FPPC Complaint

July 20th 2017

July 21st update: Rachel Swan wrote about this complaint for the Chronicle, which includes a short, unsatisfying response from Stearns.

August 3rd update: The FPPC has responded that they need a few more weeks to judge whether they should pursue a claim. The letter indicates that Stearns has lawyered up.

To whom it may concern at the California Fair Political Practices Commission,

Jim Stearns, a political consultant in San Francisco, has evaded laws governing independent expenditures by coordinating with a political candidate and laundering money through a Slate Mailer Organization (SMO). To my knowledge, this is a novel means of avoiding coordination restrictions that typically govern external spending on candidate campaigns. Normally, independent expenditures like PACs are expressly forbidden from communicating with a campaign.

During the 2016 San Francisco election, Jim Stearns was employed as the sole campaign consultant of both the Sandra Fewer campaign and the Affordable Housing Alliance. Stearns used his position at both groups to campaign for Fewer from both inside and outside the campaign. Typically, illegal coordination between candidates and external groups occurs via passed messages or illicit telephone calls. In this case, Jim Stearns was brazenly coordinating with himself.

Election authorities should quickly issue a mandate explicitly banning this behavior. If they do not, the tactics employed by Stearns will become the de-facto standard for every campaign, and will drastically undermine campaign finance transparency.

Background

In 2016, many candidates ran for the position of District 1 Supervisor to replace Supervisor Eric Mar. District 1 is also known as the Richmond neighborhood of western San Francisco. The two leading candidates were Sandra Fewer and Marjan Philhour. The Fewer campaign engaged Stearns Consulting (Jim Stearns’ one-man office) as their campaign consultant. Meanwhile, the Affordable Housing Alliance (AHA) hired Stearns for the same role.

The AHA was registered as a Slate Mailer Organization. “Slate mailers” are pieces of paper mass printed with support for or opposition to a list of candidates and ballot measures and mailed to voters. Slate Mailer Organizations (SMOs) sell placement on these mailers to campaigns, and are technically defined as entities that receive payments of $500 or more to support four or more such campaigns (Gov. Code 82048.3, 82048.4.)

Typically, an SMO will approach candidates or ballot measure campaigns that it favors and say, “Hey, we’d love to put you on our slate to endorse you. Can you pay us $500?” After all the campaigns pay up, the SMO mails out this combined slate to voters. The SMO gets to pocket the difference between how much it cost to mail the slates and how much it raised from campaigns, which is why so many of them are for-profit ventures. Here’s a sample image provided by the FPPC as an example of how one of these slate mailers should look:

Sample slate

Individuals and organizations making independent expenditures, typically PACs, are not allowed to communicate with campaigns, but SMOs are free to do so for the purposes of arranging payment from the campaign. This is a reflection of what is assumed to be the fundamental difference between an SMO and a PAC: an SMO raises money from campaigns, but a PAC raises money for campaigns. This very important distinction is why SMOs are allowed to communicate with campaigns.

However, this distinction has broken down with Jim Stearns and the AHA. Not only did Stearns serve on both the Fewer and AHA campaigns, he raised funds at the AHA while representing the Fewer campaign and coordinated the the marketing efforts of both campaigns simultaneously. He essentially had a secret slush fund to draw on while advocating for Fewer.

SMO Irregularities

The AHA deviated from the standard SMO playbook in a number of key ways that call its status as a legitimate SMO into question. Firstly, their slates don’t seem awfully much like slates. I’ve attached three “slate mailers” sent by the AHA in the Richmond. In each, three out of the four pages visible on the mailer are solely devoted to attacking Fewer’s opponent, Philhour. The remaining page makes only a cursory endorsement of three citywide ballot measures, and makes no mention of endorsing any particular political candidate.

Attack mailer example

This is very unusual for a Slate Mailer Organization, and is behavior more typical of a standard PAC. It’s not clear if attack ads can even be considered slates at all. The Fair Political Practices Commission (FPPC) manual on SMOs hasn’t addressed the issue yet. Slates often endorse a “No” vote for measures they’re opposed to, but these AHA “slates” devoted 75% of their space to attacking a candidate, and then didn’t even bother to endorse the opponent the AHA presumably supported. It seems clear that these were simply attack ads with a small appendix to have minimum plausible deniability that they were really slates.

Secondly, as mentioned, SMOs usually raise money directly from candidates and ballot measures in return for advertising them in their mailers. However, a cursory look at the AHA’s funding sources reveals that of the $507,900 it raised for the election, $280,000 of that money was raised from only one source: the American Beverage Association, colloquially known as “Big Soda.” The next largest customer of the AHA paid $20,000 for the endorsement of three ballot measures. In 2016, Big Soda spent over $22 million through the “No on V PAC” (FFPC ID 1382995) to defeat Prop V, a proposed tax increase on soda sales. Filings show that this PAC also paid Jim Stearns $40,000 to assist with their campaign as well.

This is a very strange situation for an SMO, which typically raises a large amount from many customers who pay roughly comparable amounts of money in order to be featured on the slate. Here, Big Soda put in more than half of all money raised by the AHA, and ten times as much as anyone else. One would imagine that Big Soda’s issue, opposition to Prop V, would feature prominently in all of the AHA’s mailers. Oddly, Prop V is quite literally not even mentioned in the mailers that attack Marjan Philhour. This behavior is very strange for an SMO, but not if you consider the AHA to actually be a covert PAC with the purpose of electing Sandra Fewer.

Helpfully, the FPPC has touched on a related matter. In Finley Letter, A-92-219, a one Lowell Finley asked the FPPC what would happen if his SMO received donations from a third party who was only contributing to help defray the costs of the mailer. That is, from someone who was not paying to appear on the mailer themselves. The FPPC concluded that if they raised more than $1,000 this way in a year, the SMO would have to file as a “recipient committee,” which is essentially a traditional independent expenditure PAC, with all the attendant regulations. This ruling is helpful in the case of the AHA because Big Soda paid a surprisingly large sum of money to not appear in many mailers sent by the AHA, which essentially amounts to defraying the costs of the AHA’s campaign. Notably, the AHA is already registered as a recipient committee, indicating it has operated as a PAC in the past.

Thirdly, the slates sent by the AHA were remarkably similar to mailers sent by the Fewer campaign. This was likely because Stearns was making the mailers for both campaigns. For instance, the Fewer campaign adopted the slogan “San Francisco is not for sale.” Mailers sent by the AHA featured similar slogans like “The Richmond is not for sale,” which is a bit ironic considering who paid for them. Likewise, mailers from both were printed on the same paper, in the same size, and with the same font. Is a slate designed by a political consultant from an individual candidate campaign really an independent slate?

Analysis

It’s hard to escape the conclusion that the AHA was exploiting its status as an SMO. However, one must ask why Stearns would take such risks. It would be perfectly legal for Big Soda to donate to a normal, regulated PAC. However, being in charge of both an SMO and Fewer’s political campaign gave Stearns numerous advantages during the 2016 election.

Firstly, this arrangement gave Stearns much more power over fundraising and marketing. By controlling both the AHA and the Fewer campaigns, he avoided having to worry about whether an independent PAC could actually produce good ads that supported the Fewer campaign. In this particular case, Stearns could send exactly which negative ads he wanted, with total control over appearance and timing. Additionally, since these negative ads were not attributed to Sandra Fewer, he could avoid the appearance of running a negative campaign. This is especially important given SF’s ranked choice voting system.

It’s also likely that the money from Big Soda would not have been spent on Fewer if Stearns was not also the consultant for the AHA. Big Soda’s goal in the 2016 election was to prevent the passage of Prop V. Supporting Sandra Fewer did not advance that goal. However, as Stearns was already a consultant for Big Soda, he likely managed to arrange their contribution to the AHA, in exchange for running some mailers with a No on V endorsement. The AHA certainly did run such mailers, but they also used their funds to run ads attacking Fewer’s opponent. If Stearns had not been employed by the AHA, Big Soda may still have attempted to buy an AHA endorsement, but it’s not likely those funds would have been spent campaigning directly for Fewer.

Secondly, the AHA is registered as a statewide Slate Mailer Organization. This means they report fundraising and spending to the state, not to the San Francisco Ethics Commission. Practically speaking, this allowed the Fewer campaign to conceal that a large amount of external money had been raised on their behalf. From a SF Examiner article entitled “SF’s million-dollar supervisor races”:

Philhour has received $336,000 in campaign contributions, which are capped at $500 per donor, as of Monday. She has also benefited from more than $700,000 in third-party spending, which has no limits, according to the Ethics Commission.

[…]

The total spending against Philhour has reached $450,000 in the contest, according to the Ethics Commission. Fewer’s campaign has received about $360,000 in contributions and some $74,000 in third-party spending benefiting her.

At the time of writing of that article, the official tally of third-party spending for the Fewer campaign was only $74,000. However, if the AHA had registered as a standard PAC and not a Slate Mailer Organization, they would have had to report the money they were spending on Fewer’s behalf. The money that “normal” SMOs spend to mail slates does not count as dollars spent in support of a candidate because the candidate is the one paying the SMO for their services. Since Fewer only paid the AHA $250 for the privilege of being promoted by their mailers, she received an exceptionally good deal when Big Soda happened to bankroll most of the mailers. This allowed her to keep her “third-party spending” number down, as tracked by the SF Ethics Commission, and artificially create the perception of being more of a grassroots candidate than her opponent.

Being a statewide SMO also allowed the AHA to avoid reporting their mailers to the city. San Francisco has the relatively unique requirement that PACs send copies of their mailers to the SF Ethics Commission (SF Campaign and Governmental Conduct Code 1.161). Since the AHA was not a PAC, it was not required to file their attack mailers with the city, despite clearly advocating for a particular city candidate. This made it harder to track down their mailers, as I had to acquire them from citizens who happened to have saved the ones they received in the mail.

Thirdly, this arrangement was simply very lucrative for Stearns. He was able to charge the AHA about $479,000 over the course of the 2016 election. Of that, $334,000 went to the design, printing, and mailing of the slates, which left him with a profit of about $145,000. Being the consultant for the AHA as well as Fewer campaign gave him an extra income stream, which wouldn’t have been possible if he was limited to consulting for only one of the two.

Requested Action

The FPPC should censure or fine Stearns and issue stronger requirements for what actually constitutes an independent SMO. These requirements should explicitly prohibit deep coordination with campaigns and place additional constraints on mailer design.

Regards,

Vincent Woo

CC:

Maggy Krell, Special Prosecutions Unit, Office of the Attorney General
June Cravett, Special Operations Department, San Francisco District Attorney
Pamela Parra, Political Reform Audit Manager, Franchise Tax Board
Peter Keane, Chairperson, San Francisco Ethics Commission

Appendix

Attack mailers sent by the AHA

Fewer campaign mailer showing shared design

Fewer_mailer_1.jpg

AHA Slate Mailer Organization Campaign Statement

AHA_SMO_Form_401.pdf

Stearns Campaign Consultant Registration

Stearns_Registration.pdf

Soda PAC filings showing payments to Stearns (Form 460)