Funds Seized in Campaign Money Probe

Federal authorities on Monday seized $308,000 from a nonprofit group whose director is under investigation for allegedly funneling illegal campaign contributions to Secretary of State Kevin Shelley, state officials reported.

State Controller Steve Westly said the action was taken because the San Francisco Neighbors Resource Center failed to meet a Monday deadline to provide the state with proof that it properly spent a $492,000 grant Shelley had helped arrange when he was a state assemblyman. The state attorney general, the FBI and the state’s political watchdog agency recently began investigations after the San Francisco Chronicle reported that the nonprofit run by community activist Julie Lee paid more than $100,000 to several people and companies that shortly after contributed about the same amount to Shelley’s 2002 campaign.

Westly said the funds in the bank account will be held by the U.S. attorney’s office until all state and federal investigations are completed.

“We are moving aggressively to safeguard all remaining taxpayer funds,” he said in a statement.

Lee’s attorney, Cristina Arguedas, said Lee has an excellent reputation and “denies any intentional violation of any laws, including campaign regulations.”

Although Lee is the center’s director, Arguedas said the center’s leadership will have to respond to the government’s requests for documents and the bank account seizure. The government “will have to have a process where they determine where the money properly belongs, and it will go there,” she said, noting that there is no allegation that Lee personally profited from the grant.

Shelley was on vacation and could not be reached for comment Monday. Shelley has said, “I will not accept any donations from contributors that are illegal, tainted or inappropriate -- never have, never will.”

To address questionable donations, Shelley had his campaign turn over $125,000 to the state general fund. He also put $80,000 in escrow, pending further investigation into donations made by two San Franciscans who had real estate dealings with Lee.

The episode has proved a political embarrassment to Shelley, the state’s elections chief. To help combat the damage, his campaign consultant released a state Franchise Tax Board audit, which concluded in March that Shelley’s 2002 campaign substantially complied with record-keeping and disclosure requirements of election law.

Campaign spokesman Sam Singer said that the problems with the campaign contributions were not readily apparent to state auditors. “The questionable behavior engaged in by certain donors didn’t just fly below our radar screen,” he said.

The campaign also pointed out that Shelley’s office last year had levied a $1,100 fine and requested a state investigation of the owner of a San Francisco foster and child-care home, who was a major donor to Shelley.

Eliana Maldonado attracted attention in Shelley’s office when she failed to submit a major donor report after contributing $30,000 to his campaign. When Shelley’s office contacted her, red flags went up: She said she was unaware of the political contribution and said it may have been part of her payment to a real estate agent during a home purchase. “I didn’t know they donated part of that money to Kevin Shelley,” she said in a signed statement.

When Shelley’s office made a written referral in October 2003 to the Fair Political Practices Commission, an aide alluded to the sensitivity of the situation, noting that Maldonado “suggests a possible money-laundering situation and ... it also involves the committee of the elected official who heads this agency.”

Singer said Shelley had personally endorsed the referral.

Sigrid Bathen, spokeswoman for the Fair Political Practices Commission, confirmed that there is an open investigation but declined to comment. Maldonado could not be reached for comment.

Lee, a Hong Kong-born powerbroker and fundraiser, is a member of the city’s Housing Authority Commission. Shelley hired her son after he was elected secretary of state and, as Assembly majority leader, helped her win a state grant of $492,000 in the 2000-01 budget to build a neighborhood center. The grant award passed through the California Department of Parks and Recreation.

The neighborhood center’s chief financial officer certified that all grant funds were spent and the work was complete as of March 15, 2001. Even though the center was not built, parks department Deputy Director Roy Stearns said the grant was only expected to cover planning, design and other preconstruction costs. Stearns said the department had been planning to audit the center along with other projects by nonprofit organizations, but recently moved it to the top of the list.

Officials for the parks department and controller’s office said they have been stymied in their attempts to get invoices and other documentation to show how the grant money was spent.

In an Aug. 10 letter to Lee, Jeffrey Brownfield, chief of the controller’s audits division, said that the community activist had promised to make all documents available but failed to deliver the remainder Aug. 6.

FBI spokeswoman Karen Ernst confirmed that the agency launched its own criminal investigation after a referral from the controller.