Shelley ‘Angry’ About Money Inquiry

Secretary of State Kevin Shelley, California’s custodian of election integrity, said Friday that he was blindsided by $200,000 in questionable campaign contributions allegedly arranged by a major fundraiser and ally.

“I am feeling on one hand besieged and angry, frustrated, but I am always confident the truth will out,” he said. “It is totally ironic. I’ve had people call me a tough guy, but not unethical.”

Over the last two weeks, the elections chief was hit by a string of disclosures about the alleged fundraising activities of Julie Lee, a San Francisco real estate agent and community activist who maintained close political ties to Shelley for the last seven years.

Shelley, 49, a former San Francisco supervisor and state Assembly majority leader, was elected secretary of state in 2002.

In a telephone interview, Shelley tried to distance himself from Lee’s fundraising and revealed that the lawyers who handle his campaign finance have hired investigators to look into each of his approximately 2,000 campaign contributions, including 84 of $10,000 or more.

“Clearly, a group of supporters did something that was very wrong and very inappropriate. I had no knowledge of any of their actions and don’t condone it,” he said, adding that he wants to find out if there are any more questionable contributions.

The scandal is rooted in the local political fabric of San Francisco, but involves state money and has proven a costly political embarrassment to Shelley, the son of a former mayor and a rising star in the state Democratic Party.

His problems come after he successfully ran last fall’s historic gubernatorial recall election and moved to strengthen the security of electronic voting machines that counties want to use in the upcoming presidential election.

Investigations by the FBI, state attorney general’s office and others arose after the San Francisco Chronicle reported Aug. 8 that more than $100,000 in state grant money for construction of Lee’s nonprofit neighborhood center was channeled into Shelley’s statewide campaign. Later, questions were raised about $80,000 in contributions by two people who had real estate dealings with Lee.

Shelley called for state investigations into his own donations, returned $125,000 to the state general fund and put $80,000 in escrow pending an investigation of the real estate transactions.

Lee, a 57-year-old from Hong Kong and a member of the San Francisco Housing Authority Commission, has denied any impropriety or intentional violations of spending laws, which require the reporting of the true donor.

“We disagree there was any intentional wrongdoing on the part of Julie Lee, no matter who says it,” her attorney, Cristina Arguedas, said Friday.

Shelley said he first met Lee in 1997 when they were working to block the demolition of a freeway that was important to their constituents in the city’s western reaches. Lee became a political supporter.

And in 2000, Shelley, as state Assembly majority leader, helped arrange a $500,000 state grant for the San Francisco Neighbors Resource Center, a planned community center to serve Asian immigrants in the Sunset District. Lee is the center’s director.

Shelley denied that future contributions were on his mind when he proposed the grant. He noted that the grant to Lee’s center was one of at least a dozen he helped arrange for community and government agencies in his native city that year.

He said the project did not receive preferential treatment and he did not lobby the governor for it. “I do not recall speaking to Julie Lee,” he said, “but my staff does recall speaking” to her.

Lee now sits as an appointee of former Mayor Willie Brown on San Francisco’s Housing Authority board. Shelley backed her son Andrew in an unsuccessful bid for county supervisor and hired him as an aide last year. He is on leave with a back injury.

After the state controller’s office this summer received an inquiry from the Chronicle, auditors began examining payments by the center. Records showed that several companies and individuals who received preconstruction payments soon made donations to the Shelley campaign totaling more than $100,000. The controller later referred the matter to the FBI.

Shelley said he discussed a fundraising goal with Lee but could not remember the amount. He said he was aware that some contributions later were arranged by Lee. When the names of people who received state grant money and later contributed to his campaign were read to him, he said he did not recall knowing them.

But Shelley said he recently learned that one company that received $26,000 from the center and later contributed $25,000 to his campaign was incorporated by Jeffrey Chen, the center’s onetime chief financial officer whom he met through Lee. Chen did not return a call seeking comment.

Shelley said his campaign sends all its contributions to his campaign lawyer, and the firm examines them for compliance with the reporting laws and tells major donors that they are obligated to report contributions of more than $10,000.

Almost a year ago, Shelley’s own office came across a problem that campaign experts say could have alerted him to a wider problem with contributions connected to Lee if he had dug deeper.

In October, his office assessed a $1,100 fine and requested a state investigation of a San Francisco care home owner who had donated $30,000 to Shelley’s 2002 campaign.

The donor’s failure to report the contribution had caused Shelley’s office to contact her. Her answers raised his suspicions of campaign contribution laundering because she said the money was part of her payment to a real estate agent during a home purchase.

Shelley said that the matter was brought to his attention by his general counsel, but that he was not given details such as the name of the major donor. He said he did not ask for more information because he thought it inappropriate.

“I had no reason to believe there was anything nefarious about the donations” arranged by Lee, he said. “In retrospect, I have asked myself whether something should have been done differently, or better.”

Randy Riddle, who was then general counsel, said he could not recall whether he told Shelley the name of the donor but confirmed that the secretary told him to handle the matter routinely. “This was a three-minute conversation in a firestorm” before the November recall, he added.

Robert Stern, president of the Center for Government Studies and an author of the state’s political reform law, said the alleged use of real estate transactions and a state grant in campaign money laundering is unique in his three decades of experience.

Stern said Shelley should be credited for referring one suspicious major contribution for investigation, but he should have delved into the others to see if they were legitimate.

“Usually the recipient knows the person raising the money, but is not told how they did it and does not suspect” wrongdoing, Stern said. “The recipient is grateful for the money and does not want to look a gift contribution in the mouth.”