By Tom Ramstack and Ian Simpson
WASHINGTON (Reuters) - A leading District of Columbia businessman pleaded guilty on Monday to violating campaign finance laws in a case that has tarnished the U.S. capital's Democratic mayor and overshadowed his bid for a second term.
Federal prosecutors had accused Jeffrey Thompson, once a major government contractor, of running a "shadow campaign" that funneled more than $660,000 through friends and relatives to Washington Mayor Vincent Gray's successful 2010 campaign, breaking campaign laws that forbid contributions of more than $25,000 by one person.
Gray encouraged Thompson's fundraising tactics, a prosecutor said in federal court.
"Mr. Gray agreed to keep Mr. Thompson's fundraising secret," Assistant U.S. Attorney Michael Atkinson said. Gray also agreed to refer to Thompson as "Uncle Earl" in conversations about Thompson's fundraising to conceal the activities, Atkinson said.
During a dinner meeting with the business owner, Gray presented a one-page budget of $425,000 for his "get-out-the-vote" efforts that he asked Thompson to fund, Atkinson said.
On Monday, Gray denied that anything illegal had taken place in his campaign finances.
"These are lies," Gray told the local NBC television affiliate. "The things that I've heard today are fabricated."
Under the plea bargain Thompson reached with prosecutors, the U.S. Department of Justice agreed to waive the penalty for a heavier federal charge of conspiracy to violate federal campaign finance laws and submitting false filings to the Internal Revenue Service in exchange for his guilty plea and cooperation with the government.
Thompson was dressed in a business suit as he stood next to his lawyer in court and entered his guilty plea.
Thompson is the billionaire former owner of a health care management company called D.C. Chartered Health Plan that operated with multi-million dollar contracts from the District of Columbia until a judge placed it in receivership in 2012.
Prosecutors on Monday also accused Thompson of steering more than $2 million in illegal campaign contributions to federal political candidates and 15 D.C. Council members between 2006 and 2012.
Several people affiliated with Gray's campaign or Thompson have pleaded guilty in federal court in the last two years.
Thompson also used his companies to channel about $600,000 to pay for campaign services for an unnamed presidential candidate from February to May 2008, prosecutors said in court papers. The Washington Post reported in September that the disbursement was an independent get-out-the-vote effort for Hillary Clinton's campaign for the Democratic presidential nomination.
Gray, who has presided over an economic boom while in office, leads polls heading into the crowded April 1 Democratic primary. The winner of that contest is favored to win the general election in the overwhelmingly Democratic district.
A Washington Post poll in January showed that Gray had 24 percent support, but 43 percent of those polled said the federal investigation was a major factor in this year's election.
City Council member and mayoral candidate Tommy Wells said on Monday that the prosecutor has "ensured that Jeffrey Thompson won't get away with illegally putting a mayor and council members in office so he could get multi-million dollar contracts."
(Reporting by Ian Simpson; Editing by Scott Malone and Grant McCool)