Brown, Reilly Battle Over Cost of Failed Campaign : Governor’s race: Dispute centers on whether consultant charged too much. He says he followed his contract.

As her campaign faltered and donations dried up last fall, Democratic gubernatorial challenger Kathleen Brown was thrilled to learn of a potential financial windfall:

Aides told the state treasurer that her handpicked campaign manager, Clinton Reilly, had retained too much commission on television advertising and owed the campaign about $400,000 that could be used to cover other TV ad expenses.

But those hopes were quickly dashed. Reilly insisted that the amount was offset by what the campaign owed his prominent San Francisco firm for expenses, including part of the cost of printing Brown’s widely publicized economic plan. They exchanged identical checks.

Top Brown aides say the episode fueled their own concerns about the way the veteran political strategist was spending money in Brown’s quest to unseat Republican Gov. Pete Wilson. Their misgivings deepened weeks later when Brown’s campaign ran out of money and embarrassingly vanished from the airwaves on the last weekend before the November balloting.

Now, months after her stunning loss, Brown is enmeshed in a dispute with Reilly that surfaced at a recent political forum and prompted calls for audits and arbitration.

At the heart of the disagreement is whether Reilly collected excessive commissions or fees. But interviews show that Brown, who was billed as “America’s best treasurer,” exercised only limited financial oversight over her campaign.

“Anyone who accuses me of taking money is a liar, and it’s untrue,” Reilly said.

He said his contract allowed him to charge as much markup as he wanted as long as the services were provided at a reasonably competitive price.

By his own reckoning, he lost money or broke even after he and his companies collected at least $2.7 million in gross revenues during the most expensive gubernatorial race in history. That amounted to about 15% of Brown’s total spending during the eight months Reilly ran her campaign.

Unlike most political consultants, Reilly operated a full-service agency providing strategy, management, advertising and production of campaign materials. Records and interviews show that this allowed him to make money in three ways--a monthly retainer, commissions of up to 15%, and unspecified markups on everything from bumper stickers and buttons to targeted mailers and TV spots.

One of Reilly’s firms, Campaign Production Services, sometimes marked up the cost of targeted statewide mailers more than 50% and in one case 86%, according to internal job cost estimates prepared by his employees and obtained by The Times.

The production company often marked up the cost of television ads by at least 50%, records indicate. This firm and Clinton Reilly Communications usually billed a total of $11,500 for TV spots, even though Reilly’s employees estimated that in at least one instance the ad could be produced for $7,600, according to the documents.

The Brown campaign says that Reilly owes it at least $250,000 and that it is conducting an audit. But Reilly said in an interview that he was made a scapegoat for the campaign’s financial problems.

The consultant said he charged fair prices and is seeking arbitration to collect $376,000 that he says the Brown campaign owes him. “Not only did we not overcharge the campaign,” he said, “but in fact we were undercharging for these products.”

Reilly said his companies collected $1.1 million in commissions and fees, and an additional $1.6 million for producing campaign materials.

Interviews with campaign officials and documents obtained by The Times provide a rare glimpse into the internal finances of a major statewide campaign. What also emerges is a portrait of an aggressive and ambitious businessman whom Brown entrusted with virtually total control of her campaign.

Brown’s attorney said that in hindsight there were no checks and balances to restrain Reilly, and it was difficult to regulate his business practices because he was “calling all the shots.”

Ann Hollister, Brown’s finance director, said that Reilly was asked to provide an array of documents backing up his costs but that he did not deliver them. Hollister said she believes that the structure of his companies is “actually a way for him to hide the true cost of things.”

Shown copies of some of Reilly’s internal cost sheets, Hollister described the markups as “ridiculous.”

Reilly denied that the campaign sought financial documentation from him. “No one ever asked,” he said. “This all started the day after the election when we needed to come up with some rationale” for Brown’s defeat.

Complaints against him, Reilly said, are being fueled by leaks of documents stolen from a campaign office in Los Angeles--a theft that his publicist says was not reported to police.

“After the election, somebody steals our job-cost sheets and leaks them to the press in some kind of selected way to make it look like somehow we were rapacious in our business endeavors,” Reilly said after being shown documents by Times reporters.

Although internal documents may make it appear that he made substantial profits, Reilly and his accountant said that he took a loss on other jobs related to the campaign.

It is not unusual for disputes to arise after election defeats--and the stakes were particularly high last year when Brown plunged from a front-runner in the spring to a double-digit loser in the fall.

Although a number of political consultants agree that Reilly’s spending patterns probably did not alter the outcome of the election, they say that other Democratic candidates could have benefited from a strong TV push on the last weekend by the top of the party’s ticket.

Reilly acknowledged that a Brown victory could have provided him with a springboard into national politics.

Brown’s loss was also a setback for the White House, where President Clinton had sought a Democratic ally in Sacramento to pave the way for his 1996 reelection in the pivotal state of California.

Brown, who served as state treasurer until early this year, declined to comment about her dispute with Reilly, referring questions to her attorney.

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With her campaign in disarray and the primary a few months away, Brown met with Reilly last March and quickly decided that his full-service approach was what she needed.

Reilly, 48, a onetime seminarian, had established a reputation as a tempestuous talent with a special knack for getting out the right voters on Election Day using targeted mail.

He became known as “the Cadillac of consultants” after 1988, when he managed the state’s most expensive initiative campaign--the insurance industry’s multimillion-dollar losing effort to block Proposition 103.

In 1993, Reilly’s handiwork helped catapult Richard Riordan into the Los Angeles mayor’s office--and it was Riordan campaign Chairman William Wardlaw who introduced him to the Brown campaign last year and helped negotiate the contract.

Within weeks of taking charge of the Brown effort, Reilly and his companies were producing an array of mailers and TV spots to ensure that she would win the primary in convincing style, positioning her to beat Wilson in November.

Flush with money, the campaign paid Reilly and his companies according to a contract that provided for a monthly retainer of $12,000 to Reilly and commissions of up to 15%.

In addition, Reilly said, the contract allowed him to collect markups for producing campaign materials.

Although Wardlaw was aware of the provision, other Brown campaign officials said they were unaware of it and did not know that Reilly’s bills included thousands of dollars in markups.

During the primary, Reilly produced a mailer titled “1 Million Jobs.” A job-cost sheet for 225,000 pieces shows that the cost of printing, labeling and designing was $37,694. His firm tacked on a markup of $32,393--or nearly 86%. Reilly billed Brown’s campaign $96,750, plus sales tax and shipping.

Of the mailer’s total bill of $104,487, Reilly said his projected profit was 31%, which he acknowledged is somewhat higher than the industry standard. Moreover, he said, he could have added another 15% in commission to the bill but chose not to do so.

The Brown campaign got its money’s worth, Reilly said, because the pamphlet was put out under extreme deadline pressure. “That particular piece was written on three days notice for the Democratic convention,” he said. “And our staff stayed up four nights in a row and kept the printing plants open in order to get that piece written and produced.”

His production company also prepared 375,000 copies of another glossy mailer titled “The Stakeholders” at a cost of $73,078. Records show that the firm affixed an additional markup of $48,261--66% of the original amount. With postage, tax and shipping, the mailer cost $172,812.

Reilly said the markup on the grand total equaled “just about 25% markup,” which he characterized as “standard for the industry.”

Although it is difficult to compare the costs of many campaign-related services, a spot check with printing companies suggests that Reilly’s basic costs are slightly above average but rise sharply when his markup is folded into the final price.

His company also produced 45 TV commercials on Brown’s behalf, typically charging $10,000 each and, in most cases, his second firm added an additional $1,500 in commissions, according to records and interviews. Reilly and his accountant said that overall the company lost money on the ads.

Documents relating to several of the ads indicate some of the amounts billed to the Brown campaign were higher than the costs. Shown one document indicating his companies collected $11,500 in July for an anti-crime spot produced for $7,586, Reilly said, “It’s quite possible that this is accurate.”

Reilly said he had not seen the estimates but said they were done by his employees whom he described as inexperienced at making cost projections.

Peter Bagatelos, one of Reilly’s attorneys, said his client’s profits are irrelevant because the contract places no cap on them. “Part of the trade secret of each business is knowing where and how to fulfill these jobs at these prices,” he said. “So it doesn’t matter if the profit markup is 10%, 100% or 5,000%. The issue is what did he charge the campaign and was that charge a fair market value.”

Brown’s lawyer, Patricia L. Glaser of Century City, said Brown’s understanding was that Reilly was entitled to only a 15% commission on top of his costs.

Glaser challenged Reilly’s right to take a markup without fully disclosing it and making the amount negotiable. “There has to be full disclosure,” the attorney said. “What this is about is not a simple misunderstanding.”

Brown “probably spent three minutes” looking at the contract, Glaser said, referring reporters to Wardlaw, who negotiated the terms.

Wardlaw said Reilly was entitled to receive a markup as long as he provided services at a competitive price. The contract requires that Reilly’s prices be “reasonably related” to competitive prices.

When informed that internal documents indicate that Reilly’s firm received up to 86% markup, Wardlaw said that seemed “extraordinarily high.”

Reilly’s markups appear to have been similar in the Riordan for Mayor campaign, based on several documents obtained by The Times. Records indicate that a letter sent to 115,000 Los Angeles households cost Reilly $25,209 to produce and was marked up 68%.

Wardlaw said he was not aware of markups but said, “Clint would be worth twice what we paid him in the Riordan campaign. . . . All I cared about was winning.”

Reilly’s lawyer said neither the consultant’s contract with Brown nor state campaign law required him to disclose the amount of markup he received when purchasing services from printers and other subcontractors, including a South San Francisco firm partially owned by his brother.

Such reporting, the lawyer said, would force Reilly to reveal his trade secrets--details of the special deals he says he is able to arrange that give him an economic edge over his competitors. “Everything we did is completely aboveboard and 100% according to what we’ve done in the past and according to industry standards,” Reilly said.

Although he would not disclose his production company’s total markup for the campaign, Reilly provided figures showing his communications company earned almost $1 million in commissions for buying television time--just over 10% of the $9.6 million purchase.

In contrast, Wilson’s campaign committee paid its media buyers about 5% in commissions, said the governor’s campaign manager, George Gorton.

After a convincing win in the June primary, Reilly recalled, he was treated like a “genius” by the Brown campaign staff. “They were walking around bragging,” he said. And the candidate voluntarily increased Reilly’s retainer to $17,000 a month--still less than the $20,000 a month that Wilson paid Gorton.

In the following weeks, Reilly crafted a budget that envisioned spending $15 million to $16 million to fight Wilson. But Hollister, Brown’s chief fund-raiser, said she cautioned Reilly that she could only raise $13 million.

The tension over spending increased as internal polls showed Brown losing ground. Reilly made a burst of spending on TV in a futile effort to make a strong showing in polls by Labor Day.

The Brown campaign, meanwhile, brought aboard a controller to keep tabs on spending.

Campaign officials say the controller discovered Reilly had retained a straight 15% commission on television buys rather than an amount based on a sliding scale as specified in his contract. Reilly says it was his bookkeeper who identified the $400,000 overpayment.

In either case, Reilly agreed to repay the money, although he first got the campaign to agree to pay him an identical amount for his pending expenses. They exchanged checks a week before the election.

By late October, the campaign was desperate for money. Fund-raiser Hollister and other top Brown advisers were collecting $700,000 that they believed would be set aside to buy TV time for the final 10 days before the election. But Reilly said he was counting on getting $1 million and met with Brown late one night at an almost deserted airport terminal in Oxnard to figure out how to scrape up additional cash.

A day or so later Brown learned that her campaign had no money for a final weekend TV buy.

Reilly offered to help underwrite the ads, he said, but Brown was unwilling to incur any further debt. “I needed a win in this race a lot more than I needed another . . . $200,000,” he said.

If Brown had won, Reilly’s contract entitled one of his companies to a $250,000 bonus.

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Brown’s Campaign Costs

Clinton Reilly regularly submitted bills to Kathleen Brown’s gubernatorial campaign for goods and services, but the campaign did not receive any documentation to justify his costs. This is a portion of an internal job cost sheet prepared by Reilly’s company, Campaign Production Services.

1) Costs: $37,694.34

Costs to Reilly’s firm for mailer, including design, printing, labeling and sorting.

2) Markup: $32,393.16

Charges over and above actual costs. Reilly contends that his contract allowed him to add any amount, in this case 86%.

3) Postage: $26,662.52

Reilly’s contract allowed him to pass on his postage costs.

4) Grand total: $96,750

Total charged to campaign for cost of producing mailer.