Simon Doesn’t Remember $1.2-Million Loss

One of the biggest losses that Bill Simon Jr. claimed on the tax returns he signed in October was a $1.2-million hit from his failed gamble on a pay phone company.

Yet seven months later, deposed under oath, the Republican gubernatorial nominee could not recall whether anyone told him he lost the money.

Was he happy about the loss?

“I don’t have a recollection of having a feeling of happiness or sadness or anger or joy, because I don’t remember,” Simon testified in May.

Simon’s apparent disengagement from matters with a profound impact on his personal finances and his family’s investment firm came to light in his testimony on the pay phone deal. He said that not only did he know virtually nothing about the pay phone investment, he also was unsure how much of his family’s firm belonged to him.

A Los Angeles Superior Court jury this week levied $78 million in damages against the firm, William E. Simon & Sons, after finding that it had defrauded a partner in the deal, Santa Barbara entrepreneur P. Edward Hindelang. The case stemmed from the Simon firm’s takeover of Hindelang’s Van Nuys company, Pacific Coin.

Simon quietly dropped off the campaign trail for two days at the end of May for his videotaped deposition in the case. The 619-page transcript of his testimony at a downtown Los Angeles law office offers a rare peek into the inner workings of the Simon family’s highly secretive investment firm.

It also provides insight--from the candidate--into his specific role at the firm, where he worked full time for 14 years as a top executive.

Overall, Simon portrayed himself as being detached from the firm’s investment decisions, including the pay phone fiasco that personally cost him more than $1 million.

“There’s some things you don’t necessarily need to know,” Simon testified.

At the same time, Simon couched much of his testimony in phrases that left many of his answers unclear.

Asked if he was a hands-on manager, Simon replied: “Well, you know, I guess we could talk about what you mean by ‘hands-on.’ But I would look at it as not particularly hands-on, in terms of individual investments.”

Simon, who has taken a leave of absence as co-chairman of the firm to run for governor, answered hundreds of questions with variations of “I don’t recall” and “I don’t honestly remember.”

He particularly displayed a striking lack of knowledge about the details and the broad terms of the pay phone deal, in which his family invested $16 million.

Simon, who founded William E. Simon & Sons in 1988 with his brother Peter and their father, the former U.S. Treasury secretary, is a co-chairman of the committee that approves the firm’s investments. But he testified that he did not recall attending any committee meeting on Pacific Coin.

Simon, whose average annual income is $3.3 million, also said he recalled virtually nothing about Coinable Simon LLC, the company set up by the Simon group to invest in Pacific Coin.

Yet on the federal income tax returns that Simon signed for 1999 and 2000, he listed his $1.2-million loss in Coinable Simon as one of his largest tax deductions.

Even when he was shown a 10-page memo on the pay phone deal covered with his own handwriting in the margins (including “wow!” “please explain” and “how about we make some money first”), Simon testified that he could not recall any conversations about the memo’s contents.

This week, the jury found that the Simon group hid from Hindelang that it planned to borrow large sums of money to expand Pacific Coin against his wishes, and then to take it public in a stock offering. The jury also concluded that the Simon firm hid its plan to charge $1.5 million in investment banking fees.

The jury rejected a claim by the Simon investors that Hindelang defrauded them by concealing his long-ago marijuana smuggling conviction.

At Simon’s deposition, Hindelang’s lawyers struggled to get him to answer questions about the alleged fraud. The candidate said he could not recall specifics.

But when asked, in general, whether investors buying a controlling interest in a company should disclose to its owner that they intend to take it public and charge investment banking fees, Simon defended his firm’s conduct. “Once you sell control of your company, most businesspeople understand that they run a risk, and the risk that things are done without their consent,” he testified. “There are some times when we get outvoted too, and it’s not pleasant. But it happens.”

Simon’s insistence that he played no major role in decisions on Pacific Coin does not square with the recollection of others at William E. Simon & Sons.

“Mr. Simon was very concerned about the future of the pay phone industry, and that the technology was coming in quickly and would replace pay phones,” an associate at the firm, Henry Brandon III, testified. He said Simon was “the one person I remember being vocally against it.”

“The gist of it was ‘I’m going to let this one go through, but I am concerned about these factors,’ ” Brandon said.

Yet in an interview earlier this year, Simon said that his wife opposed the investment because of the growing prevalence of cellular phones, but that he told her “there’s always going to be a need for pay phones.”

Beyond Pacific Coin, Simon’s lack of knowledge extended to matters central to the operation of his family’s firm--and to distribution of the money it makes. Anthony C. Duffy, a lawyer for Hindelang, asked Simon whether he recalled his share of William E. Simon & Sons.

“No,” Simon replied.

“Was it more or less than 50%?” Duffy asked.

“I’m sure it was less than 50%, but I just don’t know what it was,” Simon testified.

Simon’s inability to answer basic questions about his firm poses a significant political problem for a candidate who promotes himself as a successful businessman. The main rationale that he offers for his candidacy is that his management skills are stronger than those of his Democratic opponent, Gov. Gray Davis.

And the pay phone court case is not the first to raise questions about Simon’s business acumen.

Records in another case show that when Simon was on the board of directors of the now-defunct Western Federal Savings & Loan, regulators rebuked the board for lax supervision of management. Simon has argued that it was not the board’s duty to supervise management despite federal rules to the contrary.

In the pay phone case, political concerns were never far from the courtroom. For months, attorneys for Simon fought to quash Hindelang’s subpoena requiring him to testify in the pay phone case. They called the subpoena “unreasonable, oppressive and intended to harass.”

“Simon is the Republican candidate for the governorship of California, and his availability is extremely limited,” they wrote in court papers.

They also said Simon had “no direct personal knowledge of any subjects” relevant to the court case.

A judge refused to quash the subpoena. But Simon’s lawyers--in their effort to distance the candidate from the case--succeeded in getting the court to delete his name from a document that went to the jury as evidence.

An important question now is whether there is more to Simon’s history as an investment banker that could disrupt his campaign. For example, when he allowed reporters to look at his tax returns from 1990 to 2000 for a few hours last week, his state tax returns for 1995 were missing.

“They are being aggressively looked for,” Simon spokesman Mark Miner said Thursday. “They were misplaced. There’s nothing more to it than that.”

The Simon campaign has refused to let reporters take a second look at his tax returns.

A host of questions raised by the one-time glimpse remain unanswered.

The day after the viewing, for instance, Simon’s chief strategist Sal Russo could not identify the nature of Chiles Offshore--a company from which Simon claimed a $190,000 investment loss. Russo also could not explain a long list of other investments disclosed in the tax records.

Eight days after Russo pledged to explain them, the campaign has yet to do so.