California Officials Turn Up The Heat On Secretive 'Dark Money' Groups (UPDATE)

WASHINGTON -- California officials have widened an investigation into the source of $11 million that was mysteriously funneled by a few nonprofit groups in 2012 to sway two ballot measures in the state, The Huffington Post has learned.

The states election watchdog agency, the Fair Political Practices Commission, which launched the inquiry last November, is working closely with the California attorney generals office, according to a person familiar with the matter. They have issued about a dozen new subpoenas to individuals and organizations for financial records, according to the person, who requested anonymity because he was not authorized to speak publicly about the probe.

The latest round of subpoenas represents a major development in the investigation and comes on top of several subpoenas previously sent to the California PAC that spent the $11 million and three nonprofit groups that are not required to reveal their donors, including one with ties to the billionaire brothers Charles and David Koch.

The inquiry was sparked because of a California law requiring contributors to state initiatives be publicly disclosed. Investigators are reviewing how these nonprofit groups were used to shield the identities of donors and attempting to trace the original funding sources. Gary Winuk, a spokesman for the commission, declined to comment, as did Lynda Gledhill, a spokeswoman for the attorney generals office.

Californias decision to follow this murky million-dollar money trail is one of several recent legal actions around the country aimed at increasing transparency and curbing potential abuses of so-called dark money by politically active, tax-exempt groups known as 501(c)(4) social welfare organizations.

The New York attorney general last December issued new and tougher rules that require the disclosure of donors by social welfare groups that spend more than $10,000 to influence state and local races there . In January, a Montana court ruled against a dark money group that had been aggressively fighting state disclosure laws about its spending in 2008 in Montana and Colorado state elections.

These legal actions have come as some campaign watchdogs and former Internal Revenue Service officials have voiced concerns about the adequacy of IRS oversight of these tax-exempt groups. Congressional interest in the political activities of dark money groups has also been mounting. Democratic Sen. Carl Levin of Michigan, the chairman of the Senate Permanent Subcommittee on Investigations, said in early March that he intends to hold hearings this year to look into the failure of the IRS to enforce our tax laws and stem the flood of hundreds of millions of secret dollars flowing into our elections, eroding public confidence in our democracy.

Federal court rulings in 2010, including the Supreme Court's decision in the Citizens United case, paved the way for outside groups to raise unlimited sums from corporations, unions and individuals to directly back candidates. Since then, dark money groups have poured hundreds of millions into federal and state elections. These groups include the GOP-allied Crossroads GPS, which was co-founded by Republican strategist Karl Rove, and the Democratic-allied Priorities USA, which was founded by two former White House aides. Both groups, which like other social welfare outfits are supposed to operate separately from candidates' campaign committees, have drawn fire from campaign finance watchdogs for their hefty amounts of political spending.

In recent weeks, watchdog groups also have strongly criticized a new social welfare group, Organizing for Action. Launched by President Barack Obama s 2012 campaign manager, Jim Messina, the group aims to raise some $50 million to spur grassroots and political backing for the president's legislative priorities, such as gun control and immigration reform. One concern: donors of at least $500,000 will be invited to quarterly meetings with the president .

Under IRS rules, the primary purpose of 501(c)(4) social welfare groups cannot be political, but must involve educational or issue advocacy. That rule has effectively meant that groups have to spend more than 50 percent of their funds on non-political advocacy, a distinction that in practice has sometimes proven ambiguous and controversial.

The IRS has always given a little bit of attention to these groups, but not as much as called for, former IRS Commissioner Sheldon Cohen told The Huffington Post. The spending by some (c)(4) groups has pushed the envelope in terms of political activities.

Cohen added that the problem of increased political spending by tax-exempt groups has burgeoned, while noting that budget constraints have often crimped the IRS's regulatory capacities.

The California investigation into the mysterious origins of the $11 million spent on two ballot initiatives there seems to be generating the most heat. When it launched the probe in November, the states Fair Political Practices Commission called the donation the largest contribution ever disclosed as campaign money laundering in California history.

The controversy erupted shortly before Election Day when a state PAC, the Small Business Action Committee, reported spending $11 million on two ballot measures. One was aimed at fighting a tax hike backed by Gov. Jerry Brown (D), while the other would have curbed union spending on elections.

In its reports to the state, the PAC revealed only that the funds had arrived in mid-October from Americans for Responsible Leadership, a 2-year-old dark money outfit based in Arizona that had never before been involved in California elections.

Seeking to pierce the funding veil, the commission took the matter to the California Supreme Court, which ordered Americans for Responsible Leadership to disclose where the funds originated. In response, the Arizona group pointed the finger at a Virginia-based nonprofit, Americans for Job Security -- which spent close to $16 million to help GOP candidates including Mitt Romney last year -- as the source.

In a further twist, AJS had channeled the funds to a group called the Center to Protect Patient Rights, which is run by Sean Noble, a well-known Koch operative. The center then handed the $11 million over to Americans for Responsible Leadership. (Despite their under-the-radar spending drive, the groups failed to block the ballot measure hiking taxes, or to pass the one curbing union spending.)

The involvement of Nobles group in the California funding chain seems representative of the role it has played in the last two elections. Since its creation in 2009, the center has been a conservative cash conduit with very deep pockets. During the 2010 elections, it funneled almost $55 million to two-dozen other dark money outfits, including the American Future Fund, Americans for Tax Reform and Americans for Job Security.

Jason Torchinsky, a Washington election lawyer who has represented the Small Business Action Committee, Americans for Responsible Leadership, the Center to Protect Patient Rights and Americans for Job Security, declined to comment. Jan Baran, a veteran election law specialist with the firm Wiley Rein, who had not previously been identified as involved in the case, said he also has a client who is party to the matter, but declined to comment or identify the client.

Rob Tappan, a spokesman for Koch Industries, the energy conglomerate controlled by the billionaire brothers, stated that the Kochs were not involved with the issue in any way, shape or form, referring to the initiative that would have curbed union spending. Asked whether the Koch brothers, the company or any of its consultants had any role in funding the fight against the tax hike initiative, Tappan did not respond. Likewise, Tappan declined to say whether the company, the Kochs or Americans for Prosperity, a large dark money group they help fund, had received a subpoena in the California investigation.

Ann Ravel, who runs the state commission, said last fall that the four groups initially identified in the investigation are the ones we know exist. But it does not preclude our ability to investigate others we come across.

The three nonprofits that funneled the funds to the Small Business Action Committee could face fines reportedly totalling $33 million. The California attorney general's office is looking at potential criminal violations.

Meanwhile, the court ruling in Montana early this year has bolstered critics who have argued that some nonprofit social welfare groups appear to have crossed the line and become essentially political operations. The judge in the Montana case, Jeffrey Sherlock, stated that in 2008, a dark money group called the Western Tradition Partnership (which last year restyled itself as the American Tradition Partnership and is now based in Washington, D.C.) resorted to subterfuge in order not to comply with state disclosure laws.

Sherlock wrote that the group had flatly refused to comply with two discovery orders for documents. The groups attorney has said he intends to appeal the case.

In a legal first, the Montana court also ordered the names of donors to the dark money group be released, asserting that citizens had a right to the information. The records showed that from March 2008 to December 2010 the organization raised about $600,000 from other dark money groups, out of some $1.1 million it collected in total. Further documents found in a meth house in Colorado suggested that Western Tradition Partnership illegally coordinated some of its activities with campaign committees.

The court acted after a request was made by two news organizations, the PBS show "Frontline" and ProPublica, which last year teamed up to expose several of the groups schemes in a print and television reporting effort. Their "Frontline" special that aired last October depicted how Western Tradition Partnership had played a role in shaping the campaigns of some candidates in Montana state races, including creating front organizations that were used to send out mailers criticizing candidates.

Now, American Tradition Partnership may be facing other legal headaches. The Associated Press has reported that it is the focus of a federal grand jury investigation and that some of the group's documents have been subpoenaed by Montana's Commissioner of Political Practices.

On another legal front, rules calling for enhanced disclosure by social welfare groups that spend over $10,000 on state and local races in New York came after a lengthy review launched last year of some two-dozen leading 501(c)(4) groups, including Crossroads GPS and Priorities USA. The state attorney general's office spent months examining the groups' financial documents to determine whether they were in compliance with New Yorks charity laws.

The new rules would require disclosure by some national groups, such as those that spent more than $1 million to bolster GOP candidates in state Senate contests in 2012. If a tax-exempt group spends over $10,000 on state and local races, it would be forced to list donors who kick in $100 or more. The rules would also mandate that any social welfare group with operations in New York itemize the proportion of its total expenditures that goes toward political activities. Public hearings have been held to solicit comments on the new rules, which are expected to take effect later this year.

Beyond these state efforts, watchdog groups and some ex-IRS officials want the federal agency to exercise greater oversight of the booming sector of dark money groups.

Marcus Owens, who used to run the IRS's tax-exempt division, says that given the huge sums that some dark money groups have spent over the last two elections, the agency should assume a higher-profile role. The IRS needs to communicate its concerns, said Owens, now a partner at the law firm Caplin & Drysdale.

He suggested an audit project of big-spending groups is warranted, since some dark money groups seem to be using their status "to make end-runs around election law without appreciable tax risk."

UPDATE: March 26 -- Additional reporting indicates that Jan Baran, the attorney with an unidentified client involved in the probe, has previously done substantial election compliance work for Koch Industries.