Records Belie Simon on Fraud Case

As he campaigns for governor, Republican Bill Simon Jr. says he played almost no role in the business fiasco that led a jury last week to levy $78 million in damages against his family’s investment firm.

He casts himself as a peripheral player in the William E. Simon & Sons investment of $16.5 million in the pay phone company of Paul Edward Hindelang Jr., a convicted drug trafficker who won the Los Angeles fraud case.

But court records show Simon, who personally lost more than $1 million in the deal, participated in every stage of the partnership:

* Simon, then executive director of the family firm, met Hindelang after the Pacific Coin founder chose William E. Simon & Sons from a group of suitors competing to invest in his pay-phone company.

* Simon was co-chairman of the William E. Simon & Sons committee that reviewed and signed off on the Pacific Coin investment in February 1998.

* As Pacific Coin sank into financial trouble, Simon detailed his concerns in writing. When executives at William E. Simon & Sons told him Pacific Coin needed $2.5 million to meet debt payments, Simon wrote: “How about we make some money first.”

* Simon commissioned a private investigation of Hindelang in December 1998, after the Wall Street Journal reported that Hindelang had agreed to forfeit $50 million in illegal drug profits. Simon picked a firm led by a former colleague at the Manhattan U.S. attorney’s office. It found Hindelang had pleaded guilty in 1981 to charges of smuggling 500,000 pounds of marijuana into the United States. Simon said he had been unaware of Hindelang’s criminal record.

* Months later, Simon personally assured a Pacific Coin creditor, Bank of America, that William E. Simon & Sons still strongly supported the company despite a sharp drop in pay-phone revenue. The bank and other lenders ultimately seized Pacific Coin for failure to pay its debts.

After the jury’s decision last week, Simon said he “had nothing to do with” Pacific Coin. He also told reporters, “Frankly, I had very little involvement with this.”

Jeff Flint, a senior Simon campaign advisor, said the candidate had accurately characterized his involvement in Pacific Coin. “He’s been very candid,” Flint said.

Still, fallout from the partnership with a man Simon calls “precisely the kind of criminal I used to pursue” threatens to undermine Simon’s contention that his business acumen prepares him to lead a state with the world’s fifth-largest economy.

Simon’s attempt to distance himself from the Pacific Coin deal also recalls his earlier efforts to play down his role at Western Federal Savings & Loan, a thrift seized by the government in 1993 at a cost of $122 million to taxpayers.

Given the timing of the Pacific Coin verdict--14 weeks before the election--it has become a central focus of the governor’s race, complicating Simon’s effort to impugn the integrity of his Democratic rival, Gov. Gray Davis. Simon already was facing a tough challenge, as an investment banker seeking public office for the first time in a political climate dominated by corporate scandals.

For Simon, a conservative who trumpets his background as a prosecutor, the Pacific Coin case is especially harmful because it shows he did business with a former drug trafficker who served 30 months in prison. Since the verdict, Simon has struggled to contain the damage.

“When I was a federal prosecutor, I fought to keep drug kingpins off our streets through asset forfeiture and enforcement of our criminal laws,” he said in a statement, “and I certainly am intent on keeping them out of any businesses that I am involved in.”

He said his firm “engaged a number of independent consultants to conduct due diligence” on Pacific Coin, but the background check on Hindelang only “went back 10 years.”

“His conviction went back a little bit longer than that,” Simon told reporters.

At a Superior Court hearing Monday, William H. Lancaster, a lawyer for William E. Simon & Sons, urged Judge James C. Chalfant to set aside the verdict. The case affects “the politics of the state,” he said.

“At this stage,” the judge responded, “I really don’t think I should be concerned about that.”

*

Bill Simon Jr. met Ed Hindelang for the first time in late 1997 at the William E. Simon & Sons office in Westwood, and the two would later play tennis in La Quinta, according to Hindelang’s lawyer, Geoffrey Thomas.

Twelve years after his release from the federal prison camp in Lompoc, Hindelang was a wealthy Santa Barbara entrepreneur who kept quiet about his criminal past. He owned and ran Pacific Coin of Van Nuys, one of the biggest independent pay-phone companies in the West. He started with 14 pay phones in 1986, but now had 8,000 spread across Southern California.

The decision to put money into Pacific Coin was up to the Simon firm’s investment committee. Simon was its co-chairman. When the committee debated Pacific Coin, Simon raised questions about growing competition from cellular phones, according to Henry Brandon III, an executive at Simon’s firm.

“It was a big concern to him,” Brandon testified.

Simon and the rest of the committee approved the deal anyway. In February 1998, an investment group led by William E. Simon & Sons took control of Pacific Coin. The new owners kept Hindelang, who retained an interest in Pacific Coin, as chief executive officer.

In the fraud case he later filed, Hindelang argued that the Simon investors concealed from him--until the last minute--their plan to charge Pacific Coin several million dollars in investment banking fees. The Pacific Coin acquisition produced more than $1 million in fees for William E. Simon & Sons, but the firm denied hiding its intent to charge them.

Also hidden from Hindelang--fraudulently, the jury found--was the Simon group’s high-risk plan to borrow tens of millions of dollars to expand Pacific Coin, then take it public a few months later in a stock offering. Had it worked, the plan could have made the Simon investors a fortune.

Two months after the Simon group took control, Pacific Coin borrowed $42 million to buy Golden Tel, a company with 5,000 pay phones, mainly in Las Vegas. The deal produced $390,000 in fees for William E. Simon & Sons.

But flaws in the strategy quickly emerged. A slowdown in pay-phone revenue made a stock offering less and less likely. Somehow, Pacific Coin needed to keep its lenders at bay. A request for money landed on the desk of Bill Simon Jr.

*

The internal William E. Simon & Sons memo, dated Sept. 15, 1998, would be the clearest record of Simon’s personal engagement in the Pacific Coin mess.

The confidential memo, written by two of the firm’s investment managers, chronicled Pacific Coin’s growing financial troubles. It recommended that William E. Simon & Sons put another $2.5 million into the company for debt payments. Simon is the first of nine executives named on the cover page as recipients of the memo.

“I would like to spend some time understanding this situation,” Simon wrote at the top of the memo, later introduced in court. “When it rains, it pours.”

Simon underlined 13 passages in the 10-page memo.

“This is interesting,” he jotted in the margin next to a section that reported a $3-million shortfall in pay-phone revenue.

On the following page, the authors said the use of pay phones had dropped sharply when the price per call rose from 20 cents to 35 cents. “Interesting,” Simon scribbled again. “I wonder how much of this is due to mobile phones.”

The memo projected a future revenue loss of up to $6.9 million. “This is big,” Simon wrote.

It reported a plan to sell the company’s Texas pay phones for $3 million. “Was this disposition part of the original game plan?” Simon wrote.

Simon also learned from the memo that the cost of installing new Golden Tel phones at the Bellagio and other Las Vegas casinos was straining Pacific Coin’s ability to pay its debt. Money from the phones, it turned out, would not come in for months.

“Didn’t we know about this?” Simon scrawled in the margin.

Simon raised doubts about a plan to persuade banks to restructure Pacific Coin’s loans. “They will probably say no,” he wrote.

The memo reported that Pacific Coin had to make a $2-million debt payment within two weeks. “Wow!” Simon wrote.

On the page outlining how much Pacific Coin needed immediately from William E. Simon & Sons, he jotted, “How about we make some money first.” Simon also inquired about fellow Pacific Coin investors: “Did Tom and Bill put up? How much?”

Despite his interest in such details, Simon, whose firm ultimately agreed to put up the requested money, testified under oath in May 2002 that he recalled nothing about the memo and the things he wrote on it. Anthony C. Duffy, a lawyer for Hindelang, asked Simon if his notes reflected his concerns about Pacific Coin.

“You know, I just can’t say, because I don’t really remember reading the memo,” Simon testified in the videotaped deposition.

Simon read each of his handwritten notes aloud, but said the document “doesn’t refresh my memory.”

Was Simon concerned that the Pacific Coin investment was not going well?

“You know, I just don’t remember,” he testified.

What did he mean by “when it rains, it pours”?

“I don’t know.”

Why did he find the $3-million shortfall “interesting”?

“I just don’t remember what I was thinking.”

Did he recall learning that the use of pay phones was dropping?

“I don’t remember reading the document, so I can’t be quizzed on the contents of the document.”

Simon was not entirely forgetful. Asked whether he recalled that he “wanted to see some money being made out of this company before you put any more capital in,” he responded: “I think that’s a fair statement.”

Simon said he could not recall talking to other executives at his firm about Pacific Coin’s troubles, nor whether anyone answered his handwritten questions. Simon said he would normally keep asking such questions until he received a satisfactory response, but added: “I’m a nice fellow. I might go away at some point.”

*

A week before Christmas 1998, the Wall Street Journal brought disturbing news: Hindelang had been part of a Colombian marijuana smuggling ring in the late 1970s, and two decades later he had agreed to forfeit $50-million in drug profits to the U.S. attorney’s office in Miami.

Simon commissioned an urgent background check on Hindelang.

“I wonder about the truth of things that appear in the press,” Simon recalled in his deposition. “And so I thought it was useful to try to figure out what exactly was happening and whether or not, you know, what they said in the article was accurate.”

At Simon’s behest, William E. Simon & Sons hired a New York investigation firm, Decision Strategies/Fairfax International, where Phil Stern, a former colleague from the Manhattan U.S. attorney’s office, was senior managing director.

Stern faxed his confidential report on Hindelang to Simon’s Pacific Palisades home. The New York Times, Associated Press and United Press International had reported the news in stories now rolling through Simon’s fax machine: Hindelang was indeed a convicted drug trafficker.

He had been indicted in Louisiana for importing 500,000 pounds of marijuana and conspiring to import another 150,000 pounds. The dope arrived in freighters off the Florida coast, then shipments were transferred to smaller fishing and recreational boats for the final journey to the U.S. shore.

When Hindelang pleaded guilty in 1981, he agreed to forfeit $640,000 in drug proceeds. But he had hidden millions more, some of it in Swiss bank accounts. By the late 1990s federal agents had tracked it down. So in December 1997--at the same time the Simon partnership in Pacific Coin was taking shape--Hindelang had flown to Miami to meet with federal prosecutors and negotiate the deal to forfeit $50 million.

In the midst of those secret talks, the Simon group had approved a five-year employment agreement for Hindelang to remain as chief executive at Pacific Coin. Upon word of the forfeiture, he was suspended, then fired months later.

Hindelang’s criminal lawyer, Harlan Braun, said no one from the Simon firm had asked the Pacific Coin founder whether he had any felony convictions, and it was not information he was required to volunteer nearly two decades later.

In Hindelang’s absence, Pacific Coin deteriorated. Debt problems worsened. Simon told one lender, Bank of America, that Pacific Coin’s investors still strongly supported the company, according to a bank document. But the lenders not only tightened credit on Pacific Coin, they also blocked the Simon firm from further depleting the company by collecting investment-banking fees.

Finally, in December 2000, the lenders seized Pacific Coin, wiping out the investments of Simon, Hindelang and their partners.

By Hindelang’s account, the Simon group abandoned the company to “take advantage of the tax deductions from the resulting losses.” Simon’s personal income tax returns show he wrote off $1.2 million in Pacific Coin losses in 1999 and 2000, but a spokesman denied that he neglected the company.

*

For the Simon campaign, Hindelang’s lawsuit was fraught with political danger.

In October, Hindelang’s lawyers subpoenaed Simon for a deposition. Six months later, after his surprise victory in the Republican primary, Simon’s lawyers tried to quash the subpoena, saying Hindelang was trying to embarrass and harass a candidate who was “at best peripherally involved” in Pacific Coin. Simon’s time was “extremely limited in pursuit of the state’s highest public office,” his lawyer, Brent M. Finch, wrote in court papers.

Hindelang’s lawyers, Duffy and Ronald M. Oster, argued that Simon was “directly involved in all stages of the Pacific Coin investment.” Simon’s effort failed and he was forced to testify May 28 and 29 in a videotaped deposition. His testimony was condensed into a short videotape for the jury.

Had he ever met Hindelang?

“I have,” Simon testified.

Did Simon participate in the decision to invest in Pacific Coin?

“I don’t remember.”

Did anyone tell him whether the Simon firm had lost its investment in Pacific Coin?

“No. Not to the best of my recollection.”

In the end, because of a tight trial schedule, Hindelang’s lawyers let the case go to the jury without playing the Simon video. The jury ordered Simon’s firm to pay $13.3 million in compensatory damages and $65 million in punitive damages to Pacific Coin Management, a company owned almost entirely by Hindelang.

The jury rejected a claim by the Simon investors that Hindelang had defrauded them by concealing his criminal record.

After the trial, Simon called the verdict “fundamentally flawed” and vowed to appeal. He told reporters that the trial boiled down to whether jurors took the word of a former drug trafficker over that of William E. Simon & Sons.

“The jury believed Hindelang,” Simon concluded. “I think that’s it in a nutshell.”