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Trial Begins on Simon S&L Suit

Court: The family of the gubernatorial candidate says change in federal rules led to firm's failure. U.S. blames the thrift.

September 18, 2002|JONATHAN PETERSON and ROBERT PATRICK | TIMES STAFF WRITERS

WASHINGTON — A U.S. attorney Tuesday cited "poor management and board oversight" for the 1993 collapse of Western Federal Savings and Loan, a California thrift that was controlled by the family of Bill Simon Jr., the Republican gubernatorial candidate, along with other investors.

But lawyers representing the thrift's parent company blamed a misguided shift in government regulation for sinking Western Federal in 1993 rather than strengthening the beleaguered savings and loan.

"The evidence will show the government ... got it backwards," said Rowan D. Wilson, an attorney for WestFed Holdings, parent firm of Western Federal, which was based in Marina del Rey.

The conflicting views unfolded on the first day of a trial in which the Simon family and other investors seek to recover damages arising from the thrift's demise. The shutdown of Western Federal cost taxpayers $122 million.

The demise of Western Federal has taken on broader interest, because Gov. Gray Davis has sought to turn Simon's business track record into a campaign issue, arguing that Western Federal's woes cast doubt on Simon's ability to run the vast state of California.

Simon was one of a handful of board members for the thrift and later the holding company. In those capacities, he shared responsibility for overseeing the top managers who handled day-to-day operations.

On Tuesday, lawyers for the WestFed investors contended that a 1989 change in how thrifts must count their assets was a fatal blow to Western Federal, and that the shutdown was unrelated to the competence of management. Simon's name did not come up in opening arguments.

In a political ad unveiled last week, Davis zeroed in on Western Federal, noting that Simon has repeatedly sought to distance himself from the imbroglio. "If he can't take responsibility for his business, how can he run California?" the ad asked.

But Simon campaign officials emphasized Tuesday that the current trial is over how much compensation the Simon family and other investors may deserve. The U.S. Court of Federal Claims ruled in March that the government's change in accounting rules amounted to a breach of contract.

"This is a suit by Simon and many other investors to recover damages from the government for failing to keep its word," said Mark Miner, Simon's press secretary.

Asked about the Davis ad, Miner said: "The only way Gray Davis can win this election is to resort to negative, false and misleading attack ads not backed up by the truth."

The Western Federal case is the second noteworthy legal matter involving Simon in recent days. Just last week, a Los Angeles Superior Court judge ruled that the Simon family did not defraud a business partner to take control of a pay phone company--overturning a $78-million jury verdict against the family.

In the savings and loan case, a group of investors led by Simon's father, William E. Simon Sr., the late Treasury secretary, and including such financial luminaries as Preston Martin, former vice chairman of the Federal Reserve Board of Governors, took control of Western Federal in the late 1980s.

The Simon family claimed damages of $40 million; the figure claimed by the entire investor group is more than $100 million.

Government attorneys, trying to limit the size of damages, sought Tuesday to hold Western Federal's management accountable for much of the institution's financial woes.

Jane M.E. Peterson, a U.S. attorney, cited "poor management and board oversight, all of which plagued the thrift for a number of years."

The government has sought Simon's testimony, but Judge Emily C. Hewitt ruled in August that he would not have to testify until three days after the Nov. 5 election. The case is scheduled to run for several weeks.

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