Despite finding probable cause to investigate, Daniel said he was "sympathetic to the argument that the governor should not be required to be personally responsible for the enormous legal bills that she has incurred to defend against an onslaught of ethics complaints, most of which have been dismissed as unfounded."
He suggested that perhaps the state of Alaska should pay Palin back for her personal legal fees pertaining to complaints that were dismissed. That way, she would not need a legal defense fund.
Daniel also pointed out that federal office holders have guidelines for creating funds, but Alaska has no provisions for it.
In the end, Daniel recommended the governor should not receive any payments from the fund and should seek reimbursement from the state.
When reached by ABC News, Daniel declined to comment on the report.
"Preliminary investigations are confidential, so I'm unable to talk about it," Daniel said.
Daniel did confirm to ABC News that the leaked copy of his confident report was authentic but said "whoever made it public violated the confidentiality provision in the Ethics Act."
It's the latest legal distraction for the former vice presidential candidate as she prepares to leave office this weekend, and one thick with irony -- the same vehicle Palin is using to fight ethics charges is now being called a potential ethics violation itself.
The investigation into the trust was launched after Eagle River resident Kim Chatman issued a complaint April 27, alleging that Palin was misusing her official position and accepting improper gifts.
"It's an absolute shame that she would continue to keep the Alaska Fund Trust Web site up and running," Chatman said in an interview with The Associated Press.
Palin's attorney is threatening legal action against Chatman, who he said he believes leaked the report.
"All options are open in terms of legal remedies. It is a clear violation of Alaska law that Mr. Daniel explicitly reviewed with Ms. Chatman prior to her illegal actions. We will be contacting the appropriate authorities for review and action," Van Flein said.
The Alaska Fund Trust was established April 22, 2009, to help pay off debts stemming from multiple ethics complaints filed against the governor, most of which have been dismissed.
Palin has said she owes more than $500,000 in legal fees. The governor cited the mounting toll of the ethics probes as one of the reasons she is leaving office.
The fund's official Web site at http://thealaskafundtrust.com states: "The Alaska Fund Trust is the official legal fund created to defend the integrity of the Alaska Governor's Office from an onslaught of political attacks launched against current Governor Sarah Palin, the First Family, and state-employed colleagues. These baseless accusations have cost Alaska more than $1 million in public monies to defend, and Governor Palin has incurred more than half a million dollars in personal debt defending her official actions as Governor."
The fund limits donations to $150 per person. Organizers declined to say how much it has raised, and had hoped to raise about $500,000. A "webathon" last month brought in about $130,000 in pledges.
"We have not met our goal yet to raise enough money to cover her legal fees," Cole told ABC News.