Koch brothers' Arizona allies fined $1 million over hiding California campaign funding

Two dark money groups linked to conservative billionaire brothers Charles and David Koch have paid a record $1 million in fines to California to settle allegations that the combined $15 million they spent on two ballot proposals in the state was not properly disclosed.

The civil settlement, announced Thursday afternoon in Sacramento, caps a year of investigation into the activities of the two Arizona groups, Americans for Responsible Leadership and the Center to Protect Patient Rights.

The settlement disclosed new details in the case, including how the money was raised and how the Center to Protect Patient Rights disguised its two contributions to two California political committees. As part of the settlement, the Center to Protect Patient Rights conceded it was responsible for funneling $11 million through Americans for Responsible Leadership to a political committee spending money to fight a tax-hike measure and to support a proposition restricting unions' political power.

The Center to Protect Patient Rights also gave an additional $4 million to another dark money group, the American Future Fund, which gave the money to another political committee spending on the anti-union measure.

"What is the takeaway from this trail of dark money?" asked Ann Ravel, the outgoing head of California's Fair Political Practices Commission, which investigated the groups along with the state attorney general's office. "This is a nationwide issue. These groups exploit loopholes in the law to undermine the clear purpose of the law, to give essential information to the public."

The state assessed one $500,000 fine to the Center to Protect Patient Rights only, and another $500,000 fine to the two groups jointly. The state is also demanding that the two politicalcommittees "disgorge," or hand over, the $15 million they received in improper donations through the Center to Protect Patient Rights before the end of November. All of the money would go to California's general fund.

In an interview, Gary Winuk, the chief of enforcement for the California Fair Political Practices Commission, acknowledged that the state may have to go to court to recover that $15 million. One of the political committees has already closed down.

The settlement says California authorities determined that the Center to Protect Patient Rights "inadvertently, or at worst negligently," did not report itself as a donor to the American Future Fund. A similar decision was made on the group's lack of disclosure to Americans for Responsible Leadership.

In a statement sent through its lawyer, the Center to Protect Patient Rights said the commission recognized it erred largely because it had never before made contributions in California and that it had no intention to violate campaign reporting rules.

"Also, the California Attorney General conducted a complete and thorough investigation and agreed that the conduct was unintentional and inadvertent," said the lawyer, Malcolm Segal.

Americans for Responsible Leadership did not return a message seeking comment.

Anonymous money funneled through social welfare nonprofits and trade associations has become a major factor in federal elections since the Supreme Court's Citizens United decision in early 2010 opened up the door to unlimited corporate and union spending on outside ads, as documented by ProPublica. In the past two election cycles, social welfare nonprofits have spent more than $350 million, mostly from unknown donors, on election ads telling people to vote for or against federal candidates.

Some national groups have also started playing on the state level, particularly with ballot proposals.

The California agreement, reached on Oct. 17, underscored how some states, such as California, Idaho and Montana, have actually done more to identify anonymous donors than the Federal Election Commission. In June, New York Attorney General Eric Schneiderman imposed regulations attempting to require disclosure for money spent on state elections. A new disclosure bill has been introduced in California. This month, after a push by California's Ravel, regulators from 10 states announced the launch of a nationwide effort to encourage the disclosure of donors.

But the settlement also highlights the limitations of investigations into who's behind dark money groups: Instead of unmasking some reclusive billionaire or shy corporation, regulators often uncover yet another nonprofit, like a set of Russian nesting dolls. The original sources of the money spent in California were not publicly identified, nor will they be.

"A number of donors did not want to be identified," said Winuk, the enforcement chief for California's campaign finance regulator, who received only a redacted list of donors for the original contributions.

And while the groups have been linked to the Koch brothers, it's not clear how exactly they're connected. The Center to Protect Patient Rights, which operates out of a post office box in Arizona and doesn't even have a website, has been described practically like an ATM machine for various groups affiliated with the Koch brothers. The press release issued by California authorities says the Center and Americans for Responsible Leadership "operated as part of the ‘Koch Brothers Network' of dark money political nonprofit corporations."

The Kochs have long been known for spending millions to influence elections behind the scenes, through a complex network of groups that critics have nicknamed "the Kochtopus." The Kochs themselves have remained determinedly in the background. 

One link between these two groups and the Koch network is Sean Noble, a GOP strategist who runs two political consulting firms and is the sole employee of the Center to Protect Patient Rights, which was launched in 2009. In 2010, he spoke on a panel at a Koch brothers' secretive retreat, small semiannual affairs that are invitation-only and closed to the media. In 2010 and 2011, the Center to Protect Patient Rights handed out almost $60 million to conservative groups that spent tens of millions on election ads. The Huffington Post recently quoted a GOP operative describing Noble as "the wizard behind the screen" for the Koch network's election efforts in 2012.

Noble did not return a call for comment.

Another link is Wayne Gable, a former top official at Koch Industries who has also served in leadership roles in several nonprofits formed by the Kochs. In 2011, Gable launched a new trade association that gave almost $115 million to the Center to Protect Patient Rights over the following year. It's not yet clear how the Center doled out its money, as its tax return for 2012 isn't yet available.

The leader of Americans for Responsible Leadership has close ties to Noble. Republican Kirk Adams hired Noble's firm in 2011 and 2012 to help run his failed campaign to replace outgoing U.S. Rep. Jeff Flake in Arizona. Adams lost in the primary in August 2012; the next month, he was named president of Americans for Responsible Leadership.

According to the settlement, some $24.5 million of the money distributed by the Center to Protect Patient Rights was raised by GOP strategist Tony Russo for another organization, Americans for Job Security, a Virginia-based trade association. (Russo didn't return calls for comment.)

Americans for Job Security gave the money to the Center to Protect Patient Rights. Then the Center gave about $7 million to the Iowa dark money powerhouse American Future Fund on Sept. 11, 2012; of that, the American Future Fund gave about $4 million to a new California committee, the California Future Fund for Free Markets, which supported the anti-union measure. That committee has since closed down.

The Center also gave $18 million to Americans for Responsible Leadership in October 2012, recommending that the group "should use the funds to support common social interests, including support" for the Small Business Action Committee PAC, a committee that Russo was also raising money for, the settlement said. Americans for Responsible Leadership then gave $11 million to the Small Business Action Committee PAC to spend on the two ballot proposals.

That $11 million contribution sparked a complaint, an investigation and a court battle. Just before the election, Americans for Responsible Leadership admitted that it got its money from the Center to Protect Patient Rights, which in turn got the money from Americans for Job Security.

The fine is the largest in California history in a campaign-finance case.

The manner in which the groups paid it speaks volumes about how dark their money really is.

They paid by cashier's check, sent by a Sacramento lawyer's office Thursday morning, betraying no clue to the money's origin.