Scandal alarms Canada's ruling Conservatives ahead of convention

By David Ljunggren and Randall Palmer OTTAWA (Reuters) - Canada's ruling Conservatives go into what was supposed to be a triumphant convention this weekend trying to limit damage from a scandal over improper expenses that reaches the office of Prime Minister Stephen Harper and could undermine the party's chances of winning re-election in 2015. Harper has been on the defensive since news broke that his then chief of staff, Nigel Wright, gave a personal check for C$90,000 ($85,700) to Mike Duffy, a member of the upper Senate chamber, to help repay expenses that Duffy improperly claimed. Party legislators are split over how the crisis has been handled since it blew up in May and expect Harper to address it in a speech on Friday night. The scandal threatens to cut into voter support for the right-leaning, low-tax, pro-business government of Harper, who won power in early 2006 promising to clean up Ottawa. "It's a bit too early to slam the panic button, but I think the hands should be over the panic button," said pollster Nik Nanos, who sees the opposition Liberals ahead of the Conservatives by 37 percent to 29 percent. If those numbers hold on election day two years from now, the Liberals, under new party leader Justin Trudeau, would almost certainly end nearly a decade of Conservative power. The affair is expected to dominate the convention, which is being held in Calgary, Canada's oil capital and an area that traditionally votes Conservative. The meeting, postponed after the costliest floods in Canada's history swamped the city in June, was designed to highlight government priorities. "Obviously people will want to talk about it, they'll want to hear from the prime minister on it. I'm assuming he (Harper) will address it," legislator Bob Dechert told reporters on Wednesday. "We've got a lot of phone calls and people want to know the truth," said Member of Parliament Mark Warawa. 'MONSTROUS FRAUD' As the Senate debates whether to suspend Duffy and two others senators without pay, Duffy has thrown some bombs, alleging that he took part in "monstrous fraud" crafted by Harper's office to cover up the Wright payment and that the Conservative Party separately arranged to pay his legal fees. Harper insists he had no knowledge of the C$90,000 check, saying Wright had acted alone and took sole responsibility. However, Wright told police that he had told three others of the payment in the prime minister's office. "It's pretty clear that on this particular issue the Conservatives are not in control and that they are fire-fighting day to day. And when you start fire-fighting day to day, it's hard to be consistent," Nanos told Reuters. The prime minister usually keeps a tight grip on the government and the party, and a striking part of this crisis is how many members are willing to express open dissent. Harper says Duffy and the two other senators - all of whom he named to the Senate in December 2008 - should be kicked out for wrongdoing over their expenses, even though no formal charges have been laid. That has annoyed some within his party. "We didn't win Vimy Ridge (in World War One) to give up the presumption of innocence in this chamber this week," said dissenting Conservative Hugh Segal. Harper is a formidable political operator and few are willing to write him off, especially given that the next federal election is not due until October 2015. "He's got to come up with something that fills that window and gets everybody excited," said Keith Beardsley, who advised Harper as deputy chief of staff from 2006 to 2008. "It's a slow process, when your brand gets chipped away. It's not something you rebuild overnight," he told Reuters. Ipsos Reid pollster John Wright sees a tighter race than Nanos, with the Liberals, Conservatives and the left-leaning New Democrats within two percentage points of each other. "I would not characterize the prime minister being in trouble from a vote perspective, but from an issue perspective, the answer is yes," pollster Wright told Reuters. The opposition can barely contain its glee. "People who have been Conservatives all their lives certainly in my riding, they're telling me 'We didn't vote for this, we didn't vote for these scandals'," said Peter Julian, a legislator with the official opposition New Democrats. ($1=$1.05 Canadian) (Additional reporting by Louise Egan; Editing by Vicki Allen)