Coelho to Resign in Face of Probe; Party in ‘Disarray’

House Democratic Whip Tony Coelho of Merced, facing a preliminary criminal investigation by the Justice Department and calls for an Ethics Committee inquiry into his financial dealings, has decided to resign from Congress next month, a close congressional associate said Friday night.

Coelho’s decision, coming on the heels of an apparent decision by House Speaker Jim Wright (D-Tex.) to give up his post and leave Congress in the face of similar ethics problems, stunned colleagues in both parties and threw the question of Democratic leadership in the House into confusion.

“I’ve never seen our party in such disarray as it is now,” said a Democratic member who declined to be identified. “This is scary. There’s going to be a panic.”

Rep. Robert T. Matsui (D-Sacramento) said he was “absolutely stunned” by Coelho’s decision to quit. “It’s a shame,” Matsui said. “He’s a hard charger. He raised more money for the party than Democrats could imagine. Tony was the oil that kept the engine moving, from a political perspective.”

Gingrich Stunned

Rep. Newt Gingrich (R-Ga.), who has led the crusade against what he claims is pervasive corruption in the Democratic Party, said he was also stunned by the news of Coelho’s quitting. “But I think the fact that the No. 1 and No. 3 Democrats apparently will both leave in June says something about 35 years of monopoly power,” Gingrich said, referring to the fact that Democrats have controlled the House of Representatives since 1953-54, the last time the GOP had a majority.

Rep. Vic Fazio (D-Sacramento), a friend of Coelho’s and a member of the House Ethics Committee, said the Merced congressman telephoned him Friday night to say he was resigning. Fazio said Coelho apparently acted to spare his party, his family and himself the ordeal of a protracted public inquiry into his activities.

“He did not want to put himself and the party through that. He’s confident he’s not in any legal trouble,” Fazio said, “but he doesn’t want to put the party or his family through that. He’s worked 10 years to create a better party, and he didn’t want to give the Republicans that kind of target.”

“I feel very sad,” Fazio said. “I’m going to miss him. He’ll leave a vacuum in our delegation and in our Caucus in the House.”

He said Coelho did not discuss what he intended to do next.

Coelho’s problems began several weeks ago when he acknowledged that he bought a $100,000 junk bond underwritten by Drexel Burnham Lambert Inc. with the help of a $50,000 loan from Columbia Savings & Loan Assn. arranged by its chief, Thomas Spiegel--a loan the congressman failed to disclose as required by law. Coelho and Mayor Tom Bradley, also the subject of a preliminary investigation by the Justice Department, were later involved in a lobbying effort on behalf of Drexel.

One of Coelho’s congressional colleagues said the Democratic leader was concerned that his financial affairs were being aired more frequently on national television news programs and he feared the effect this might have on his two teen-age daughters.

Coelho himself was in seclusion late Friday night at his home, a large brick house on more than an acre of land in suburban Annandale, Va. The house was guarded by two Capitol police officers in plain clothes who threatened to have reporters arrested when they tried to contact the congressman.

Earlier Friday evening, Coelho had attended a high school class play in which one of his two daughters had taken part.

House Democratic Leader Thomas S. Foley (D-Wash.) said that Coelho’s decision came as a “shock and surprise” to him when he learned of it.

“I think it’s a great loss for the House, and it’s a very great disappointment to me personally,” he said in a telephone interview from Spokane. “Tony’s been one of the most creative and able persons who has ever been in the leadership so he won’t be easy to follow.”

But Foley said there are Democrats who have already expressed interest in a top Democratic post who could handle the assignment.

The No. 2 Democrat in the House and heir-apparent to the Speaker said he would return to Washington on Sunday night, a day earlier than scheduled, to consider the next step.

Coelho, who sought to have the news of his decision announced exclusively in the New York Times, was quoted as saying he would leave Congress on June 15, his 47th birthday.

In connection with Coelho’s purchase of the junk bond, his lawyer later acknowledged that the congressman had taken advantage of a tax break to which he was not entitled when he sold the bond at a profit and probably owes the Internal Revenue Service at least a few hundred dollars in unreported back taxes on the transaction.

Coelho, who earned a $6,882 profit on the junk bond transaction in 1986, later arranged a meeting for a Columbia lobbyist with a member of the House Banking Committee to discuss issues of interest to Spiegel, The Times has learned.

Coelho arranged the meeting last March between Rep. Richard H. Lehman (D-Sanger) and Norman Brownstein, a Denver attorney and lobbyist who currently represents several savings and loan including Columbia, which is heavily invested in junk bonds.

Robert Bauer, Coelho’s attorney, said that setting up the Lehman-Brownstein meeting was the only act by Coelho in the wake of his junk bond purchase that could possibly be construed as a quid pro quo for Spiegel’s help in obtaining the $100,000 bond. But Bauer dismissed it as insignificant because Coelho routinely introduces people to his colleagues in Congress.

On Friday, Common Cause, the citizens lobby that precipitated the current ethics probe of Speaker Wright, called on the House Ethics Committee to investigate Coelho’s junk bond purchase.

The group asked the panel to look into whether the deal violated a House rule prohibiting each member from accepting “favors or benefits under circumstances which might be construed by reasonable persons as influencing the performance of his governmental duties.”

Spiegel, a close associate of junk bond king Michael Milken, has acknowledged assisting Coelho by recommending--and then helping finance--the highly unusual purchase of the bond, which was underwritten by Drexel.

The preliminary criminal investigations of both Coelho and Bradley have been opened by the Justice Department’s public integrity section in Washington in connection with their financial dealings with the Drexel firm.

Although details of the investigations are not known, a central question being examined is whether Bradley and Coelho, who have acknowledged that they made investments through Drexel, illegally received preferential treatment. The inquiry also is expected to examine whether investment opportunities may have been made available to the two Democratic office-holders with the hope or expectation of favored treatment from them in return.

Both have denied doing anything improper.

Earlier this year, Bradley called Coelho to help launch a lobbying effort by several California political figures on behalf of Drexel. The campaign attempted to persuade the Securities and Exchange Commission not to require Drexel, as part of a settlement of the agency’s civil suit against the firm, to move its junk bond operation to New York from Beverly Hills.

A spokesman for Bradley could not be reached for comment on the Coelho resignation, but one City Council member said it is certain to intensify questions about Bradley’s dealings with Drexel and officials at Columbia Savings.

“It’s a startling development and very ominous for the mayor,” said City Councilman Zev Yaroslavsky. “It’s a shock.”

Yaroslavsky said: “Obviously something much more serious is going on here. How this will affect the mayor, I don’t know. But it certainly intensifies the questions.

“Obviously Coelho’s and Bradley’s lives overlapped here,” Yaroslavsky said. “There may also be differences. So it may be dangerous to jump to conclusions. But it is ominous.”

City Councilwoman Gloria Molina said: “Obviously this is very serious. . . . These constant revelations are making it much more difficult for the mayor. It will create such a cloud that even if, in the end, the conclusion is that there is nothing to prosecute, that he didn’t use his office for personal gain, it will still create a perception” that something was improper.

Staff writers Rich Connell and Frederick M. Muir in Los Angeles contributed to this story.