10:50 am Aug. 3, 20121
Eric Schneiderman, New York's Democratic attorney general, is trying to win a fight over independent campaign expenditures that his party, for the moment, is losing badly.
In particular, he is using his subpoena power to dredge up the details of a series of donations made by a New York nonprofit to an affiliate of the U.S. Chamber of Commerce in the early 2000s, when the Chamber was engaging in an aggressive push to enact tort reform—a push that helped oust a handful of longtime incumbents, most notably Senate minority leader Tom Daschle in South Dakota.
Schneiderman's action comes in response to complaints from ChamberWatch, a labor-backed group that alleges that the Starr Foundation, a New York-based nonprofit controlled by former AIG C.E.O. Hank Greenberg—who was, personally, a highly public supporter of tort reform—funneled $18 million to the Chamber's effort through a sister nonprofit, the National Chamber Foundation.
Sources close to the investigation said it's just the first part of a larger push by Schneiderman to fill an oversight void in Washington that was created by the Supreme Court's decision in Citizens United and, possibly, to compel broader action by other regulatory bodies.
"If he can make an example of somebody, I think that can really have some consequences," said Daniel Kurtz, former head of the charities bureau in the New York State attorney general's office. "And other agencies will feel, 'Gee, how did he do this? We gotta get on this.'"
That the push just happens to be commencing at the height of a presidential cycle in which unprecedented amounts of corporate and outside money are being spent to affect the outcome, the vast majority in the service of Mitt Romney and Republican candidates for Congress, is clearly something that the unabashedly partisan attorney general can live with.
"As the chief regulator of charities and non-profits in the State of New York, I am committed to restoring accountability and transparency by shining a light on the new role that these organizations are now playing in our political process," Schneiderman said, through a spokesman.
Schneiderman's role as a regulator of these outside political groups, much like the groups themselves, is made possible by a loophole: The outside organizations that are expected to spend more than $1 billion during the 2012 campaigns have most of their contributions shrouded from public view by I.R.S. rules that classify the groups as "social welfare" organizations. That status allows donors who might otherwise shy from public contributions to fund pet causes and candidates without having their names in the news.
It is that I.R.S. classification that brings the organizations under the jurisdiction of Schneiderman, whose office is entrusted to oversee any charities that maintain an office, or so much as raise money, in New York State. That mandate in turn gives Schneiderman—who has emerged as one of Obama's steadiest allies in New York—broad powers to examine the way in which nonprofits raise and spend money for political purposes.
For many of these groups, Schneiderman's prying actually poses an existential threat. Any evidence to suggest that the "primary purpose" of such organizations—known as 501C4s—is actually political could undermine their standing with the I.R.S. If those organizations were to lose their preferred tax exempt status, they would be forced to pay onerous taxes on their contributions, or register as political entities and then disclose the sources of their funding, either of which would presumably have a chilling effect on other big individual donors and corporations who were willing to give on the condition of anonymity.
The combined effect could be devastating to the current system.
"Traditionally, the I.R.S. is a very slow actor, which is why it's very good to see the A.G. get involved, because they tend to move a bit more quickly," said Susan Lerner of the good government group Common Cause New York. "But when the I.R.S. does move, wow, it's like a guillotine coming down."
TO THE EXTENT THAT THE DEMOCRATS HAVE TRIED to mitigate the now-unbridled involvement of wealthy Republican-friendly funders in federal elections by requiring more transparency, they have failed.
Last month, for example, Democrats were unable to overcome a Republican filibuster of the DISCLOSE Act, a bill sponsored by Chuck Schumer that would have required more disclosure from certain political donors. The bill has gotten only minimal support from Republicans in the House.
Meanwhile, the Federal Election Commission remains deadlocked over a number of rules that would mandate more disclosure. (The F.E.C. is composed of three members of each political party, but requires four votes to take any official action.)
"Clearly they've handcuffed themselves, it's deadlocked" said Representative Chris Van Hollen of Maryland, who sponsored the DISCLOSE Act in the House, and scored one of the few disclosure-related victories for Democrats in Washington in March, with a district court ruling that even 501c4 groups must disclose donors to certain "electioneering communications." That decision has forced some super PACs to readjust their advertising in advance of an appellate hearing next month, but Van Hollen said there's still a glaring need for an aggressive regulator.
"A lot of people think they can act with impunity because there's not a federal cop on the beat," he said.
At the very least, Schneiderman is hoping to dispel that sense of impunity.
Sources said the attorney general's Charities Bureau is proactively reviewing the 990 forms filed by a number of nonprofits, which detail where the organizations' money is spent.
"He seems to have figured out what Eliot figured out: how important the sector is, how enormous it is, and how many problems it has," said Bill Josephson, a former head of the Charities Bureau under Eliot Spitzer.
In doing so, Schneiderman is treading on turf which has traditionally belonged to the Internal Revenue Service. The I.R.S. has the final say over an organization's tax-exempt status, though it's unclear how actively the agency wants to police the issue.
Last year, the I.R.S. publicly abandoned an effort to impose taxes on five wealthy donors who gave to non-profits that were heavily involved in political activity.
"Until further notice, examination resources should not be expended on this issue," wrote Steven Miller, the I.R.S.'s deputy commissioner in charge of enforcement, in a memo on July 7, 2011.
Advocates for greater disclosure hope Schneiderman's efforts will prod the I.R.S. into more public action.
The day after the New York Times reported that Schneiderman was issuing subpoenas, a spokesperson for the I.R.S. told the Wall Street Journal that the agency had prepared a questionnaire to be circulated to some of the largest quasi-political nonprofit groups, which would be the first step in any possible changes to their tax-exempt status, or a broader clarification of the agency's rules.
Last week, the Campaign Legal Center, a group that has been urging the I.R.S. to consider the issue for over a year, received its first formal response from the agency, in the form of a letter saying the I.R.S. "is aware of the current public interest in this issue" and would be reviewing its rules.
But the I.R.S. is legally prohibited from speaking publicly about its specific audits, leaving even some close observers to wonder how active the agency plans to be.
"The I.R.S. could be more forthcoming," said Marcus Owens, who previously served as director of the Exempt Organizations Division at the I.R.S.
"There's nothing that precludes them from saying we currently are reviewing five, ten, zero, a thousand 501c4 organizations, without identifying any particular organization, and thereby give the citizens some assurance that indeed the cop is on the beat, so to speak.
"But they haven't done that. So it's hard to know from the outside looking in, whether we simply have a situation where the I.R.S. is doing its job, but is somewhat muted by the disclosure rules and hasn't found its voice, and allowed it to communicate about an audit activity. Or is it just designing a questionnaire while Rome figuratively burns?"
The agency's retreat in 2011 seems to have been prompted by wilting pressure from Republican members of Congress, who called the plan a political witch-hunt and questioned whether the agency was acting at the behest of the Obama administration.
Conservatives have said much the same thing about Schneiderman's subpoenas. In a post for Commentary's website entitled "Schneiderman's Partisan Fishing Expedition," Jonathan S. Tobin wrote that the "left-wing attorney general is launching a brazenly partisan attack on the right of political speech in the guise of an investigation of alleged violations of the tax code."
But Schneiderman, a former state senator for the Upper West Side who is in fact an openly partisan Democrat, is unlikely to mind the blowback, which will only further endear him to his (increasingly national) liberal base. The editorial boards for the New York Times applauded the subpoenas, saying Schneiderman's investigation would provide a necessary look at "secret world of undisclosed political contributions," because "government watchdogs are dozing." A Newsday editorial said it was "watching with interest" (in a good way).
"I think we have a tradition here in New York, of attorney generals who are valiant champions of the people in a lot of different areas that other attorney generals have not had the vision to engage with," said Lerner of Common Cause. "And I think Attorney General Schneiderman falls well within that tradition of taking on the difficult but very real instances of lawbreaking that others have looked past or haven't been able to see."
IN THE CASE OF THE CHAMBER OF COMMERCE, SCHNEIDERMAN IS LOOKING specifically at how money moved among the three nonprofits.
Between 2003 and 2005, the Starr Foundation reported $18 million in grants to the National Chamber Foundation, which, around the same time, provided loans to the Chamber of Commerce in roughly the same amount.
At the time, Greenberg, who serves as chairman of the Starr Foundation, was heavily involved in an effort to enact tort reform, for which the chamber was also lobbying. (The chamber, in an act of innovation under its new director, Thomas Donohue, had begun allowing for earmarked donations from some of its big contributors, allowing them to fund some political and lobbying campaigns through the chamber's coffers.)
But any direct contributions from the Starr Foundation for that purpose would have been subject to a severe excise tax. The complaint from ChamberWatch, which was first filed with the I.R.S. in 2010, alleges that the Chamber Foundation was used as a pass-through, and that the loan was more like a gift.
Schneiderman's investigation could pursue a number of outcomes, depending on what he finds. The office could file criminal or civil charges, revokes its charity status in New York, or simply make public the results of its investigation.
In 2005, under Spitzer, the office published a scathing report of its investigation into the early days of the Starr Foundation, which accused Greenberg and other executives of selling off some assets at a discount rate for personal gain, even though it declined to bring charges, on the grounds that the transgressions had occurred too far in the past.
(Spitzer's investigators had traveled as far as Bermuda to seize files after receiving a tip that AIG was moving files out of its office. Last week, in a heated exchange with CNBC's Maria Bartiromo, Spitzer denied he was motivated by any personal animus for Greenberg.)
Such a public report could have a chilling effect on other organizations, if donors and corporations who are sensitive to public scrutiny determine that their donations might not remain private in the face of investigations like Schneiderman's.
The Starr Foundation did not return a call for comment.
A spokesman for the chamber suggested that Schneiderman's investigation was motivated by politics.
"In the midst of a highly charged political season, it comes as no surprise that the New York State Attorney General would use his office to rehash a very old story about the Chamber's finances," said Tom Collamore, the Chamber's Senior Vice President of Communications and Strategy, in an emailed statement. "The subpoena they have issued closely resembles a politically motivated letter that an activist group sent to the IRS in 2010, also just before an important election."
The chamber did not specify to what degree it intends to cooperate with the subpoenas.
"This curiously timed subpoena will play out in the appropriate legal channels. In the meantime, the Chamber will not be distracted from its focus on issues related to jobs, growth and the nation's economic recovery, while at the same time vigorously supporting candidates we believe will help put our country on the right track."