By Andrea L. Moseley

There are very few sui generis innovators when it comes to alleged criminal schemes. Steve Bannon may be a headliner but he is no pioneer as he becomes the new government flagship for alleged donor fraud.

In recent times, Southern District of New York (SDNY) prosecutors have made no secret about the Department of Justice’s intent to intensify its efforts to combat the abuse of vulnerable political donors. This summer I authored a series of articles about campaign finance crimes and related donor fraud forecasting what is now Steve Bannon’s inauspicious reality. As a white collar criminal defense attorney, I have been analyzing my experience defending those accused of campaign related fraud and anticipating the prevailing winds of DoJ’s investigations and prosecutions during this presidential election year. So, what can we already see from Steve Bannon’s imminent prosecution?

If you missed it, the series began with What do Scam PACs and the Coronoavirus Have in Common and continued here, here and here.

We learned today that Steve Bannon has been indicted by the same office (SDNY) that very publicly promised to take down political action committee fraud when it announced the first prosecution of its kind in late 2018. Bannon, Brian Kolfage, Andrew Badolato and Timothy Shea are alleged to have funneled hundreds of thousands of dollars from an online crowdfunding campaign known as “We Build the Wall” that raised more than $25 million.

The allegations in the Bannon indictment mirror the key facts contained in the burgeoning wave of “Scam-PAC” prosecutions I covered in my series. The general allegations against Bannon et al. are that they used false pretenses (that all of the donated money would be spent on construction) when in fact, the true use of the funds was concealed and misappropriated. The accused are said to have falsely assured donors that Kolfage would “not take a penny in salary or compensation” and that “100% of the funds raised . . . will be used in the execution of our mission and purpose” because, as Bannon allegedly publicly stated, “we’re a volunteer organization.”

The government claims that Kolfage took $350,000 for his personal use and that Bannon (through a non-profit organization under his control) received over $1,000,000 which Bannon used to secretly pay Kolfage “to cover hundreds of thousands of dollars in Bannon’s personal expenses.”

Another factual similarity between Bannon’s current indictment and recent “Scam PAC” prosecutions is that to conceal allegedly fraudulent payments, the accused in both types of cases used shell companies, generated false invoices and made “sham” vendor arrangements.

There are two broad varieties of donor fraud cases. There are organizations that raise funds with the promise to support candidates or a particular cause, but instead do not spend any money to support candidates or causes and/or use lying as a mechanism to get you to part with your money. This type of donor fraud is easy to spot because it is just garden variety fraud, a typical theft by false pretenses (category one).

The second type of donor fraud case is much more controversial because it involves situations where the fundraising organization is in fact raising money for the stated cause and the organization does in fact donate money to the cause. BUT, the organizers spend a whole lot more money on themselves, on overhead and very little on the cause. I have labeled this second type of potential donor fraud “proportionality fraud” (category two). The idea here is that donors might be shocked or would feel defrauded if they found out how much of their donation went to the cause vs. to the organization raising money for the cause.

In defending those accused of donor fraud, it is imperative to remember that category two/proportionality fraud may not be a crime at all. There is no clear statutory guidance on exactly how much fundraisers must donate to the cause vs. use for legitimate overhead costs. Until there is unambiguous statutory guidance on this point, there should be no proportionality fraud. Explicit notice to the public that certain behavior is proscribed by law is one of the most fundamental tenants of a fair system of government. It is equally important to remember that the government may allege a clear-cut case of category one fraud but the facts developed through litigation may reveal that it is more like a category two (and arguable) fraud case.

My experience in defending these cases is that there is much ado made about the proportion of self-dealing vs. donating.  But the actual crime is the misrepresentation.  The focus should be on the level and volume of misrepresentations used to raise money. Bannon’s case is clearly alleged as a category one fraud case. The alleged sweeping promises that “100%” of the funds raised would be used to build the wall; “I [Kolfage] won’t take a penny from these donations” and “[We Build the Wall] campaign goes directly to wall!!! Not anyone’s pocket,” and “I’m [Kolfage] taking nothing! Zero” are very difficult facts for the defendants.

It is hard to believe that any organization could afford to give 100% of its money to a cause. There are inevitable transaction and operating costs that go into raising funds and typically some portion of the donations, even if minimal, would cover those costs. I suspect one pivotal question for Bannon and the other defendants is whether the government can establish who approved and/or authored such blanket statements.

The indictment raises many unanswered questions and we will await the discovery of unknown factual details as the case unfolds.