A disgusted Orange County Superior Court judge blasted two of the state's top political consultants and a renowned anti-tax group for "hoodwinking" the public with "fraudulent" fund-raising tactics.
Superior Court Judge Donald E. Smallwood said this week that the Howard Jarvis Taxpayers Assn., along with direct-mail gurus William Butcher and Arnold Forde, raised money from the public under false pretenses in order to put more than $1.5 million into the pockets of the Newport Beach political consultants.
"There is something terribly wrong when huge sums of money can be raised in the course of political campaigns, transferred to a parent or sponsoring organization and then funneled back to the political consultants," Smallwood wrote in a harshly worded decision.
Smallwood's scathing assessment of the mid-1980s fund-raising techniques of Butcher and Forde and the tax-fighting Jarvis group consumed a substantial portion of his 47-page decision and caps one of the county's most secretive and complex legal cases.
A frustrated Smallwood wrote that, although he found the conduct of Butcher and Forde "reprehensible" and believed they had "facilitated" campaign reporting violations by the Jarvis group, they could not be held liable under the Political Reform Act.
But the judge found that the Los Angeles-based Jarvis group had violated the act by not reporting more than $624,000 spent and $738,000 raised during one direct-mail campaign launched six days after Jarvis' 1986 death. The judge's decision came in a lawsuit brought in 1988 by Paul McCauley, a 45-year-old Sherman Oaks accountant. McCauley charged that the Jarvis group (then known as the California Tax Reduction Movement) should have been making regular disclosures of where it was getting its money and how it was being spent.
Also contested was whether Butcher-Forde Consulting was the Jarvis group's "de facto" treasurer and therefore was financially liable for any alleged campaign reporting violations.
Smallwood awarded McCauley $300,000 plus six years' worth of attorneys' fees and ordered the Jarvis group to deposit $300,000 in the state's general fund as required by the Political Reform Act. The penalty is one of the largest ever levied in a civil suit brought by a private citizen under the act.
"This case cried out for a public hearing," said McCauley, a shy, frail accountant who, with attorney Anthony Kornarens, spent the past six years poring over the Jarvis group's books. "They thumbed their noses at the law and they're paying a very steep price for it. As far as Butcher-Forde's concerned, I think the judgment itself is a heavy indictment of their conduct."
Reflecting their continuing influence in California politics, Butcher-Forde and longtime associate Stu Mollrich are coordinating the campaign for passage of a June 27 ballot measure that would boost Orange County's sales tax by a half-cent. The judge's decision this week involves activities separate from their work on behalf of the Measure R sales tax proposal.
Mollrich, who played a key role in writing the fund-raising letters, also was severely criticized by Smallwood for engaging in "reprehensible" conduct.
An attorney for the Jarvis group, Lawrence J. Straw, said that he was pleased overall with the decision because Smallwood found only one violation of the Political Reform Act out of 30 campaign transactions at issue.
However, Straw said the penalty for the one violation was unfairly high. He stressed that the Jarvis organization was run on a shoestring during the mid-1980s and perhaps relied too heavily on Butcher and Forde to decide what was right.
"The judge said the treasurer (that the Jarvis group) went out and hired let them down, and that Butcher and Forde were playing things close to the line," Straw said. "The people they were relying upon really let them down."
Butcher and Forde's attorney, David Elson, said his clients were pleased because "they frankly felt all along that there was no basis for having them in this case for campaign reporting violations."
Elson said he did not attempt to rebut the portrayal of his clients in the case because, "frankly, we didn't believe (Butcher and Forde's conduct) was material to what was being tried."
Attorneys have 10 days to ask Smallwood to reconsider portions of his decision, then they can file an appeal.
The case already has been to the 4th District Court of Appeal five times and has been wrapped in secrecy for much of that time. For four years, the hundreds of pleadings, motions and depositions taken in the suit--enough to fill a pair of three-drawer file cabinets--were mysteriously locked away in the basement of the Santa Ana courthouse. No one seems to know who sealed the suit and no one can find a court order declaring it secret.
Smallwood, at least the fifth judge to preside over the case, unsealed the documents after The Times first wrote about the suit last November. The veteran jurist said it was "incongruous" to have under lock and key a case based entirely on alleged violations of the Political Reform Act--an act "designed to illuminate" political fund-raising and other issues for the public.
In his decision this week, Smallwood found the Jarvis group had violated the Political Reform Act during a 1986 campaign that hinged on a letter sent out after Jarvis' death. The black-bordered letter pleaded for cash to pass Proposition 62, an initiative to shore up the landmark Proposition 13. It was signed by Jarvis' widow, Estelle, but was written by Butcher-Forde.
None of the money raised went to the Proposition 62 campaign, according to testimony by the group's treasurer, Costa Mesa attorney Dana Reed. Instead, the $738,097 raised went into the Jarvis group's general account and was not reported, Reed testified.
Smallwood attacked Reed's testimony that he didn't report the contributions because none of the money had been used in the campaign for Proposition 62. Reed testified that he decided that contributions should be reported based on how the money was used, not by how it was solicited.
Smallwood said Reed's testimony was "totally without support in the law . . . and given his background and experience it is almost irresponsible."
"Clearly, the recipient of this letter, whether a sophisticated businessman or a widow of modest means, would assume at the time of sending his or her check that at least some portion of it was being used by (the Jarvis group) to help pass Proposition 62," Smallwood wrote.
McCauley's attorney, Kornarens, said Smallwood's frankly worded decision "will be a great benefit to the public in this state."
"The public needs to know a lot more about the fund-raising tactics engaged in by certain organizations," Kornarens said. "The court went to great pains to address those issue and for that we're very grateful."
In his decision, Smallwood appeared thwarted by the confines of the Political Reform Act.
After examining a series of the group's fund-raising campaigns from 1984 to 1988, Smallwood wrote that it was "well-established" that the Jarvis group and Butcher-Forde sent out "debt reduction" letters in the closing days of campaigns when no debt existed.
These campaign committees would then donate the surplus money to the Jarvis group, which did not file campaign reports detailing how the money was spent, according to court documents.
"If the funds received and expenditures made were properly reported (by the committees), then the underlying deceit is an abuse which must be accepted," Smallwood wrote.
In particular, Smallwood pointed to a fund-raiser in late 1984, which sought to raise money to pay off a purported $349,000 debt left over from a failed attempt to amend the state Constitution.
Smallwood said that while the campaign committee was "still beseeching the recipients of its mailers" to take care of the debt, it had already begun "transferring considerable sums of money" to the Jarvis group that was used to pay Butcher-Forde more than $1.5 million in fees.
"The court is troubled by this entire scenario, since it is obvious the recipients of the (committee's) late 'debt reduction' letters were in many cases being hoodwinked and taken advantage of," Smallwood wrote.
Smallwood appeared exasperated that he was unable to punish Butcher-Forde and the Jarvis group for these actions, conceding that "even if the court assumes that the mailers were in effect misleading or even fraudulent, that fact doesn't establish a violation of the (Political Reform Act). This case is not a lawsuit over alleged violations of the California Elections Code."
And despite the "incestuous" relationship between Butcher-Forde and the Jarvis group, Smallwood found that "the heart and soul" of the group was Jarvis, who was primarily responsible for initiating the group's political activity.
But Butcher, who has since changed his last name to Lord-Butcher, still took the largest measure of the judge's wrath. At several points in his decision, Smallwood said that he "had difficulty believing much of Mr. Butcher's testimony."
Butcher and Forde hooked up with anti-tax icon Jarvis in the wake of Proposition 13 and in 1978 helped him form the California Tax Reduction Movement to protect and further the aims of the initiative.
During a 17-day trial last December, Butcher testified that as part of the political process, he and Jarvis regularly disregarded established contracts and struck new financial deals that they kept in their heads. Once the Jarvis group began pulling in large sums of money, Jarvis agreed that Butcher-Forde should get an additional $1.5 million in fees to boost past billings, Butcher testified.
But instead of paying Butcher-Forde in one lump sum, a new contract allowed them to retroactively bill past mail campaigns 25 cents per piece of mail and charge a 17.65% management fee on the Jarvis group's gross expenditures.
Smallwood said this activity was not a violation of the Political Reform Act, but perhaps should be. "Nonprofit organizations and their consultants . . . should not be permitted to evade their reporting requirements simply by keeping everything in their heads and then, depending how things work out, generate large bonuses to be paid retroactively," he wrote.
Although no accounting of how much Butcher-Forde was paid during the mid-1980s is included in the decision, financial documents in the court file, including a 1985 income tax return, show that $3.6 million of the $6.9 million the group spent in 1985 went to fund-raising and nearly $2.5 million went to Butcher-Forde as fees. The following year, Butcher-Forde's fees accounted for 47% of the group's expenditures, or $1.8 million, court records show.
In a stinging final assessment, Smallwood wrote that although "Butcher, Forde and Mollrich had no legal liability, the court finds their conduct to be violative of the premises which underlie the Political Reform Act. While it may be reprehensible, such conduct must be tolerated in a free society . . . "