Top Ten Jury Verdicts of 2002 - Lawyers Weekly USA

Top #7 of Ten

Pacific Coin Management Wins $97.2 Million Fraud Verdict

Company Owned by Gubernatorial Candidate Ordered To Pay

By Amy Johnson Conner

Verdict:  $97.2 million total, $75 million in punitive damages

State:  California

Type of Case:  Business Fraud

Trial:  21.5 weeks

Deliberation:  3 days

Status:  Verdict overturned in a JNOV ruling; plaintiff plans to appeal that ruling.

Case Name:  Pacific Coin Management v. BR Telephony, et. al.

Date of verdict:  August 7, 2002

Plaintiff's Attorneys:  Anthony Duffy of The Duffy Law Firm in Newport Beach, Calif.; and Geoffrey Thomas and Ron Oster of Paul, Hastings, Janofsky & Walker in Los Angeles.

Size of Firm:  3 Lawyers (Duffy), 724 lawyers (Thomas and Oster)

Defense attorneys:  William H. Lancaster of Seyfarth Shaw in Los Angeles; Stephanie Krafchak of Krafchak & Associates in Los Angeles

Back in July, a California jury was convened to decide a case that pitted a convicted drug smuggler against the Republican candidate for governor in a business fraud case - and the felon won.  The suit involved dueling fraud allegations in a complex business transaction between a company owned by Republican nominee Bill Simon, and Paul Edward "Ed" Hindelang Jr., a man who had been sentenced to 10 years in prison in 1981 for smuggling 500,000 pounds of marijuana into the country.

Hindelang sued Simon's company for buying a controlling interest in his own company and then running it into the ground, Simon, in turn, sued Hindelang for failing to reveal his unsavory past.

In the end, the jury awarded Hindelang $97.2 million, agreeing that Simon's company and another investor devised a high-risk financial plan that drove Hindelang's financial venture into the ground.

Then, in another twist in this strange financial battle, the trial judge threw out the jury's verdict, ruling that it was, indeed, the defendants who had been defrauded. 

A Surprising Reversal

Hindelang was the founder and 95 percent owner of Pacific Coin, a pay-phone company that grew to become one of the most successful in Southern California.

When Simon's company and another investor purchased a controlling interest in Pacific Coin, they never told Hindelang they had a risky plan to load the company with debt, hold an initial public offering (IPO), then quickly exit with those IPO profits in hand, leaving Pacific Coin to dig out - or not - from under the mountain of debt.

But the company never made it to the IPO stage.  Saddled with a debt load it could not pay, Pacific Coin's banks foreclosed and the company went bankrupt. 

While Hindelang blamed the collapse of Pacific Coin on the defendants' high-risk business plan, the defendants filed a countersuit saying that, in fact, Hindelang had defrauded them by failing to reveal he was convicted and served time for running a major drug smuggling operation. 

The defendants claimed it was this revelation about Hindelang's past, not the IPO plan that drove Pacific Coin into bankruptcy. 

The jury found for Hindelang on the counterclaim and then awarded him a huge verdict in his own suit. 

Plaintiff's attorney Anthony Duffy said the arrogance of the defense, which contrasted with the plaintiff's forthcoming testimony about his past, offended the jury and ultimately contributed to the large verdict.  His colleagues agree. 

"There was an arrogance that the other side displayed.  It's something you see often in these cases.  You [had] a real mismatch on the two sides in terms of economic power and the other side felt it could get away with basically anything," said co-counsel Ronald Oster.

But the defense insists the plaintiff's attorneys - and the jurors - got it all wrong.  The trial judge agreed in a 37-page ruling Sept. 12, which threw out the verdict and found that the defendants were, in fact, the ones defrauded. 

"I don't think there was arrogance at all," said defense attorney William Lancaster.  "If anything, perhaps they misread indignation to their own purpose.  I think certainly we were indignant at the notion of having been cheated out of so much by somebody that our clients trusted." 

The Facts

In late 1997 and early 1998, Pacific Coin was negotiating an investment deal with BR Telephony, run by Bill Rogers, and William E. Simon & Sons, a principal of which was California gubernatorial candidate Bill Simon. 

Under the deal, the two companies would purchase a controlling interest in Pacific Coin and Hindelang would remain on as an executive. 

But as the investment deal was nearing completion, Hindelang was involved in another high-stakes negotiation - this one with the federal government for the return of $50 million in drug proceeds.  Because the deal with the government was about to be made public, Hindelang finally called the chairman of Pacific Coin and came clean about his drug smuggling past.

According to the Wall Street Journal, Hindelang told the company chairman about the $50 million, his 1981 conviction for smuggling 500,000 pounds of marijuana and that, as part of a plea agreement that included turning government informant, he was sentenced to 10 years and served about 30 months behind bars.

Hindelang was then forced out of Pacific Coin, while the investment transaction moved forward, the paper reported. 

According to the plaintiff's attorneys, the Simon and Rogers companies had big plans for Pacific Coin, plans they never revealed to Hindelang.

"Their plan . . . turns out to be disastrous.  It's the worst strategy you could follow given the cellular [telephone] competition," Oster said.  "They wanted to take over this company, make it look like it was growing real fast, attract the attention of the public and then do a quick IPO and bail out.  They loaded the company with debt in the meantime, but they were planning to be long gone by the time the loans came due." 

Oster contended that it was only after mounting debt forced Pacific Coin into bankruptcy that the Rogers and Simon companies balked at Hindelang's past.

"That transaction fell apart and litigation started then," with the Simon and Rogers's companies filing a RICO against Hindelang in federal court, said Duffy.

The defense had a simple view of the facts.

"From the outset there was critical information concealed from our clients as investors, specifically the felony conviction for drug smuggling and his ongoing negotiations for a forfeiture of some $50 million which he held in proceeds," said Lancaster.  "None of that was told to our clients.  Accordingly, they invested in what was a troubled company and a chief executive who had a path that would trouble the company further.  They were defrauded."

Not a 'Political Trial'

One thing the trial was not about, according to the plaintiff's attorneys, was Bill Simon's political career.  Thomas said they never brought up the issue at trial and when the other side raised it, they just listened and didn't respond.  Simon was never called to testify, as he had very little direct involvement in the transaction.

"We ultimately decided we didn't have to attack Simon to win this case so we didn't make a point of going after him," Oster said.

Even so, the verdict and the judge's later judgment-not-withstanding-the-verdict (JNOV) ruling, did have an impact on Simon's campaign.  The verdict itself dealt a blow to Simon on the campaign trail and bolstered ads run by incumbent Gov. Gary Davis attacking Simon's business record.  The JNOV ruling six weeks later, however, is credited with reviving Simon's campaign and his narrow loss to Davis.

No Federal Claim

The federal court ruled that there was no federally actionable activity involved and dismissed the RICO claim, Oster said.  As a result, both parties rushed to state court to file their respective fraud claims and Hindelang's team won, picking up the advantage of being the plaintiff in the case. 

Stressing that they didn't pick this fight, Hindelang's attorneys said it was imperative that they win the race to state court.  There are "advantages to getting to tell your story first," Thomas said. 

As for the plaintiff, Hindelang's lawyers were able to address their client's conviction in their opening statements and called him as their first witness, all before the defense got a chance to spin it to their advantage.

"Our thinking was that they were going to hear so much about [Hindelang] from so many different people, it painted a horrible picture.  So it was better for the jury really early on to see the truth about that, rather than having to hear all the evidence and wondering [whether] this guy was this terrible person they were talking about," Oster said.

That decision was an obstacle for the defense.

Hindelang "came at the beginning of the case.  There was a substantial amount of testimony after he got off the stand.  I don't know how much the jury remembered at the end of the day," Lancaster said.

In the state court suit, filed in Los Angeles, the plaintiff argued that he disclosed the elements of his business record that were relevant.  Hindelang didn't volunteer information about his conviction, but, he argued, even if he had disclosed his conviction, it would have had no bearing whatsoever on the way the partnership was run, and ultimately, the failure of the business.

"Even if you agree with the thesis that you have to disclose everything in the past, even if nobody asks, you still have to . . . demonstrate they were harmed by it," Oster said.  And the defense couldn't.

The defense claimed the conviction was considered a material fact and not disclosing it was necessarily related to the liability, Thomas explained. 

"The overriding defense that Ed had was that even if we agreed for the moment that [the defendants] should have heard about Ed's past, once they knew, they didn't say 'The deal is off.'  They were convinced about the wisdom of the pay telephone business and went forward with the deal, embraced the business and it failed," Thomas said.

"They had spent $1 million doing all kinds of due diligence," Oster added.  "They had Deloitte and Touche, Latham & Watkins, accountants and industry strategists come in.  We were able to argue to the jury [that the defendants] either knew about the conviction and didn't care, or [those performing the due diligence] didn't consider it important."

Documents Showed No Damage

For the first several months of the case, the attorneys spent most of their time going over documents obtained through discovery from banks and law firms that described how the transaction soured and the company failed.

According to Thomas, the documents showed no evidence that the revelations about Hindelang's past damaged the company.

"The whole case lacked a necessary element of liability," he said. 

In preparation for trial, the plaintiff's attorneys focused on "the real issue," which Duffy said was "what caused the loss of this company."

"The second thing we knew from early on was the strategy of the other side was . . . to paint Ed Hindelang as someone evil who had a felony conviction 20-some years before," Duffy continued.  "We felt we had to show the jury that Ed Hindelang, whatever mistakes he had made in the past, was honest and acted appropriately in the transaction with these companies."

The Star Witness:  The Plaintiff

In the opening statement, the plaintiff's attorneys (Duffy) told the jury what the case was about - the loss of the company through a risky business deal; and what it was not about - a criminal conviction from years past. 

They began testimony with their own client, who owned up to his smuggling operation and drug conviction, but contended that he moved on and created Pacific coin an a lawful way, Duffy said.

The plaintiff's attorneys tried to soften the negative impact of the drug conviction by stressing that their client was involved on the business end of a smuggling ring and that he did not sell drugs to children on street corners.

"It was wrong," Duffy stressed at trial.  "But he took responsibility."

However, the judge would not let Hindelang testify about his contribution to putting other drug smugglers behind bars - an agreement that was part of his plea agreement.

"One of the things that did not come out in trial was all the effort Ed spent after the arrest and conviction to assist the U.S. government in prosecuting guys involved in heavy duty [drug trading]," said Duffy.  "I always thought in a fair representation of the evidence that would be brought in." 

Moving on from the conviction, the attorneys encouraged Hindelang's love for his business to come through by asking detailed questions about the pay telephone industry.

"He has a passion for pay phones.  You and I look at a pay phone and we don't see much, but this man looks at a pay phone and can say, 'It does this, here's how you make sure you collect your money from a major carrier, here's what they do,'" Duffy said.

This industry knowledge made him a strong witness, Thomas said.  "He went from 14 phones to 6,000 phones and personally collected the quarters" when his business first began.  "There wasn't a question he didn't have an answer for."

As for plaintiffs suspected, the defense focused heavily on Hindelang's past and his testimony was the thrust of their case, according to Lancaster.  Their strategy was to prove that fraud was committed in February 1998 when the deal to take over Pacific Coin began and Hindelang did not disclose his drug conviction. 

He also implied that Pacific Coin was part of a money laundering operation.  Because of a pre-trial ruling by the judge, little could be directly said in this regard.  Had that information been fully revealed to the jury Lancaster thinks it would have made a big difference in its decision.

The plaintiff's attorneys believe the defense approach backfired.

"They pursued a strategy of relentlessly attacking Ed Hindelang," Oster said.  "In the process, they just completely lost sight, not only of their own vulnerability, but how a jury could easily conclude a claim of fraud could be interpreted as an attempt to cover up their own behavior.  They really overplayed their hand."

Anatomy of a Bankruptcy

The plaintiff's next challenge was to prove how the company failed. 

"The company didn't fail because somebody resurrected Ed's conviction . . . it had a lot of bank debt.  It couldn't pay the bank," Duffy said.

Although the plaintiff's attorneys had handwritten memos from the Simon group detailing his decision to invest in Pacific Coin, "he had a complete failure of memory on the subject" during his deposition, Oster said.

Armed with other documents obtained in discovery that outlined the partners' plan for an IPO, the plaintiff's attorneys questioned the defense witnesses about their scheme.

The defendants testified there was never a plan to take Pacific Coin public.  An officer of the Simon group even spelled it out: "'N-E-V-E-R,'" Duffy recalled, did the management team have a plan to take the company public.

"Then I showed them the documents," he said.  But even then the defendants claimed those documents were no official plan, just options for what could be done with the company. 

One of the Simon group defendants later testified the truth," Duffy said.  "It was such an extreme statement and it came back to haunt him."

In their closing, Oster and Duffy asked the jury to consider whether they thought Hindelang - whom jurors invited to stand with them in their jury photograph after the verdict - was incapable of telling the truth.  The defense repeatedly made "these overboard attacks that didn't match up with the evidence," he said. 

To assist the jury's understanding of the defendants' business plan, the plaintiff's attorneys called expert witness Bill Purcell, an investment banker who worked for Dillon Reed for more than 30 years.

The crux of his testimony was that the Simon group's business plan for Pacific Coin was incredibly risky.  Purcell testified that a company like Simon's might have many different "shoot-the-moon" IPO plans brewing at once and all it takes is one successful execution of the plan to make up for the losses of the others and return a hefty profit.

While this type of risk was not that daunting for a large and wealthy company like Simon & Sons, it posed a much higher level of risk for an independent businessman like Hindelang.

"That's why you have to disclose the strategy so people can accurately assess the risk" before going into business, Oster said.

Duffy credits some of his success to taking good depositions.  By pressing for specific answers, knowing the facts, knowing the documents and not "letting somebody just get away with giving a non-responsive answer," lawyers can glean information they may not even realize will help them until they get to trial, he said.

For example, one witness whose testimony spanned two days came to court the second day with a style that seemed much more coached than the day before - far more equivocal to allow himself wiggle room on cross-examination.

"I could go to the deposition, where he did not equivocate," Duffy said.  He even asked:  "Do I really have to read from the deposition again?" to make his point to the jury that the witness had been more forthcoming before trial.

"Create that road map so when you get to trial you can use that stuff to really [get] where you want to go," Duffy advised.  "If you ask specific enough questions it's hard for somebody to worm out of it in trial.  If you ask very general questions or don't have the facts down, you leave it open" for witnesses to testify that they didn't understand a question during deposition. 

The Moment of Truth

In their closing, Duffy and Oster reminded jurors about the documents that showed the Simon and Rogers groups planned to take the company public.  They also emphasized the plaintiff's credibility in contrast to the defendants' evasiveness.

The damages Hindelang incurred was a number the jury could easily remember:  $22.2 million.  Thomas said he felt good about their chances when every juror in the front row leaned forward for a pencil and paper after Oster announced that number.

After a two-and-a-half-week trial and three days of deliberation, the jury returned a verdict of $22.2 million in compensatory damages.  Then came the punitives arguments.

The defendants provided financial information that asserted their companies' net worth was only about $15,000.  But the plaintiff's attorneys pointed out that this seemed to contradict their testimony throughout the trial about what successful investors they were.

"They walked in here and described themselves as investors and one was running for office saying he was a successful businessman," Duffy said.

With little reliable financial evidence from the defense, Oster turned around one of their refrains in his closing punitivies argument.  Throughout the trial the defense spoke about "multiples" of earnings results and other financial figures.  In his punitives argument, he asked the jury to consider which "multiple" of the $22.2 million damages verdict would be an appropriate punishment. 

After Duffy's final plaintiff's argument and deliberating for one and a half hours, jurors awarded a total of $75 million in punitive damages, $10 million of which was rendered against Rogers' group and $65 million against Simon's. 

Although the trial judge overturned the verdict in his Sept. 12 JNOV ruling, the plaintiff plans to appeal as soon as the judge officially enters his ruling.