The case largely stems from money spent to keep Edwards' mistress, Rielle Hunter, in hiding along with former campaign aide Andrew Young, who initially claimed paternity so Edwards could continue pursuing the White House without the taint of the affair.
Investigators are looking chiefly at whether funds paid to Hunter and Young -- from outside political groups and Edwards' political donors -- should have been considered campaign donations since they arguably aided his presidential bid, according to several people involved in the case who spoke on condition of anonymity because of the ongoing probe. They're also looking closely at whether any entities linked to Edwards operated illegally.
While it could not be learned if prosecutors have found violations of a specific statute, federal election laws require disclosure of the money spent on campaigns for federal offices, limit the amounts of such donations and prohibit the conversion of campaign funds to personal use.
Edwards' attorney Wade Smith would not discuss specifics but said, "We do not believe there is evidence that John has violated any election laws."
The investigation has been led for nearly two years by George Holding, the U.S. attorney in Raleigh appointed by President George W. Bush, with help from FBI and IRS agents and Justice Department attorneys from Washington. North Carolina's senators have asked President Barack Obama not to replace Holding until he finishes this probe.
Several people interviewed by investigators said the questions focused on Edwards' knowledge of campaign finance law, going as far back as whether he used his Senate office to conduct political business in violation of congressional rules. Subpoenas issued in the case request e-mails, records and other material related to more than two dozen individuals and organizations connected to Edwards and his allies throughout his political career.
Atop the list, read to the AP by someone with access to a subpoena, is the Alliance for a New America, which is a political 527 group, named for the tax code section that governs it. Also on the list is a like-named private entity called Alliance for a New America LLC, or AFNA LLC, and Edwards' former campaign manager Nick Baldick, who ran the political 527 group in support of Edwards' bid for the 2008 Democratic presidential nomination. (IRS records for the same groups refer to the groups as Alliance for New America, without an "a.")
Baldick and his attorney Jim Lamb would not comment on the investigation, but Lamb said Baldick has been told he is not a target of it.
Federal records show about $3.3 million of the $4.8 million raised by the 527 was distributed to AFNA LLC for unspecified "consulting services." The 527 and the LLC shared not only their name, but the same Alexandria, Va., post office box and the same contact, a Baldick associate named Katherine Buchanan. A crucial difference between the two Alliance entities was that the LLC was a limited liability company that did not have to publicly disclose how its money was spent.
Lloyd Mayer, a Notre Dame law professor and tax expert, said it's clear the alliance's creators established the LLC to hide the details of expenditures. It's a legal maneuver that campaign finance observers have long feared might become a part of politics as money managers try to hide operations from competitors and the public.
"The spirit of the law is being violated here," said Mayer, who has represented major advocacy groups including the NAACP National Voter Fund. "You shouldn't be able to hide what you're spending money on. But is the letter of law being violated or did they find a cute loophole?"
Buchanan, also listed in the subpoena, declined to discuss the groups or their spending. Buchanan's home was listed in Virginia state records as the principal address for the LLC. Buchanan filed paperwork in August 2008 to close the LLC a year after its creation, declaring it "never began business."
A person involved in the investigation and who is familiar with the financial transactions told AP that Baldick provided Young about a $30,000 raise to move off the Edwards campaign payroll onto one of Baldick's private organizations around the time Young began taking care of a pregnant Hunter in fall 2007, when the primary campaign was heating up. Young also got more than $150,000 as commission for money he raised for Alliance for a New America. A month after Young got his last campaign paycheck on Nov. 14, 2007, he publicly claimed paternity of Hunter's child.
Young has long since renounced his paternity claim and broken with Edwards. In a book, "The Politician," Young said he was covering up Edwards' fatherhood of the child. Edwards admitted paternity last year.
The person familiar with the financial transactions said Young received some payments from Slan Productions, a consulting firm also listed in the subpoena. In one filing with the Federal Election Commission, Slan Productions' address is listed as Baldick's home in Chevy Chase, Md.
The grand jury also has subpoenaed material related to the Hilltop Public Solutions consulting firm created by Baldick, a leading Democratic operative who also worked on presidential campaigns for Al Gore and Bill Clinton before Edwards picked him to manage his 2004 White House bid.
The subpoena asks for material related to Rachel "Bunny" Mellon, the 100-year-old widow of banking heir Paul Mellon. Young wrote in his book that Bunny Mellon would send him checks for hundreds of thousands of dollars hidden in boxes of chocolates, and he would use the money to help keep Hunter in hiding from the public and cancer-stricken Elizabeth Edwards, who died just last month. Young wrote that Edwards agreed they should solicit the money from Mellon.
Mellon also had donated to Edwards' campaign and his PAC and almost single-handedly bankrolled the Alliance for a New America political group with $3.5 million from her investment fund, Oak Spring Farms, also listed in subpoenas. Alexander Forger, an attorney in New York who represents Mellon and was called to testify before the grand jury, said he had assumed that all the money had gone to advertising and related expenses and was surprised to learn it was transferred to the AFNA LLC.
"I didn't know that you could get away with that kind of ambivalence as to where it went," Forger said in an interview. "You ought to know where the money went. Just to park it in an LLC doesn't seem to be much in the way of disclosure."
IRS records indicate the Alliance political group did directly spend about a third of its money on advertising in the 2008 Democratic presidential primary campaign. Obama made an issue of the ads, which supported Edwards in the Iowa caucuses, because Baldick, then Edwards' former campaign manager, was running the group. In response, Edwards said it was a separate entity that he legally couldn't control but publicly asked the group to stop the ads.
Investigators are also looking at money sent by Edwards' former campaign finance chairman, Fred Baron, who died in 2008. Baron said he provided support for Young and Hunter to move across the country but without Edwards' knowledge.
Young contended in his book that Edwards was aware of Baron's money, and at least one other person has told investigators that Edwards knew about the payments from the start.
Also listed on subpoenas are two Edwards political action committees -- the New American Optimists, formed after his 2000 election to the Senate, and the One America Committee formed later. Both were required to disclose expenditures and the source of donations.
The subpoenas also seek information about the Center for Promise and Opportunity, a nonprofit Edwards formed in 2005. Jim Cooney, another Edwards attorney, told AP that the nonprofit and One America Committee had a written agreement to share costs of a contract with Hunter's video production firm, Midline Groove, to produce Web videos. Midline Groove is also listed on the subpoenas.
Federal records show the One America Committee paid Midline Groove more than $100,000 for producing Internet videos. Cooney said the nonprofit paid the firm a similar amount. Edwards did not sign the agreements, but they were reviewed by appropriate personnel at both organizations, Cooney said.
Campaign finance reform advocates have said the center may have stretched tax law limits by paying for Edwards' campaign staffers and travel to important political states between his two presidential bids. Such nonprofits are prohibited from having a primary purpose of supporting or opposing candidates.
One person familiar with the grand jury probe said investigators have been asking whether Edwards used the center as a shell organization for a presidential campaign.