Fraud Verdict Against Simon Firm Thrown Out

A Los Angeles Superior Court judge on Thursday swept aside a $78-million jury verdict against the family investment firm of Republican gubernatorial candidate Bill Simon Jr.

Reversing a jury’s July 30 verdict, Judge James C. Chalfant found that William E. Simon & Sons did not defraud a business partner, Paul Edward Hindelang, in a deal to take control of his pay phone company.

On the contrary, it was Hindelang who defrauded a Simon investment group by failing to reveal that he was a convicted drug trafficker, the judge concluded. Hindelang attorney Anthony C. Duffy said his client had not decided whether to appeal.

Coming less than eight weeks before election day, the decision’s impact was as much political as legal. The Simon campaign cast the ruling as a crucial turnaround for a candidate who for months has been a magnet for bad news.

“Today is a new beginning for our campaign,” Simon told reporters at a downtown hotel.

“I have said all along that the jury verdict was fundamentally flawed and would be overturned, and that’s exactly what happened this morning. Now the people of California will get the kind of campaign--at least from me--that they deserve.”

Other Republicans were more cautious after a summer of troubles for Simon, from staff turmoil to the candidate’s retraction of his campaign’s positions on gay rights.

“It keeps him in the race, but it certainly doesn’t win him the race,” said veteran GOP consultant Allan Hoffenblum.

Simon’s biggest problem, he said, remains his failure to define himself on his own terms amid a deluge of television spots from Democratic Gov. Gray Davis that portray Simon as a corporate scoundrel.

But in Sacramento and Washington, Republicans said the court’s reversal would undercut Davis’ efforts to raise doubts about Simon’s contention that he is a successful businessman.

“It seems to me that one of the main pillars of the Davis campaign has just collapsed beneath him,” said state Sen. Jim Brulte of Rancho Cucamonga, the Legislature’s top Republican.

Still, among Simon’s biggest troubles is a lack of money to buy enough television ads to run a competitive race.

Trouble Raising Funds

During the first 10 days of September, Simon collected $159,000, according to state records listing donations of $1,000 or more. That would buy less than one full day of statewide television ads.

In contrast, Davis raised more than $1.9 million over the same 10 days. Much of it came from unions with an interest in bills awaiting his signature or veto.

Simon’s finance chairman, Frank Baxter, blamed the lackluster fund-raising on the fraud verdict, saying donors had “adopted a wait-and-see attitude”--until Chalfant’s reversal.

“People who have been on the fence jumped over the fence today,” he said. But for three months, Davis has far outspent his GOP opponent on TV spots, including one that bashes Simon for the fraud verdict. Despite the judge’s reversal, Davis advisors said the ad would keep running for a few more days.

The fraud case stems from the Simon group’s investment of $33 million in Pacific Coin, a Van Nuys company founded by Hindelang.

At a trial in July, the jury found that the Simon investors defrauded Hindelang by hiding their plan to charge $1.5 million in investment banking fees, and by hiding an aggressive growth plan that ultimately led to the company’s collapse.

Practice Not Illegal

In his decision Thursday, Chalfant agreed that William E. Simon & Sons failed to disclose its plan to charge fees. He said he did not “countenance this kind of sharp practice,” but found it was not illegal.

“If this is investment banking ‘custom and practice,’ then it is a custom which the investment banking world needs to change,” he wrote.

Chalfant soundly rejected the claim that the Simon group hid its aggressive growth plan for Pacific Coin--the core allegation of fraud.

“The court does not set aside a jury’s fraud verdict lightly,” Chalfant wrote. “But substantial evidence does not support the fraud claim, and the jury’s verdict cannot stand.”

In response to Hindelang’s lawsuit, the Simon investors filed their own claims against him. In essence, they alleged that Hindelang had committed fraud by concealing his drug trafficking conviction, a claim rejected by the jury.

But Chalfant found that Hindelang had defrauded the Simon investors when they were negotiating with him to acquire a controlling stake in his company. Hindelang, the judge found, hid not just his criminal record, but also his apparent use of drug money to finance Pacific Coin, as well as his secret talks with U.S. authorities on forfeiting $50 million in illicit gains that he had stashed offshore for two decades.

It was true, the judge said, that news articles on Hindelang’s criminal past were available had the Simon group looked for them.

“Perhaps they or their agents should have done so,” Chalfant wrote. But the law of fraud “protects both the gullible victim and the diligent.”

Simon and his business partners took control of Pacific Coin in February 1998, but said they only learned of Hindelang’s drug smuggling from a December 1998 article in the Wall Street Journal.

At the trial, the Simon investors sought restitution of the $33 million they had invested in Pacific Coin. But Chalfant denied the request because they had continued to operate the company even after they fired Hindelang.

Instead, the judge awarded the Simon group $125,000 to cover the cost of investigating Hindelang’s background after publication of the Wall Street Journal article.

Duffy, Hindelang’s lawyer, said he was disappointed that the jury verdict was reversed, but he said the $125,000 was “hardly a victorious award” for a group that sought $33 million.

“The only reason they would want to declare it a victory is that their man’s a candidate,” he said.

Ruling Praised

The candidate’s brother, Peter Simon, chairman of William E. Simon & Sons, welcomed the verdict’s reversal, saying the firm had been completely open and honest in its dealings with Pacific Coin.

“Our reputation as both a successful and ethical investment firm has been completely vindicated,” he said.

On Tuesday, the Davis campaign pressed its case against the GOP candidate on another business that went sour; it released a new television spot blaming Simon for the $122-million taxpayer bailout of a failed savings and loan.

“Believe me, we have plenty of additional Simon screws-ups, failures and ethical lapses to talk about between now and Nov. 5,” said Garry South, chief strategist of the Davis reelection campaign, who cast Thursday’s decision as a partisan ruling by a Republican judge.

At a bill-signing ceremony Thursday in Monterey Park, Davis said: “Even though a judge has a right to do what is appropriate, a jury of 12 people still found that Mr. Simon defrauded a company.”

Simon charges that Davis has distorted his business record.

In Washington, Republican Party officials were elated by the decision, the first good political news to come out of California in months. “Everybody is going to be a lot more optimistic about the race after today,” said a GOP strategist, who noted that Davis has yet to put the race away despite Simon’s repeated stumbles.

The optimism was tempered, however, by continued concerns about the novice candidate and the persistent internal feuding among his advisors.

White House Reaction

At the White House, spokeswoman Anne Womack said President Bush “has supported Bill Simon’s candidacy all along ... and all along took Bill Simon at his word that the verdict would be thrown out.”

Privately, however, the president’s political team had all but given up on Simon by the time the judge reached his decision, turning attention to Bush’s reelection and hopes of improving on his dismal 2000 performance in California, when he lost the state in a landslide.

Last month, Bush made a Stockton-to-Orange County campaign swing on Simon’s behalf, but the results were hardly encouraging. Fund-raising fell far short of expectations and Bush’s arms-length treatment of Simon--including the failure to utter his name at his public appearances--was the centerpiece of most news accounts.

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Times staff writer Mark Z. Barabak contributed to this report.