A judge Thursday threw out a politically damaging $78 million civil fraud verdict against GOP gubernatorial candidate Bill Simon's family investment firm.

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.

Simon, who faces Democratic Gov. Gray Davis in the November election, had described the July 30 jury verdict as "crazy" and "fundamentally flawed" and maintained that it would not stand.

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 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. The investment was in a Van Nuys pay phone company, Pacific Coin, founded by Paul Edward Hindelang of Santa Barbara.

Hindelang was a convicted marijuana smuggler who 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.