When wealthy people spend their own money to get elected to public office, their opponents and others wonder exactly where that money is coming from.
Derek Smith is being asked that today.
Smith has put $540,000 of his own money into his 2nd Congressional District race against incumbent Rep. Merrill Cook, R-Utah, so far. He may spend more on it if he wins the primary next Tuesday and faces Democrat Jim Matheson in November.
Smith is a partner in the privately held iEngineer.com, a computer/Internet firm that helps engineering firms communicate their technical data internally and with clients. He's a multimillionaire through ownership in that firm, records filed with the U.S. House clerk show.
Smith is loaning his campaign the cash so at some later date he can, under federal law, repay himself. Unlike some other rich Utah officeholders — like Sen. Bob Bennett — Smith is not borrowing money against his stock.
Rather, Smith said Tuesday morning he sold the stock earlier this year to 10 individuals and companies with past connections to iEngineer.com.
Smith said because of confidential legal agreements, he can't disclose who bought the stock without their permission, which he is seeking. The company is also in the middle of a merger and acquisition that also prevents him from disclosing details of his stock sale.
But he emphasized that the sale took place when iEngineer.com itself and his partner decided to sell some stock. "Some of the sale took place before I was even considering running for office," said Smith. And he sold less of his personal stock than did the company or his partner, he said.
But he is putting his profits from that sale into his campaign.
Republicans fear any kind of financial scandal could harm their chances to keep hold of the 2nd Congressional District. Sources told the Deseret News that a letter was circulated this week among Utah Republican Party Central Committee members asking Smith to explain publicly exactly how his personal finances are being rearranged to pay for his race. Smith said he is being as open and above-board as he can about his campaign sources considering legal restrictions placed on him by the stock sale.
Smith's campaign financing raises a question similar to one Bennett faced after his 1992 election. Are business partners and/or his firm compensating the candidate fairly? Or are they circumventing Federal Election Commission rules by paying more than what is appropriate and thus getting around FEC rules on limits on individual campaign contributions?
For example, if a share of iEngineer.com stock is really worth $1, but a political supporter buys it from Smith for $2 and Smith uses that $2 in the campaign, then is the supporter really contributing $1 extra to the campaign?
"Nothing like that happened here," said Smith. That's shown by the fact that the investors bought stock from his partner and the firm itself at the same price as they purchased it from Smith.
Smith said the firm determined the fair market value of the stock and the 10 people and businesses paid it. Politics and his campaign had nothing to do with setting the price, Smith said. He added that iEngineer.com stock is much sought after in certain segments of the business world and he, his firm and partner could sell a lot more but have decided not to.
In a federal campaign the law says an individual is limited to a $1,000 donation for each "election" — be it a convention fight, a primary or a final election — for a total of $3,000. Corporations can't give any money themselves but can set up a political action committee, which in turn is limited to a $5,000 contribution per "election," a total of $15,000.
The FEC investigated Bennett's relationship with the company that made him a millionaire — Franklin Quest (now Franklin Covey). Franklin paid Bennett severance bonuses after he left the firm to run in 1992. Since Bennett used some of that money in his campaign, the question was whether Franklin inappropriately subsidized the campaign. The FEC ultimately took no action against Bennett on that issue (Bennett paid a $55,000 fine to the FEC for other, non-related actions of his 1992 campaign). Bennett maintained all along that he and Franklin never did anything wrong, that the bonuses was a legitimate businesses practice unrelated to the campaign.
As the campaigns rush to Tuesday's primary election, Cook is also asking Smith questions about how he is self-funding his campaign.
Finally, Smith was to hold a press conference Wednesday to explain his financial dealings and to ask Cook some questions himself.
"In the interest of full disclosure, I ask Merrill to make public an IRS audit of his company, Cook Slurry, in 1997 and any settlement he may have made in unpaid taxes. Also, he should disclose the results of an EPA investigation of a 1997 spill at Cook Slurry and any fines or penalties paid for that," said Smith.
Smith also wants Cook to revisit several old scandals, giving explanations for them, including some old lawsuits, accounting for salary payments to a staffer, the firings of former staffers, among others.