As I reported in July 2020, California Gov. Gavin Newsom and his wife got a sweet deal on their $3.7 million Fair Oaks, California estate. Newsom’s cousin and PlumpJack business partner, Jeremy Scherer, through an LLC, acquired the home in December 2018 in an all-cash transaction, then transferred the unencumbered deed to the Newsoms in October 2019. Just two months later the Newsoms obtained a cash-out refi loan that netted them $2.7 million, tax-free.
The Newsoms claimed to be members of the LLC, and that it was really their money Scherer used to purchase the estate, so there wasn’t any ethical or legal (under California election law) problem with the transaction. However, both Newsoms are required to report any entity they own more than a 10% interest in on financial disclosure forms, listing any real property that the entity owns on a Form 700, which is required to be filed annually. The LLC has never been listed on the Newsoms’ forms, and it wasn’t listed for the period in which it wasn’t the Newsoms’ primary residence (an elected official’s primary residence isn’t required to be disclosed).
This raised a lot of eyebrows – and a lot of questions – but apparently wasn’t being investigated by anyone.
California’s Fair Political Practices Commission (FPPC) was seemingly more interested in investigating whether gubernatorial candidate Larry Elder failed to disclose some income on his initial Form 700 – a form he’s never been required to file before – before filing an amendment a few weeks later than looking into a multi-million dollar problem.
Thursday morning the California Republican Party filed a sworn complaint with the FPPC about the transactions and failure to disclose and asked for a full investigation. By the close of business the Sacramento Bee was reporting that the FPPC had already dismissed the complaint:
“The Fair Political Practices Commission issued a letter Thursday afternoon dismissing the complaint and saying the governor had followed the law.”
At the time of this writing, the letter isn’t available on the FPPC’s website and CAGOP officials say they don’t have a copy of it either. I asked the Sacramento Bee where they got the letter since it wasn’t available on the FPPC’s website, and a few hours later their article had been stealth edited to read:
The Fair Political Practices Commission issued a letter Thursday afternoon dismissing the complaint and saying the governor had followed the law, according to a copy of the letter provided by Newsom’s campaign. The FPPC also provided a copy of the letter to The Bee.
Since I don’t have a copy of the letter, I have to rely on what the Bee reports it contains:
In the letter, Christopher Burton, assistant chief of the commission’s enforcement division, referred to a decision the FPPC reached last month following an investigation into a similar complaint filed anonymously.
The commission “determined that the subject real property transactions did not give rise to any reportable interests.”
As it turns out, I recently was made aware of the July 14, 2021 letter and planned to write on it Thursday, but then learned about the CAGOP’s complaint. Since the Sacramento Bee won’t link to the letter (which is silly because it’s publicly available) here it is.
Addressed to Newsom’s attorney, the letter begins (emphasis added):
This letter is in response to several nonsworn complaints alleging that Gavin Newsom (“Newsom”), current Governor of California, failed to properly report certain economic interests on his statements of economic interests (“SEI”) in connection with the purchase and subsequent transfer of certain real property in 2018 and 2019. After conducting our investigation and review of the matter, we determined that the subject real property transactions did not give rise to any reportable interests. Therefore, because the allegations have been disproven, we are closing this matter without further action.
What investigation and review did the FPPC conduct? They don’t list any documents reviewed or people interviewed.
The letter continues:
Section 87200 of the Act requires that elected state officials, including the Governor, report investments, business positions, and sources of income, including receipt of gifts, loans, and travel payments, from sources located in or doing business in their agency’s jurisdiction, on their SEIs. Under the Act, “investment” includes any investment interest in a business entity. Section 82005 of the Act defines “business entity” as “any organization or enterprise operated for profit.” Our investigation found that, although an entity, solely owned by Newsom and his spouse, was created to effect the subject real property transactions, it was not operated for profit and, therefore, did not give rise to a reportable investment interest.
That’s a new one. California’s election watchdog agency is now able to determine for what purpose an LLC is created, and that a for-profit entity (as all LLCs are) was not operated for profit and therefore not an asset an elected official needs to disclose. And, if he doesn’t need to disclose his ownership in the LLC, he doesn’t have to list the real property it owns.
So very convenient. And, so vague. I reviewed a number of what the FPPC labels “no action closure letters” and Newsom’s was the only one that didn’t list the particulars of the transaction – not even that it is regarding a home or an LLC or involving a first cousin.
In addition, the agency doesn’t state how they know the Newsoms were the sole owners of the LLC. The fact remains that there isn’t a single document with the California Secretary of State listing the Newsoms as members of the LLC. Its management structure is as a “one manager” LLC, so it’s certainly possible that Scherer acted only as the manager and wasn’t a member. But, neither Newsom is listed as a member on the LLCs Form LLC-12 or Form LLC-12A. Of course, if anyone brings that up to the FPPC they will likely issue their own interpretation of what was required of the Newsoms from another state agency.
The letter continues:
In addition, Sections 82028 and 82030 of the Act provide that a reportable “gift” or “income” does not include a gift, loan, or payment received on a loan from an individual’s spouse, child, parent, grandparent, grandchild, brother, sister, parent-in-law, brother-in-law, sister-in-law, nephew, niece, aunt, uncle, or first cousin, or the spouse of any such person. Our investigation found that all payments related to the purchase of the subject property emanated from either Newsom himself or an exempted family member; therefore, the payments did not give rise to any reportable gift or income interests.
So, who’s the exempted family member? Is it his spouse, his first cousin, or both? Was it a gift or a loan? If it was a loan, did Scherer make the loan to the LLC and receive repayment through the LLC? Did the FPPC determine that Scherer had $3.7 million in cash sitting around and that it wasn’t simply a compilation of dollars from people like the Gettys or groups like PG&E? If Scherer didn’t personally provide all of the funds, and he was acting as an intermediary, then the gift/loan exemption doesn’t apply. It’s incumbent upon the FPPC to investigate and determine that. If it was all done above-board and just to keep the Newsoms’ address private, then all of the proper income tax documents would have been available for state regulators to examine. Were they available? Were they examined?
We need a much more detailed explanation of exactly what this investigation looked like, especially since Newsom has a history of failing to properly report gifts and loans and in light of his issues with PG&E and his wife’s company. We need to know exactly which documents were reviewed, and be provided with redacted copies of tax returns. All of the candidates in this recall election were forced to file five years of tax returns for public inspection; Gavin Newsom should, too.