Secret Donors Multiply in U.S. Election Spending

In the weeks before last November's election, television viewers in South Carolina were treated to an animated caricature of Representative John Spratt high- kicking in a chorus line with President Barack Obama and then- House Speaker Nancy Pelosi.

"It's the worst economy in decades," the ad intoned, "and the folks in Washington are living it up, spending our tax dollars like there's no tomorrow."

Photographer: Mark Wilson/Getty Images Karl Rove, former senior advisor and deputy chief of staff to former President Bush, drives away after appearing at the Law offices of Patton & Boggs on May 15, 2009, in Washington, D.C. Play Video May 19 (Bloomberg) -- In the weeks before last November's election, television viewers in South Carolina were treated to this advertisement of an animated caricature of Congressman John Spratt high-kicking in a chorus line with President Barack Obama and then-House Speaker Nancy Pelosi. That ad and two others seen here, were paid for by a group called the Commission on Hope, Growth and Opportunity. The group is part of a larger number of outside, or non-party, organizations that spent $305 million in the 2010 elections, including $137 million that came from anonymous donors. The money is a precursor to the secret funding expected to flood the 2012 presidential campaign. (Source: Campaign Media Analysis Group. Source: Bloomberg) Chart: Secret Donors Wield Increased Influence Chart: Groups Affected Campaign Without FEC Scrutiny Photographer: Jay Premack/Bloomberg Crossroads Grassroots Policy Founder Karl Rove. "It's the worst economy in decades," the ad intoned, "and the folks in Washington are living it up, spending our tax dollars like there's no tomorrow." The television ads were paid for by a group called the Commission on Hope, Growth and Opportunity, according to ad trackers at Campaign Media Analysis Group. Source: CMAG

That ad and a second one mocking Spratt appeared at least 723 times between Sept. 25 and Election Day and were paid for by a group called the Commission on Hope, Growth and Opportunity, according to ad trackers at Campaign Media Analysis Group, a unit of WPP Plc. Spratt, a 14-term Democrat, saw a seven-point lead in an early poll vanish and lost the election.

Commission on Hope and four other Republican-leaning groups spent at least $4.05 million attacking candidates in the run-up to the November voting, according to Campaign Media estimates and TV station records obtained by Bloomberg News. None of that spending can be found searching the public database of the Federal Election Commission, and FEC spokeswoman Mary Brandenberger said the commission has no record of it.

Federal law requires FEC disclosure of money spent on ads mentioning or depicting a candidate in the 60 days before a general election. The five groups whose spending wasn't reported either declined to comment, were unreachable, or said they deemed the spending not reportable under the law.

Secret Donors

The five are among the outside, or non-party, organizations that have played a growing role in federal elections. They include trade groups, unions and nonprofits started by political operatives that raise and spend money for advertising. The $305 million they reported spending in the 2010 elections was more than four times the amount such entities paid out in the midterm elections in 2006, according to the Washington-based Center for Responsive Politics, a research group that tracks FEC filings.

Growing more sharply is a subset that keeps secret the identities of donors who bankroll the ads. These outside organizations told the FEC they spent $137 million in the 2010 cycle -- 25 times the 2006 level. Commission on Hope represents an even more secretive type that has taken itself off the radar of federal regulators entirely -- by reporting neither spending nor donors to the FEC.

Unlimited Donations

Non-party groups, including the secretive ones, are already planning to raise more money in the 2012 elections. They received a boost from the U.S. Supreme Court's decision in the Citizens United case last year, which for the first time allowed corporations and unions to spend unlimited amounts on ads advocating the election or defeat of a candidate.

The organizations face little scrutiny from the FEC, where split votes between Republican and Democratic commissioners have stymied enforcement in case after case for almost three years.

As a result, voters may find themselves choosing the next U.S. president knowing less about those trying to shape their views of the candidates than they have since secret money helped finance the Watergate burglary and re-elect President Richard Nixon in 1972. Watergate led to his resignation and ushered in the law that created the FEC. Investigators found more than $20 million had been given behind the scenes to Nixon's campaign.

In the 2010 election, donors tested how secret spending through outside groups works, and used it on a small scale, according to Linda Fowler, a government professor at Dartmouth College in Hanover, New Hampshire. "There will be more next time," she said.

Watergate Looking 'Quaint'

"The amounts of corporate money involved in Watergate will look quaint by the standards of secret corporate funding that will take place in 2012," said Donald Simon, a director of Democracy 21 and former general counsel of Common Cause, both pro-disclosure organizations.

Obama is considering an executive order that could undercut these predictions and reduce secrecy. It would mandate disclosure of political contributions over $5,000 a year by any company vying for a federal contract, according to a draft reviewed by Bloomberg News. The U.S. Chamber of Commerce, which collects secret money for political ads, has vowed to fight it.

Expenditure and broadcasting records collected by Bloomberg provide a glimpse of secretive groups' strategy, their willingness to co-operate with one another on tactics and their spending on close races in the final days of the 2010 campaign. The records also show how the identities of those who funded false advertising were shielded in some cases by tax laws.

Avoiding Disclosure Requirements

In the Citizens United decision, the high court expressed confidence that interested voters could easily discern the identities of those paying for campaign ads.

"With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters," Justice Anthony Kennedy wrote for the 5-4 majority.

The Supreme Court didn't reckon with political operatives who quickly turned toward tax-exempt non-profits to avoid disclosure requirements.

Examples of how this money worked in 2010 were found largely on the Republican side. That's because conservative outside groups, who overwhelmingly spend on behalf of Republicans, outspent the liberal ones that favor Democrats by about two to one -- and by seven to one when the money came from secret donors, CRP data show.

The restocking of the outside-money war chests for the presidential election has already begun.

Rove, Gillespie

American Crossroads and Crossroads Grassroots Policy Strategies -- created by Karl Rove and Ed Gillespie, former aides to President George W. Bush -- have set a $120 million goal for 2012.

They gathered $71 million in 2010, according to spokesman Jonathan Collegio. Crossroads GPS keeps its donor list secret.

"Democrats, having watched what happened last time, are . . . not going to roll over," said David Axelrod, former senior adviser at the White House, who recently left to help plan president Obama's re-election campaign. He predicted "a lot" of new groups appearing on his side of the political divide.

Democratic activists have already formed at least three designed to raise money without disclosing donors. "Our goal is to keep pace with Karl Rove" and other Republican-leaning groups, "but we don't think we'll necessarily be able to match them dollar for dollar," said Bill Burton, a former White House deputy press secretary and co-founder of Priorities USA, one of the new organizations.

Effectiveness Magnified

Outside groups were responsible for only about 8 percent of the total spending in the 2010 elections, which handed the Republicans a majority in the U.S. House of Representatives, where they hold 240 of 435 seats.

Still, the spending surprised Democrats in the days just prior to the election and helped the Republicans offset the money-raising advantage many Democrats had.

And the effectiveness of the outside money was magnified by coordination efforts by the Republican-leaning groups. Leaders of about 15 met regularly to discuss where to concentrate their firepower, said Collegio, the Crossroads spokesman.

"What happened exceeded our expectations, in terms of the activity on the other side," Axelrod said. "Hundreds of millions of dollars came into the campaigns, much of it from unnamed sources. And they were meaningful dollars. Where you really felt it was in the House races. They came in late with a large amount of money and ended up making a big difference."

A Desk Downtown

Former Democratic Representative Dan Maffei said he would have been re-elected "if it were not for the outside advertising which came in exclusively for my opponent late in the campaign." Maffei lost to Republican Ann Marie Buerkle in New York's 25th Congressional District, which includes Syracuse.

Nationally, Maffei said, outside money made the difference between the Republicans picking up "30 or 40" seats in the House and the 63 they won in the end.

Commission on Hope paid at least $2.10 million for ads against Spratt, Maffei and nine other Democrats in seven states in the 60 days prior to voting, according to estimates by Campaign Media. Ten of the 11 Democrats lost.

Formed in March 2010, Commission on Hope lists only one person on its website -- William B. Canfield, a former Republican Senate aide who is the group's general counsel. Its address is a downtown Washington law office where he has a desk. Canfield declined to comment.

Coordinated Effort

Eleven other groups with secret donors bought ads taking on one or more of the 11 Democrats that Commission on Hope targeted, spending $5.87 million, according to CRP data and Campaign Media estimates.

One, the U.S. Chamber of Commerce, spent $1.13 million in five of the 10 races, according to CRP. Another, the 60 Plus Association, which has favored steps toward privatizing Social Security, spent $1.09 million in six of the races.

Eight of the groups joined Commission on Hope in attacking Democrat John Salazar, who was defeated in Colorado. In the Florida panhandle, vanquished Democrat Allen Boyd was hit by ads bought by Commission on Hope and at least seven others. Spratt lost to state Representative Mick Mulvaney, the first Republican congressman from the district in 127 years.

Two of the organizations that didn't report to the FEC, the California-based Taxpayer Network and Water for All, bought ads against Democratic Senator Barbara Boxer of California. Campaign Media numbers show Water for All spent at least $102,000 for ads in Spanish that ran in central California featuring photos of Boxer and Fresno Congressman Jim Costa framed by red circles with lines drawn across them. Boxer and Costa were re-elected.

Exemption Claim

Water for All didn't report its campaign expenditures to the FEC because the ads weren't political in nature and "we don't need to file," said Brian C. Leighton, the group's attorney. "The rules do not require us to file."

Protecting America's Future, a Wisconsin group, bought ads attacking Democrat Julie Lassa, according to TV-station logs from Wausau. Lassa was defeated in her bid to win a seat in the district that includes Wausau. James R. Troupis, a Middleton, Wisconsin, attorney who incorporated the group, said he didn't know why the organization hadn't reported its expenditures.

The National Federation of Independent Business, a Nashville-based trade group, acknowledged it didn't report about $1.5 million of the money it spent during the 60-day window. It said that portion was exempt from the FEC's reporting requirements.

Obama's Old Seat

In the Illinois race for Obama's old Senate seat, combined candidate and party spending was $19.8 million for Republican Mark Kirk and $18.3 million for Democrat Alexi Giannoulias, according to CRP. Non-party players came up with $7.1 million favoring Kirk and $2.2 million for Giannoulias -- expanding the money advantage for the Republican, who won.

The largest expenditure on behalf of Giannoulias was $692,128 from a political action committee funded mostly by labor unions, including $500,000 from the Service Employees International Union.

More than half of the outside surge benefiting Kirk came from the U.S. Chamber and Rove's Crossroads GPS. Five months after the election, the names of the unreported donors remain a mystery to the public.

"If you find out, let me know," said Colin Van Osten, campaign manager for Ann Kuster, who lost her bid for a New Hampshire congressional seat by a single percentage point after an ad assault from American Action Network and 10 other non- party groups, CRP data show.

'Fool's Gold'

Commission on Hope paid $302,300 to three Baltimore TV stations for ads in which Democratic Representative Frank Kratovil took John Spratt's place in the "DC Follies" chorus line, according to the stations. In Manchester, New Hampshire, Portland, Maine, and Boston, Campaign Media data show the group spent at least $388,522 for television ads opposing two-term incumbent Democrat Carol Shea-Porter before her defeat.

In all, the group paid at least $741,928 to show the DC Follies in South Carolina, Maryland, Pennsylvania, Ohio and Florida, according to Campaign Media. The ads were identical except for the candidate's name and photo, and the southern inflections in the announcer's voice below the Mason-Dixon line.

In nine cities, the group spent $586,801 on an ad inviting viewers to call Democratic representatives to order a collectible coin "clad in 14-karat fool's gold" commemorating their votes for the "Pelosi agenda."

Maffei, the New York Democrat, led Buerkle by 12 points two weeks before the election. He spent more than $3 million on his campaign, compared to less than $800,000 by Buerkle.

'Collectible Coin'

Outsiders including American Crossroads added more funds to the race and cut the Democrat's advantage. They reported spending more than $600,000 for ads hitting Maffei or boosting Buerkle, according to CRP.

Commission on Hope chipped in $154,000 -- unreported to the FEC -- to plaster Maffei's district with the "collectible coin" and another anti-Maffei ad, which ran for 10 days in Rochester, according to Campaign Media.

Maffei's lead evaporated, and Buerkle defeated him after a recount by 648 votes. The outside money spent against him late in the campaign proved more influential than his own funds, Maffei said in an interview. Buerkle attributed her victory to a "grassroots campaign" based on volunteers who had never been politically active before, said Liza Lowery, her spokeswoman.

'Less Accountable'

"What has happened in American politics with the advent of campaign finance (changes) is the parties have taken a back seat to the interest groups," said Tom Davis, who served as chairman of the National Republican Congressional Committee from 1999 to 2002. "So the people who are running these other things have as much to say as the party operatives. They've got spending, and they're less accountable."

Commission on Hope and others have non-profit, tax-exempt status as "social welfare" organizations under section 501(c)(4) of the tax code, and must report the names of donors to the Internal Revenue Service, which doesn't make them public. To maintain their tax-exempt status, they must limit their politicking to less than half their activities.

In its application to the IRS for recognition as a tax- exempt organization, Commission on Hope went farther, checking the "no" box on the form when asked if it planned to "spend any money attempting to influence the selection, nomination, election, or appointment of any person to any federal, state or local public office."

The Bipartisan Campaign Reform Act of 2002, known as McCain -Feingold after its two sponsors, prohibited the use of corporate and union money for ads mentioning candidates running within 60 days before a general election.

'Massive Influence-Seeking'

Five years later, a group called Wisconsin Right to Life, which had been urging voters to demand that senators oppose the filibustering of judicial nominees, argued that even though their ads named lawmakers running for re-election, they were not political since they didn't ask voters to vote for or against a particular senator.

The Supreme Court accepted the argument, ruling 5-4 that unless an ad was explicit in giving voting guidance on a candidate, it was not an illegal use of corporate money and not prohibited by McCain-Feingold.

Then, in the Citizens United case last year, the Court went farther, ruling that corporations and labor unions could spend with no limit on ads that did explicitly call for a candidate's defeat or re-election.

The decision has the potential to unleash "massive influence-seeking corporate expenditures and opened the door to enormous damage to our democracy," said Fred Wertheimer, the president of Democracy 21.

Advantages of Anonymity

The biggest of the groups that kept its donors secret in 2010 was the U.S. Chamber, which reported $32.9 million in campaign spending to the FEC. After the chamber, the largest were American Action; Crossroads GPS; and the American Future Fund, an Iowa-based group founded with seed money from an ethanol executive.

For donors, one of the advantages of anonymity is insulation from controversies -- such as challenges about the accuracy of political attacks.

In 2010, one of these erupted in Colorado over ads bought by American Action that claimed Representative Ed Perlmutter had endorsed Viagra for rapists and pedophiles. The ad ran 178 times, at a cost of $215,402, according to Campaign Media.

Perlmutter, it turns out, had done no such thing. During the debate over the health-care law, the U.S. Senate had voted on a proposed amendment seeking to restrict federal health spending for the erectile dysfunction drug. The House never took a vote on the question.

Pulling An Ad

Denver's KUSA pulled the ad when it concluded it was inaccurate, said Mark Cornetta, the station's president. American Action, chaired by Washington financier and former Nixon aide Frederic V. Malek, continued to run it for several days afterward against Connecticut Representative Christopher Murphy, according to Campaign Media. Perlmutter and Murphy defeated their Republican challengers.

Malek said he wasn't involved in choosing ads the group decides to run. "I don't have any idea about the specifics," Malek said in an interview. "I know that we advertised on behalf of center-right candidates. But I really haven't seen most of the ads."

Malek declined to disclose American Action's donors. "When people give to an organization under the assumption that it's anonymous, people expect it to be anonymous," he said. "We'd be violating them by releasing any names without their concurrence."

'False And Misleading'

Taxpayer Network, the California group, spent more than $300,000 to finance anti-Boxer ads, according to four Sacramento TV stations. The spending wasn't reported to the FEC. One of the ads asked, "Would you deny our veterans ongoing health care when they're wounded defending us?"

"Boxer did," it declared.

The ad featured a small text reference, which remained on the screen for four seconds, identifying an amendment discussed during the health-care overhaul law passed last year. Boxer, who was re-elected, joined the majority in voting to table the amendment, which proposed a tax exemption on medical devices provided to military veterans. In the debate, the Senate never voted on any measure that would have denied veterans health care benefits under federal law.

"This is the worst kind of false and misleading attack," said Boxer spokesman Zachary Coile.

Taxpayer Network's donors remain undisclosed. On its website, the group says that it "does not endorse or oppose candidates for election."

'Spending Spree'

Its address is a UPS mailbox in the small California town of Rocklin. Two of its three directors, Bruce and Lisa Hughes, are divorce lawyers from Orange County, California. The third is former Indiana Representative David McIntosh, a lawyer with the firm Mayer Brown LLP. None of the directors responded to repeated calls and emails.

The NFIB spent $1 million for ads urging viewers to vote for 17 Republicans, all but three of whom won, and reported this spending to the FEC as required by law.

NFIB spokesman Kipp Maloney acknowledged not reporting $1.53 million to the commission. The money, according to Campaign Media, paid for 3,683 showings of ads that ran between Oct. 13 and Nov. 2 and accused seven incumbent Democrats of engaging in a "spending spree."

Lobbying, Not Politics

FEC rules mandate the reporting of ads that mention candidates within 60 days of an election, and that target "the relevant electorate." The unreported NFIB ads were aimed at "constituents," who may or may not vote, and not the "relevant electorate" specified in the law, Maloney said. "They were not political ads. They were lobbying efforts."

In the closing weeks of the 2010 campaign, Max Baucus, the Democratic chairman of the Senate Finance Committee, asked the IRS to review the activities of groups with tax-exempt status to see whether they violated tax laws by overdoing their political activities.

Baucus's staff and the IRS are "still talking," according to a Finance Committee aide. Grant Williams, an IRS spokesman, said the agency had "no immediate comment."

The Democratic Congressional Campaign Committee filed a complaint with the FEC before the election accusing Commission on Hope of illegally keeping its spending secret. At least a half-dozen other groups have complained about alleged violations in the 2010 election cycle. FEC spokeswoman Judith Ingram declined to comment on the status of any pending complaint.

FEC Deadlock

Based on its recent history, the FEC as constituted won't be in a hurry to bring any enforcement actions. Inaction has been its usual course since July 2008, when three Republicans -- Caroline Hunter, Donald McGahn and Matthew Petersen -- attended their first meeting of the six-member commission, which also has three Democrats. Four votes are needed to take action.

Since then, there have been 14 party-line votes on enforcement cases in which the Republicans disregarded the FEC general counsel's recommendation and voted not to investigate alleged campaign-law violations. In four other cases, partisan splits caused the FEC to reject proposed settlement agreements negotiated by its general counsel.

An early deadlock came when the new Republicans rejected a settlement FEC lawyers had negotiated after a previous commission concluded that the November Fund had broken the law. The settlement would have penalized the group, which received $3 million from the U.S. Chamber and ran ads attacking Senator John Edwards, the 2004 Democratic candidate for vice president.

Generating Penalties

That November Fund vote and two similar ones were the first made along party lines in five years. The previous commission said the fund had failed to register as a political committee and had taken donations in violation of a $5,000 limit.

The impasses snapped a string of 11 enforcement cases between November 2006 and November 2007 in which the FEC took action against outside groups -- some pro-Republican, some pro- Democratic -- that were accused of exceeding donation limits in the 2004 elections.

Those cases generated more than $3 million in penalties, part of a record $11.8 million collected in 2006 and 2007. From 2008 through 2010, including the 34 months since the new Republican members arrived, the FEC has collected just over $2 million in penalties, agency figures show.

"What started to change was that, ideologically, you have three commissioners who do not believe the law should exist," said Larry Noble, a former FEC general counsel.

'Rendered Irrelevant'

McGahn took issue with the extent of FEC's enforcement actions and fines before he and his Republican colleagues arrived and said lower penalties the last few years are historically "much more in line" with past commissions.

He rejected the idea that the Republicans aren't enforcing the law. "The core of the agency is doing just fine," he said.

"I feel bad for" the reform groups that call the agency dysfunctional, he said. "Much of their life's work has been rendered irrelevant by a series of stinging court cases."

The agency can do a lot to promote disclosure even with a deadlocked commission, said FEC Chairwoman Cynthia Bauerly, a Democrat.

"While I'd prefer that we could find a way to get those votes through, we still do a lot of work here." Her staff, she said, can ask groups for information via letters and can issue public reports.