Christmas comes early for campaign watchdogs—or late, depending on your perspective. Thanks to a lag in IRS reporting rules, the tax returns of independent groups that spent hundreds of millions of dollars in the 2012 election are just now coming due. Considered together with a recent campaign-finance investigation in California, these filings hint at an orgy of self-dealing and “dark money” shenanigans unprecedented in American politics.
The first presidential election since the Supreme Court’s 2010 Citizens United decision spawned what Bloomberg Businessweek called “a Cayman Islands-style web of nonprofit front groups and shell companies.” These not only shielded donors’ identities but also obscured the huge profits of political operatives who moved nimbly between the candidates, the super PACs, and the vendors that get their business.
The so-called “independent expenditure” groups have been “transforming the business of running a political campaign and changing the pecking order of the most coveted jobs,” Businessweek noted. “With a super-PAC, the opportunity to make money is soaring while the job is getting easier to do.”
Is it any wonder then that many of the biggest players from past elections jumped to the other side of the game in 2012? Or that they imported two money-making techniques perfected in campaign work: shell corporations that put fees and commissions beyond the reach of federal disclosure rules, and “integrated businesses,” set up by staff and advisers to do nuts-and-bolts electioneering?
The just-settled California case offers an example of both gambits, along with a textbook case of the new dark-money shuffle. The state’s Fair Political Practices Commission traced $29 million raised to run ads about state ballot measures through a daisy chain of 501(c)4 tax-exempt groups, which are not required to identify donors—hence the “dark money.” The lynchpin for this maneuver was the Center to Protect Patients Rights (CPPR), run by a former Capitol Hill staffer named Sean Noble. Operating out of a post-office box in Arizona, CPPR’s sole function is to accept grants, then turn around and make grants for a network of conservative nonprofits.
In the California case, $29 million from in-state donors who wanted to remain anonymous was steered to the Virginia-based Americans for Job Security, which passed $24.5 million to CPPR. Noble then made two grants: $18 million to Americans for Responsible Leadership (ARL), which passed on $11 million to the Small Business Action Committee (SBAC) in California; and $7 million to American Future Fund, which gave $4 million to the California Future Fund.
California officials called this “money laundering” and levied the state’s largest-ever campaign fine—$1 million—against CPPR and ARL. They also demanded that SBAC and California Future Fund pay $15 million to the state treasury, although the latter group has already closed up shop. The settlement did not dispute the claim that these violations were “inadvertent.” Nevertheless, Ann Ravel, the outgoing head of the commission, warned, “This is a nationwide issue. These groups exploit loopholes in the law to undermine the clear purpose of the law.”
They also take a nice cut for themselves. According to depositions, the fundraisers and the groups that transferred the funds split a 15-percent commission on the $29 million three ways. Overall, CPPR handled about $140 million in 2012, according to a tax return filed at the last possible moment in November 2013. Noble, its unsalaried president, steered nearly $24 million to his own private consulting firms, on top of the $10 million he paid his firms in 2011.
The California fundraisers were unhappy that less than half their money made it back to the state—or that, as soon as the investigation began, Noble wrote a letter to the state commission, laying out his version of the scheme, which eventually led to a settlement. “Hell yes, I’m pissed,” one of the fundraisers told investigators. “I think he panicked to prevent your agency from opening up his books.”
Who Knows Where the Funds Go?
Old-school consultants such as Mark McKinnon, a strategist for George W. Bush in 2000, are dismayed by super PACs’ profligacy. Without a campaign manager to “keep a handle on spending and fees,” he said, “you basically have just a few people getting together to check the box on legal structure, and then they basically just divide up the money.”
"How you track the actual dollars will be very difficult if not impossible,” he added. “That’s the ugly beauty of the scheme.”
But the fact is, the old guard developed the basic practices that have transformed politics into a potential get-rich-quick scheme. One is to create a limited liability corporation, or LLC, for campaign billings--preferably with an opaque, alphabetic name that requires a trip to the state attorney’s office to find out who owns VG LLC, AKPD Media, WWP LLC or NGP VAN. This practice, which effectively masks commissions and expenses, is standard for the “senior advisers” who don’t appear on the payroll reports for a campaign.
A shell company is also the preferred vehicle for the “integrated businesses” set up by campaign staff to do a campaign’s grunt work: ads, mail, polling, voter outreach. Some of these vendors are established firms with a large staff—for example, GMMG, which spent $302 million of Obama’s campaign cash in 2012, is a huge Washington-based company that performs a variety of campaign functions. But others pop up for a single election cycle. VG LLC, for example, was anonymously incorporated midway through the Romney campaign and received $19 million for fundraising services. The campaign later confirmed that it was owned by Romney finance chair Spencer Zwick, who also charged the campaign $9 million through his older firm, SJZ LLC.
Although the Romney campaign didn’t invent these perfectly legal practices, it took them to a new level. American Rambler Productions was incorporated in Delaware, where principals can remain anonymous. The Romney campaign eventually spent more than $260 million through this LLC, which, according to senior adviser Beth Myers, was set up as a general contractor for media operations to streamline operations and avoid commissions. But the collateral result is that it’s impossible to determine how much of the $20 million Rambler spent on “creative” and “strategic” services went to the LLCs of top advisers Stuart Stevens, Russ Schriefer, Eric Ferhnstrom, and Myers, all of whom say they worked for a flat fee.
In addition, nine venders with ties to Romney’s campaign staff received more than $160 million. Digital director Zac Moffatt, for example, steered an eye-popping $95 million to Targeted Victory, a company he co-founded in 2009. Moffat was officially on leave from the firm in 2012, collecting a $300,000 campaign salary. Myers said that like American Rambler, Targeted Victory served as a general contractor, farming out digital work to numerous smaller shops.
As a private partnership, Targeted Victory has no duty to disclose how much was paid to other companies or spent advertising on online, where 10 to 15 percent is the standard commission. Nor must it disclose the terms under which Moffatt resumed his partnership in the company, which in 2012 did more than $100 million in business for the campaign, a Romney super PAC, the Republican National Committee, and Crossroads GPS, among others.