Some people are hoping to hoist John McCain on his own campaign finance petard. As satisfying as it would be to see the Senator receive a healthy dose of his bitter medicine, however, the complaints filed against him with the FEC will almost assuredly fail.
In the blogosphere it is the most recent complaint filed by Jane Hamsher, et al. that is getting the most attention.
Yesterday, on behalf of a large number of progressive bloggers and activists, Jane went to the FEC and filed an official complaint against 
John McCain’s alleged campaign finance violations. We’ve been asking a lot of questions about this, and the answers have been less than forthcoming. So, instead of just sitting here and stewing about yet another GOP ethical problem, we decided to put our action where our concerns were.
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As Markos of DailyKos pointed out in joining the complaint, “John McCain has officially blown past campaign spending limits mandated by his original acceptance of public campaign funding. While he has signaled his intent to withdraw from such financing, that has been hindered by the fact that he used the promise of public funding to secure a campaign loan.” Guess the campaign finance laws only apply when they aren’t inconvenient for McCain’s ambitions.
In truth, Hamsher’s complaint is a just piggy-backing off of the DNC’s complaint filed on February 25, 2008. Unsurprisingly, the DNC complaint is much more substantive:
In order to receive matching funds, John McCain signed a binding agreement with the FEC to accept spending limits and to abide by the conditions of receiving those funds. The FEC makes clear that any request to withdraw from the agreement must be granted by the FEC. In other words, McCain can’t just unilaterally withdraw. FEC Chairman David Mason made this clear in a letter to McCain advising him that the law requires the FEC to approve his request to withdraw from his contract.
According to past Commission rulings, the McCain campaign would not be allowed to withdraw from matching funds because it has already violated a key condition for being let out of the program – pledging matching funds as collateral for a private loan. McCain obtained a $4 million line of credit — drew $2,971,697 from it – and documents make clear that the promise of public financing was used to secure his loan.
The gravamen of both complaints is that McCain’s attempt to withdraw from the matching funds program, and thus to spend more than allowed thereunder, is a dead letter because he pledged the certification for federal matching funds as security for private financing. According to the FEC, withdrawal from the program will normally be automatically granted “prior to the payment date for any such funds to such candidate or his or her committee upon receipt of a written request signed by the candidate, provided that the certification of funds has not been pledged as security for private financing.” However, the loan documents tell a different story.
In November of 2007, McCain took out a $3 Million line of credit with Fidelity & Trust Bank of Maryland (see DNC Comp., Ex. 4, pdf p.18). As a part of that loan, McCain also executed a Security Agreement pledging all of his assets to the Bank as collateral, with the explicit exception of:
any certifications of matching fund eligibility currently possessed by [McCain] or obtained before January 1, 2008 and the right of John McCain 2008, Inc. and John McCain to receive payment under these certifications [which] are not collateral under the Commercial Security Agreement for this Loan.
(see pdf p.21). Such disclaiming language appears throughout the loan documents, making it abundantly clear that the Bank had no security interest in or to the certifications or any matching funds.
The entire loan was later modified, on December 17, 2007, raising the limit on the amount that could be borrowed to $4 Million. The modification also altered the language concerning the matching fund certifications. In particular, the parties had anticipated all along that McCain may withdraw from the program, and the documents addressed the scenario of McCain then losing the New Hampshire primary afterwards. In that case, McCain would then reapply (i.e. re-certify) for federal matching funds, and then pledge a security interest therein to the Bank. The Loan modification, changed the re-certification promise to include the next primary McCain ran in after withdrawal. (see pdf p.35).
In addition, the modification revised the “STATUS OF CURRENTLY HELD CERTIFICATIONS OF MATCHING FUNDS” to read:
[McCain] and Lender agree that any certifications of matching funds eligibility now held by [McCain], and the right of [McCain] to receive payment under such certifications, are not (and shall not be) collateral for the Loan.
At this point it should be painfully clear that neither McCain nor the Bank think that there is a security interest in the certification.
The DNC attempts to argue that despite the clear and unambiguous language to the contrary, McCain did in fact pledge a security interest in the certification … with respect to future matching funds! The DNC basically makes three arguments in order to prove its case:
(1) McCain’s promise to re-certify for matching funds in the event that he loses a primary after withdrawing from the program, and to grant a security interest in such certification and matching funds to the Bank, creates “a present encumbrance, however conditional, of the Campaign’s future interest in and entitlement to matching funds ….”
This argument is fallacious on its face. The FEC policy of automatically granting a request to withdraw from the program provided that the currently held certification has not been pledged does not have anything to do with future certifications. It only deals with a certification presently held by a candidate. That McCain promised to grant a security interest to future certifications, upon certain other conditions being met, is not material to the current certifications. Indeed, both the Bank and McCain understood that a security interest in the certification would prevent McCain from withdrawing, which is why they drafted the documents the way that they did.
Furthermore, even accepting the DNC’s argument as valid, it is self-defeating. If the Bank’s has a present security interest in future certifications, and that security interest prevents McCain’s withdrawal from the program, then the conditions precedent to the Bank perfecting it’s security interest (i.e. withdrawal and re-certification) cannot be met. Ergo, it has no security interest.
(2) McCain agreed to abide by, and to stay within, “overall or state spending limits set forth in the Federal Matching Funds Program,” regardless of whether the campaign was still participating in the program or not. The DNC reasons that these provisions are for the sole purpose of ensuring that McCain can receive future matching funds, and that the Bank can take a security interest therein.
The DNC is probably right about that, but so what? It still doesn’t create any security interest since not only was any such interest specifically and repeatedly disclaimed, the only possible interest the Bank could have would be in funds received after McCain withdrew from the program and then re-certified. At the time McCain attempted to withdraw from the program, the certification his campaign held was not encumbered. End of story.
(3) While the description of collateral excludes current certifications held by McCain, it implicitly includes “rights to receive matching funds, i.e., that come into existence, after January 1, 2008, based on matchable contributions received and presentations in good order made after that date … The modification makes clear again that, although the initial amount certified in December 2007 may not be part of the Collateral, the Collateral will include future amounts of matching funds paid, based on future submissions, even though based on the initial certification of eligibility.”
Although this argument is also wrong, it is certainly clever. If we assume that the specific exclusions of McCain’s certification found throughout the documents are simply ineffective, and that the limits on the Bank’s interest in such certification and the rights to any matching funds is only the good up to date of the modification, then the DNC’s argument that any certified funds after that date are in fact part of the Collateral might actually make some sense. However, there are a couple of problems with it.
First of all, there is only one certification, and that is the initial one made by McCain in August of 2007. When McCain withdrew from the program on February 7, 2008, it is implied that the initial amount certified had not been amended, and that no further funds had been certified for matching. Accordingly, once again there has not been a present security interest created, nor is it even clear that a future interest was anticipated by the Bank prior to McCain’s withdrawal and re-certification.
Secondly, looking at Exhibit 2 of the DNC Complaint we see that as of December 20, 2007 John McCain had certified $5,812,197.35 (also found here). However, when we look at the FEC data for 2008 Presidential Matching Fund Submissions, there are no new funds submitted for certification since the December 20 press release. If we accept the DNC’s argument as correct, and McCain has not in fact submitted any new funds for certification since December 20, 2007, then the Bank still does not have any security interest in the certification or matching funds.
Accordingly, the DNC’s Complaint will most likely be denied since the Bank quite clearly excluded McCain’s certification and any matching funds from becoming security for the loan. If McCain actually did submit funds after December 20, 2007 for certification, there is a colorable argument that such certified funds are pledged as collateral, but given the totality of the documents that’s not a very winnable position.
Regarding Hamsher’s Complaint, it tries to make the case that because the FEC has not yet granted McCain’s request that he withdraw from the program, that he is still bound by the spending caps, and that he has violated those caps. Even if she is right about McCain’s campaign exceeding the spending limits, McCain would certainly have a reasonable expectation to believe that he will eventually be released from the program, given that he complies with the provisos for an automatic grant of his request. Moreover, it would not be reasonable to expect to him to await the FEC’s decision on the matter when the commission doesn’t even have enough members to do so:
The only trouble is, the commission hasn’t got a quorum… and it won’t, until the Senate breaks a deadlock on approving nominees.
The FEC can’t deliver any decision yet, and prior opinions indicate clearly that McCain will be released. Why should he be restricted to the spending caps?
Furthermore, and this goes to all the arguments above, it’s not even clear that the FEC has the power to prevent McCain from withdrawing in the first place. The FEC thinks that the certification process creates a binding contract between the candidate and the commission, but it doesn’t look like any enforceable contract I’ve ever seen. There is no consideration, and there is no mutuality of obligation. A candidate can apply for the funds, but he can’t be required to actually take them, can he? If he were to take the funds, then there is probably an enforceable contract, but prior to that time the candidate is merely trying to establish eligibility. Imagine going to a bank and applying for a loan, and then having the bank sue you because your credit score does not allow you to qualify for a loan. That’s pretty much the argument being made.
So that’s the DNC and Hamsher case against McCain in a nut shell. He accepted a loan from a bank, specifically excluding as collateral any certification for matching federal funds, except that he secretly really did! Oh, and because the FEC hasn’t granted McCain permission to not accept federal matching funds, then he is still bound by the spending caps, and he’s violated those with reckless abandon. Needless to say, I don’t think either complaint will be successful.
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