Pacific Coin: The Untold Story
1. The Telecommunications Act of 1996 Created Two Significant Opportunities for Pay Phone Companies to Increase Their Profits.
First, the new federal law allowed the newly deregulated industry to increase its rates above the long frozen rate of 25 cents per call.
Second, it allowed pay phone operators for the first time to charge “dial through fees”, (i.e, to receive a portion of the charges for long distance calls made on their phones using cards from other carriers).
2. Cell phone usage flattening out – At the time, complaints about unreliable service, complex and expensive calling plans, and no foreseeable drops in rates, led many to believe that cell phone usage had reached maximum penetration for the time being.
3. Ed Hindelang, a perceived industry leader, was bullish – Hindelang, a recognized industry leader, was bullish on the industry. It was perceived to be an industry ripe for consolidation in the newly deregulated world. As late as September 1998, Hindelang was still promoting the industry in internal company memos.
1. The elasticity of pay phone call costs proved higher than anticipated - People long accustomed to using one quarter to make calls proved more resistant that anticipated to paying more.
2. Dial through revenues did not materialize quickly enough – Pay phone companies had difficulty collecting these fees because the established long distance carriers challenged the new regulations and the bills they received.
3. Prices plummeted, and cell phones exploded - Cell phone companies recognized their weaknesses and aggressively changed business practices (i.e. they marketed subscription that reduced the cost to consumers, gave away (or discounted the price of) cellular phones, and improved their service).
The role of William E. Simon Jr.:
At the time of the investment in Pacific Coin, Bill Simon was an Executive Director of William E. Simon & Sons and a Co-Chair of its Investment Committee. In those roles, he oversaw the whole firm, participated in Investment Committee discussions, but did not direct the firm’s Private Equity Group or manage that group’s individual investments. In fact, at this time, his primary focus was the creation of the firm’s new Special Situations Group, which invests in the debt and securities of distressed debt.
· Testimony by numerous individuals showed that Simon was not actively involved in this investment:
1. At the time the firm’s Private Equity Group presented the Pacific Coin investment opportunity the Investment Committee, Bill Simon was one of eight members of the committee.
2. According to Henry Brandon’s deposition testimony, Mr. Simon questioned the wisdom of investing in a pay phone company in light of competition from the cellular phone industry.
3. Simon’s handwritten notes on memos about Pacific Coin illustrate his concern about the lack of profitability of investment.
4. Jurors interviewed after the trial said it was apparent to them that Bill Simon did not have a role in this investment.
5. Judge ruled that Simon deposition testimony showed no new facts beyond what other witnesses had testified to. Hindelang’s attorneys elected not to present Simon’s deposition testimony in the case.
6. Simon was not on member of the management or board of directors of Pacific Coin, nor was he a partner in Coinable Simon.
· Hindelang Smuggled Two Million Pounds of Marijuana into the U.S. - Hindelang pioneered the “mother ship” concept, considered a major advance in drug smuggling techniques at the time. Hindelang has estimated that he helped smuggle over two million pounds of marijuana into the United States.
· Hindelang Associated with Columbian Drug Lords and Manuel Noreiga - Smuggling earned him close associations with major Columbian drug lords. Investigators have also uncovered potential money laundering ties between Hindelang and Manuel Noreiga.
· Hindelang Served Three Years in Prison for Drug Trafficking - Eventually, Hindelang was caught again. Facing a potential of up to sixty-five years in prison, he plea-bargained, agreeing to testify against his drug partners and to turning over his drug profits. He turned over $640,000 of drug profits – claiming that’s all there was – and received a sentence of 10 years. He served 3 of those 10 in Lompoc federal penitentiary.
· Drug Money Financed Hindelang’s Early Payphone Business - Upon his early release, Hindelang entered the payphone business. It is clear that people who had helped him launder drug money did participate in the early financing of the company.
· In 1998, Hindelang Forfeited $50 million in Drug Assets to the Federal Government - By the late 1990’s, even as Hindelang negotiated with the federal government, he hid his past from the new investors. Only when the government finally announced that it had negotiated the forfeiture of $50 million from Ed Hindelang – far more than the original claim of “only $640,000” – was the extent of his duplicity to both his business partners and to the government and the taxpayers revealed. News accounts and testimony from the trial reveal the extent of his efforts to conceal assets from the government.
· Fed’s Believe Some of Hindelang’s Drug Assets Remain Free From Forfeiture Today - The federal government believes some of Hindelang’s drug assets remain free from forfeiture today. Four In Rem actions against assets tied to Ed Hindelang are pending in the Southern District of Florida today.
· Neighbors, Business Partners Shocked by 1998 Seizure of $50 Million – By all appearances, Hindelang was a model citizen and leader in the payphone industry. Everyone was fooled. Wall Street Journal interviews with neighbors and business partners at the time of the 1998 seizure of $50 million from Hindelang showed close associates and friends who were shocked by his past.
· Ed Hindelang Grew His Business, No One Knew of His Criminal Past - By the mid to late 1990’s, Ed Hindelang had grown his payphone business into one of the largest private payphone companies in the country. And again, it is important to note that he was a recognized industry leader, and no one in the industry knew of his past.
· Hindelang Was To Be CEO of the New Company, Until His Past Was Revealed - The proposed new firm was always presented as Mr. Hindelang’s company, and one in which he would continue to run. He was always intended to be the CEO of the company, and indeed he remained the CEO and “key man” in the firm from the beginning of the merger/acquisition talks until the day the his past was revealed and he was fired.
· Hindelang Pocketed Nearly $26 Million Upon the Completion of the Merger - The deal by which three regional payphone companies were merged into the new Pacific Coin was completed in February 1998. At this point, Ed Hindelang pocketed nearly $26 million, while retaining 23% ownership in the new firm (the largest individual ownership) and remained as CEO, guiding the company and its subsequent acquisition strategy.
· Hindelang Motivated By $26 Million to Conceal Past - By concealing his drug past, Hindelang received $26 million in cash into his bank account, retained his company, and retained his vision for consolidating and growing his company.
· Deloitte and Touche Conducted Background Search on Hindelang - A typical corporate background check was conducted by Deloitte Touche, a major accounting firm used by Simon & Sons. The search went back 10 years and focused on Mr. Hindelang’s professional reputation. By all accounts, he was a recognized leader in the industry. His drug past was beyond the ten-year window typical of these investigations (documentation available upon request).
· Hindelang Lied on Legal Document Regarding Felony Conviction - Hindelang was considered the important player in the new company, so important that a separate “Key Man” insurance policy was taken on Mr. Hindelang. On that form, Mr. Hindelang was asked if he had ever been convicted of a felony. He checked “No” and signed the legal document.
Hindelang Lied on Additional Legal Document to Help Start His Company - When forming his company in 1987, Hindelang assured his investors, under penalty of perjury, that he had never been convicted of a felony. This document allowed Hindelang to obtain the financing at the start of Pacific Coin in the 1980’s. Hindelang’s Fraud Allegations All Refuted by Evidence:
The jury has recommended findings against the investors for fraud and interference with contract. All of these allegations are directly refuted by evidence introduced in trial.
Hindelang alleged that William E. Simon & Sons did not disclose to Hindelang that it would be charging a fee for its work on the February 1998 transaction.
1. Hindelang himself testified at trial that the $1.5 million fee was negotiated in advance of the February 1998 transaction, and that as part of that negotiation, he was successful in bargaining for $1 million to be paid directly to him.
2. Hindelang signed documents agreeing to and acknowledging the fees before the transaction closed.
3. Testimony showed that the competing investment bank (Seidler Haas) proposed $4 million in bank fees. Simon & Sons charged $1.5 million.
Hindelang alleged that the investors set about to make a “quick killing” by undergoing a secret plan to expand the company with debt, then take the company public through an IPO.
1. Judge Chalfant agreed with William E. Simon & Sons and the other cross defendants before trial that there was no basis for this fraud allegation in his summary judgment decision. The trial testimony confirmed this.
2. The possibility and procedures by which the company could be taken public was revealed to Hindelang in documents he admitted to receiving in his testimony at trial.
3. Any IPO required 80% supermajority to undertake, and Hindelang retained 23% ownership of the company. As Mr. Hindelang himself testified, he was told in advance of the deal that an IPO was a possibility, and he knew that he had “complete control” to stop any such IPO. As Mr. Hindelang testified, he “had the vote to stop it.”
Hindelang alleged that Simon & Sons concealed their desire for rapid expansion through acquisition. He claims they promised to abide by his “grow slow” philosophy. Hindelang identified Pac Coin’s acquisition of GoldenTel, the largest independent pay phone company in Nevada, as evidence of an acquisition he opposed.
1. Like Hindelang’s fraud claims about the IPO, Judge Chalfant also found before trial that Hindelang could not sustain this claim for fraud. The testimony at trial only confirmed Judge Chalfant’s finding.
2. Ed Hindelang’s entire career in the payphone industry had been dominated by growth by acquisition.
3. Even before he entered into business with the Simon, Hindelang sought to purchase Golden Tel on his own.
4. In January 1999, Hindelang signed a letter of intent, sent to Golden Tel, specifically agreeing to the $41 million acquisition price that he later claimed was inappropriate and fraudulent.
5. Hindelang voted his 23% ownership in favor of the acquisition. Without his votes, the 80% required for major acquisitions would not have passed.
6. The new Pacific Coin had made eight prior acquisitions before the Golden-Tel acquisition, and two more acquisitions after the Golden-Tel deal. Hindelang supported all of these and did not exercise his right to stop them.
· Hindelang’s claim of interference with contract is legally flawed - The law says that a person cannot be legally found to have interfered with his own contract, and that a person’s agent also can’t be held to have interfered. Here, all of the parties whom Hindelang says interfered with contracts were parties or agents of parties to those very contracts. The judge has already indicated that this is not a valid basis for an interference claim. He has reaffirmed this indication since the trial.
· Ed Hindelang is the only person in this deal who profited - Hindelang immediately received $26 million upon the Simon investment in his company. When the banks seized the company, the investors lost their investment. Coinable Simon as a partnership owned the largest stake and stood to lose the most. There is no rational reason to believe that they wanted to “run the company into the ground.”
Simon Message:
I am confident we will win the case. The facts are clearly on our side that this person misled the investors. He lied on corporate documents that he was a convicted drug trafficker.
As the facts become public, I believe the people of California will understand our side of the story in a way that the jury did not.
Remember this fact:
Judge Chalfant agreed with William E. Simon & Sons and the other cross defendants before trial that there was no basis for this fraud allegation in his summary judgment decision. The trial testimony confirmed this.
I'm sure the facts in the article are accurate, but the headline leaves a very misleading impression. Or I suppose it depends on the definition of "involved".
What it says is that he expressed reesrvations on the investment, and the vote supported it, so it went ahead. (No direct word on how he voted; the article slyly implies that he voted in its favour, but I doubt it).
Then, when a report circulated in the company on the investment's status, he wrote comments in the margins asking pointed questions about the situation. They were the kind of things I would write if I was looking at something I had not viewed for a long time, and was trying to size up its present potential.
Now, if you would call that a significant involvement, contrary to what Simon claimed, I would respectfully tell you you are wrong. It is indictive of someone who has gone on to newer and better things, leaving the company to its professional managers. (This is routine; it's simply how venture capital works). What we see are the comments of someone who is juggling dozens of balls in the air and only has an hour or so for this one.
So either the LA Times writer is incredibly unsophisticated in business, or he simply wanted to write a hatchet job on Simon. If he did, he did an exceptionally poor job -- except in that headline, which I expect in a Gray Davis campaign ad very soon.
D