May 30 (Bloomberg) -- Dee Quigley acknowledged at the time it was ``sick, sick, sick'' for her to be joking about the Holocaust.

She regretted, she would later testify, musing about attaching a picture of an oven to her Jewish neighbors' house, burning a cross, perhaps using one of their children as the cross.

However offensive, these were facetious fantasies, not plots, her lawyer would later argue. Quigley had no reason to suspect her words would travel further than her best friend, to whom she was speaking on her cordless phone.

But two houses down in an upscale Denver suburb, the chief object of Quigley's musings, Candace Aronson, was listening with a police scanner and a tape recorder.

Now, almost nine years later, the neighbors' feud has become a collision point for privacy and free speech. So far, privacy is winning, and winning big.

A federal jury slammed the Anti-Defamation League, which publicly attacked the Quigleys, with a $10.5 million verdict for, among other things, defamation. The national, New York-based group, acting through its Denver office, falsely accused the Quigleys of being militant anti-Semites, invaded their privacy and broke federal wiretap law, the jury found.

The trial judge shaved the award to $10.1 million, and last month a federal appeals court in Denver upheld it.

The ``First Amendment provides no refuge for the ADL,'' the appeals court said in a 2-1 opinion. The phone conversations ``were purely private matters, rather than matters of public concern,'' the majority said.

Threatened and Frightened

The dissenting judge, the ADL and a slew of public interest groups say otherwise.

``ADL in Denver did what ADL does and what ADL should be doing: assisting a Jewish family that told us they were facing discrimination, were being threatened and were frightened,'' ADL corporate counsel Jill Kahn Meltzer said this week from New York.

She is disturbed that ``the majority didn't see anti-Semitism as a matter of public concern.'' If it had, the verdict would be reversed and the Quigleys would have to go back to court and make the difficult case that the ADL acted with malice.

In this country, we can say despicable things privately if our words inflict no harm.

But what if Dee Quigley really had been scheming to drive Jews out of the neighborhood through threats, intimidation, perhaps violence, as the ADL claimed?

Shouldn't that be exposed? Does the fact that the ADL was wrong about the Quigleys automatically make the whole issue a private matter?

Robust Debate

To allow robust debate on issues of public concern, defamation laws allow people to make mistakes -- bad mistakes -- as long as they don't do so intentionally or with a reckless disregard for the truth.

And yet, the Quigleys suffered greatly at the hands of an advocacy group that let its cause overcome its responsibility to verify its allegations and follow the wiretapping law.

The $10.1 million award, $8.4 million imposed as punishment and the rest as compensation, seems excessive under the circumstances. But surely the Quigleys deserved something, and the ADL deserved punishment.

Or did they?

What's indisputable is that the relationship Dee and Bill Quigley had with Candace and Mitchell Aronson began amiably and soured quickly after the Aronsons moved into the neighborhood in Evergreen, Colorado, in 1994.

First, Mrs. Aronson took the Quigleys' children, ages 9 and 14, to an R-rated movie without their parents' knowledge. Matters worsened each time Mrs. Aronson yelled obscenities at Mrs. Quigley, according to the opinion by the 10th U.S. Circuit Court of Appeals. There were arguments over the Aronson dog, and animal control was called.

Constitutional Confrontation

By late October, each couple was accusing the other of using their cars to endanger and intimidate them.

But it was the tapes that catapulted the feud out of Evergreen and into constitutional territory.

``If something big happens, like there's a house burning, I'll call you,'' Mrs. Quigley said over the phone to her friend on Oct. 20, 1994. Mrs. Aronson, angry at the Quigleys, had tuned in on a police scanner to eavesdrop on her neighbors.

Mr. Aronson the next day contacted the ADL, which brought in lawyers who were ADL volunteers and board members. Concluding the eavesdropping was legal, they urged the Aronsons to keep taping.

Based on snippets taped between Oct. 20 and Nov. 1, 1994, and without interviewing anyone else in the neighborhood, they sued that December, accusing the Quigleys of civil rights violations, ethnic intimidation and defamation, among other things.

So that all of Denver knew about the case, the ADL's local director, Saul Rosenthal, who had never heard the tapes or read the transcripts, held a press conference the next day.

Cross Burning?

``What we have here are dozens of instances of attempts to intimidate, threaten and do harm to the Aronsons,'' Rosenthal said.

The Quigleys had ``threatened to burn a cross on the Aronsons' property. Planned to tape a facsimile of an oven door on their home. Discussed plans to douse one of the Aronson children with a flammable liquid,'' Rosenthal said, amplifying further on a radio talk show.

Two days later, the district attorney's office charged the Quigleys with ethnic intimidation and conspiracy to commit it.

Soon the couple was getting hate mail. One package contained feces. Their own priest denounced them at church and they hired security guards and used fake names.

The momentum began shifting when the Aronsons' lawyers learned, belatedly, that Congress had recently outlawed intercepting cordless telephone calls, forcing them to pare down their claims.

Little Evidence

Next, the Quigleys counter-sued the Aronsons. They sued the ADL and Rosenthal, too, as well as the Aronsons' ADL-affiliated lawyers.

In the meantime, the prosecutor's office, conducting its own investigation, found little evidence and dropped the ethnic intimidation charges. The Quigleys sued the district attorney, too.

Everyone except the ADL settled. The prosecutor's office paid $75,000 to the Quigleys. The lawyers' insurer paid $350,000.

The Aronsons, who started the whole mess, dropped their suit but paid nothing. In fact, they collected $50,000 from their lawyers, accusing them of having a conflict between serving their interests and the ADL's.

Only the ADL decided to defend itself.

There is no question the federal wiretap law was violated, or that the Quigleys were injured emotionally and economically by distortions told by the ADL.

Big Question

The big question is whether Mrs. Quigley's private conversations are an issue of public concern. If so, the Quigleys would have to prove the ADL acted maliciously, that is, it either knew its public statements were false or recklessly disregarded whether they were.

To decide, we have to assume the ADL was speaking the truth, according to 10th Circuit dissenter, Judge Harris Hartz.

And so, ``the question before us is whether it is a matter of public concern that residents of an upscale neighborhood have conspired to engage in violence and intimidation to remove a family from the neighborhood because of the family's religious heritage.''

The answer is obvious.

``Surely, faith-based intolerance, particularly when combined with threats of violence, is a matter of concern to the community at large,'' Hartz wrote.

The ADL, through its director and the lawyers, had some responsibility to try to make sure the Aronsons' allegations were true, didn't it?

The question is how much, and the answer will help decide whether $8.6 million in punitive damages was too much.

It's a question the full 10th Circuit is being asked to answer.