2012 Campaign Cash Scandal Ends With PAC's Shutdown

In a quiet ending to one of the most high-profile campaign money controversies in California history, the political action committee reprimanded for accepting $11 million from mystery donors in 2012 has closed its doors.

The political arm of the Small Business Action Committee (SBAC) filed official termination papers on Monday, six months after agreeing to hand over $300,000 in campaign cash to state officials for accepting what turned out to be the largest anonymous donation to a political effort in California history.

The group's backers agreed to the settlement, but disagree with the enforcement effort that led to it.

"We still feel that the law has unconstitutional aspects to it," said Joel Fox, president of the SBAC, in a telephone interview.

Fox's group was a principal opponent of Gov. Jerry Brown's 2012 tax increase initiative and is a longtime player in California political campaigns opposed to tax hikes. He argues the rules that require the repayment of money spent on what was legal political activity — from mailers to TV ads — probably wouldn’t pass muster in the courts because of the possibility that it would mute a group’s right to freedom of political speech.

"How do you take that speech back?" asked Fox.

The shutdown of the Small Business Committee's PAC was a matter of necessity for Fox's group: Had the PAC remained in operation, every new dollar it raised would have had to be handed over to the state, up to $11 million — the amount of the original contribution SBAC accepted from what turned out to be a network of opaque nonprofits with links to conservative billionaires Charles and David Koch.

In all, three out-of-state nonprofit groups funneled $16 million into the effort to beat Brown's Proposition 30 and pass Proposition 32, an effort to curb union political power that voters ultimately rejected.

The case highlighted the complex and secretive way political money now moves through 501(c)(4) organizations, designated by the IRS as "social welfare" groups and allowed to keep confidential the identity of their donors. In all, $29 million was collected by a Virginia-based nonprofit to influence California political campaigns in 2012. Most of that money was then transferred to an Arizona-based 501(c)(4) and ultimately funneled into two California political campaigns, the most prominent being the campaign run by the SBAC.

Last October, state officials imposed a $1 million fine in the case while also ordering four groups to hand over $15 million in tainted money — which, because the money had already been spent on the 2012 campaigns, effectively meant that the groups were required to pay it back.

In January, SBAC agreed to hand over $300,000, leaving it $10.7 million short of the settlement. State officials admitted that they had no way to compel the group to make up the difference.

The reality was that if SBAC shuttered its campaign committee, as it did on Monday, it would be the official end of the debt owed.

The final documents show that SBAC's political action committee also paid legal fees associated with the case, as well as $175,000 to the actual organization — in effect, money transferred from the group's political operation to its operating expenses.

SBAC's Fox said all of the political action committee's finances were reviewed by the state Fair Political Practices Commission, which agreed to the $300,000 cash settlement.

The biggest loser from the committee's demise may be wealthy GOP political activist Charles Munger Jr., whose $10 million loan to SBAC's PAC in fall 2012 was never repaid.

The case of the so-called 2012 mystery money sparked a number of calls for reform. In May, Gov. Brown signed a law requiring new disclosures when it comes to donations from 501(c)(4) groups. The saga also provided a new PR weapon for Democrats in California and across the nation against the Koch brothers and their efforts to influence politics and government through nonprofit organizations.

And even though the PAC has now closed its doors, its backers aren’t going anywhere. It's perfectly legal for the Small Business Action Committee, the parent organization, to start all over again from scratch.

"If we choose," said Fox, "we can open another PAC."