He was halfway through the speech, so called because he delivers essentially the same speech everywhere. He was speaking earnestly, affably, somehow managing an evangelist’s presence even while standing staunchly at attention, and he was explaining how one government agency had spent $20,500 in administrative salaries to buy $500 worth of oil. If he is sent to Washington, he said, he will put a stop to such excesses. “I’m not going to go there as a politician.” His hands gripped the lectern. “I’m going there as a citizen to fight the politicians.”
A California reporter stood to one side, measuring the applause, and then shrugged, as if to apologize for the fervent look on the faces in the middle-class, middle-aged crowd. “I’ve seen it happen over and over again. People start to believe that this guy is really different than the others.”
Ronald Reagan’s political quest, which could culminate soon in either a presidential or vice-presidential nomination, has been conducted as a populist’s crusade. Back in the Fifties, before the political world had heard of Jimmy Carter or Jerry Brown or even George Wallace, Reagan was touring the country as General Electric’s good-will ambassador and telling audiences they should kick politicians out of government and replace them with honest citizens. A decade later Reagan began offering himself to voters as a “citizen-politician,” separating himself from regular politicians and their spendthrift friends who were wasting or stealing the public money. Crowds cheered loudest and longest when he promised to eliminate the political “buddy system” and restore government to the tax-paying middle class.
But once in office Reagan didn’t remember the middleclass homeowners, or the small businessmen, either. Reagan agreed to new state income taxes that increased the annual bite on middle-income people from $426 to $728 in eight years. And he extended the squeeze to other areas.
Reagan’s property tax bill, for instance, cost the owner of a $15,000 house $78 more each year but saved owners of $700,000 mansions as much as $4000 a year. His tax bill also exempted oil rigs from property taxes, infuriating the Los Angeles County tax assessor who labeled it a “blatant piece of special-interest legislation that set the pattern for the entire Reagan administration.” But it pleased Henry Salvatori.
Salvatori was one of several nouveau riche southern Californians who belonged to Reagan’s closet cabinet. Salvatori, now 75, made his fortune in oil drilling and exploration, and used his millions to endow academia’s only “chair in anticommunism” (at the University of Southern California) and to finance conservative politicians like Barry Goldwater and former Los Angeles mayor Sam Yorty.
Others in Reagan’s inner circle included Holmes Tuttle, now 71, a Los Angeles businessman who claims to be the country’s biggest Ford dealer, and Justin Dart, now 69, founder of Dart Industries, a Los Angeles-based conglomerate that traffics in real estate and owns Rexall Drugs. Tuttle serves on Dart’s board of directors and both men are friends of Salvatori. All three are self-made millionaires who are part of the growing shift of this country’s wealth from the East Coast to the Southwest. They first emerged as political power brokers in the Eisenhower-Nixon campaigns of the Fifties.
In a 1973 Los Angeles Times article, Dart credited Tuttle with the idea of “recruiting a former cowboy and actor to be our governor.” They bestowed their influence and money on Reagan after his famous television appearance for Goldwater advertised his political and telegenic appeal to a national audience. Reagan had lined up behind Goldwater’s unrealistic candidacy in 1964. But while Goldwater sank, Reagan emerged as the new conservative darling. Two weeks after Goldwater’s defeat, the first Reagan-for-president office opened in Owosso, Michigan, and two years later Reagan upset a two-term incumbent by a million-vote margin to become governor of California.
Reagan’s friends raised $2.5 million for his 1966 campaign, and when Reagan refused to live in the traditional governor’s mansion in Sacramento (he felt it was unsafe and an eyesore) they bought a 12-room Tudor manor house that the state then rented for him. Reagan did not give official positions to his closet cabinet, but one of his aides complained that they consulted so often in Reagan’s office that “it’s like living in the same house with your mother-in-law.”
Reagan deferred to them on the selection of appointees and other key decisions while he issued press releases and began to run for president. The state ended up with two horse breeders, Y. Charles Soda and Robert Fluor, as race track commissioners; former trucking operator Vernon Cristina as a state highway commissioner; Burton E. Smith, a past president of the California Real Estate Association who opposed open housing, as real estate commissioner; management consultant Albert Beeson as state labor commissioner (a post that had been held by a labor unionist for the previous 40 years); an agribusiness owner as director of agriculture and a savings and loan executive as supervisor of savings and loan institutions.
William French Smith, now 58, Reagan’s closest adviser and personal attorney, took a special interest in state affairs, or what some called a conflict of interest. The ranking partner in Gibson, Dunn and Crutcher of Los Angeles, one of California’s largest and most powerful law firms, Smith became a power in Republican back rooms, where many of his clients held influence. He also became a director of California’s major utilities, an insurance company and Crocker Bank. With Reagan he oversaw the governor’s legal and financial affairs and helped coordinate his selection of appointees. In that capacity Smith helped choose an executive from an outdoor advertising firm for the scenic roadway board, while serving as counsel for the billboard lobby.
Smith also helped appoint pro-utility businessmen to the Public Utilities Commission (PUC). Under Reagan’s predecessor, the PUC had been known as a tough proconsumer agency that had reduced rate hikes. But under Reagan the PUC allowed Pacific Telephone’s profit rate to jump from 6.3 to 7.8%, at a cost of $193 million to California consumers, and permitted the phone company to keep a $1.5 billion tax savings.
Pacific Telephone has Smith’s law firm on retainer, and in 1968 it added Smith to its board of directors.
Another Smith client, the Irvine Company, owned 130 square miles of southern California ranchland that was in the middle of nowhere until it donated 1000 acres for a university campus, which gave the company a substantial tax break and set up a captive economic base for a town of 100,000 it planned to build. By 1970 the plan was working so well that the Irvine Company decided to expand its town to 430,000 people, a move that required permission from the University of California board of regents.
As it happened, the man presiding over the board of regents was Smith, Irvine’s lawyer, having been placed there along with six associates by his friend the governor. When regent Norton Simon, an anti-Reagan Republican, insinuated that Smith was profiteering for his client, Smith abstained from voting on the expansion. But Reagan, who held a vote on the board, and his six other appointees pushed the proposal through.
Earlier, the State Lands Commission, another board that Reagan controlled, had agreed to swap 2.5 miles of prime state-owned shoreline to the Irvine Company for what one state official called “450 acres of useless swampland.” Under the previous governor, the SLC had spurned the same trade as a theft of state resources.
Reagan’s SLC also favored closet-cabinet member Justin Dart. In 1972, without notifying the SLC, Dart built a pipeline from state-owned Donner Lake to his 6000-acre resort in the Sierra Nevadas. But even after the SLC learned of Dart’s highhandedness, it allowed the pipeline to continue sucking up lake water, ruling that it would hurt the environment to remove the pipes. “It was a completely bullshit ruling,” said one angry observer. “Imagine how fast a hippie would have been ordered to get out if he’d been caught piping state water to his shack.”
That same year Reagan’s PUC granted Dart an exemption to string his utility wires aboveground at a 25,000-acre development in the Tehachapi Mountains. In so doing, the PUC overruled its own staff, which had discovered Dart was distorting figures to hide a huge profit.
Dart and Reagan’s dealings looked like a quid pro quo by 1974 when Reagan acquired $7000 in Dart Industries stock, an investment that had been made more valuable by the PUC and SLC rulings. Judging by California records Reagan filed in 1975, the stock apparently was a gift from Dart.
Reagan maintained a similar relationship with C. Arnholt Smith, who gained a reputation as the Robert Vesco of San Diego during Watergate. Smith, a lavish contributor to Nixon’s political career, put together a banking and investment empire that crumbled in 1974. Over the last two years, Smith has been indicted on over 50 counts of fraud. Smith, who has since pleaded guilty to federal charges of bank fraud, loaned Reagan $25,000 at a critical juncture in his 1966 campaign, according to a former Smith aide, and funneled $15,000 to Reagan’s 1970 reelection. Then in 1971 Reagan’s PUC squelched an investigation that was about to expose Smith for using a front to retain control of Golden West Airlines in defiance of a federal antitrust ruling.
Reagan himself is a nouveau riche multimillionaire — by far the wealthiest contender in this year’s presidential race — having made most of his fortune on the Yearling Row Ranch, a modest 290-acre chunk of brown grass and forsaken rock deep in the Santa Monica Mountains.
On clear days the Santa Monicas are visible from downtown Los Angeles. The steep hills give definition to Los Angeles’s northern horizon, stretching from the San Fernando Valley, bunching up behind Hollywood and stopping just short of the Pacific Ocean.
Reagan bought the main ranch and its buildings in 1951, then added more acreage over the next decade. He raised horses for riding and enjoyed quiet vacations there. He had no close neighbors. All around was the sprawling Century Ranch which Twentieth Century-Fox used for filming movies. It seemed an appropriate hideaway for a faded actor who liked to contemplate his future on horseback.
But only one month after Reagan was elected governor in 1966, he sold 236 acres of his Yearling Row Ranch, which he had bought for $85,000, to Twentieth Century-Fox for $1.9 million. He had paid only $275 an acre for the land. Twentieth Century-Fox gave him $8178 an acre. The transaction meant Reagan was financially set for life.
The terrain in that part of the Santa Monicas is dry and rugged. Nearly every square foot is on an incline. In most places, as skeptical ranchers put it, “The only way a cow can graze is if you nail her feet to the ground.” Until last century, people left this land for mountain goats and cougars. Then smugglers began using it as a way station for Chinese aliens who were being supplied to railroad gangs. Early in this century millionaire sportsmen used it briefly as a hunting retreat. In the early Forties, Twentieth Century-Fox bought three square miles as backdrops for its westerns.
Reagan purchased his ranch for horses and made no effort to turn it into a profit-making venture. Excluding development, the land’s only other value was as a tax shelter. For that reason the Los Angeles County tax assessor, Philip E. Watson, decided in the mid-Sixties that Reagan’s ranch taxes should be computed at a market value of $3500 an acre. Reagan filed a complaint asking for a lower assessment. In a recent interview, Watson agreed with Reagan that the market value was closer to $1500 an acre. But a citizens group filed a countercomplaint asking for a higher assessment. Eventually the state supreme court settled the matter, ruling that $3000 an acre was the fairest price.
Yet Twentieth Century-Fox paid nearly three times that much to the governor-elect in 1966 — and raised the question of why.
The Fox officials who took over the company in a 1971 management change say that they themselves are unclear about the answer. Lewis Wolff, who directed the company’s land dealings from 1971 until recently, said, “Christ, I don’t know” when Rolling Stone asked him. “The ranch is like an iceberg,” he said. “The property looks beautiful on the right day, but when it rains it’s the first place to flood and when there’s a fire it’s the first place to burn.”
Fox executive Phillip Myers said that old company records indicate the purchase was for “production purposes.” But he could find no record to explain why the then-existing Fox property was not adequate. The company did not need the land for a tax shelter, he said, because it was losing money in the mid-Sixties, and spending $1.9 million only increased the losses.
Both Wolff and Myers said that the former owners had no plans for developing the land. In 1971 the new management briefly explored that possibility. But, as Myers admitted, the company quickly learned that development was not a viable option because environmental groups were poised to stop any bulldozers with a lawsuit. In 1972 the California Coastal Commission initiative formalized the situation, effectively eliminating all commercial development in the area.
Richard Zanuck, a top Fox official at the time of the sale, agreed that “it was a good deal for Reagan.” He conceded that Fox did not have a pressing need for the land. But, he said, Fox bought it as a possible site for the company’s headquarters, a possibility that never materialized.
Except for the intrusion of movie crews, Reagan’s former ranch remained unused through the early Seventies. Reagan continued to keep horses at the ranch and use it for short visits. By 1974 the ranch had become an obvious white elephant for Fox.
In early 1974, Reagan’s last year as governor, the State Parks and Recreation Board resolved Fox’s problem by buying the ranch for a park, allowing the company to recover part of what it had paid Reagan. At the same time, the state bought up the rest of Fox’s property in the area. Because the state paid for all the land in a lump sum, it is nearly impossible to determine the movie company’s per-acre return on the Reagan ranch. Overall, the company received only $1800 an acre for its holdings.
The 1974 sale prompted a new look at Reagan’s ties to Twentieth Century-Fox. The Zanuck family, which controlled Fox in 1966, publicly backed Reagan’s gubernatorial campaigns, and the movie company contributed $2500 to his 1970 reelection. In 1967 Reagan had appointed attorney Harry Sokolov, then executive assistant to the president of Fox, as chairman of the state Parks and Recreation Board, which later bought the land from Fox.
Rolling Stone investigators spent the month of June 1976 trying to answer why Twentieth Century-Fox had originally decided to make Reagan a multimillionaire. A top Los Angeles County official, who asked to remain anonymous, had one theory. “I’ve investigated the situation,” he said, “and my conclusion is that the land deal was part of a bribe.” According to him, Reagan returned Fox’s favor in 1968 by signing a controversial tax bill that his predecessor had vetoed six years earlier. The bill gave the motion picture industry a wholesale tax break on its film inventory and permitted movie companies to forgo their usual procedure of stopping production on the annual assessment date to avoid taxes.
According to state records, the bill saved Fox about $250,000 a year. But, because the other moviemaking giants also benefited, proof of a payoff is only circumstantial.
A top state official, one of California’s most powerful Democrats, offered an alternative theory based on an investigation he had conducted in 1970. “We spent a long time looking into this because it always smelled funny to me,” he said. “We came away with the feeling that Twentieth Century-Fox was a pawn in the deal. We figured that Reagan’s gang had actually put up the money.” His hypothesis was that secret sugar daddies had financed the deal, using Fox as a conduit, to insure that Reagan was financially free to run for president.
The Democratic official had no hard evidence either. But Rolling Stone found a second land deal that seems to lend credence to his theory.
When Twentieth Century-Fox bought Reagan’s ranch in 1966, it did not take an adjoining 54-acre parcel that he also owned, which, along with his other assets, was placed in a blind trust when Reagan took office. Then in 1968 the 54 acres were sold for $165,000, five times the assessed value, as part of a trade with Santa Rosa Ranches that gave Reagan another ranch. The 54-acre parcel, more craggy, precipitous and arid than Reagan’s Yearling Row Ranch, is valuable mostly as scenery.
Jim Huesman, an executive at Kaiser Aetna, which controls Santa Rosa, told Rolling Stone in July that the company had misplaced its records of the land purchase. “But I’m sure that we accepted it in trade because we were certain we could sell it and recover the value we’d put on it,” Huesman said. A year later the 57th Madison Corporation bought the parcel, taking it off Santa Rosa’s hands and, in effect, reimbursing Santa Rosa for what it had given Reagan.
The 57th Madison Corporation presented Rolling Stone with another unknown. The corporation is not on file with the California secretary of state’s office or the California Corporations Commission. Los Angeles records list Beverly Hills attorney Jeffrey Nagin as its official representative and give Delaware as its home state. Nagin rebuffed four phone queries, and officials in Delaware, a state with laws that favor the creation of “paper” entities, also refused to answer questions over the phone.
A check with New York state and city records failed to yield a clue. But a search of the New York phone book produced a phone number and the address of an office building where the 57th Madison Corporation shares a floor with a foundation for research in blindness. An official there referred all questions to “a Dr. Jules Stein of California.”
Stein, 80, is cofounder of the Los Angeles-based Music Corporation of America (MCA), one of the largest movie, record and television conglomerates in the world. In a phone interview Stein said he had bought the land without any specific purpose in mind. He claimed that he no longer remembered the details of the purchase, including the purchase price, and referred those questions to his accountant. (The accountant initially told Rolling Stone he needed time to look up the records, then said that “Dr. Stein has withdrawn his permission for you to have the information.”) Stein said his best recollection of the deal was that Reagan “made a very good profit” on his Yearling Row Ranch and that he expected Fox to develop the land. He expressed surprise when told that Coastal Commission regulations now forbid commercial developments on it.
Stein admitted that the parcel is 57th Madison’s only speculative real estate in California. But he did not mention that Universal Studios, which is owned by MCA, hired former Fox president Richard Zanuck after Fox’s 1966 land deal; that Stein himself served as a trustee of Reagan’s trust when it sold the 54 acres to Santa Rosa; or that by buying the land secondhand through Santa Rosa, instead of directly from Reagan, Stein avoided any ethical, legal or political questions the transaction might have raised.
Stein, one of California’s wealthiest men, has a longstanding personal and business relationship with Reagan. In the early Fifties Reagan helped Stein’s MCA achieve a major financial breakthrough. Stein wanted to expand MCA, then a talent agency representing Reagan and other actors, into the production of television shows. The move required a special waiver from the Screen Actors Guild. Reagan, a former six-term guild president then on the guild’s board of directors, used his influence there to make certain MCA received the waiver.
For the past 20 years the Hollywood cocktail circuit has buzzed with reports that Stein is one of the secret financial powers behind Reagan. Novelist Henry Denker based his book The Kingmaker on his observations of Stein and Reagan. The novel’s central character, a showbusiness tycoon, manipulates the financial dealings and the political career of an actor-politician, making him happy and rich while he runs for governor.
To a certain extent, Denker’s fiction imitated reality. Stein does belong to the circle of millionaires that promoted and patronized Reagan’s political ascendancy. As a trustee of Reagan’s blind trust, he was involved with the governor’s investments. And, through his stepson, he helped Reagan minimize his taxes.
Stein’s stepson owns Oppenheimer Industries Inc., a firm that specializes in providing tax shelters for people with six-figure incomes. Reagan’s taxes became a serious consideration in the late Sixties after the sale of his ranch left him with nearly $2 million to invest. Some of the money went to Oppenheimer to buy beef cattle on ranches in Wyoming, Nevada and Montana, which Reagan then wrote off on his tax returns.
Reagan’s tax payments in the past decade reflect a skillful use of tax breaks available to the very rich. Reagan has been saving about $11,500 a year in taxes on his new Tip Top Ranch near Santa Barbara because it is assessed for agriculture rather than at its true value, a maneuver that has been generally criticized as a tax loophole for land barons. A law firm hired by President Ford’s campaign recently reviewed Reagan’s tax data and concluded that to escape paying taxes he also is using irrevocable trusts for his children.
So far, the law firm’s conclusion is only a guess because information about Reagan’s taxes remains sketchy. Nearly all that is known about Reagan’s taxes has come from diggings, or promptings, of investigative reporters.
In 1971 a Sacramento radio station reporter, who had an inside tip from the state Franchise Tax Board, accused Reagan of avoiding all 1970 state income taxes. After angrily confirming the report, Reagan insisted that his tax-free year was an aberration and, without disclosing his tax returns, claimed he had paid $91,000 in state in come taxes the previous four years. But a Sacramento Bee reporter quickly showed that an estimated $87,000 of the $91,000 almost certainly went for selling the ranch, leaving a meager $1000 a year tax on an annual income that exceeded $50,000. One California newspaper berated him with an editorial headlined, “Governor Reagan Feeling No Pain,” in reference to Reagan’s campaign admonition that taxes should hurt.
Earlier this year, in response to mounting pressure, Reagan finally released an abbreviated account of his 1970-75 federal taxes. The New York Times hired tax experts who determined that Reagan also had paid no federal income taxes in 1970 and, in two other years, had paid only a fraction of the amount warranted by his tax bracket. For the three years in question his taxes approximated those of a $20,000-a-year electrician, while his earnings approached those of a $100,000-a-year executive.
Senate Watergate testimony, based on information the Nixon administration requested, had previously revealed that the Internal Revenue Service found Reagan did not pay $13,101 in 1962-65 federal taxes he owed.
Alone among post-Watergate presidential candidates, Reagan has refused to make full disclosure of his personal finances, including his taxes and his business dealings with his millionaire friends. Those reporters who persist with their questions are eventually referred to William French Smith, Reagan’s personal lawyer who figured so prominently in his gubernatorial administration.
Smith probably knows more about Reagan’s money than anyone. He has overseen Reagan’s taxes since the actor turned politician. His law firm helped arrange the $1.9 million ranch sale to Twentieth Century-Fox. And he served with Stein on Reagan’s blind trust when it negotiated the 54-acre transactions with Santa Rosa.
The Santa Rosa deal gave Reagan a 771-acre ranch in Riverside County, California. At the time, Reagan claimed that his trustees had handled all negotiations and that he planned to use the new land only for recreation. Apparently neither statement was true. Taft Schreiber, another member of Reagan’s closet cabinet, told a reporter earlier this year that Reagan personally “instigated” the deal in an apparent violation of the terms of the trust. Schreiber also said Reagan viewed the Riverside ranch as a profit-making venture. Reagan’s land is adjacent to parcels owned by the Schreiber family and Smith. All three gambled that plans for a nearby airport and race track, both of which have since been abandoned, would launch a land boom.
Schreiber was Jules Stein’s right-hand man at MCA, and also one of Reagan’s longtime agents; he created Reagan’s role as host of GE Theater. When he broke with Reagan and decided to back Ford earlier this year, he became the first close associate of Reagan willing to discuss the workings of his inner circle. Before we had a chance to talk with him, however, Schreiber died in early June from a blood transfusion mix-up during a minor urinary tract operation.
A month later, Rolling Stone took all its unanswered questions to Smith’s law offices. Smith, Reagan’s top confidant, is a tall, controlled man who wears blackrimmed bifocals and looks like a pug-nosed Henry Fonda. We knew Smith had the answers, the inside story of Reagan’s money, whether Reagan has been compromised or manipulated in his business deals, how much his friends have influenced his political decisions, why he’s as secretive as Nixon.
A spiral staircase of polished wood connects the 45th and 46th floors that serve as quarters for Smith’s law firm atop the Arco Building in downtown Los Angeles. The view in Smith’s private office is panoramic despite the silver-gray smog outside. Pictures of Smith posing with Reagan and his family adorn the marble walls. A grandfather clock stands elegantly next to the large plate glass window.
Smith acted cordial, even friendly. But he demanded the tape recorder be turned off because “in the past I’ve been the victim of left-wing propagandists” bearing such devices. His vantage point overlooking this city of southern California big business seemed far removed from Reagan’s ardent populism on the stump. So, it turned out, was the conversation.
How often do you confer with Mr. Reagan?
“Frequently … with some regularity. But I’m not going to get into that. It’s a private matter.”
When did you first meet him?
“We rubbed shoulders some time back, but I don’t want to get into our relationship.”
Have you ever been involved in a conflict of interest?
“I’ve always tried to remove myself from situations that might invite a conflict of interest. But in any situation where you’re a friend of someone, you’re just not sterile.”
Don’t you think the public has a right to know about Mr. Reagan’s finances since he’s running for president?
“We’ll worry about that when he becomes president.”