NEW YORK (Reuters) - In late October 2009, a Republican operative approached members of Mayor Michael Bloomberg's re-election campaign with a proposal.
On Election Day, he would provide what's known as "ballot security" -- paying poll watchers to ensure voter fraud or mistakes don't occur -- for about $1.1 million.
Bloomberg accepted, and days before the election, his aides transferred $1.2 million from his personal fortune to the state Independence Party, which had endorsed his candidacy. Bloomberg intended the party to keep $100,000, and the rest to go to the operative, John Haggerty.
But Haggerty never hired any poll workers, Manhattan prosecutors say. Instead, he took $750,000 the party sent him in December 2009 and used most of it to pay for a house. He directed the party to keep the remaining $450,000.
This story, told in court filings, forms the basis of the grand larceny charge against Haggerty, whose trial is expected to start Monday in state court in New York. But it has also raised questions about whether Bloomberg's political donations violated New York election law.
Bloomberg's office has denied any impropriety, saying the contributions were in accordance with campaign-finance law.
"As a general matter, the mayor's team sought and received legal advice when making contributions, and this contribution was perfectly legal and appropriate," Howard Wolfson, a deputy mayor and one of Bloomberg's chief advisers, said in an email.
Neither Bloomberg nor the Independence Party have been charged with any violations of election law.
The key question is whether Bloomberg's money can be considered a campaign expenditure intended to help him get re-elected, or a donation to the party to aid all of its candidates.
Two laws govern city campaign funding: the state election law and the New York City Campaign Finance Act. Both laws require that candidates report all expenditures intended to help a campaign.
The state law does not require donors to report what they give to party "housekeeping" accounts, but these accounts are restricted to paying for maintaining a headquarters and staff and other "ordinary activities which are not for the express purpose of promoting the candidacy of specific candidates."
Bloomberg, who spent more than $100 million of his own money on the 2009 campaign, did not report the $1.2 million to the state election board.
Henry Berger, an election lawyer, said he believes Bloomberg's failure to report the donation represents a campaign-finance violation.
"If he gave them money to be used in connection with his campaign, he violated his obligation to the state board of elections," Berger said.
But Wolfson said Haggerty's proposal was intended to help multiple candidates, not just the mayor.
"Our expectation was that the Election Day operation would benefit all candidates running on the Independence Party line," he said.
Berger called that a "distinction without a difference."
"I think that's a campaign expense," he said. "I think Election Day expenses in their entirety are campaign-related."
Whether Bloomberg's contribution was legal is complicated by the absence of a judicial ruling that governs the interpretation of the law's language, said Jerry Goldfeder, an election lawyer who has worked for many Democratic campaigns, including those of several of Bloomberg's mayoral opponents.
"The election law in New York is written in an ill-defined, ambiguous way," Goldfeder said, adding that he did not believe any laws were broken. "It's one of the more porous statutes that we have. But if the Independence Party spent money on ballot security, it is within the normal range of how housekeeping accounts spend monies."
Both the New York City Campaign Finance Board and the state board of elections have the power to investigate potential violations, though enforcement on the city level is generally more rigorous, experts say.
The campaign finance board can fine offenders as much as $10,000 for a deliberate infraction, while state law includes potential civil and criminal penalties for violators. Both bodies can refer cases to law enforcement, though that is rare.
The city board conducts audits of all citywide candidates following elections, and the audit of Bloomberg's 2009 campaign is not complete.
Eric Friedman, a board spokesman, said, "While we don't discuss the substance of audits that are ongoing, part of every audit that we do is to ensure that the reporting to the public is complete and accurate."
Even if he did not violate any election laws, Bloomberg could face some uncomfortable questioning if he testifies at Haggerty's trial, which remains a possibility.
Haggerty's lawyers have indicated in court documents that they will ask the mayor and his aides about the practice of using third-party accounts to pay for vendors, and will argue that Bloomberg deliberately hid Haggerty's hiring rather than simply paying him directly.
"Obviously, Bloomberg did not want this money to be known," Muzzio said. "Otherwise, they would have done it through the campaign. The inside-baseball folks are beginning to say, 'What does the mayor have to hide?'"
When asked why Bloomberg didn't hire Haggerty directly through the campaign, Wolfson said in an email that it was "because election day operations are traditionally the purview of parties."
The case is People v. Haggerty, New York State Supreme Court, New York County, No. 2598/2010.
(Reporting by Joseph Ax; Editing by Jesse Wegman)