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OS ANGELES — A judge Thursday threw out a politically damaging $78 million civil fraud verdict against GOP gubernatorial candidate Bill Simon’s family investment firm, ruling that William E. Simon & Sons and other investors were the fraud victims. 

Superior Court Judge James C. Chalfant, in a written ruling, dismissed the huge compensatory and punitive damages verdict against William E. Simon & Sons and a nearly $20 million verdict also levied by a jury against another investor group. 

“This decision is of course inconsistent with the jury’s verdict,” Chalfant wrote. “The court believes in the jury system and has found that juries usually reach the same decision that the court would. Not this time.” 

Simon, who faces Democratic Gov. Gray Davis in the November election, had maintained that the July 30 jury verdict would not stand. 

“Today is a new beginning for our campaign,” Simon told a press conference packed with supporters at a hotel near the courthouse an hour after the verdict was thrown out. 

“I have said all along that the jury verdict was fundamentally flawed and would be overturned and that’s exactly what happened this morning,” he said. “Now the people of California will get the kind of campaign, at least from me, they deserve.” 

A half-dozen protesters chanted “We believe the jury” outside the Omni Los Angeles Hotel and carried signs reading “It took a Wilson judge.” Chalfant was appointed the bench by former Gov. Pete Wilson, a Republican. 

The jury had awarded the huge verdicts to Edward Paul Hindelang of Santa Barbara, a convicted marijuana smuggler who founded Pacific Coin, a Van Nuys pay phone company in which Simon’s firm and others invested. 

Hindelang’s attorney, Geoffrey L. Thomas, said he will appeal Chalfant’s decision. 

“It’s hard to know what the judge was going to do and this was certainly an option that we considered. It simply sets up the final phase on appeal,” Thomas said. 

Simon was not personally named in the lawsuit, but with corporate wrongdoing in the spotlight the fraud verdict was political poison that stunned the GOP and struck at a key theme of Simon’s first-time candidacy, his boasts of private-sector success. 

The verdict became another setback for his stumbling campaign, spooking donors and becoming the focus of a Davis attack ad that remains on the air. 

The lawsuit arose from a 1998 acquisition of Pacific Coin by investors including William E. Simon & Sons, the New Jersey and California firm Simon started with his brother and father, a former U.S. Treasury secretary. 

Hindelang had served 30 months in prison in the early 1980s, but the investors didn’t know that at the time, they said. 

The investors planned to grow Pacific Coin, but with the pay phone market shrinking, the company faltered, fell into debt and was seized by its lenders in December 2000. 

That same month Hindelang sued Simon & Sons, alleging the investors defrauded him by concealing a perilous and ultimately failed plan to take Pacific Coin public and make huge profits. 

The investors countersued, accusing Hindelang of committing fraud and costing them millions by hiding his troubled drug past. Simon & Sons invested $16.5 million in Pacific Coin and lost it all, and Simon personally lost $1.2 million. 

Jurors found unanimously for Hindelang and awarded him $65 million in punitive damages and $13.3 million in compensatory damages from Simon & Sons. The other investor, B-R Investors, was assessed $10.9 million in punitive damages and $8.9 million in compensatory damages. 

In his 36-page ruling, Chalfant wrote that it was “an immutable fact established by overwhelming evidence that Hindelang defrauded” the investors by failing to disclose his criminal convictions, his negotiations with federal authorities to forfeit drug proceeds and that Pacific Coin may have been founded with drug money. 

The judge wrote that investors’ testimony “that they never would have invested $26 million in Pacific Coin had they known the truth was uncontradicted and undisputable, underscoring the magnitude of Hindelang’s fraud.” 

The judge awarded the investors $125,000 to cover costs they paid for investigations of Hindelang.