William E. Simon is best known for making a fortune in leveraged buyouts after a star turn as an outspoken, conservative Treasury secretary in the 1970s. So what’s he doing in the dupe’s role in two recent Ponzi schemes?
The hard-charging financier is also notorious for his hubris, harshness and impatience. So what’s he doing quietly offering Communion to cancer and AIDS patients in New York or assisting sick pilgrims at Lourdes?
After more than two decades in the public eye, the 68-year-old Mr. Simon still holds substantial surprises. For one thing, he is coming into focus as a less savvy investor than his reputation suggests. Yet he is also emerging as less cold-hearted and more reflective than he has appeared to many of his critics. And though he has been out of politics for many years, he clearly hasn’t lost his taste for it, a fact that may yield one more surprise — in 1996.
Mr. Simon’s entanglement in the recent scam involving the Foundation for New Era Philanthropy appears to reflect both his growing charitable inclinations and his unexpected financial sloppiness. Last year, New Era’s mastermind, John G. Bennett, told Mr. Simon that New Era had a stable of anonymous donors who would match his contributions to charities — and thus let Mr. Simon give away twice as much as he otherwise might. All he had to do was deposit his money with New Era for six months.
Though a double-your-money offer in which the contributor must turn over funds has all the earmarks of a common fraud, Mr. Simon wrote out five checks to New Era, totaling more than $3.2 million, between January and May of this year. It turned out that the matching donors didn’t exist, and Mr. Simon is currently among hundreds of individuals and organizations waiting in line in bankruptcy court to get at least some of their money back.
Mr. Simon participated without personally examining the foundation’s financial records because, he says, he trusted Mr. Bennett, who appeared to share Mr. Simon’s religious convictions and devotion to good works. Moreover, several other friends of Mr. Simon in the world of philanthropy and finance were signing on as well. But for Mr. Simon, the New Era fiasco wasn’t an isolated misjudgment.
Seven years earlier, Mr. Simon had invested $5 million in Hedged-Investments Associates, a Denver-based fund, even though it never provided investors with audited financial statements. Like Mr. Bennett, James C. Donahue, the fund’s manager, presented himself as deeply religious. Although Mr. Simon withdrew his money before the fund collapsed in 1990 amid allegations that so-called profits were coming from the contributions of other investors, a bankruptcy trustee is still trying to get him to return any phony profits he may have derived. (A lower court has supported Mr. Simon’s contention that he owes nothing; the case is on appeal.)
Though these two Ponzi schemes are surely the biggest financial embarrassments of Mr. Simon’s career, they come in the context of a broader record of surprisingly lackluster investments in thrifts and real estate in the past decade. Considering this performance — which may even have reduced his net worth — why does Mr. Simon have a reputation as one of the great investors of our time? In a word, Wesray.
This was the pioneering leveraged-buyout company Mr. Simon founded with Raymond G. Chambers in 1981. By demonstrating that investors could make vast profits by acquiring divisions of large conglomerates and enhancing their efficiency, Wesray Corp. helped alter the basic ground rules of American business. It also made Mr. Simon fabulously wealthy.
In its most celebrated transaction, Wesray paid $80.5 million to purchase Gibson Greetings Inc. from RCA Corp. in January 1982. Messrs. Simon and Chambers together are believed to have put up just $1 million of the purchase price, borrowing the rest. When they took Gibson public at a valuation of $290 million in May 1983, each man pocketed about $70 million.
“It was really unbelievable. It was a phenomenon,” Mr. Simon recalls with a broad grin. According to an estimate by Mr. Chambers that reflects only some of the deals, the two partners earned a combined $300 million from Wesray. Mr. Simon, interviewed at his sprawling East Hampton, N.Y., summer home last month, wouldn’t comment on the amount.
But since the partnership came apart in 1986 amid recriminations between the two founders, Mr. Simon has been unable to recreate anything like Wesray’s glory days, despite his extensive resources and still-impressive energy and drive.
Not that he hasn’t tried. After leaving Wesray, Mr. Simon first set his sights on the Pacific Rim, publicly predicting that he would assemble a business empire akin to the great trading houses described in James Clavell’s “Noble House.” Forging a new partnership, this time with Gerald L. Parsky, a Los Angeles attorney who had worked for him as an assistant Treasury secretary, Mr. Simon pursued his pan-Pacific vision by acquiring several troubled savings-and-loan associations and a small bank.
Mr. Simon said at the time that the thrifts would be the foundation for a giant merchant bank. But it was apparent from the start that some of the elements that made Wesray so successful couldn’t be replicated. For one thing, while Wesray was able to finance almost all its acquisitions with money from large U.S. financial institutions, Mr. Simon now had to put up his own money and attract funds from other individuals. These included members of Saudi Arabia’s royal family, who remembered Mr. Simon’s role as the U.S. “energy czar” during the oil embargo in 1973.
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Mr. Simon’s Pacific strategy never really got off the ground. He and Mr. Parsky earned a multimillion-dollar profit from the purchase and sale of two Hawaiian financial institutions but, in 1991, Mr. Simon sent Mr. Parsky a one-page fax announcing that he was quitting the partnership. Although Messrs. Simon and Parsky have never fully explained the reason for the break, former colleagues suggest it involved personality clashes and Mr. Simon’s desire to increase the involvement of his two sons, William E. Simon Jr. and J. Peter Simon.
Mr. Simon purchased Mr. Parsky’s interests in the remaining financial institutions and, in October 1991, he and Bill Simon Jr. set up offices in the Marina Del Rey, Calif., headquarters of one of the thrifts, Western Federal Savings & Loan. But despite the Simons’ involvement in its management, Western was seized by federal authorities in 1993 because of what the authorities said was its inadequate capital base. Mr. Simon declines to comment on published reports that he lost $40 million on Western, but at the time of the seizure Bill Simon Jr. said the family had lost what he called a “substantial capital investment.”
The three Simons, whose company William E. Simon & Sons now has about 55 employees in Morristown, N.J., Los Angeles and Hong Kong, kept substantial stakes in three other California institutions, but these haven’t shown promise as building blocks for any kind of financial empire.
World Trade Bank, a single-branch company located in Beverly Hills, has lost money in each of the past three years, including $2.8 million in 1994, according to Federal Deposit Insurance Corp. documents. Its capital base is so marginal that it is subject to a consent decree with the Comptroller of the Currency limiting the bank’s growth. The Simons recently agreed to merge World Trade with another small financial institution, in a deal that would leave the family with a 20% interest in the new company.
The situation is even more dire at Southern California Federal Savings & Loan, a $1.7 billion institution also based in Beverly Hills. SoCal lost $49.1 million last year, according to Office of Thrift Supervision records. As of the end of March, the federal agency considered SoCal “critically undercapitalized.” In June, Mr. Simon arranged a $60 million capital infusion, the bulk of it from the Bishop Estate, a richly endowed Hawaiian trust, says Preston Martin, a Simon associate who served as SoCal’s chairman until he was removed at the time of the infusion. Mr. Martin says that Bishop has now displaced Mr. Simon as SoCal’s controlling shareholder.
Mr. Simon acknowledges that the thrift investments have been unsuccessful, but he now dismisses the importance of the companies he once predicted would grow into a great financial empire, calling them “those peanut little things.” As for the family’s losses, Bill Simon Jr. says, “It’s not as bad as it has been reported.” In fact, he says, when all the pluses and minuses are tallied, the family’s loss stands at just $7 million — “not a lot compared to our portfolio.”
The elder Mr. Simon blames the losses on federal increases in the capital requirements of his thrifts in violation, he says, of agreements he made with the government when he made the acquisitions. (An Office of Thrift Supervision spokesman declines to comment, citing pending litigation.) Analysts agree that rule changes were partly responsible for the state of Mr. Simon’s thrifts. But they say that his timing — considered a strong suit during Mr. Simon’s Wesray years — was also unfortunate: “Southern California has been disastrous over the past few years,” says Gareth Plank, a San Francisco-based thrift analyst with Rodman & Renshaw Inc.
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Real-estate development, another key component of Mr. Simon’s business, also has proved disappointing. In 1987, his company purchased an interest in The Hills, an 1,800-acre development that stretches across two New Jersey townships, Bedminster and Bernards. The project, of which about 3,300 of 5,200 planned units have been completed, is believed to be New Jersey’s largest planned-community development.
The Simons originally paid about $6 million to purchase a 12.5% interest in the development, according to Peter Simon, who adds, “We were involved in a very strong market at the time.” Saying his father thought the cash investment would be limited to the purchase price, Peter Simon adds: “It was supposed to be an annuity.”
Instead, the real-estate market collapsed soon after the purchase. When commercial banks virtually ceased making real-estate loans, the Simons and their partners in the project had to come up with millions of dollars in cash to cover the cost of developing the site. Peter Simon, who says the family now owns 33% of the development and has lent money to one of the other partners to cover his share of the costs, laments, “We’ve been writing checks because no one would lend.”
At this point, Peter Simon says, the family’s stake is “multiples” of the original purchase price. “It’s a very large investment for us,” he says.
Here again, the elder Mr. Simon’s timing has been problematic. He invested in the property near the peak of the 1980s real-estate boom, New Jersey developers say. John Kerwin, president of Hills Development Co. until Mr. Simon replaced him in 1992, says residential sales at The Hills — about $100 million in both 1986 and 1987 — dipped to about $40 million in both 1990 and 1991 as New Jersey’s recession turned into a real-estate-industry depression. The business has yet to recover: Peter Simon expects sales to run about $50 million this year.
The Hills could ultimately prove to be a profitable enterprise, but at this point Peter Simon calls it “a very difficult investment,” adding: “When I get a call from The Hills, it’s because they have a problem — and it usually means they want cash.”
Mr. Simon has done better with a throwback to his early years as a municipal-bond trader: William E. Simon & Sons Municipal Securities, a modest-sized municipal-bond trading and underwriting company based in Morristown. A brochure says the firm, which has 27 professionals and is 56% owned by the family, trades about $2 billion in bonds every month. Mr. Simon says the firm, with $10 million in capital, has been solidly profitable ever since it opened for business in 1990.
Mr. Simon also has investments in a wide array of companies that he and his sons don’t actively manage. According to a brochure provided by Mr. Simon, they include a group of Southern radio stations; Brothers Gourmet Coffees Inc., a coffee wholesaler and retailer; Premium Holdings Corp., one of the Midwest’s biggest hog producers; Atlantic Greenhouses Inc., a group of floral greenhouses in the eastern U.S.; Allied Waste Industries Inc., a garbage-management company; Andrew M. Carter & Co., a Boston-based bond investment firm; and a Washington-based restaurant chain called La Madeleine Inc.
Also, the Simons’ Hong Kong office, which was launched in 1991 in partnership with Indonesia’s wealthy Bakrie family, has acquired interests in a shipping company and an eyeglass manufacturer. Mr. Simon, who plans to visit Hong Kong this fall, says the shipping company has been steadily profitable. The Asian office is currently attempting to raise a $200 million investment fund, in which the Government of Singapore Investment Corp. has agreed to invest $50 million, according to a prospectus.
Because most of these companies are private — and the Simons won’t discuss the bottom line — it is difficult to make an independent judgment on the profitability of the family holdings. However, it is known that at least one company that was not listed in the Simons’ brochure has been unsuccessful: Weintraub Entertainment Group, an independent Los Angeles film-production company that filed for Chapter 11 bankruptcy-court protection in 1990. Mr. Simon dismisses the loss with a shrug: “It’s like drilling oil wells. I put in $750,000 or $1 million, and they went a full year without hitting anything. It’s pretty small in the scheme of things.”
More generally, some observers say, Mr. Simon’s prospects are hurt by the very diversity of his investments. Indeed, one former executive of William E. Simon & Sons says he left the firm for this reason. “By and large, Bill’s investing hasn’t taken on any particular theme in the last five or six years,” this former executive says. “Firms that have the best returns are the ones that have the most focus. You can only be an authority on so many kinds of deals and industries.”
Actually, Peter Simon says about half the family’s money is invested through a group of 30 outside investment managers. Mr. Simon acknowledges that many financial experts would criticize such a far-flung approach as inviting mediocrity. However, he says his money managers have outperformed the market over the past seven years and he believes they will continue to do so.
Still, in evaluating the Simons’ finances, some observers — including Forbes magazine, which attempts to rank the 400 wealthiest Americans — believe Mr. Simon’s wealth has declined since the Wesray years. In 1989 and 1990, Forbes included Mr. Simon on its “rich list,” estimating his net worth at $300 million. But the magazine dropped him in 1993, citing “bad investments.”
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The recent string of apparently unspectacular investments in thrifts and real estate has even caused some to reassess what really went into Wesray’s undeniable success; one revisionist point of view holds that the leveraged-buyout triumphs may have owed less to Mr. Simon’s good judgment and connections than to Mr. Chambers’s business savvy.
“Simon hasn’t done anything substantial since he broke up with Ray Chambers,” says Gerard L. Smith, an investment banker who until recently was co-head of mergers and acquisitions at Salomon Brothers and who advised Mr. Simon on several potential California thrift acquisitions. “He’s trying to prove to the world that Chambers wasn’t the reason that Wesray was so successful, but he was,” Mr. Smith adds.
Mr. Chambers, who now devotes most of his time to charitable activities, declined to be interviewed for this article. But in an angry letter to Mr. Simon that preceded their breakup by about a year, he suggested that he considered himself to be the crucial, unrecognized force behind Wesray’s success. “I never minded `being in the trenches’ and being responsible for getting the deals done and then making them work,” he wrote. “I’m the man who has been sincerely content to stay in your shadow and let you have the Wesray limelight.”
Mr. Simon asserts that his own vision and his ability to open doors were essential to the success of Wesray. Still, it now appears that, at the very least, the company’s triumph was more a collaboration than it was billed as at the time, when Mr. Simon was the public face of the operation.
Wesray also illustrates Mr. Simon’s long-term difficulty maintaining good relations with partners and employees. According to Mr. Chambers’s letter in November 1985, the two men had just had an argument over Mr. Chambers’s request that Mr. Simon treat Wesray employees more kindly. The letter suggests that Wesray’s breakup came as a result of Mr. Chambers’s unhappiness with Mr. Simon. “After our distasteful `conversation’ of Friday, I don’t think it would be fruitful to continue our relationship in its present form,” Mr. Chambers wrote. “I suggest that we either liquidate Wesray or reconstitute it.”
Mr. Simon says the end of the era of wildly profitable leveraged buyouts, rather than any personality clash, caused Wesray to break up. Of the letter, he says, “That’s under the heading of nitpicking.”
In any case, the letter seems to confirm what Mr. Simon’s friends and critics say is his most unattractive feature — the way he treats business colleagues. Secretaries are frequent victims. When one of them botches a telephone message or some logistical arrangement, Mr. Simon, who is fanatical about returning phone calls and letters, sometimes reacts explosively. Mr. Simon admits he has a hot temper, although he says it is never malicious. “There isn’t enough time for niceties,” he says. “I’m impatient.”
Barbara Jensen, who was Mr. Simon’s lead secretary for 23 years until she retired in 1989, says the main problem is Mr. Simon’s absolute intolerance of delay. “He has no patience, none at all. It’s unbelievable,” she says. “If everything is running all right, he’s fine; but if he thinks you’re not doing your job, he’s a bear.” Noting that many of Mr. Simon’s secretaries don’t last long, she adds: “He hollers a lot. If you take it to heart, you’re in trouble.”
A prominent businessman who sat on Citicorp’s board of directors at the same time as Mr. Simon and considers him a personal friend says Mr. Simon’s habit of telephoning repeatedly before the other person has a chance to call back is annoying. He also says Mr. Simon’s outbursts, far from being limited to low-level staffers, reached into Citicorp’s boardroom: “When things don’t go the way they should, Bill is very quick to let people know what he thinks. His interpersonal skills have suffered.”
The chief executive of a New York investment-banking company who also considers Mr. Simon to be a friend says, “I like him, but he’s a very difficult guy. Anyone who has a reputation for being difficult gives you pause.”
Mr. Simon also suffers lingering resentment from some of the people he encouraged to invest in exploratory oil wells in the late 1970s. These investors say Mr. Simon didn’t inform them that he was receiving ownership interests in successful wells, in apparent compensation for bringing them into the deals. When the operation collapsed in 1985, some investors considered, but rejected, the possibility of suing Mr. Simon for failing to disclose his separate deal. (Mr. Simon admits he should have done a better job of disclosing his deal, though he says it was legitimate.) Still, the incident isn’t forgotten, says one of the investors, John Zenko, who runs a Chicago-based publishing business: “People think he’s an edge player. I don’t think he’s a crook; he’s an alley cat.”
Yet there’s a warmer side to Mr. Simon that enables many of his colleagues to forgive his rough edges. Whatever strain existed between Messrs. Simon and Chambers in the mid-1980s seems to have disappeared since then. The two men co-own the building in Morristown from which Mr. Chambers runs his family foundation and Mr. Simon manages his company. Mr. Simon, who says he generally sees Mr. Chambers once a week, describes him as a “great friend.”
Despite his difficult reputation, Mr. Simon considers himself a highly principled man with a strong spirit of generosity — and is viewed this way by many friends and colleagues. Says longtime employee Mrs. Jensen, “The truth is he is a teddy bear.”
“He doesn’t like being the person people think he is,” says Mary Pat Fortier, another former longtime secretary who now considers Mr. Simon to be a friend. Although she says he is a “taskmaster,” she also says he takes it upon himself to make thoughtful gestures, big and small. When he heard of the death of a dog belonging to one of the John M. Olin Foundation’s secretaries, Mrs. Fortier says, he bought her a new one.
Mr. Simon has been president of the conservative foundation for almost two decades; the 26-page biography his office distributes overflows with foundation and charitable fund-raising work.
“I’m an interesting study, no doubt about that,” Mr. Simon says with a kind of bemused detachment. “I’m tough, I’m hard-driving, I have a temper, some people think I’m arrogant. Some of that is true, but I also know that I’ve helped a lot of people.”
For more than a decade, he says, he and his family (he has seven children) spent part of every Christmas Day at Covenant House, a home for troubled children in New York City, distributing presents and serving food. More recently, he says, the family has been making Christmas Day visits to a number of hospitals.
Mr. Simon, a Catholic, says his religious commitment grew after he made a pilgrimage to the French town of Lourdes, the location of an important shrine, in 1992. “He had an experience there, and it changed his life,” says the Rev. Maurice Chase, a Los Angeles priest who has gone to Lourdes with Mr. Simon. “It really hit him.” Mr. Simon says he plans to go to Lourdes every year for the rest of his life. Like other modern-day pilgrims, he works as a “helper,” assisting sick and handicapped pilgrims attend Mass and processions and enter a large stone bath that contains “Lourdes water.”
A few months after his first trip to Lourdes, Mr. Simon began working as a Eucharistic minister, serving Communion to patients at three New York-area hospitals, Memorial Sloan-Kettering Cancer Center, Morristown Memorial Hospital and the Terence Cardinal Cooke Healthcare Center in East Harlem. Jennifer Grey, an official at the Cardinal Cooke Center, says Mr. Simon was the first volunteer to ask to work in its 150-bed ward for AIDS patients, where he now spends about four hours every couple of weeks. “He doesn’t just give Communion,” Ms. Grey says. “Some people spend just a few minutes and move on, but he really spends time. He’s truly a comfort.”
At the same time, Mr. Simon seems to have become less involved in the details of his business life. Though in the early years Mr. Simon exercised tight control over his family investment firm, his sons now play a more substantial role. “Dad’s desire to know all the details has diminished very substantially,” Peter Simon says.
Yet the elder Mr. Simon’s longtime passion for nautical adventures remains intense — his 175-foot luxury yacht Itasca took him close to both of the Earth’s poles last year. And his love of politics hasn’t waned either. Having kept in touch with prominent Republicans over the years, Mr. Simon says a number of people have asked him to re-enter the political arena by running for the U.S. Senate seat being vacated by Bill Bradley.
Mr. Simon says his wife, Carol, who died of cancer in June, was the main reason he didn’t run for office in the past, and he admits to being intrigued by the idea. Mr. Simon is an advocate of reduced government, diminished deficits and a flat tax, causes he has been trumpeting for more than 20 years.
“I don’t want to say I’m considering” running for the Senate, he says, “but I’m not ruling anything out either.”
On one point, though, he says he is certain: “I am going to do one more big thing in my life.”
