CALIFORNIA VERDICT WEIGHS ON CAMPAIGN FOR GOVERNOR

LOS ANGELES, Aug. 1 - With his underfinanced campaign for governor already
struggling, Bill Simon Jr. hit another setback this week when the family
investment company he had run was ordered to pay $78 million for defrauding
a partner in a failed pay-telephone venture.

The company, William E. Simon & Sons, lost a jury trial in State Superior
Court and was ordered to pay $65 million in punitive damages and $13.3
million in compensatory damages to a former business partner, Paul Edward
Hindelang Jr. Mr. Hindelang is a convicted drug smuggler who had started
the phone company in which Mr. Simon's firm eventually became an investor,
Pacific Coin.

Mr. Simon, who had a come-from-behind-victory in the Republican primary in
March, said that the family company would appeal and that he was confident
the decision would be thrown out. But the case could prove to be a burden
for his campaign.

Mr. Simon has not run for public office before, and one of his assertions
has been that, as a successful businessman, he has the skills to manage the
affairs of the largest state in the nation. He has criticized the
Democratic incumbent, Gray Davis, as mismanaging things like the state's
energy crisis last year and its budget.

Mr. Davis's campaign has criticized Mr. Simon's business record, pointing
out that, among other things, a savings and loan association the family
controlled had failed, costing taxpayers millions of dollars, and that a
securities business the family controlled in New Jersey had faced sanctions
because of improper practices.

Now, not only did the family business lose its latest court battle, but it
lost to a man with two major drug convictions who had been forced to
disgorge $50 million in drug profits.

Making matters worse, several political experts said, the verdict comes at
a time when public skepticism of business leaders is growing because of
accounting scandals at major corporations.

"No campaign likes headlines like these," said Dan Schnur, a Republican
campaign adviser who is not working with Mr. Simon, "but what you have now
is an imperative for Simon to define his background as a businessman
without someone defining it for him."

The court case involved an investment that Mr. Simon's family company made
with another investor several years ago in Pacific Coin. When the investors
learned of Mr. Hindelang's drug convictions, he was fired. Shortly
afterward, the company crumpled under a debt load, and it is now operated
by the banks that lent it money. Mr. Simon was a top executive of the
family company at the time the investments were made.

Mr. Hindelang sued the family company, saying he was lured into selling his
company and not told of a plan for adding debt and then selling shares to
the public, which wiped out the investors.

"They destroyed a company they invested in and took control of," said
Ronald Oster, a lawyer representing Mr. Hindelang.

Mr. Simon's campaign said Mr. Davis was using the verdict to avoid
answering questions about his record as governor.

"We have a governor who after three-and-a-half years has no accomplishments
to point to, which is why he talks about things like this," Mark Miner, a
spokesman for Mr. Simon, said. "We're confident that we'll continue to run
a vigorous campaign based on the issues."

Mr. Simon's business career has been devoted to investing the fortune
created by his late father, William E. Simon, a former treasury secretary,
philanthropist and conservative ideologue. The family has made a broad
array of investments over the years.

Its most famous and successful investment was in Gibson Greetings, one of
the first big leveraged buyouts, in the early 1980's. The elder Mr. Simon
and a partner bought control of the company mostly with debt. Mr. Simon
turned his $330,000 investment into $68 million in 18 months.

The younger Mr. Simon has sought to turn that image of wealth into an image
of acumen, and that had seemed to help him in the primary against the
former Los Angeles mayor Richard J. Riordan, also a wealthy man. But the
court decision this week was one of several events that have allowed Mr.
Davis to question Mr. Simon's record.

Mr. Simon was also embarrassed recently when he provided some personal tax
information after months in which he insisted he would not disclose his
returns to protect his family's privacy.

But when he allowed reporters a couple of hours to peruse hundreds of pages
of tax documents, he had to respond to questions about why his returns
showed annual losses of millions of dollars and whether he had used tax
shelters to protect his wealth.

Mark DiCamillo, a pollster with the nonpartisan Field Poll, said that the
latest disclosure came at a slow time in the campaign when voters were
focused more on general impressions of the candidates rather than policies,
so the damage could be limited. "I don't think the real campaign for
governor has started yet and so far the public is unenthusiastic about
either candidate," he said.