Simon Firm Must Pay $78 Million, Jury Rules

A Los Angeles Superior Court jury ordered the William E. Simon & Sons firm to pay $78 million in damages for fraud and other misconduct in an investment debacle that also led to a major personal financial loss for Republican gubernatorial nominee Bill Simon Jr.

The damages awarded at hearings Tuesday and Wednesday by a state Superior Court jury were a major blow to a candidate who has marketed himself primarily as a successful businessman.

The jury ordered the Simon firm to pay $65 million in punitive awards and $13.3 million in compensatory damages to the plaintiff, P. Edward Hindelang of Santa Barbara.

Simon released a statement Wednesday saying he expects Superior Court Judge Thomas L. Willhite Jr. to set aside the judgment “or it will be overturned on appeal.”

“The findings in today’s court verdict are fundamentally flawed, and I don’t expect them to stand,” the candidate said.

Two investment partners of the Simon group were also found liable for fraud: B-R Investors Inc. and BR Telephony Partners LP, both controlled by William Rogers. The jury ordered B-R Investors to pay $8.9 million in compensatory damages and $10 million in punitive damages.

Simon, a co-founder and co-chairman of William E. Simon & Sons, was not named as a defendant. But the case stems from a 1998 pay telephone investment deal in which Simon personally lost more than $1.2 million, according to tax returns that he let reporters see for a few hours last week.

Court records show that Simon reviewed details of the deal as it unfolded, and he testified about his role in a videotaped deposition.

The jury found that William E. Simon & Sons--established in 1988 by Simon, his brother Peter and their father, William E. Simon, the late Treasury secretary--defrauded Hindelang in a deal to take control of his Los Angeles pay phone company, Pacific Coin.

The jury concluded that the Simon firm hid from Hindelang, who retained an interest in the company, that it planned to borrow huge sums of money to expand Pacific Coin against his wishes, and then to take it public in a stock offering.

Within months of the Simon group’s February 1998 takeover, Pacific Coin went deep into debt to fund its $42-million acquisition of another company, Golden Tel, which owned a network of pay phones in Las Vegas casinos. Pacific Coin soon collapsed and was taken over by its lenders.

The Simon group, according to Hindelang, gave up on Pacific Coin and let it die in order to take advantage of tax deductions from the resulting losses. The candidate’s tax returns show that Bill Simon Jr. substantially reduced his federal tax bill in 1999 and 2000 by writing off his Pacific Coin losses.

Ronald Oster, a lawyer for Hindelang, told the jury Wednesday that the greed and arrogance of the Simon investment group caused the death of Pacific Coin, a company that Hindelang had built up over 14 years.

“They destroyed the company,” Oster said. “They destroyed 14 years of hard work.”

The jury also upheld Hindelang’s complaint that the Simon firm concealed its plan to charge him unconscionable investment banking fees totaling $1.5 million.

Simon said that Hindelang had failed to disclose to the Simon investment group that he had been convicted for marijuana trafficking in the 1970s. Simon called Hindelang “precisely the kind of criminal I used to pursue” as a Manhattan federal prosecutor in the 1980s. Under the Simon group’s control, Pacific Coin fired Hindelang after learning of his conviction in a Wall Street Journal story.

But the Superior Court jury dismissed a claim by the Simon investors in which they charged that Hindelang had defrauded them by concealing his conviction.

In a hearing Wednesday on the damage claims, Hindelang’s attorneys portrayed the talk of their client’s marijuana conviction as irrelevant to the Pacific Coin investment fiasco. They said it was part of a campaign of character assassination by the Simon group to smear a man who had the courage to challenge a powerful Wall Street investment firm in court.

The jury found unanimously that William E. Simon & Sons was liable for defrauding Pacific Coin Management, a company led by Hindelang.

The damage awards underscored anew the perils of running for public office as a businessman at a time of corporate scandal in America. For two months, Simon’s Democratic opponent, Gov. Gray Davis, has hammered him in television ads for some failures that Simon suffered as an investment banker. Davis’ most recent spot says Simon has faced “losses, bankruptcies, lawsuits and even allegations of fraud.”

Simon’s difficulties could grow further next month when--just weeks before the Nov. 5 election--a trial is scheduled to begin in a 1992 lawsuit he filed to recover his family’s $40-million investment in the defunct Western Federal Savings and Loan.

Simon alleges that government wrongdoing caused the S&L;’s collapse. But the U.S. Justice Department argues that Simon and his partners made a bad investment, then made it worse by retaining executives who mismanaged the thrift.

The pay phone deal was one of hundreds that Simon oversaw during his 14 years as a top manager at his family’s investment firm. Simon, who ran the firm’s Los Angeles office, has taken a leave of absence to run for governor.

In his statement Wednesday, Simon said his family invested $16.5 million in Pacific Coin. In an interview with The Times last winter, Simon recalled that his wife asked him at the time: “Why do you want to invest in a pay phone company? Nobody uses pay phones anymore.”

Simon said he replied: “No matter how much mobile phones come in, there’s always going to be a need for pay phones.”

But Simon’s tax returns show that Pacific Coin was one of Simon’s biggest investment failures. It appears on the tax returns as Coinable Simon LLC, the company that his family set up to invest in Pacific Coin. Simon took Coinable Simon write-offs of $754,314 in 1999 and $450,546 in 2000. The jury found Coinable Simon liable for fraud, but assessed damages only to William E. Simon & Sons and its partner in the deal, B-R Investors.

On Wednesday, lawyers for the Simon investment group tried to convince the jury that the Simon group had done nothing wrong.

“I suppose it would be politic for me to say I’m sorry,” William H. Lancaster, a William E. Simon & Sons lawyer, told the jury. “I cannot. I will not. I did not bring you a lie. My clients did not bring you a lie.”

“They made a very substantial investment in the company, and it was lost,” he said. “Is that reprehensible? No.”