Fraud Verdict Stuns Simon’s Backers Across the Country

Fretful Republicans from California to Washington were reassessing their commitment Thursday to the gubernatorial candidacy of Bill Simon Jr., as the GOP hopeful struggled to contain the political fallout from a jury’s multimillion-dollar fraud verdict.

Simon dismissed the $78-million judgment at a campaign stop in Los Angeles, calling the decision by 12 jurors “fundamentally flawed.” He predicted it would eventually be overturned by the trial judge or an appeals court.

Strategists for Democratic incumbent Gray Davis redoubled their attack on Simon, launching a new statewide television ad criticizing his business ethics and accusing him of dodging taxes. “If we can’t trust him in business, how can we trust him in the governor’s office?” the spot asked.

More significant was the silence emanating from the White House and national Republican Party leaders, who would normally spring to the defense of their California standard-bearer.

“The bottom line question is [whether] everyone is walking out now,” said one GOP official. “I don’t think anybody knows the answer to that. That question has not been answered yet, yes or no.”

The White House, meantime, was gauging the political damage to determine whether President Bush should proceed with plans for a California swing and a joint fund-raising appearances with Simon later this month.

The fraud verdict against Simon’s firm--described as “the f-bomb” by one Republican strategist in Sacramento--was the latest blow to a campaign that has stumbled repeatedly since the first-time candidate emerged as the surprise winner of March’s GOP primary.

Rapid staff turnover, infighting among his top strategists and a prolonged controversy over the release of Simon’s personal income tax returns have all sapped his candidacy and hurt his fund-raising.

The fraud verdict poses a particular threat to Simon, because it strikes at the rationale for his candidacy: that his business acumen has prepared him to be governor of the nation’s largest state.

That strategy had grown perilous even before the verdicts were rendered, as headlines about financial debacles at Enron, WorldCom and other companies shook faith in corporate America.

One Republican strategist described a “meltdown” in Simon’s support among GOP donors, even before the fraud verdict produced front-page headlines across the state Thursday.

A Times analysis of Simon’s fund-raising shows a dramatic decline in large contributions since Bush headlined a series of fund-raisers in the spring--underscoring the import of the president’s visible support for the GOP nominee.

Simon’s campaign took in an average of $26,000 a day in donations of more than $5,000 in July--a third of the rate for June--and the number of donors also dropped precipitously.

While some of the June total is likely to have reflected an effort to boost donations by month’s end, when holdings had to be reported to the state, the decline was still striking. But the political effect of the verdict was not limited to Simon’s campaign.

His planned visit puts Bush in an awkward position as he attempts to bolster his party in California and his own credentials on corporate accountability.

“If he doesn’t go [to California], conservatives will scream foul and Simon supporters will say the president promised to help him and broke his word,” said Stuart Rothenberg, an independent analyst and election handicapper in Washington.

“If he goes, then the president has painted a target on his forehead for Democrats to say he talks about punishing white-collar criminals and corporate executives who commit fraud, but raises money for them.”

The latest problem came unexpectedly Wednesday in Los Angeles Superior Court. The case involved Simon’s family investment firm and a deal to take control of a pay telephone company.

The jury found that William E. Simon & Sons had committed fraud and other misconduct and ordered the firm to pay $65 million in punitive damages, in addition to $13.3 million in compensatory damages assessed a day earlier. Simon himself was not named as a defendant.

Campaigning Thursday in Los Angeles, Simon sought to defuse the controversy at a tense news conference at John C. Fremont High School.

Simon insisted “there was no fraud” in the transaction and expressed confidence the verdict would be overturned. While he said the ruling was “fatally flawed,” he declined to say how. “I’ll leave it to the lawyers to argue it out in court,” he said.

As for the political consequences, Simon called the verdict little more than “a bump in the road,” and fairly taunted Davis to try to make more of it.

“I am sure now that Davis’ people are busily making new ads, and I hope they do,” Simon said. “Because if they want to attack me now for a bad verdict and take the side of a convicted drug trafficker ... then Davis is welcome to choose that side.”

Simon was referring to the plaintiff in the fraud case, P. Edward Hindelang of Santa Barbara. Hindelang, who sold most of his phone company, Pacific Coin, to the Simon investment firm, had been convicted of marijuana trafficking in the 1970s.

In reaching its verdict, the Superior Court jury dismissed a claim by the Simon investors that Hindelang had defrauded them by concealing his conviction.

Just as Simon forecast, Davis took to the airwaves Thursday with yet another ad attacking his rival’s ethics--only this one involved Simon’s connection with a failed savings and loan and an offshore tax shelter under investigation by the Internal Revenue Service.

The governor himself brought up the court case at a stop in Sacramento, likening the verdict and IRS investigation to the corporate scandals involving Enron and WorldCom.

“You don’t get socked with [$78 million in damages] just for jaywalking,” Davis told reporters after a speech to Latino business and community leaders.

“These are the kind of [issues] that have turned people off,” Davis went on. “I think people are in no mood for the kind of businessman with questionable ethics.”

While Davis’ comments were predictable, more worrisome for Simon was the criticism from his fellow Republicans, who were stunned by the jury’s decision--as were some of Simon’s top advisors.

“Given the size of the verdict, it makes you wonder--both from a litigation perspective and certainly from a political perspective--why this case wasn’t settled,” said Arnold Steinberg, a GOP strategist who has worked for a number of wealthy businessmen-turned-candidates, including former Los Angeles Mayor Richard Riordan.

“I don’t understand how the campaign could be blind-sided by long-standing litigation whose outcome is decided by a unanimous jury,” Steinberg said.

Or as one Republican strategist in Washington put it, “If you’re fined $78 million, you did something pretty bad. That’s the bottom line.”

Not all the faithful were given over to gloom.

“It’s not over. The fat lady hasn’t sung,” said Kevin Spillane, a GOP strategist in Sacramento who has been critical of the Simon campaign in the past. “This race is going to be competitive to the very end, simply because Gray Davis remains very unpopular. And this lawsuit doesn’t impact Californians in the same way Gray Davis’ mistakes and fund-raising abuses have.”

And uncomfortable as it may be, some say Bush has little choice but to follow through and honor his commitment to Simon. Invitations have already gone out for this month’s events, hosted by businessmen Alex Spanos and David Murdock.

Invitations for the Murdock event ask for contributions of as much as $100,000 for “preferred seating” and two photographs with Bush at Murdock’s Ventura farm.

“The worst thing Bush could do now is cut and run,” said Scott Reed, a Republican consultant in Washington.

“Republicans have been demoralized in California over the last few elections. Bush has an opportunity to put California back in the Republican column, and the Simon campaign is a steppingstone,” he said. “They have to help Simon. They have no choice.”

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Times staff writers Michael Finnegan, Gregg Jones and Doug Smith contributed to this report.