Trial Battle Rages Over Firm’s Pact With Mayor

The contract between Tom Shepard & Associates and Mayor Roger Hedgecock’s 1983 campaign committee resulted in a heavy financial loss for the firm, but nevertheless might have been “a good move” for Shepard that helped the consultant attract additional clients, a local accounting professor testified Thursday in Hedgecock’s trial.

Concurring with earlier testimony from the district attorney’s own accountant, Prof. Arthur Brodshatzer, called by the prosecutor, also conceded that the overhead expenses of Shepard’s political consulting firm that were not reimbursed under the Hedgecock committee contract should not be construed as a contribution to the mayor’s campaign.

Brodshatzer’s admission about the overhead expenses not being a campaign contribution is a crucial one, because a major underpinning of the prosecutors’ case is the theory that the tens of thousands of dollars in indirect overhead costs that Shepard’s firm lost on the 1983 race represented, in essence, an illegal donation to Hedgecock’s campaign.

As the mayor’s felony perjury and conspiracy trial in Superior Court recessed until next week, both Hedgecock and his attorney, Michael Pancer, were ecstatic about the accountants’ testimony, which they believe bolstered their position.

“Two accountants called by the D.A. have now testified that the difference between what we paid and Tom Shepard’s total costs is not a campaign contribution,” Hedgecock said after the court session ended. “So what the hell are we here for? Am I being tried because Tom Shepard lost money? I think this is the turning point.”

Defense Contention

Pancer added that the testimony by Brodshatzer and Raymond Tatum, an accountant who works for the district attorney’s office, “establishes the validity of the contract” between Hedgecock’s committee and Shepard’s firm. Initially paid a $750 monthly retainer, the firm later received 15% of all advertisements bought on Hedgecock’s behalf--a formula that resulted in a fee of about $30,000.

Not surprisingly, Assistant Dist. Atty. Richard D. Huffman, who expects to conclude the prosecution’s case next week, had a different perspective.

“He’s just plain wrong,” Huffman said outside the courtroom. “That’s not the way I see the evidence at all.”

Most of Thursday’s court session was devoted to a test of wills between Pancer and Brodshatzer, who was paid $175 per hour by the district attorney’s office as an “expert witness”--a role that the San Diego State University professor and certified public accountant said he has performed more than 100 times.

During his cross-examination, Pancer relentlessly chipped away at the accounting professor’s assertion that Shepard’s firm lost about 52 cents on every dollar that it spent on Hedgecock’s behalf. Brodshatzer, however, was just as tenacious in seeking to hold his ground by defending the validity of his analyses of the Hedgecock campaign’s and Shepard firm’s finances.

One of Brodshatzer’s major conclusions is that if a pro-rated portion of Tom Shepard & Associates’ staff expenses, overhead and operating costs had been charged to the Hedgecock campaign, the firm actually “lost” $181,936 on the contract.

Pancer sought to discredit that finding by suggesting that Brodshatzer had arrived at it by relying on inaccurate figures supplied to him by Tatum. During testimony Wednesday, Tatum said that the Hedgecock campaign paid Shepard’s firm $352,731 and the company’s campaign-related bills totaled $341,646; Pancer later showed that Tatum’s miscalculations accounted for most of the alleged “difference” between receipts and billings.

Noting that Hedgecock was elected May 3, 1983, but that Brodshatzer’s calculations were based on the Shepard agency’s overhead costs through July 1, Pancer also argued that it was improper to assign the firm’s May and June expenses to the Hedgecock campaign. The Hedgecock committee’s contract with Shepard effectively ended on the date of the election, Pancer said.

Brodshatzer agreed that, so long as there were “no possible offsets”--such as prepaid staff salaries--”it would . . . be correct” to not hold the Hedgecock campaign accountable for the two months’ overhead expenses.

Under questioning from Deputy Dist. Atty. Charles Wickersham, however, Brodshatzer noted that, even if those two months’ costs are deducted, Shepard’s firm still “lost” $147,192 on Hedgecock’s campaign under his formula.

Pancer, though, emphasized that the California Political Reform Act specifically states that a political consulting or advertising agency’s overhead costs are not considered to be a contribution to a candidate.

“So, sir, there’s nothing you’ve testified to or about . . . that you’re telling us are campaign contributions?” Pancer asked.

“No,” Brodshatzer answered. “All I’m talking about,” he added, is that the Shepard firm’s compensation under the contract was insufficient to cover all of its direct and indirect expenses.

Hedgecock and Pancer, however, contend that the question of whether Shepard’s firm made a profit or lost money on the campaign is irrelevant. The thrust of their argument is that Hedgecock’s campaign committee had a valid, market-rate contract with Shepard’s firm; whether the resulting fee was large enough to produce a profit was Shepard’s concern, not Hedgecock’s, they say.

“Assume that the contract specified a 15% (commission on ads) and that all external costs were paid,” Pancer said. “Wouldn’t the Hedgecock campaign have fulfilled the contract?”

“If you ask me to assume all you’re saying, arithmetically, it would have fulfilled it,” Brodshatzer said.

Another overriding argument advanced by Pancer is that Shepard might have been perfectly willing to lose money on the race, viewing it as “an investment in his future” that could significantly increase the value of his new firm, founded in early 1982. According to that line of reasoning, Shepard realized that running a successful mayoral campaign would enhance his young firm’s reputation and act as a magnet for new clients--which, in fact, proved to be the case.

After repeatedly asking questions Thursday focused on that “loss leader” theory, Pancer finally won a grudging concession from Brodshatzer that such an approach could, under the proper circumstances, be logical.

“If you took the account, lost money, did well (in the mayoral race), established a track record and therefore could (charge more) on every future contract, wouldn’t that be a smart move economically?” Pancer asked.

“If I accept your hypotheticals, yes,” said Brodshatzer. “That might be a good move.”

Huffman, however, has countered by arguing that Shepard was able to take such a casual attitude toward his firm’s initial profitability--or, more properly, the lack thereof--only because former La Jolla financiers J. David (Jerry) Dominelli and Nancy Hoover pumped more than $360,000 into the company during 1982 and 1983.

Because Hedgecock was the firm’s major client during most of that period, prosecutors argue that Shepard’s firm essentially was a political laundry, and that Dominelli’s and Hoover’s investments in the company were tantamount to illegal contributions to Hedgecock’s campaign.

“Do you see a great deal of wisdom in taking on a client like the Hedgecock committee when it results in that kind of loss?” Deputy Dist. Atty. Wickersham asked.

“Not in my opinion,” Brodshatzer said. “Because it’s going to take an awful long time to make up that loss.”