A local accounting professor testified Wednesday that Tom Shepard & Associates lost more than $130,000 by running San Diego Mayor Roger Hedgecock's 1983 campaign--a claim that Hedgecock dismissed as "a complete fraud" based on a "biased, selective" analysis of the political consultant's financial records.
During a daylong war of numbers, attorneys in Hedgecock's felony retrial battled over one of the central issues in the case: the question of whether Shepard's consulting firm was, as the prosecution contends, essentially a political laundering service used to funnel illegal contributions to Hedgecock's campaign, or whether, as the defense argues, it was a legitimate business willing to absorb a financial loss to enhance its reputation by running a successful citywide campaign.
Arthur Brodshatzer, a San Diego State University professor and certified public accountant who testified during Hedgecock's first trial, was on the witness stand for more than three hours Wednesday, seeking to lead the eight-woman, four-man jury through a maze of numbers and financial transactions that prosecutors contend document how Hedgecock allegedly conspired with three of his prominent backers to use Shepard's firm as a pipeline for illegal donations to the mayor's 1983 race.
In a lengthy, often confusing and occasionally comic test of wills, the opposing attorneys consistently used the same set of facts but diametrically opposed theories and interpretations in their questioning in an attempt to direct Brodshatzer's testimony into areas most favorable to their respective positions.
By day's end, both sides believed that they had scored key points with the jury, including disclosures or contentions that:
- Shepard's firm lost between $137,887 and $157,386, "and probably more," while coordinating Hedgecock's campaign from August, 1982, through May, 1983, according to Brodshatzer. However, in addition to vigorously disputing the validity of the accountant's theory, defense attorney Michael Pancer also got Brodshatzer to concede that Shepard's firm conceivably could have used the Hedgecock campaign as a "loss leader" designed to attract other clients.
- Former J. David & Co. principal Nancy Hoover purportedly received tax deductions in excess of $100,000 for investments that she and J. David founder J. David (Jerry) Dominelli made in Tom Shepard & Associates throughout 1982 and 1983. Pancer's attempt to introduce into evidence a tax form documenting Hoover's deductions touched off a heated debate with Deputy Dist. Atty. Charles Wickersham, who accused the defense attorney of "trial by trickery" and blocked, at least temporarily, the tax form's acceptance by Superior Court Judge William L. Todd Jr.
- Hoover contributed $250 to Hedgecock, the maximum individual donation allowed under local election laws, in June, 1981--a revelation that raises questions about one of the major underpinnings of the prosecution's case. One of the cornerstones of the alleged conspiracy, prosecutors contend, was a crucial November, 1981, luncheon at which Hedgecock reportedly agreed to reconcile with Hoover and cease criticizing her for leaving her husband to live with Dominelli. Noting that Hoover's $250 contribution preceded that luncheon by more than five months, Hedgecock concluded, "So much for the reconciliation theory."
Most of Wednesday's court session was devoted to a verbal and statistical joust between Pancer and Brodshatzer, who was paid $175 per hour by the district attorney's office as an "expert witness.' (Pancer, who represented Hedgecock in the mayor's first trial, is serving as co-counsel to chief defense attorney Oscar Goodman in the retrial.)
During his cross-examination, Pancer relentlessly chipped away at the accounting professor's assertion that Shepard's firm lost about 39 cents on every dollar that it spent on Hedgecock's behalf, compared to a 31-cent profit on every dollar that the firm received from other clients. However, Brodshatzer, who seemed to relish the verbal give-and-take with Pancer, just as tenaciously sought to hold his ground by defending his analyses of the Hedgecock campaign's and Shepard firm's finances.
Between August, 1982, and May, 1983--the month in which Hedgecock won a special mayoral race to succeed Pete Wilson after the latter's election to the U.S. Senate --Shepard's firm received $352,247 from Hedgecock's campaign committee and paid $337,568 in campaign-related bills, Brodshatzer testified.
While those figures produce a $14,679 surplus, 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" between $137,887 and $157,386, depending on the accounting method used.
The defense contends that the question of whether Shepard's firm made a profit or lost money on the campaign is irrelevant. The essence 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.
"All the bills sent by (Shepard's firm). . . to the Roger Hedgecock for Mayor Committee were paid, weren't they?" Pancer asked.
"To the best of my knowledge, yes," Brodshatzer answered.
Initially paid a $750 monthly retainer by Hedgecock's campaign, Shepard's firm later received a 15% commission on all electronic media advertisements bought on Hedgecock's behalf--a formula that produced a fee of $30,150 throughout the mayoral race. Brodshatzer, however, contended that Hedgecock's campaign actually paid only $14,679, less than half of that amount required under the contract.
In addition, the accountant asserted that Shepard could have easily anticipated that the contract with Hedgecock's campaign would generate huge financial losses for his firm.
"The contract . . . doesn't even cover two months of (Shepard's) payroll," Brodshatzer said. "It was a guaranteed loss from the beginning."
However, one of the overriding arguments advanced by Pancer and Hedgecock is that Shepard realized that running a successful mayoral campaign would enhance his fledging firm, founded in January, 1982, and act as a magnet for new clients--which, in fact, proved to be the case.
In a replay of scenes from the first trial, Pancer, after repeatedly asking questions focused on that "loss leader" theory, finally won a grudging concession from Brodshatzer that such long-range goals would be "one of the things I'd consider" in making the kind of decision Shepard did in regard to Hedgecock's campaign.
Pancer also criticized Brodshatzer for ending his financial analysis of Shepard's firm in May, 1983, arguing that doing so distorted the picture of the firm's financial status.
"He's taking a carefully sculpted time in a two-year history of a firm when there's the highest overhead and least income," Hedgecock said. "It shows the worst moment in the firm's fiscal history." As a result of Hedgecock's 1983 victory, Shepard's firm was "on its way to becoming profitable," the mayor added. "I paid off as a 'loss leader.' "
Pancer's attempt to introduce evidence about Hoover's tax deductions stemming from the more than $360,000 that she and Dominelli invested in Shepard's firm touched off Wickersham's most emotional response to date.
With jurors out of the courtroom, Pancer argued to Todd that Hoover's tax documents had been introduced at the first trial, adding that they should be reintroduced under an agreement between the two sides not to oppose the introduction of documents admitted in the first trial.
"I've never agreed to (accept) that!" Wickersham shouted. "That document is too important. What it purports to show is pretty important to this case."
What the document shows, Pancer argues, is that Hoover's six-figure tax write-offs "effectively cut her losses from her investment (in Shepard's firm) in half"--a fact that the defense could use in its attempt to portray her investments as legitimate business decisions, not illegal campaign donations.
"That's why they don't want it (the documents) in," Pancer said.
However, transcripts from the first trial--read by court officials at Todd's request--showed that the prosecution had objected to the tax forms' introduction in the first trial. Because of the lack of mutual consent, Todd refused to allow Pancer to introduce the document as evidence Wednesday. The defense, however, hopes to resurrect the document when it presents its side of the case later in the trial.