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.
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.
Noble declined to speak with investigators, according to Gary Winuk, enforcement chief at the California Fair Political Practices Commission, and he did not answer requests for comment from The Times.
Noble had already helped Russo with hundreds of thousands of dollars for political research and focus groups. Now Russo needed a different kind of assistance.
He wanted the Virginia group, Americans for Job Security, to transfer the millions he had raised with Miller to Noble's center, and he wanted Noble to relay the money to California campaign committees, obscuring the money trail.
There were risks. Russo and Miller would forfeit control of the donations, and they knew little about Noble. But donors had recommended him, the pair told investigators. And "we were running out of options," Miller said.
On Sept. 10, the Virginia group sent about $4 million to Noble's Center to Protect Patient Rights. Within a few days, the center routed roughly the same sum to an Iowa nonprofit, which sent it to a newly created California campaign committee.
Russo and Miller then directed $20.5 million more to the center, for a total of nearly $25 million.
The state documents show that one of the donors working with Russo and Miller, whose name was crossed out, emailed Charles Koch to ask for his direct assistance.
"It would be great if you could support the final effort with several million," the donor wrote, adding that "Sean Noble from your group has been immensely helpful," and "I look forward to seeing you on a golf course."
A month before the November election, the whole operation came crashing down.
At that point, Noble had routed about $4 million to a California campaign committee. Russo sent him a text message asking for more cash, and $11 million was quickly delivered to the Small Business Action Committee, a California PAC fighting higher taxes and supporting the anti-union measure.
The money had come from an obscure Phoenix nonprofit, Americans for Responsible Leadership, which had received it from the Center to Protect Patient Rights.
An $11-million donation attracts immediate attention, even in a state as large as California. Americans for Responsible Leadership refused to tell the Fair Political Practices Commission, California's ethics watchdog, where the money originated, and the agency launched an investigation to determine whether disclosure laws had been violated.
That heat created a problem. When Russo next asked Noble to transfer money, Noble balked. Expressing concern about the investigation, Noble said he didn't think he could help now, Russo told investigators.
Miller believed Noble hoped to prevent California authorities "from opening up his books," giving them the keys to an entire network of nonprofits that were distributing money around the country.
Russo never pried another dime from Noble. Russo said he and Miller scrambled to raise more cash to make up for the rest of the funds.
Miller said he was angry. "But at that point," he said, "we were screwed, you know, because we didn't have any legal control."
On election day, voters passed Brown's tax-hike plan and rejected the anti-union measure, delivering two blows to the Republicans.
Late last month, state officials announced they were fining the Center to Protect Patient Rights and Americans for Responsible Leadership a total of $1 million for violating California law. The groups should have disclosed that the center was the source of the campaign money but had failed to do so, authorities said.
The Small Business Action Committee and another California campaign group were ordered to pay the state $15 million, equivalent to the amount of money state officials said was improperly reported. The Iowa group that was the conduit for $4 million was not fined because it is more established in California politics, Winuk said.
Russo, sitting in his lawyer's Sacramento office in July, told authorities he still wasn't sure what happened to the $10 million that never came back to California.Copyright © 2014, Los Angeles Times