Consultants Dodged Law, Judge Is Told : Courts: Attorney for direct-mail experts denies allegations in lawsuit, which has been cloaked in mystery. Lawyers say they don’t know why documents were sealed.

Two Newport Beach political consultants used an anti-tax group they helped start to dodge a required public accounting of roughly $19 million donated by Californians to political action committees and causes, an attorney charged Monday during opening statements in a civil lawsuit that has been mysteriously kept from public view since 1990.

“What the California Tax Reduction Movement became in practice is a most prolific goose who laid golden eggs,” said Gary Phillips, the attorney for a Sherman Oaks man suing the consultants. “This (lawsuit) is about accountability.”

On the opening day of the non-jury trial, Orange County Superior Court Judge Donald E. Smallwood--addressing questions raised in The Times on Sunday--asked attorneys in the case if they knew why or how more than 42 fat volumes of pleadings and other documents taken in the politically sensitive suit had been sealed from public view.

None of the attorneys professed to know how the suit--which pits a shy, 45-year-old accountant against powerful direct-mail gurus William Butcher and Arnold Forde--had been shielded from public scrutiny for more than four years.

“Frankly I don’t understand why we’ve got anything under seal in this case,” said Smallwood, at least the fifth judge to preside over the case.

Smallwood said it seemed “incongruous” to have under seal a case based entirely on alleged violations of the Political Reform Act of 1974--an act “designed to illuminate” political fund raising and other issues for the public.

Although he declined to unseal the six filing cabinet drawers filled with documents already filed in connection with the suit, Smallwood said that all 1,300 exhibits and the testimony to be offered during the scheduled five-week trial would be public.

“Everything that transpires in this courtroom is going to be open to the public,” he said.

Monday, attorneys from both sides laid the groundwork for their cases. Phillips, the attorney representing accountant Paul McCauley, delivered an opening statement about the case. David Elson, an attorney for Butcher, Forde and their consulting firm, and Lawrence Straw, an attorney for the California Tax Reduction Movement, or CTRM, offered their comments on the case in written trial briefs presented to Smallwood.

At issue is whether CTRM (now known as the Howard Jarvis Taxpayer Assn.) was a political action committee that should have been making regular public disclosures of where it was getting its money, and how it was being spent. Also contested is whether Butcher-Forde Consulting or BFC Direct Marketing, as their firm is known, was the “de facto” treasurer of CTRM, and therefore financially liable for what McCauley maintains are violations of the Political Reform Act.

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If CTRM is determined to be a political action committee subject to the Political Reform Act and Butcher-Forde is found to be financially liable, the defendants could be ordered to pay fines equaling the money that was spent and that should have been accounted for publicly.

McCauley contends that Butcher-Forde used CTRM to set up various political action committees that traded on the well-respected Howard Jarvis name. According to court documents filed by the plaintiff, the committees would raise money through mass mailings and then transfer much of the proceeds back to CTRM, which never publicly reported how the money was spent.

As their fees, Butcher and Forde arranged to be paid nearly half the money collected from Californians statewide to support such causes as the campaign to recall former Supreme Court Justice Rose Elizabeth Bird, and another to Save Proposition 13, McCauley contends in court documents.

“Most of the money not reported would end up in one place: Butcher-Forde Consulting’s pocket,” Phillips charged in his opening statement.

Under the Political Reform Act, “receipts and expenditures in election campaigns should be fully and truthfully disclosed in order that the voters may be fully informed and improper practices may be inhibited.”

Outside the courtroom, Elson didn’t deny that his clients made a lot of money under their contract with CTRM. In fact, he said that “large amounts” of CTRM’s expenditures “presumably got paid to Butcher-Forde Consulting.”

According to federal income tax returns included in court documents, nearly half of the millions CTRM paid in two different years went to Butcher-Forde.

The records show that in 1985, half of the $6.9 million CTRM spent went to fund raising, and another nearly $2.5 million was paid to Butcher-Forde as fees. In 1986, Butcher-Forde’s fees totaled $1.8 million, or 47% of the group’s expenditures, court records state.

But, Elson stressed, the issue isn’t whether or not his clients got rich, but whether they had control of CTRM’s checkbook and, therefore, may be financially liable if CTRM made reporting violations under the Political Reform Act.

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“One of the plaintiff’s overblown--and, for that matter, legally irrelevant--claims is that CTRM was formed and operated as no more than a mere instrument for the BFC defendants’ . . . own profit,” Elson argued in the brief he submitted in lieu of an oral opening statement.

Elson said his clients could only be liable if they actually served as CTRM’s campaign treasurer, and not because they served as CTRM’s campaign manager and direct mail consultant. He also said McCauley’s action could “chill participation in the political process” because active participants would fear people with “an ax to grind” could bring suit alleging campaign reporting violations.

In their briefs, Elson and Straw also argued that CTRM and the political action committees it spawned had checked with the Fair Political Practices Commission and had satisfied the FPPC’s reporting requirements.

“CTRM did receive surplus campaign funds from its sponsored committees,” Straw wrote in his brief. “The transfer of these funds to CTRM was reported on the committees’ campaign statements.”

Argued Elson: “The FPPC never questioned the manner in which CTRM separated political receipts and expenditures from CTRM’s other activities for public reporting purposes.”

Monday’s first witness was Trevor Grimm, former personal attorney of the late Howard Jarvis and general counsel of the Howard Jarvis Taxpayers Assn. Grimm testified that while Jarvis looked to Butcher and Forde for advice, he ran the show.

Grimm said any payment Butcher-Forde received was approved by Jarvis.

“I know that Howard Jarvis was elated with the progress of the organization,” Grimm said. “To that extent, I assume that’s why they got what they got. He thought Butcher was a genius. . . . He thought they were worth it.”