Simon’s Success Story Is a Secret

Day after day, Republican gubernatorial nominee Bill Simon Jr. describes himself as a “successful businessman.”

The proof, he says, is the high rate of returns on investments by his family’s financial firm, William E. Simon & Sons. But when Simon is asked to specify how high they are, he responds: “They’re private,” “I can’t give them out,” and “I’m not allowed to talk about it.”

The absence of concrete data to back up Simon’s self-proclaimed success poses a growing problem for his campaign, political analysts say. That is particularly true at a time of deep public skepticism about the integrity of corporate America, with WorldCom, Tyco and other companies engulfed in scandal.

On Friday, Simon’s difficulty in trying to leap from business to government was further complicated by news, first reported in the Wall Street Journal, that the Internal Revenue Service has named him as a beneficiary of a possibly illegal tax shelter.

The disclosure only underscored Simon’s challenge in convincing voters that secret balance sheets would prove his acumen--if only he could make them public.

“I don’t see why people would believe him if he doesn’t provide evidence,” said Ann Crigler, director of the Jesse Unruh Institute of Politics at USC. “He’s got to substantiate that.”

Simon and his advisors say securities rules and confidentiality agreements with clients bar them from making public the records that would demonstrate his success.

But they recognize that those constraints clash with Simon’s political needs. Indeed, a key rationale of his candidacy is that Democratic Gov. Gray Davis has mismanaged the state, and that Simon, as a successful businessman, could do a better job.

“There would be nothing better for the campaign than for Bill to be able to tell you what the rates of return are,” said Jeff Flint, a senior Simon campaign advisor.

The closest the campaign has come so far is to say that the overall rate of return on investments by William E. Simon & Sons since 1994 has averaged more than 20% per year.

But the campaign used a highly subjective methodology to calculate that figure, declined to release documentation to back it up and would not provide specific annual returns. The campaign also would not divulge any information on investment performance from 1988, when Simon joined the firm, to 1994.

Simon worked full time as a top manager at the firm for 14 years. He has taken a leave of absence for the duration of the campaign.

In the normal course of business, William E. Simon & Sons does not track its global year-to-year returns, according to the firm. Instead, it monitors returns only by specific investments, said Michael Lenard, a managing director of the firm. Its $1-billion portfolio is a labyrinth of partnerships, corporations, real estate projects, bonds and other securities.

Lenard did not dispute that average returns have exceeded 20% per year since 1994, but said federal rules bar disclosure of specific numbers. Many clients, he added, “don’t want to be known,” so they require the firm to keep investment deals private.

“They like to be under the radar; we like to be under the radar,” Lenard said.

But as a candidate for governor of America’s most populous state, Simon has drawn intense scrutiny to the firm from the news media and the Davis reelection campaign.

Davis researchers have combed through court files and reams of other documents on William E. Simon & Sons in search of material to undercut Simon. The Davis campaign is spending millions of dollars to publicize its most damaging findings in television ads: a savings and loan that “went belly-up,” a shipping company that “lost millions,” Simon ties to an Enron partner “under federal investigation” for questionable accounting practices.

Garry South, chief strategist of the Davis campaign, called Simon an “idiot kid” who “mucks up everything he gets his mitts on,” then denies responsibility for his business failures.

“The guy is like a little kid in a room with a broken lamp who swears up and down that he had absolutely nothing to do with it,” South said. “That lamp fell off the table all by itself. He has no idea how it occurred.”

Simon advisors say the Davis team has grossly distorted the Republican candidate’s business record and deny every accusation in the governor’s ads.

“They’re completely false and misleading,” Flint said. “The voters do not believe that Bill Simon has been a bad businessman. The voters understand instinctively that Bill Simon has been a good businessman. It’s clear to them that he has been successful.”

With no hard data to bolster such assertions, Simon has struggled to establish their validity.

Now, the storm of allegations on corporate shenanigans, from Arthur Andersen to Martha Stewart, has made the task harder.

Ross K. Baker, a political science professor at Rutgers University, said the political environment “has never been less auspicious” for first-time candidates who put boardroom experience at the top of their resumes.

“The climate since the Enron implosion began has become very toxic and very hostile to people from corporate America,” he said.

Simon could testify to that on Friday, when a story on the front page of the Journal--complete with a drawing of Simon--said the Internal Revenue Service had named him and others as beneficiaries of possibly illegal tax shelters. Simon was not personally accused of wrongdoing, but the story came at a time when Davis has been hammering him for refusing to release his tax returns.

“This is a very simple question,” Davis said Friday. “Did he use offshore tax shelters to avoid paying taxes or didn’t he? I think we all suspect that he did, or else he would have released his tax returns by now.”

Simon, surrounded by television cameras and reporters Friday after a hotel speech in Universal City, was asked if he had known about the tax shelters, but did not answer. He denied any wrongdoing and dismissed the matter as a dispute between the IRS and the accounting firms that set up the shelters.

“Whatever the results of that dispute are, we’re certainly happy to live with,” he said.

Over the course of the campaign, Simon, 51, has laid out his qualifications to be governor, often citing his longtime charity work and his three years as a Manhattan federal prosecutor in the 1980s. But above all, he points to his work at William E. Simon & Sons.

In speeches, he frames the governor’s race as a choice between a “successful businessman” and a “career politician.” Simon’s ads promote him as a “successful businessman.” His Web site biography includes a page titled “Successful Businessman.”

At a lunch with reporters last month, Simon described his work at William E. Simon & Sons as the essence of his success.

“We started from scratch in terms of our operations,” he said. “We built up three different groups of investment professionals. We built a back office. We built a support staff of investment professionals, and we believe we’ve achieved good rates of return.”

What are the rates of return?

“They’re private,” he said. “I’m not allowed to talk about it.”

But he went on to say the returns were “certainly in excess of the benchmarks, like the stock market or the bond markets.”

The firm, based in New Jersey, was co-founded in 1988 by former U.S. Treasury Secretary William E. Simon and his sons, J. Peter Simon and Bill Simon Jr.

For the first six years or so, its activities were limited to managing the family’s vast wealth, according to Lenard, the managing director.

The Simon brothers took control of the firm from their father in the mid-1990s. In 1995, it was restructured as a private investment firm. While still managing the Simon family fortune, it also raises money from pension funds, insurance companies, foundations, wealthy individuals and other sources. It invests the money in stocks, bonds and other areas. Bill Simon Jr. has run the firm’s Los Angeles office since 1990.

As a privately owned firm, all but a tiny portion of its business is closed to public scrutiny. But Simon’s firm must abide by federal rules that govern the private sale of securities to investors. One rule prohibits private firms such as the Simons’ from selling securities through solicitation or advertising in the media. William E. Simon & Sons and similar firms have interpreted that rule as a ban on public disclosure of investment returns.

U.S. Securities and Exchange Commission spokesman John Heine declined to comment on the rule.

But Marcel Kahan, a securities law professor at New York University Law School, said the rule “does not trump the 1st Amendment” in a political campaign. He said it was very unlikely that Simon would be breaking the rule by disclosing specific rates of return. He also said it was odd that Simon and his aides had told the news media that the firm’s returns were “good” or, as Flint put it, “extremely favorable,” but refused to give specific numbers.

Simon “wants to have his cake and eat it too,” Kahan said.

Aside from rates of return, Flint said another sign of Simon’s success was the profusion of outside investors who do business with the firm.

“When very savvy institutional investors trust Bill Simon’s firm to invest their money, I think that speaks volumes about the success, particularly in the rate of return,” he said.

Flint would not say how much of the firm’s money comes from the Simon family and how much comes from outside investors.

The Simon campaign has declined to identify any of the firm’s clients, citing confidentiality pacts.

As another mark of success, Flint called Simon a visionary in California real estate. But he revealed only two of the firm’s more than 180 real estate investments--both of them Hollywood renovation projects: the Grafton Hotel on Sunset Boulevard and an office building at Hollywood Boulevard and Vine Street.

As for the firm’s average overall returns of more than 20% per year since 1994, Flint said the figure applies to gains on investments that were sold, along with the estimated change in value of assets that were easy to appraise.

He declined to say what portion of the firm’s assets was easy to appraise and what portion was not.

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Times staff writer Matea Gold contributed to this report.