California probe of campaign donations sheds light on 'dark money'

SACRAMENTO — Tony Russo had a multimillion-dollar problem.

The Republican consultant and his team had raised piles of cash to use in California politics as last November's election approached. But a wrinkle in state law meant he couldn't spend it in the final two months of the campaign without jeopardizing the anonymity he had promised his rich donors.

So Russo turned to what he called "the Koch network." He asked a political consultant who has worked with billionaire Republican contributors Charles and David Koch to shuttle the money through an Arizona nonprofit. That group, which is not required to reveal its donors, could send cash to California causes without names attached.

But things went from bad to worse. Although Russo handed over $25 million, only about $15 million ended up back in California. And when the money surfaced, it sparked an investigation by state authorities, who last month[ levied $16 million in penalties against the Arizona group and three others.

The case offers a rare glimpse into the shadowy world of politically active nonprofits, which have played an increasing role in elections nationwide since the U.S. Supreme Court eased campaign rules in 2010. They provide donors a way to influence elections by piping major money around the country until it resurfaces — without their fingerprints — in a campaign.

Advocates of transparency in government call it "dark money."

Russo declined to be interviewed by The Times. But he and his colleagues detailed their experience for California investigators, conversations that were recorded in hundreds of pages of transcripts.

Those records and other documents released by authorities show a convoluted money trail. They also show the risks of operating in a political world so intricate that even Russo didn't fully understand how it worked when he threw in his donors' money.

"There's all kinds of groups all over the country that I wouldn't even know," Russo said.

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California Republicans faced two major battles last year: a fight against Gov. Jerry Brown's tax hike and a push to pass a measure that would limit unions' political fundraising.

Russo did not think the state party was up to the task. He envisioned an independent advertising pitch to voters that would tout economic destruction wrought by tax increases and political havoc caused by powerful California labor unions.

To bring in the big money needed for a statewide television campaign, Russo worked with GOP consultant Jeff Miller, lead fundraiser for former Gov. Arnold Schwarzenegger and for Texas Gov. Rick Perry's 2012 presidential campaign. Miller declined to be interviewed by The Times.

The Fisher family, of the clothing firm Gap Inc., contributed more than $9 million. San Francisco investor Charles Schwab gave $6.4 million, and Los Angeles philanthropist Eli Broad sent $1 million.

The money went to a Virginia nonprofit that would use it to pay for the ad blitz and be allowed to keep the contributors secret. Nonprofits, unlike political action committees, are not required to identify their donors under federal law.

Many donors did not want to "put their name on … this fight because they didn't want to face the retribution of the unions," Miller told state investigators. Deep-pocketed labor groups were planning major campaign efforts in 2012, and some conservatives were wary of crossing them.

But by the time the money was pouring in, summer was turning into fall. If the donations were spent after early September, there was a risk that the veil would have to be lifted on those who wrote the checks, in accordance with California's complex campaign laws.

That's when Russo turned to Republican strategist Sean Noble, who has worked as a consultant for the Koch brothers and whom he had met on a trip to Las Vegas the year before.

Noble heads the Center to Protect Patient Rights, an Arizona nonprofit known as a clearinghouse for conservative causes. In 2010, the organization had distributed more than $55 million to 26 groups allied with Republicans to help them in the midterm elections.

Robert Tappan, a spokesman for Koch Industries, confirmed that Noble has worked for the Koch brothers as a political consultant. Charles and David Koch did not play any role in California campaigns last year, Tappan said.

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