California fines groups $16 million for funneling money to campaigns

By Chris Megerian and Anthony York

Oct. 25, 2013 12 AM PT

SACRAMENTO — California officials are imposing a record $16 million in penalties on secretive political groups that funneled money into initiative campaigns in 2012, ending a yearlong investigation that showed gaps in state disclosure laws.

Two campaign committees in California are being ordered to pay a total of $15 million to the state, a sum equivalent to the donations they received, which regulators said were improperly reported. Two Arizona nonprofits, one linked to billionaire Republican donors Charles and David Koch, will pay a combined $1-million fine as part of a settlement.

The nonprofits are not being required to reveal their donors’ identities, even though disclosure was at the root of the investigation. Under existing campaign finance laws, the state cannot force the groups to release the names, officials said.

“California law doesn’t provide adequate disclosure of political contributions made through dark-money nonprofits,” said Fair Political Practices Commission Chairwoman Ann Ravel, who announced the investigation’s resolution Thursday along with the commission’s largest-ever penalties.

The case highlighted how some big-ticket donors have sought to influence political campaigns by relying on off-the-books methods. Anonymous donations have exploded in popularity since 2010, when the U.S. Supreme Court ruled in the Citizens United case that many nonprofits can spend unlimited money on elections.

The controversial donations in California last year bankrolled two of the biggest conservative election causes: derailing Gov. Jerry Brown’s ultimately successful tax hike and supporting an unsuccessful ballot measure intended to limit unions’ political power.

Only a haphazardly redacted list of names, uncovered by state officials through their investigation, provides clues to some of the original donors’ identities.

Charles Schwab, the San Francisco investor, gave $6.4 million. The Fisher family, owners of clothing retailer Gap Inc., where Brown’s wife was once an executive, donated more than $9 million.

Los Angeles philanthropist Eli Broad provided $1 million, despite his public support for higher taxes on high-earning Californians. And casino owner Sheldon Adelson, one of the biggest Republican donors in the country, and his wife gave $500,000. B. Wayne Hughes, founder of Public Storage, donated $450,000.

None could be reached for comment.

The donors gave to Americans for Job Security, a Virginia trade association, as a first step in what officials characterized as a scheme designed to hide the original sources of campaign money. As the money was channeled to California, some of the transfers were not properly disclosed and therefore violated state law, officials said.

Thursday’s announcement drew mixed reactions from experts and advocates, who praised state officials for their aggressive probe and expressed concern about loopholes in disclosure laws across the country.

It’s rare for regulators to pursue such cases, said Paul S. Ryan, senior counsel for the Campaign Legal Center in Washington: “Voters don’t have the information they need to make informed decisions on election day.”

Phil Ung of California Common Cause, an advocacy group that filed the original complaint about the controversial donations last year, said new laws will be necessary to dissuade secret donors.

“You know they’ll be back. And they’ll be more sophisticated,” he said.

The donations that were routed through the Arizona nonprofits were solicited by Tony Russo, a California-based Republican political consultant, according to state officials.

Russo did not return calls requesting comment. But a state interview transcript shows he told investigators he wanted to use nonprofits to help with California campaigns.

“Koch, our understanding was, had a pretty significant network of groups,” Russo said. “So that’s why we went to Sean.”

Russo was referring to Sean Noble, a political operative who has worked with the Kochs and is president of the Arizona-based Center to Protect Patient Rights.

Donors wanted to remain secret, Russo said, “because of all the risk [of retribution] involved with the unions,” the interview transcript shows, and Noble seemed interested in helping.

A spokesman for the Koch brothers and their company, Robert Tappan, said they had no involvement in the battles over Propositions 30 or 32.

Officials said Russo offered donors two options: provide money directly to a California group called the Small Business Action Committee and have your identities revealed, or give to Americans for Job Security, and remain anonymous because the law does not require that group to identify its donors.

The money sent to Americans for Job Security was intended for “issue advocacy,” meaning advertising that doesn’t expressly urge Californians to vote one way or another. Because of laws on how and when such funds can be used, the group passed the money to the Center to Protect Patient Rights in Arizona.

The center then sent $11 million to a Phoenix group, Americans for Responsible Leadership, which provided it to the Small Business Action Committee.

In another transaction, using a separate source of money, the Center to Protect Patient Rights provided more than $4 million to the America Future Fund in Iowa, which relayed the money to the California Future Fund for Free Markets, a campaign committee supporting Proposition 32.

The settlement the state reached with the two Arizona nonprofits said violations of California law were inadvertent, and the investigation did not result in any criminal charges.

Kirk Adams, president of Americans for Responsible Leadership, said people who have a problem with anonymous political money “can take it up with the First Amendment.”

“What’s happened here is an attempt to intimidate groups like ours from participating in California politics,” Adams said.

Representatives from the Small Business Action Committee said they plan to fight the $11-million penalty.

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