Both scam political action committees and COVID-19 fundraising are currently rife with opportunities for fraud. These groups labeled “scam PACs” purportedly raise money for political causes but instead, direct the money they receive from donors elsewhere. With the 2020 presidential election just around the corner and with increasing anxieties over the spread of COVID-19, requests for donations to advance both sets of causes are widespread and intensifying. Recently, the U.S. Department of Justice has highlighted an intent to step up its enforcement game both against Scam PACs and coronavirus-related fraud.
Scam PACs are not new, but prosecutions of individuals involving alleged Scam PACs have significantly increased in the last two years. In late 2018, William Tierney became the first person successfully prosecuted for running a Scam PAC. After this highly-publicized, flagship prosecution, the U.S. Attorney for the Southern District of New York announced that “[t]his is the first-ever federal prosecution of fraudulent scam PACs, but it won’t be the last.” As for COVID-19 fraud, since March 16, 2020, the Attorney General and the Deputy Attorney General have issued at least 4 memos detailing the actions it is taking to prioritize taking down these bad actors. These vows of prosecutorial emphasis will increasingly become the focus and study for the white-collar defense community over the next few months.
This article is the introduction to a series called “Scam PACs and COVID-19: Defending against allegations and prosecutions.” In the coming weeks, I will cover DoJ prosecutions and policies against campaign finance fraud, the history and development of PACs, DoJ focus on COVID-19 fraud, defending targets, and sentencing guidelines issues relating to the same. Let’s get started with some background.
What is a Scam PAC?
Well, you put the word “scam” in front of it and it the common meaning seems clear as first glance. In the narrowest of terms, a Scam PAC is a fundraising organization that raises funds with the promise to support candidates or a particular cause, but instead does not spend any money to support candidates or causes. It is a classic theft by false pretenses. In broader terms, a Scam PAC also includes committees that purport to send money to political causes but instead, these committees donate very little to the stated cause and mostly pay for the committee’s overhead, that is, pays itself most of the money. The latter definition raises some serious vagueness concerns and will be a subject of discussion for another post.
What is the definition of a PAC?
According to the Federal Election Commission (“FEC”), PACs include (1) separate segregated funds (“SSFs”), (2) nonconnected committees and (3) Super PACs.
- SSFs and nonconnected committees:
- SSFs are political committees established and administered by corporations, labor unions, membership organizations or trade associations. These committees can solicit contributions only from individuals associated with a connected or sponsoring organization.
- By contrast, nonconnected committees— as their name suggests — are not sponsored by or connected to any of the aforementioned entities and are free to solicit contributions from the general public.
- Super PACs (independent expenditure only political committees) and Hybrid PACs (political committees with non-contribution accounts):
- Super PACs(independent expenditure only political committees) are committees that may receive unlimited contributions from individuals, corporations, labor unions and other PACs for the purpose of financing independent expenditures and other independent political activity.
- Hybrid PACs: (political committees with non-contribution accounts) solicit and accept unlimited contributions from individuals, corporations, labor organizations and other political committees to a segregated bank account for the purpose of financing independent expenditures, other ads that refer to a federal candidate, and generic voter drives in federal elections, while maintaining a separate bank account, subject to all the statutory amount limitations and source prohibitions, that is permitted to make contributions to federal candidates.
- Leadership PACs: A Leadership PAC is a political committee that is directly or indirectly established, financed, maintained or controlled by a candidate or an individual holding federal office, but is not an authorized committee of the candidate or officeholder and is not affiliated with an authorized committee of a candidate of officeholder. Members of Congress and other political leaders often establish Leadership PACs in order to support candidates for various federal and nonfederal offices. Like other multi-candidate PACs, a Leadership PAC may contribute up to $5,000 per election to a federal candidate committee.
What kind of fraud is the DOJ targeting during the COVID-19 Pandemic?
In response to concerns over COVID-19 related fraud, DOJ has begun to form special task forces. This is not new for DoJ; it has had a long-running task force for health care fraud and one called Procurement Collusion Strike Force. For example, the United States Attorneys for the Western and Eastern Districts of Virginia, the FBI, and the Virginia State Police formed the “Virginia Coronavirus Task Force” to focus on fraud and exploitation arising from the pandemic. The Virginia Coronavirus Task Force is just one of many recent task forces formed between state and federal officials that have cropped up since the pandemic has taken hold. Just this week, DoJ announced an arrest in one of the first big coronavirus related fraud cases brought by the Justice Department’s new COVID-19 Hoarding and Price Gouging task force.
According to the DoJ, some examples of COVID-19 scams include: “Treatment,” “Supply,” “Provider,” “Charity,” “Phishing,” “App” and “Investment” scams.
- Treatment scams: Individuals or companies offering to sell fake cures, vaccines, and advice on unproven treatments for COVID-19;
- Supply scams: Individuals creating fake shops, websites, social media accounts, and email addresses claiming to sell medical supplies currently in high demand, such as surgical masks. Here, the purported seller pockets the money and never provides the supplies;
- Provider scams: Individuals contacting people by phone and/or email, pretending to be doctors and hospitals that have treated a friend or relative for COVID-19, and demanding payment for that treatment;
- Charity scams: Individuals or companies soliciting donations for individuals, groups, and areas affected by COVID-19 but who do not actually intend and do not provide support for the stated cause (note here the overlap with our ongoing discussion about so-called “Scam PACs”);
- Phishing scams: Individuals or companies posing as national and global health authorities, including the World Health Organization (WHO) and the Centers for Disease Control and Prevention (CDC), sending phishing emails designed to trick recipients into downloading malware or providing personal identifying and financial information;
- App scams: Individuals creating and manipulating mobile apps designed to track the spread of COVID-19 to insert malware that will compromise users’ devices and personal information; and,
- Investment scams: Individuals or companies offering online promotions on various platforms, including social media, claiming that the products or services of publicly traded companies can prevent, detect, or cure COVID-19, and that the stock of these companies will dramatically increase in value as a result. The DoJ reports that these promotions are often styled as “research reports,” make predictions of a specific “target price,” and relate to microcap stocks, or low-priced stocks issued by the smallest of companies with limited publicly available information.
Who is responsible for monitoring and investigating Scam PACs and pandemic-related fraud cases?
The Federal Trade Commission (FTC), is the body responsible for policing telemarketing. However, it generally has no jurisdiction over political fundraising. The FTC’s major tools in protecting consumers from deceptive or fraudulent practices in the marketplace (for example the “do not call” laws) do not apply to political calls, which have First Amendment protections under the U.S. Constitution. The Federal Election Commission (FEC) has jurisdiction over the civil enforcement of campaign finance laws and spending.
Sidebar: The FEC has jurisdiction over the financing of campaigns for the U.S. House, Senate, Presidency and the Vice Presidency so these folks would not be the ones to address any election fraud at the state level.
However, the FEC has not had a track record of referring Scam PACs for prosecution or for strengthening fraud and disclosure requirements to address Scam PAC concerns. Attempts to engage in this type of regulation is further complicated by the overlap of First Amendment protections in messaging from political action committees.
The DoJ had stepped into this vacuum to take a swing at Scam PACs. Stay tuned to this series for more on the thorny history of enforcement of federal campaign finance laws.
COVID-19 related fraud:
This type of fraud, because it does not involve political activity, could potentially be addressed by the FTC with civil fines and penalties but will most certainly be handled criminally. As you can see from the rapid DoJ response to potential fraud in this area, COVID-19 fraud cases will be handled by the Feds and for smaller cases by local law enforcement. This is garden variety fraud and does not have the complication of overlapping with First Amendment Constitutional rights like Scam PACs.
Stay tuned for our next installment in this series and more on the potential intersections of this unlikely pair, Scam PAC and COVID-19 fraud prosecutions.