SANDLER,e REIFF & YOUNG, P.F 50 E STREET,S.E., SUITE300 WASHINGTON,DC 20003 JOSEPHE. SANDLER TELEPHONE:(202) 479- 1 1 1 1 sandler@sandlerreifhom FACSIMILE:(202) 479- 1 1 1 5 NEILP. REIFF rei [email protected] \ COUNSEL: JOHN HARDMYOUNG [email protected] $$ October 17,2005 Kamau Philbert, Esq. Office of the General Counsel Federal ,Election Commission 999 E Street, N.W. Washington, D.C. 20463 Re: MUR5659 *;.. *;.. Dear M$. Philbert: The undersigned represent the Democratic Party of Hawaii and Yuriko Sugimura, as Treasurer (“DPH”), in the above-referenced MUR. This matter has been generated in response to an audit conducted by the Commission of the activities of the DPH during the 2002 election cycle. The Commission has found reason to believe that the DPH has violated the Federal Election Campaign Act of 1971, as amended, as follows: 1) the Party violated 2 U.S.C. 5 441b(a) by misdepositing two donations totaling $30,000 fiom prohibited sources into its federal account; 2) the Party violated 2 U.S.C. 5 441a(f) by misdepositing $36,000 in excessive contributions into its federal account and 3) the Party violated 2 U.S.C. 5 434@)(4)(H)(v)by failing to report $155,125 in disbursements that the Commission has presumed to be allocable expenses. I ! 2 I I I I I i BACKGROUND This matter was generated as a result of Commission audit of DPH’s financial records in connection with the 2002 election cycle. The facts of this matter relating to the alleged violations can only be understood in context of the circumstances surrounding the 2002 elections in the state of Hawaii. As described below, it is clear that the DPH’s efforts undertaken by its “coordinated campaign” were solely in connection with non- federal elections. In 2002, the state of Hawaii had only two federal elections, two seats for the United States House of Representatives. The two house seats were occupied by long time Democratic incumbents Neil Abercrombie and Patsy Mink. In addition to prior stints in the House of Representatives, each had continuously represented Hawaii in the House of Representatives since 199 1. In 2000, each had won their election handily, with Congressman Abercrombie winning his election by a 69%-29% margin, and Congresswoman Mink winning by a 62%-36% margin. In 2000, Al Gore easily won Hawaii by a 56%-37% margin and Senator Daniel kaka was easily re-elected by a 73%- 25% margin. Each member was expected to easily win their nomination and general election contests in 2002 (See “Unchallenged Democrats stoking campaign coffers,” Honolulu Advertiser, p. lA, April 22,2002, attached as Exhibit A). 3 By contrast, the non-federal elections in Hawaii were highly contested in 2002. The Democrats were faced with an open seat for Governor against a candidate. Linda Lingle, who had only lost by one percentage point in the prior gubernatorial election, was again the candidate for Governor for the Republicans. The Democrats, on the other hand, had a divisive primary campaign and finally, on September 21,2002, nominated Lieutenant Governor Mazie Hirono as its candidate. In addition, the Republican Party had made serious gains in the 2000 state legislative elections and were primed to do so again in 2002. It was against this backdrop that the DPH established a “coordinated campaign” to help elect Mazie Hirono for Governor, and to support other non-federal candidates at all levels. Based upon the fact that both members of Congress were in non- competitive races, there was no consideration of inclusion of either candidate in the plans of the coordinated campaign. Ultimately, it was determined that the coordinated campaign would be used exclusively to influence non- federal elections (See Declaration of Andy Winer, attached as Exhibit B). Throughout the gubernatorial campaign, the Republican candidate held a sizable lead in the polls. Through the concerted efforts of the Coordinated Campaign’s advertising that opposed Lingle the election drew into a virtual dead heat. The DPH spent hundreds of thousands of dollars on candidate specific advertising in the campaign for governor, and also spent heavily on candidate specific mailings for its state legislative candidates. Republican gubernatorial candidate Linda Lingle ultimately won the gubernatorial race by a 52%-47% margin, but the Democrats gained four seats in the Hawaii House and lost 2 seats in the Hawaii Senate. In another significant development, Congresswoman Patsy Mink fell seriously ill in early September 2002 and died on September 27,2002, one week after she had been easily re-nominated as the party’s congressional candidate. Although the DPH attempted to have Congresswoman Mink replaced on the ballot, Hawaii courts ruled that her name must remain on the ballot and a special election to replace her was scheduled for later in November 2002, contingent on Mink receiving a majority of the vote in the 2002 general election. Notwithstanding Congresswoman Mink’s death, the Republican candidate, Bob McDermott, did not receive any support fiom the Hawaii Republican Party and was not considered a threat to receive a majority of the vote in November. At the request of the Mink family, the DPH did not undertake any campaign activity on behalf of Congresswoman Mink. Ultimately, despite the lack of any active campaign by her campaign committee or the DPH, Congresswoman Mink was handily reelected by a 56%-40% margin. Thus, the DPH’s coordinated campaign had no active campaign for, or made direct expenditures on behalf of any federal candidate during the 2002 campaign cycle. Its focus was exclusively on its gubernatorial and other non-federal elections and its payment fiom non-federal funds of most of its campaign expenses was appropriate and proper. ’ ’ The audit report did not cite any evidence that DPH expended fbnds for adverhsmg that named a federal candidate or could be considered generic adverhsmg. section 3 mfra. Because DPH’s sole focus was on state and local elections, it is doubtfbl that such advertising existed. DPH comrmttee is still trymg to detemne conclusively whether any generic adverhsmg actually ran. In any event, even if such advertising was run, it is believed that the total cost of such advertising did not exceed $20,000. Of course, the 4 With respect to the financial,activities of the DPH, according to the Commission's Audit report, the non-federal share of allocable expenses for the DPH was $603,431. However, the DPH transferred only $275,636 to the federal account. This lead to an under-trwsfer of $327,795 of potential federal funds by the DPH from its non-federal accounts to its federal account. DPH's preoccupation with the election of a emocratic governor and state legislature explains the unusual under transfer of non-fede a1 fhds to its feder$l account. This significant under-transfer clearly reflects the non-fed1 ral nature and focus of the DPH's activities during the 2002 election cycle. ,@ COMMZSSION AUDITi .h I, 2% I 'W 1) !.& Apparent Misdmosit of Union Contributions I Finding 1 of the Commission's Audit Report determined that the DPH had received $30,000 from the non-federal accounts of two political action coII1IIliffees. In response, the DPH had explained that the contributions had been inadvertently misdeposited into its federal account and agreed to include these on its debt schedule until suEh time that it had funds to correct the misdeposit. The DPH made transfers in two installments to correct the misdeposit. First, on September 24,2004,the DPH transferred $20,000 &om its federal account to its non-federal account. Second, on September 29,2004 the DPH transferred $10,000 fiom its federal account to its non- count. In additional to these mitigating steps, it should be noted that DPH disclosed the receipt of these funds, albeit in the wrong account, and the gross fer of non-federal fhds through the allocation process further mitigated any potential problems caused by these misdeposits. Thus, there was nothing sinister about this error, which involves a relatively small amount of funds. 2) Apparent Accmtance of Excessive Contributions Finding 2 of the Commission's Audit Report determined that the DPH had accepted $5 1,000 in excessive contributions. Of that amount, the DPH was able to demonstrate that $5,000 of those contributions was not excessive and that it had already refunded $20,000 of the remaining excessive contributions. The DPH agreed to include an additional $26,000 as debt on its reports and made refhd payments to all contributors by November 24,2004.The DPH contends that each of these misdeposits was I inadvertent. As stated in our discussion above, the Commission should also note the mitigating effect of the failure to transfer non-federal fbnds for allocable expenses during the 2002 election cycle. Accordingly, any description of this violation should be described as a misdeposit. decision to run generic advertising would have been based solely upon non-federal considerations and such advertisements would not have been mtended to influence any federal election. 5 3) Apparent Misreportinn of Allocable Expenses The Audit Division reviewed the activities of the DPH’s non-federal account and identified $164,640 in expenditures for television and radio production, television advertising, research, postage and consulting that appeared to lack documentation sufficient for the Audit staff to conclusively determine that such activities were in connection with non-federal elections. This amount reflects a small portion of the actual $889,3 15 in non-federal disbursements apparently reviewed by the Audit Division. With respect tb the $164,640, the Audit Division identified 54 expenditures that they could not properl$document as being entirely in connection with non-federal elections.