Federal Election Commission May Limit LLC Gifts to Super PACs

Documents newly released by the Federal Election Commission in cases involving 2012 election-cycle contributions to super PACs may foreshadow enforcement action against limited liability companies in the future.

In four cases dating back to the last presidential election cycle, the FEC commissioners deadlocked 3-3 on whether to go forward with investigations of whether several LLCs were used to try to mask the identities of the true donors to a super PAC backing Republican presidential candidate Mitt Romney, a conservative super PAC called FreedomWorks and a super PAC backing Democratic presidential candidate Barack Obama. The agency’s general counsel had recommended pursuing three out of four probes.

But the three GOP commissioners who voted against proceeding said that while in these cases, the LLCs and the individuals donating through them didn’t have “fair warning” of how the agency would interpret the law, in the future “closely held corporations and corporate LLCs may be considered straw donors” in violation of the law “under certain circumstances.”

The three Democrats on the panel voted to pursue all of the investigations because, they wrote, law and FEC regulations “prohibit contributors from using the names of LLCs to deprive the public of information to which it is entitled.”

Though the cases are years old, the commissioners’ statements are highly relevant to the current election cycle; super PACs are increasingly dependent on contributions from LLCs totaling in the millions of dollars; some of those gifts have raised flags with watchdog groups.

The Cases

The specifics of the cases differed, but in all of them LLCs were used to contribute to super PACs.

In March 2011, Ed Conard, a former employee of Romney’s old company, Bain Capital, made a $1 million donation to the pro-Romney super PAC Restore Our Future through an LLC — W Spann — that he established solely for the purpose of making the contribution; the LLC dissolved shortly thereafter. When the contribution drew press attention, Conard stepped forward; he said he’d contributed through the LLC because he was worried about his family’s security if he used his own name.

In a second case (there were originally two complaints filed), Steven Lund, the owner of two dormant LLCs, F8 and Eli Publishing, told the FEC that he’d made contributions totaling $2 million to Restore Our Future through the companies because of “accounting advantages.”

A third case involved $12 million in contributions to the conservative super PAC FreedomWorks in a one month period just before the 2012 election — Oct. 1-Nov. 1. The LLCs that made the donations, Specialty Investment Group and Kingston Pike Development, had been formed just weeks before by William Rose, though press reports indicated that a FreedomWorks board member, Richard Stephenson, was the source of the funds.

The FEC had remained silent for years on the matters, which had been the subject of complaints filed with the agency by the Campaign Legal Center and Democracy 21. Last month the complainants received word that the probes would be dropped, but the underlying “statements of reasons” by the commissioners were released only Friday.

In a fourth case on which the commissioners were deadlocked, Prazrakel “Pras” Michel made two political contributions totaling $1.2 million to a super PAC called Black Men Vote through SPM Holdings LLC. The FEC general counsel recommended against further pursuing that matter.

The Fight

According to their statement, the Republican commissioners’ reasoning boiled down to this: Because the Supreme Court’s 2010 decision in FEC v. Citizens Unitedopened the door to corporate donations to outside spending groups, donors could be forgiven for thinking that corporate LLC donations would be no problem either — especially since the agency had given no guidance to the contrary. Whether an LLC’s contributions were illegal would depend on a number of factors, the conservative commissioners wrote, including whether the LLC’s funds came from a single individual and whether the company was created only for the purpose of making political donations.

But in these cases, they said, “principles of due process, fair notice, and First Amendment clarity counsel against” moving forward against the donors in these cases since the agency hadn’t done so in similar instances.

“All these guys [behind the LLCs] admitted…exactly what they were trying to do and they thought they were allowed to do that,” said Brad Smith, a former FEC commissioner and the chair of the Center for Competitive Politics. “Even if it was illegal, it was done because it was a fair reading of a past precedent,” he toldOpenSecrets Blog.

Larry Noble, general counsel of the Campaign Legal Center, one of the groups that brought the complaints, scoffed at the notion that fair warning was an issue. “This is civil law. It doesn’t require people to know what the law is” or have intent to violate it, he told OpenSecrets Blog. If they knowingly broke the law, he noted, it could be a criminal matter in the Justice Department’s jurisdiction.

The commission’s Democrats, on the other hand, said the question was much simpler: Under longstanding law, donors can’t make contributions in the name of another, which are commonly referred to as straw-man donations.

“Although the ability of individuals and corporations to make unlimited contributions to super PACs is a post-Citizens United…phenomenon,” the Democrats wrote, “the longstanding prohibition against making contributions in the name of another remains unchanged and squarely applies to these cases.”

In an interview, Democratic Commissioner Ann Ravel blamed the delay in taking up the aging cases on the panel’s Republicans. When she chaired the agency in 2015, she said, “I tried to put these cases on the agenda and they wouldn’t take them on.” Ravel called them “open and shut” matters that should have resulted in prompt enforcement action.

Upshot? Watch Yourself

Disputes in these cases aside, the Republicans now are clearly on record saying that LLC contributions won’t fly in the future in at least some cases.

“What the Republicans are saying, in light of [Citizens United], is that they don’t think the defendants should be fined,” said Smith. “But they do say it’s potentially an issue…Presumably, the next time these cases come up, no one is going to say, they didn’t have fair warning. Now, you’re on the hook.”

Noble agreed, saying, “I would assume the vote would be six-nothing after this.”

Still, it’s unclear whether the agency’s Republicans and Democrats, who have agreed on very little in recent years, will be able to come to a meeting of the minds in this area.