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The Los Angeles Times
Jan 27, 2004 - 08:00 AM

by Dan Morain

Gov.'s Loan for Recall Ruled Illegal;

Borrowing $4.5 million broke campaign law, a judge says. Aides blame error on ethics panel and say Schwarzenegger won't appeal.
SACRAMENTO -- A Superior Court judge ruled Monday that Gov. Arnold Schwarzenegger violated state election law by using a $4.5-million bank loan to help finance his campaign in last fall's recall race.

Superior Court Judge Loren E. McMaster, saying that such loans could open the way for money laundering of campaign donations, ordered Schwarzenegger to cease raising money to retire the debt, and not use money he has already raised to repay the loan.

In a preliminary injunction, McMaster ordered that the governor place any contributions he has raised to repay the loan in an escrow account "so that they may be returned should that relief ultimately be ordered in this proceeding."

The judge's 29-page ruling was the first interpretation by the courts of the loan provision of Proposition 34, the state campaign finance law passed by voters in 2000.

The law states that candidates are barred from lending their campaigns more than $100,000. In taking the loan, Schwarzenegger said he relied on an interpretation from the state Fair Political Practices Commission, the agency responsible for overseeing campaign finance law.

But McMaster said that if Schwarzenegger raised money to repay the loan, "the public would not learn who financially contributed to the campaign until after the election, when it would be too late."

In a prepared statement, Schwarzenegger's political aides, suggesting there will be no appeal, said the governor "intends to comply with the judge's order." McMaster imposed no fines on Schwarzenegger; the governor could end the case simply by repaying the money out of his own pocket.

Schwarzenegger reported to the state this month that he spent nearly $10.6 million on his campaign in 2003. At least $4.5 million of it was a loan from City National Bank in Beverly Hills, with an interest rate of 4%.

The judge was acting in a suit brought by Sacramento labor leader Bill Camp, with aid from the California Democratic Party.

"It is a pretty complete victory," said attorney Lowell Finley, who represented Camp.

Schwarzenegger critic Jamie Court of the Foundations for Taxpayer andConsumer Rights in Santa Monica added: "He ran to clean up Sacramento and did it basically by violating campaign finance."

At the time Schwarzenegger took out the loan, campaign aides indicated that he would probably raise money to repay it. Since then, however, they have said the governor had not decided whether to use donations to pay it off.

In their written statement, Schwarzenegger campaign aides said they were gratified that McMaster concluded the governor had based his decision to take the loan on what, according to the judge, was an erroneous interpretation of the law by the Fair Political Practices Commission.

McMaster concluded that the regulation was invalid, noting that it conflicted with the statute created by Proposition 34. The judge noted that in the official ballot pamphlet sent to all registered voters in 2000, backers of Proposition 34 said the measure would close a loophole in prior campaign law by which wealthy candidates could loan their campaigns more than $100,000.

The commission had concluded that while candidates could not loan themselves more than $100,000, they could obtain bank loans of unlimited size.

Under the interpretation by the commission and Schwarzenegger, McMaster wrote, "the loophole is not only opened, but the $100,000 limit ... is rendered meaningless." The judge noted Schwarzenegger's interpretation "would legitimize a form of 'money laundering.' "

"The only persons who could obtain a loan on terms made available to defendant Schwarzenegger here -- $4.5-million signature loan at prime -- would have to be persons of independent wealth," McMaster wrote.

McMaster is the same judge who concluded during the recall campaign that Lt. Gov. Cruz Bustamante violated Proposition 34's cap of $21,200 on donations from individual donors.

Bustamante, relying on what he said was an interpretation by the Fair Political Practices Commission, received several donations of $100,000 and more into an old campaign account that predated Proposition 34, and then tried to spend the money on his gubernatorial bid.

The panel has since sued Bustamante, alleging that he violated campaign finance law. On Monday, Richie Ross, Bustamante's political advisor, appeared to sympathize with the governor.

"Gov. Schwarzenegger, as well as Lt. Gov. Bustamante, are victims of a lack of clarity, either in the statutes or in the interpretations given by the [panel]," Ross said. "Obviously, the law is subject to different, valid interpretations."

Schwarzenegger's final campaign finance reports for 2003 won't be filed until next week. But a preliminary count shows that he raised $25.4 million last year, including the $10.6 million he gave himself in cash and loans from City National Bank.

He has raised at least $3.4 million in a variety of campaign accounts since he won the recall Oct. 7.





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