with the actual size of the mistake or with the amount of funds that were actually spent from the matching account on non-qualified activity, which is substantially smaller, rather than burden a committee that simply can't afford to pay with this massive fine, rather massive repayment obligation, and, um, I will now take questions, which I'm sure there may be one or two.
>> Thank you very much, Mr. Backer, and just to let you know, you still have 15 minutes, so if there's more that you want to say at the end, you're more than welcome to do so. Are there any questions? Commissioner Walter?
>> Repayment, what difference does it make if you can't pay it? In other words, you're seeking a reduction, but you're telling us that there's no funds available anyway.
>> Well, the fact that it can't repay the obligation, I don't think changes the fact that, the committee and the candidate don't want to be in a position of having, of even feeling that they owe that money. Certainly, if there's a much smaller amount of money, you know, maybe they, it's possible to raise $3,000, I don't think it's remotely possible for them to raise $333,000. I also think they want to be good actors, they want to have acted the best way possible, and I think it probably sets a good precedent that this Commission's going to look at the, you know, all the facts and circumstances here, recognize the limited amount, or the very small mistake that was made and the massive ripple that it caused, it's like a little, you know, big rock that sinks in a pond, and hopefully instruct other committees that may be using matching funds how to do this a little bit better, but I just don't think that it makes sense for them to be saddled with a fine they can't pay when there's plenty of good arguments why they shouldn't have been saddled with the fine at all.
>> One of the other things, pardon my harsh voice, um, seemed to be that there was an effort to, trying to work with your client, and there was a request for some information, it took eight months to get it, then the bank statements, they never got them, and, so, you know, as I understand the Judge's decision and everything else, our obligations are to do the best estimate we can do, and, so, what else could we do but take what information we had and didn't have and do that? Just looking at it from a sense of the equities here.
>> I would probably not dispute that the accounting, the non-politically experienced accounting firm that was working on this matter probably was not the best choice at the time that they were involved, and my client would have been better off having sought professional legal advice in this particular area a lot sooner, and certainly, once we got involved, we did our best to remedy the data loss that was involved there. You know, it's a shame that they made the staffing decisions that they made with the limited available pool of talent that they had, but I also think that at the time when they finally had people who sort of are experienced with the Federal Election Commission process and are pulling in the information that was required and requested, I get that you can only make the determination you can make with the data that you have. When we were able to provide that data, I would hope that wouldn't be held against the committee's bad earlier hiring decisions.
>> Other questions? Mr. Vice Chair.
>> Thank you. At what point was the disclaimer error, as you describe it, at what point was that detected?
>> During the audit process.
>> Okay, it was never identified and corrected during the campaign at all, it was only after the fact?
>> That's my understanding, yes, and, so, the entirety of the funds that were raised subject to the old disclaimer posed the date of eligibility were all done under the wrong disclaimers. They just didn't have an attorney giving them advice.
>> Okay, and, so, your argument is that they were, um, the campaign was operating as if the correct disclaimer was in place, which was that, what, the first 250 would go to the primary, and the remainder would go to the general? They were operating under that assumption, even though the language, and I assume, so, the argument is that we have a course of behavior which is evidenced of the fact that this was a mistake, not just an after the fact, I mean, obviously, in order to make the determination, whether or not there was a mistake, there needs, we're looking for some evidence of the fact that there was a mistake, and you're saying that their course of conduct is evidence of the mistake that you're arguing was embodied in that solicitation.
>> Yes. The way they handled the funds, they were operating under the model that if you're, the first $250 of any new contribution after the date of an eligibility would apply to the primary to the extent you had previously donated, then to the general, and then back again to the primary, so 250, 2500, 2250, and in fact, as that money came in, they were depositing the first $250 of those contributions, not all of them, there's probably one or two that slipped through by the nature of busy campaigning, but they were depositing the $250 into the primary account and the balance into the general account, and if there was enough back into the primary thereafter, so, actually, the banking lays out, or rather the banking activity and the financial activity comports with their understanding of what they were supposed to be doing and how they should have been doing it, and they just didn't update the disclaimer, and I think that came out during the audit process. There was a bit of, like, wait, what do you mean, we put the money in here, we're supposed to do it this way. It seems a little silly, and you know, it's frustrating, because in my shoes, I deal with clients all day long, telling them about this disclaimer requirement, that disclaimer requirement, and it seems like the most obvious and basic thing, from my perspective, but this is all that I do, and if you're not a campaign finance lawyer, it may not necessarily dawn on a, you know, small, scrappy, under-funded campaign to have made that correction. It's a stupid mistake, but it was a mistake, and they acted at all times, and the banking, I think, demonstrates this, in a manner that was perfectly legal and appropriate. They just didn't update the disclaimer.
>> Okay.
>> Any other questions from the Commission? Any questions from council?
>> None.
>> Okay, thank you. Mr. Backer, do you want to make a final closing statement?
>> I thank the Commission for hearing us out and giving us this opportunity to raise these concerns, and we hope you'll find for our client.
>> All right. Thank you very much, and, um, as I indicated previously, you have five days from today to submit further materials, if you wish to.
>> Yes. Thank you.
>> Thank you. Thanks for coming. Thank you all. This special open meeting is adjourned.