August 10, 2015 07:52 AM UTC

GOP activists allege that Republican State Chair is concealing dire financial problems from donors

• 14 Comments
• by: Jason Salzman

(The Coffmangate red-on-red backstabbery continues – Promoted by Colorado Pols)

UPDATE: GOP activists have clarified and corrected a couple issues in this blog post, but the central points still stand.

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In an email distributed Friday by GOP activist Marilyn Marks, three GOP Central Committee members express dismay over the financial health of the state Republican Party and accuse State Chairman Steve House of concealing outstanding liabilities from donors.

The letter was signed by Nicholas Lundberg and Doug Childress. They did not immediately respond to my request to verify the letter, but other sources have verified it.  It was addressed to members of the Republican Central Committee.

The email lists 11 specific items, and it requests that the Executive Committee, which beat back an effort to oust House, address the financial concerns at its Aug. 19 meeting.

Most of the points focus reporting failures; others allege deception:

3.        Chairman House acknowledged that he concealed and failed to report outstanding liabilities and bank debt to avoid donors learning that the party was in “dire financial straits.” Such failure to disclose violates campaign finance laws, violates bank covenants, and is unethical with respect to reporting obligations to the CRC.

4.        Chairman House states that at least $188,000 in unrecorded liabilities have intentionally not been disclosed. He states that unpaid legal bills make up a significant amount of the liability and relate to the Independent Expenditure Committee (IEC) legal issues. He further states that it is undetermined whether the party will ultimately pay for this liability.

An email seeking comment from the Colorado Republican Party was not immediately answered.

The letter asks that the Committee insist that an “independent CPA firm be immediately engaged to audit the books and records and prepare financial statements as required” by the bylaws of the state Republican Party.

The letter summarizes the situation this way:

We write you as concerned legal and financial professionals to explain our growing concerns about the Colorado Republican Party’s financial reporting and disclosures. The party appears to be materially out of compliance with federal and state reporting requirements, bank loan covenants, and bylaw financial reporting requirements. This situation is exacerbated by Chairman [Steve] House’s disregard for basic requirements of financial transparency, decisions to conceal material liabilities, and his lack of candor regarding financial matters…

Repeated efforts made by several other CRC members to persuade Chairman House to address the issues have been unsuccessful. Instead, he has demonstrated a lack of basic business knowledge and financial literacy resulting in significant financial reporting problems and reputational damage to the party.

The text of the letter, without attachments, follows:

Dear Fellow Central Committee Members:

As we work to prepare for an exciting 2016 election, our state party must undertake some preparatory work to ensure that the party is in a strong position going into election season.  Financial health and transparency are essential foundations for success as we seek to attract voters, candidates and donors. The party faces concerning financial reporting issues we wish to bring to your immediate attention for a timely remedy.

We write you as concerned legal and financial professionals to explain our growing concerns about the Colorado Republican Party’s financial reporting and disclosures. The party appears to be materially out of compliance with federal and state reporting requirements, bank loan covenants, and bylaw financial reporting requirements. This situation is exacerbated by Chairman House’s disregard for basic requirements of financial transparency, decisions to conceal material liabilities, and his lack of candor regarding financial matters.

The problems are attracting the attention of the press, candidates, volunteers and donors. They must be promptly addressed by the officers of the party to repair the reputation of the party, and to diminish the financial risks. Repeated efforts made by several other CRC members to persuade Chairman House to address the issues have been unsuccessful. Instead, he has demonstrated a lack of basic business knowledge and financial literacy resulting in significant financial reporting problems and reputational damage to the party. We ask that you join with us to seek the commitment of Chairman House, the Audit Committee and the Executive Committee to bring the party into compliance with: Federal Election Commission financial reporting requirements Affirmative Loan Covenants with Centennial Bank requiring the books and records be kept in accordance with Generally Accepted Accounting Practices (GAAP); Bylaw requirements for independent CPA firm annual audits; Bylaw requirements to provide quarterly financial statements to membership.

Non-compliance may have been a problem in prior administrations, but improper past practice cannot stand in the way of the transparency and compliance. Nor can the excuse of “competitive secrets” be used to conceal financial information that must be public. The public has access to exceptionally detailed financial transactions through required FEC reporting, such as this 35 page June, 2015 report. Political parties are by law not permitted to have much “confidential financial information.”

Our concerns are based on the correspondence attached to this letter, the Quarter 1 and 2 schedules transmitted to the CRC, and recent FEC reports. We have also referenced loan documents and party bylaws. Our major concerns are:

1.         Chairman House improperly asserts that the party is not required to use GAAP. However, bank loan covenants require GAAP. The party is in technical default with the loan’s affirmative covenant to maintain its books and records in accordance with GAAP.

2.        Party members have a reasonable expectation of meaningful quarterly statements. Chairman House makes the nonsensical argument that the “books” are kept on different basis of accounting than used in the preparation of the financial statements.

3.        Chairman House acknowledged that he concealed and failed to report outstanding liabilities and bank debt to avoid donors learning that the party was in “dire financial straits.” Such failure to disclose violates campaign finance laws, violates bank covenants, and is unethical with respect to reporting obligations to the CRC.

4.        Chairman House states that at least $188,000 in unrecorded liabilities have intentionally not been disclosed. He states that unpaid legal bills make up a significant amount of the liability and relate to the Independent Expenditure Committee (IEC) legal issues. He further states that it is undetermined whether the party will ultimately pay for this liability.

5.        Chairman House states that he did not want to “dump” all the liabilities onto the required disclosure statements because it would appear to be blaming Ryan Call for large unpaid expenses.

6.        The bylaws require an annual audit by an independent CPA firm and to report the results of the audit to the executive committee. To our knowledge, no such audit was conducted for the year ending December 31, 2014, a clear violation of the bylaws.

7.        Chairman House’s staff wrote an email on July 9, 2015 that first quarter audit was under way, causing the delay in the CRC receiving the financial statements. However when the financial “statements” were released, they had not been audited.

8.        The recently released nonstandard, incoherent quarterly financial schedules were supplied to the CRC in lieu standard “quarterly financial statements.” Chairman House refused to provide the fundamental statements required by GAAP, Balance Sheet, Statement of Cash Flows and Income Statement. He argued that such statements are not required, although they are universally understood to be essential elements of an organization’s “financial statements” required under GAAP.

9.        The nonstandard financial schedule provided to the CRC classifies the $70,000 proceeds from a bank loan as a contribution and income, not as a liability. Chairman House considers it a “contribution” in his communication attached. Treating loan proceeds as income is not compliant with GAAP.

10.    Chairman House acknowledges that, despite the many month delay in producing financial statements, material adjustments must be made to the financials once they are “through the August ExComm meeting,” and “before month end,” implying that the ExComm will still not receive accurate financial statements in August.

11.    Chairman House indicates that the Q1 and Q2 financial schedules were prepared based on an “sense of” current “running rates” rather than actual financial activity. This is a serious departure from GAAP maintained books and records required by CRC’s lender, Centennial Bank.

Our concerns about the loan covenant default and CRC bylaw compliance are serious. The Audit Committee, which requires one of the three members to be a CPA, must provide immediate and direct oversight of financial management and reporting. It is imperative that an independent CPA firm be immediately engaged to audit the books and records and prepare financial statements as required in Article X of the bylaws.

We urge each of you to contact voting and non-voting members of the Executive Committee prior to their August 19 meeting to ensure that these issues are addressed by the Executive Committee. Urge the Executive Committee to direct the Audit Committee to set the scope of the audit at the Formal Audit level, as opposed to a review or a compilation, consistent with Article X.A.1.d of the bylaws.  All county chairs and congressional district chairs are members are the Executive Committee, whether they are voting or non-voting members. Non-voting members can attend executive sessions and take a meaningful part in requesting information and offering suggestions.

The linked pages of correspondence are included as supporting documentation for the summary of our concerns. We have highlighted some of the more concerning statements in yellow. While House’s assertions may appear reasonable if you skim his communications, a thorough reading reveals illogical deflection and lack of candor that represents an ethical breach and failure to disclose material financial information.

With the attention of the CRC and its Executive Committee, financial management issues can be brought under control in a timely manner so that our party can prepare itself for 2016 success.

Sincerely,

Nicholas Lundberg, Accountant, Denver CRC member

Doug Childress, CPA, Jefferson County CRC member

The day after the above email was distributed, Marilyn Marks send out a second email below, signed by the same GOP activists along with Randy Corporon, clarifying and/or correcting a few points:

Dear Central Committee Member:

You should have received an email yesterday that we wish to update to answer some of your inquiries and correct a few errors. 

FAQs

Is the party insolvent? Is it able to pay the bills?  

Given Chairman House’s statements that liabilities may exceed $188,000 and a recent FEC report showing cash on hand of $125,000, there is reason for concern and Executive Committee review.

If the party is out of compliance with bank debt agreements, does that mean that the bank will call the loan?

Not necessarily. The bank will likely undertake a review of the financial condition, and make their decisions based on current risks and liquidity. They will likely demand financial statements based on Generally Accepted Accounting Principles.

Aren’t these just petty accounting technicalities that make no difference in getting Republicans elected in 2016?

No. If the party is in stable financial condition, the reporting issues can be promptly remedied. However, if the organization is facing a cash crisis, it will shake the confidence of donors, candidates, and vendors.  

Chairman House’s emails state that he plans to have a closed-door session to discuss financial matters at the August meeting. Can he do that? 

Yes, but the Executive Committee should discourage that, given the legitimate interest that members, candidates, and donors have in the party’s financial picture.

Also, non-voting members may attend. All county chairs, CD chairs and chairs of affiliated organizations should be encouraged to attend, speak up and get answers for their constituents.

Shouldn’t this criticism be behind closed doors? Aren’t we just giving the Democrats ammunition and making 2016 tougher for us?

Private inquiries and requests have been unsuccessful. Chairman House has not been candid and has concealed information that the party is required to disclose.

The Democratic Party does opposition research and likely knows more about the issues than most Central Committee members do. We should expect them to use it mid-next year when it is too late for us to remedy the issues.

These financial reporting issues were inherited. Why are you blaming Chairman House?

Chairman House is responsible for complying with the bylaws, bank covenants and campaign finance laws, which all require a recognition of liabilities, whether or not they were reported in the past.

If you have additional questions, please let us know at ColoradoConcernedGOP@gmail.com .

Thank you for your questions and concern.

Sincerely,

Randy Corporon

Doug Childress

Nicholas Lundberg

 

This blog post originally listed Celeste Gamache, Attorney, Denver County, CRC member, as a signer of the Aug. 7  letter. She did not sign it.