The company promised “ethical lobbying” in the wake of the cash for questions scandal which dogged the Tories in the 1990s, and pledged not to work for companies such as gun-makers and tobacco firms.
Yet within a year LLM was caught up in a cash for access row when executives were allegedly caught boasting about links to the Labour hierarchy.
LLM denied any impropriety.
The scandal did not dent the company’s prospects, and Mr Mendelsohn and his colleagues sold the business for £10million in July 2005. It made him a millionaire.
Mr Mendelsohn left LLM in the summer to take on his unpaid role with Labour.
Westminster insiders who know him well say he probably thought he could sort out the problems presented by David Abrahams’ unorthodox way of donating.
One said: “He would have thought he could fix it with David Abrahams and make him an open donor.
"But not telling the National Executive Committee or the Prime Minister is dreadful.”
Mr Mendelsohn has admitted that he and Mr Abrahams have a “personal history of past disagreements” - a reference to when Mr Abrahams was ejected from Labour Friends of Israel when Mr Mendelsohn was chairman in 2002.
Mr Mendelsohn is steeped in the north London Jewish community.
He is a close friend of Lord Levy, who was at the heart of Labour’s cash for peerages affair.
Mr Mendelsohn donated £5,000 to Gordon Brown’s campaign to be party leader in the summer.
But a Labour source said: “I think he has lost Brown the next election. Once you get tainted, this stuff sticks forever.”
Mr Mendelsohn is one half of a “media power” couple.
His 35-year-old wife, Nicola, is a close friend of Mr Brown’s wife, Sarah, and is the deputy chairman of the advertising agency, Grey London.
She has won more than £100million of new business for Grey since she joined the agency.
The couple have four children, Gabi, Danny, Sam and Zac.