Court Rules for Simon in S&L; Case Davis Used as Basis for Attack Ads

Former gubernatorial candidate Bill Simon Jr. and other investors in a defunct savings and loan have won a $305-million judgment against the U.S. government in a case featured last year in campaign attack ads by Gov. Gray Davis.

Simon’s court victory bolsters the arguments that he made last year to counter Davis’ accusations that Simon had caused the collapse -- and taxpayer “bailout” -- of the Marina del Rey thrift, Western Federal Savings and Loan.

Judge Emily C. Hewitt of the U.S. Court of Federal Claims in Washington upheld the Simon investors’ claim that the government had caused the failure of Western Federal, wiping out their investment in the thrift.

In a March 17 opinion, she awarded $305 million in damages to Westfed Holdings Inc., the company that owned Western Federal.

Simon, a major Westfed stockholder, was on the board of directors at both Westfed and the thrift. His family lost its entire $40-million stake in Western Federal. It was not immediately clear how much of the $305 million might go to the Simons.

In a memo last week to employees at his investment firm, William E. Simon & Sons, the former Republican nominee for governor called the judgment “extremely favorable.”

“In short, we were completely vindicated after a lengthy court battle,” he wrote. The Democratic governor “used this case to personally attack me and my family, as well as our extended family here at the firm.” He called the governor’s charges “totally false.”

Simon’s association with the failed S&L; was the centerpiece of Davis’ effort to cast the Republican as an incompetent businessman who could not be trusted to run California. A main tenet of Simon’s campaign was that he was “a successful businessman.”

When Simon “directed” Western Federal, one Davis ad said, the thrift “made bad loans, went belly-up and was seized by the federal government.” The ad, the first of several that raised the topic, blamed “Simon’s mismanagement” for the taxpayer “bailout” of the thrift. It also mocked Simon for trying to recover his money in court: “On top of it all, now Simon is suing the government, asking taxpayers to pay him back his investment.”

Garry South, chief strategist of the Davis reelection campaign, stood by the criticism, saying that Simon had tried to play down his role at Western Federal. South said the S&L; remains a demonstration of Simon’s pattern of taking credit for business successes while denying blame for failures.

“If this guy thinks this is going to be vindication in the eyes of the typical voter if he runs for office again, all I can say is good luck to him,” South said.

In their lawsuit, the Simon investors argued successfully that the government had broken the agreements laying out terms of their 1988 purchase of Western Federal.

Specifically, Congress and thrift regulators had toughened accounting rules in response to the S&L; scandal of the 1980s, then applied those stricter standards improperly to Western Federal in violation of the contracts, the suit said.

Hewitt called that breach “a substantial factor” in the Simon group’s investment loss. She said Western Federal “admittedly had other troubles,” including bad loans, “uneven internal controls, and a weak economy.” But Western Federal, she found, “would not have been seized” if the government had not broken its word by changing the rules.

The Simon lawsuit is one of 120 filed against the government by S&L; investors in similar circumstances. Justice Department spokesman Charles Miller said the judgment in the Simon case was “one of the highest awards to date.” He declined to say whether the government would appeal.

Hewitt’s judgment came more than 10 years after the Simon investors filed their lawsuit. Given the possibility of an appeal, they “shouldn’t be planning on getting that money any time soon,” said banking consultant Bert Ely, an expert on the S&L; crisis.

If the judgment survives, it would more than triple the $122 million cost to taxpayers for the seizure of Western Federal.