You do solemnly swear that the testimony you may give in the cause now pending before this Court shall be the truth, the whole truth, and nothing but the truth, so help you God.
I do. NEILL FREEMAN, was called as a witness on behalf of the Plaintiffs, was duly sworn and testified as follows:
My name is Neill, middle initial W., last name Freeman. Neill is spelled N-e-i-double L. Freeman is spelled F-r-e-e-m-a-n.
It's a consulting firm that really has three lines of business. We consult with companies in public policy and business strategy matters. We consult with companies in environmental matters, and we do special investigative projects in the financial transactions, both prospective and historic, and present the results to public bodies, to Congress, or to court's of law.
I graduated from the University of Washington in Seattle, Washington in 1966, and I received a Bachelor's of Arts in Business Administration with a major in accounting. I am a licensed and certified public accountant in California, in Washington, and in North Carolina. As a result of that licensure, I'm required each year to maintain continuing professional education, and I've done that virtually for the last 30 years.
I operated as a referee in the Superior Court in the State of California dealing with the accounting and financial matters partnership dissolutions and disputes between business owners.
A Special Master is something very similar to that in the federal court system, where an individual appointed by the Court to step into the shoes of the Court for a very limited purpose to understand the information to assist the Court with its role as a trier of fact.
(BY MR. GELBLUM) I'd like to show you what I'll mark as Exhibit 2409. Is that your curriculum vitae?
I was asked to review the financial information presented by defendant's counsel, to review information of a financial nature that was provided, to review deposition testimony, and to provide the Court and this jury with information relating to the financial condition or the net worth of Mr. Simpson.
And did you determine what you believed to be Mr. Simpson's net worth as of December 31, 1996?
(BY MR. GELBLUM) We'll go through in some detail how you got there. Before we do that, can you tell the jury what documents you reviewed, general categories of documents?
I reviewed Mr. Simpson's statements of net worth that were provided that were generally provided starting in December 1993 forward through December 31, 1996, and there were several different versions of the '96 financial statements. I reviewed the report of a Mr. Mark Roesler, financial information relating to O.J. Simpson Enterprises, Orenthal Productions, a company called Pig Skins Behind the Corner Stone Company. I reviewed bank loan applications, a loan and appraisal relating to the Rockingham residence. I've looked at actuarial statements relating to Mr. Simpson's pension plans. I've reviewed contracts. I've looked at miscellaneous documents relating to the combination of Orenthal Productions, and O.J. Simpson Enterprises, and the deposition testimony of Mr. Goodfriend, Mr. Taft.
His accountant and -- Mr. Simpson's accountant and lawyer, respectively. I've looked at some bank account records as of December 31 and other various dates.
Okay. You said that you looked at -- well, first of all, this is all information, as you understand it, that was provided by the defense in this case?
Okay. And you looked at statements that were prepared quarterly from December, 1993 through December, 1995; is that right?
And did you review some deposition testimony by Mr. Taft for the purpose for which those statements were prepared?
I'll just show to you testimony -- it's Mr. Taft's deposition, page -- the confidential portion, page 9, line 23, through page 10, line 23. Did you review this testimony?
I'm going to object to this, Your Honor. You can't use the deposition in this manner.
Rather than have him parrot back what his understanding of the -- rather than have the witness just parrot back what his understanding is from Mr. Taft's deposition that these were prepared in the ordinary course of business, that they're accurate, get it from the horse's mouth and have the jury see exactly what Mr. Taft said. I can ask the witness what his understanding is, but it's based on his testimony which -- it's just more direct and accurate.
It's not a proper way to use a deposition, Your Honor. It's not impeachment and it's not --
Frankly, if that -- what you're intending to do, it appears to me not to be probative to that point at all. Makes absolutely -- doesn't make any sense.
It describes what the statements were there for, that there -- they were there for his internal use, his financial use.
I'm not impeaching anybody. I'm going to compare these to the statements that we got that were prepared for the purpose of litigation.
I'll sustain the objection, 352. I'm reading it and I'm a judge, and if that's the purpose for which you're offering it, this confuses me, it doesn't help me; if it doesn't help me, how's it going to help the jury?
Maybe my -- let me make a different point. I'm sorry, I didn't make it clear. These statements, December, '93 through December, '95, were prepared for Mr. Simpson's internal business use, his financial planning purposes, as this says.
The next statement, 45 days, which is prepared for purposes of litigation, as this shows, shows a net worth of $500,000. I think that's probative of the reliability of the statements that the defendants are offering.
My point is, all he's going to say is he read Mr. Taft's deposition and he said -- and that's what his understanding is based on, Mr. Taft's deposition, that the earlier ones were prepared for that purpose. I just thought I'd show it to the jury --
(BY MR. GELBLUM) Did you cause a chart to be prepared comparing various of the net worth statements that were produced by the defense?
Yes, sir, I did. (Counsel displays chart entitled "Orenthal James Simpson Net Worth Reported by Simpson.")
This chart lists the financial statements that were provided by defendant's counsel in this matter at various dates. The first one was provided as of December 31, 1993, and they include financial statements through December 31, 1996. On the left-hand scale, the vertical scale, I've listed numbers which are in millions of dollars, and that's used against -- which you can measure the height of each of the bars representing a financial statement to determine approximately what the net worth reported on that financial statement was. So by way of example, December 31, 1993, the financial statement reported a net worth slightly in excess of $10 million. Another example is in December of 1994, after the murders, the financial statement reported a net worth of almost $11 million. After the acquittal, at December 31, 1995, the reported net worth in excess of $8 million.
Again, it's your understanding that those statements from December, 1993 through December, 1995 were prepared for the internal financial uses of Mr. Simpson?
Okay. And then there's a sudden drop off in February, 1996. Is that the first statement that was produced in this litigation, as you understand it?
And that's as of February 15, 1996. So that's indicated by the small bar. And you would have to read across to the left scale to see that it's about $500,000.
It's your understanding that in contrast to the ones from December, 1995 and previously, the ones to the right of that were not produced for Mr. Simpson's personal financial use but for protection from the plaintiffs in this litigation?
And the last item on there is December 31, 1996, and what is the number that Mr. Simpson produced for his net worth for that statement?
This is the most recent statement, which was as of December 31, 1996, and it reports that he has a negative net worth of over $800,000.
You can resume your seat. Did you also review -- you mentioned Mark Roesler before, and he'll be another expert witness that the ladies and gentlemen will hear from a little later. Did you review a report that Mr. Roesler prepared?
The subject matter of that report was the earnings ability of Mr. Simpson into the future, and allowed me -- or gave me a basis for computing the present value in today's dollars of what that earnings capacity was.
Now, have you prepared summaries of the information shown on the various net worth statements Mr. Simpson has prepared and the other financial documents?
(BY MR. GELBLUM) Mr. Freeman, could you briefly explain for the jury the format of Exhibit 753?
This Exhibit 753 reports several different pieces of financial information. It reports Mr. Simpson's assets, which are divided, as is their custom, into current assets, closely held investments, other assets and total assets and then reports liability. There are three columns, and the three columns represent that which was reported by the defendant at December 31, 1996 and the latest revision which was as of January 31, 1997 --
The adjustment column represents adjustments that I have made to the amounts reported in that most recent financial statement. And the last column shows the effect of those adjustments on Mr. Simpson's net worth.
All right. Let's talk about the adjustments that you made, sir. First adjustment, so the jury's clear, because you said earlier it's $15 million, was roughly $15 million?
We'll get to that in a minute. First adjustment you made was in the loan receivable from Orenthal Productions, that's an adjustment of $265,726. Can you tell the jury why you made that adjustment?
Okay. If you look at financial statements of Orenthal Productions, you'll find that it lists as a debt to Mr. Simpson this amount, $265,000. The financial statements that were provided by the defendant list it as only $1, and the explanation is that Orenthal Productions owes more than it has in assets.
As of December 31, 1996, did that show an account payable by Orenthal Productions to Mr. Simpson?
However, looking at Orenthal Productions, early in the year they owed Mr. Simpson as much as a million dollars and they had been making payments on that, so the million dollars that they owed him in the February 15 financial statements by way of example has --
Excuse me. -- in the earlier financial statements has been paid down to $265,000. In addition, Orenthal Productions had a purported income of over $800,000 during the year, and since it's a conduit for his professional earnings, it appears that there is every prospect of having that paid in the future.
So based on the information you have seen, that debt should be repaid in time by Orenthal Productions so it should remain as an asset on Mr. Simpson's balance sheet?
The next adjustment you made was to the Apollo residence. Again, Mr. Simpson reported that on the most recent balance sheet at $1, and you made an approximately $250,000 adjustment, correct?
Until 1996, on every financial statement produced, it was listed as $250,000. It was also listed at $250,000 on bank loan applications.
And even on the February 15, 1996 net worth statement that was provided to us in this litigation for purposes of this litigation, was that listed at $250,000?
Okay. Is there another entry on this chart in another -- in another category that Mr. Simpson considers this to be his asset?
Yes, there is. The remaining mortgage on that Apollo residence first trust deed lists it as a liability.
Mr. Simpson, by virtue of his football career, is entitled to a pension from the NFL Players Association at age 55, and that was not listed on the financial statements in December. I have computed the present value of that based on life expectancy of 25 years -- or, excuse me, 24 years, and that amount is $175,592.
I called the NFL Players Association and talked to them on a no-name basis. They reported that players are entitled to a pension based upon their years of service in the league and the particular years that they played.
Steve, would you put up the -- on the Elmo, put up on -- I had Mr. Foster put on the Elmo. We'll mark next in order, 2411.
Yes. This is a table which lists the years out -- for the next 24 years of Mr. Simpson's life, and starting at his age 55 in the year 2002, it provides for a monthly income of $1,910 or a total for the year of $22,922 for the remainder of his life. What I have done is, utilizing a discount rate of 7 percent, computed what the value is today at the -- as of the end of January, 1997 of these future payments.
Can you first of all explain to the jury what you mean by discount rate and how you arrived at it?
Well, it's kind of the opposite of a savings account. If you put a dollar in a savings account today and it earns 5 percent, at the end of a year you would have -- well, let's say $100, at 5 percent you'd have $105, the present value of $105 one year in the future is a dollar today. And so that's what a present value is. It's measuring in today's value something that you expect in the future.
7 percent rate is a rate that's slightly higher than the U.S. treasury rate -- deposit rate for long-term security and slightly less than one would get, for example, in investing in corporate bonds or preferred stocks.
(BY MR. GELBLUM) Again, did you -- you said you used a life expectancy for Mr. Simpson, what, 24 years?
There are a number of life expectancy tables that are available for any particular individual at a given age to estimate what the average life expectancy of that individual will be in the future. And one of those appears at the BAJI table at 14.7, and looking at those, they, for Mr. Simpson, project a life expectancy of anywhere from 24 to 26 years -- 23-1/2 to 26 years, and I used 24.
Before we get to the next adjustment, I just want to make sure the jury understands, where you don't have an adjustment, you've just taken the assets that Mr. Simpson listed on the December 31, 1996 statement, the last revision of it, and carried it straight across to the column that you're going to end up using for your total; is that right?
Okay. Now, let's get to the next adjustment on this page, which is the big one there, the value of name and likeness and trademarks for $24,880,568.
Can you explain to the jury very briefly what you -- what is meant by the value of name and likeness and trademarks?
The value of name and likeness and trademarks is the value measured in today's dollars of the exclusive use and right of exploitation of the name and likeness of Mr. Simpson plus any trademarks that he has of those names and likenesses.
Is it another way of saying what a reasonable person would pay Mr. Simpson today for the exclusive right to exploit his name and likeness for the rest of his life?
Well, the actual right extends to life plus 50 years so it would extend beyond that. I've only measured it for his life span of -- estimated life span of 24 years. But that's the amount that a person today would pay to have absolute control over the use and distribution of his name and likeness into the future.
Now, were you the one who figured out what Mr. Simpson would be able to make in the future off of his name and likeness?
And is it your opinion as a forensic accountant that it is proper to include this number on a current net worth statement?
Well, that gives a complete picture of what the prospects or financial condition of Mr. Simpson is. It's the same kind of concept that's used when people, for example, are financing movies or when corporations merge, there are things that under regular accounting principles, under income tax principles, for example, are not listed as -- as either, but people recognize that, in fact, they do exist, and are listed as an asset. So that's what -- good will is another name for this type of concept.
Okay. And again, the concept is this is what the reasonable person would pay Mr. Simpson today?
Yes, sir. This is the same type of computation that I did for Mr. Simpson's -- the present value of his NFL pension. I've listed the years and I've listed 24 years here, and because the first year we're measuring, as of January, that it's only 11 -- 11/12ths of a year into the future. I have applied a discount rate of 7 percent, and by way of example, the receipt of income during the remainder of 1997 in the amount of $2,125,000 has a value at the end of January of a million $888,000. Another example, in the year 2000 the receipt of that amount of money, $2,125,000, has a present value of about 1 million, 681. So if -- somebody would pay today $1,681,000 for the right to receive that amount in the future.
Because money more remote, that is the right to receive money further down the line, has less value in today's dollars. I would pay you less to receive $2 million in 2008 than I would pay you to receive $2 million in 2002.
If you flip that around, the pass book example you used before, is that because I would need to invest less today to achieve 2 million 125, two years from now?
Mr. Roesler's report and his testimony at deposition, I assume his deposition here at court, will be that the earning powers of Mr. Simpson, on average, for the rest of his life will vary between 2 and $3 million a year. He cautioned me that some years will be extraordinarily high and some years will be low, but on average, year in and year out over the next 24 years it will average between 2 and $3 million. The average of those are the middle point, which would make -- which is used in this presentation, would be $2,500,000. But because of the nature of the exploitation of Mr. Simpson's name and likeness, he would most likely have to pay commissions to someone, and so I've measured commissions in this case -- well, Mr. Roesler told me the commissions could vary between 5 percent of the amount that the celebrity gains, and up to 20 percent. That the range is typically, for a living person, more in the neighborhood of 5 to 10 percent. For 15 percent, there would be extraordinary services for the person helping the individual. So I've allowed for 2 percent commission on two-and-a-half-million dollars' worth of annual earnings.
(BY MR. GELBLUM) Now, again, you only went out -- you went out to the year 2021. That's based on, as you discussed before, Mr. Simpson's life expectancy?
You did not include any number there for the value of exploiting that name and likeness after his death?
If somebody were to pay Mr. Simpson today for the right and in perpetuity to exploit his name and his likeness, would that most likely include that right to do that after his death?
Now, you have one deduction there, less receivable reinstated. Can you just explain that to the jury?
Yes, sir. The total present value of the future extreme of earnings is $25,146,000. The conduit through which Mr. Simpson conducts his business is Orenthal Productions. And that was the receivable that they had written off to one dollar. I have reinstated it on the balance sheet. And a possible source of that would, of course, be about this earning stream. I've deducted it from this double earning stream to avoid double accounting and come up with a net amount of $24,880,000.
Does that tie into the number on the big chart in front of the jury, this number that I used on Exhibit 753? Let's see. On the large chart in front of the jury, which I believe was 2410 --
(BY MR. GELBLUM) There's a large liability, actually, the last one listed there, for accounts payable, criminal/civil defense litigation, for almost $1,600,000. Do you see that?
And is that -- are these primarily for the exclusive liabilities from Mr. Simpson's criminal case?
Okay. In your experience, does the fact that that is as old as it is, almost a year and a half old, if not older, and the fact that it is a debt to professionals in large part, indicate anything to you about the probability of that would be paid in full?
I object. That calls for speculation on the part of this witness. There's no foundation.
Typically, when debts are outstanding for a long time, in accounting, most people consider debts 90 days old or older, 90 days past due or older, to be somewhat questionable. The likelihood of collecting them in full by the person to who they are owed decreases. And so it's likely at some point in time that Mr. Simpson would be able to compromise, that is, to pay those liabilities off for amounts less than are stated in this statement of net worth.
That is a conservative professional approach, that it gives Mr. Simpson the benefit of the full amount of the bill, even though he may not pay that in the future.
Okay. So the bottom line on the adjusted portion on this first page of Exhibit 753 is $28,837,236; is that right?
Steve, could we get the second page of this, the board for the second page. This is also part of 753. (Mr. Foster complies.)
(BY MR. GELBLUM) We've placed before the jury an enlargement of the second page of Exhibit 753, Mr. Roesler. This also something you prepared?
Yes. This is a continuation of that exhibit. And the amounts on the first line, assets and in excess of liability, are the same amounts that appeared on the bottom line of the page that we were just looking at. And then in Mr. Simpson's financial statements as of December 31, 1996, he provided for estimated income taxes and arrived, therefore, at the negative value or the negative net worth of $856,157.
Right. Did -- was there any line item at all for these deferred taxes on any of the net worth statements that you saw from Mr. Simpson that were prepared for his own use, as opposed to for use in this litigation?
And have you -- have you reviewed some documentation provided by Mr. Simpson that calculates that $4 million number?
Okay. Is there a component there for -- Well, first of all, I ask you, can you explain to the jury this concept of including deferred income taxes as a liability?
On the first page of Exhibit 753, there are assets that are listed at their fair market value: For example, the Rockingham estate. And those values are values that are greater than the tax basis or the amounts that Mr. Simpson paid in, invested in there. So if he were to sell that asset today and realize the $3.7 million, he would owe taxes on the difference between his tax basis and that property and the amount of money that he received to save his proceeds. So, in other words, in order -- in order to balance that out, the part of the computations that are made on this line are computations which you compute turns current tax rates, the amount of tax liability, were that $3.7 million to be realized.
Now, is it certain that the taxes that Mr. Simpson listed on the net worth statements, that he's going to have to pay those taxes?
For example, on the house, are there provisions in the tax laws that would allow Mr. Simpson not to pay any taxes at all on -- on the sale of that house?
I'm going to object. This calls for speculation as to what Mr. Simpson will do in the future, if he has any dollars to do it with.
(Continuing.) There are tax provisions that allow homeowners to roll over any gain that they have on a principal residence. So he could, in effect, defer that for the balance of his lifetime, even if he were to sell the property. In addition, both last year and this year in Congress, there has been various proposals by both parties and the president to --
I'm going to object to any proposals. This is total speculation, whether any tax laws --
(BY MR. GELBLUM) The page headed, Calculation of Adjustments to Defer Tax, we'll go through this item by item. Is this going to tie into the middle portion of the board that's before the jury now, the second page of 753?
Yes, sir. If you go down to the bottom of this page, you will see that the adjustment to the deferred tax computation is $9,012,199, which is the adjustment that I have made to computations provided by Mr. Simpson.
Okay. Let's go back to 2413. And these are now -- these are adjustments to Mr. Simpson's computation of the deferred tax that he included as a liability on the most recent net worth statement; is that right?
Would you go back to the top of the page, too, Steve. (Document adjusted on the Elmo screen by Mr. Foster.)
(BY MR. GELBLUM) Let's start with the first one. Could you explain that to the jury, please.
Yes, sir. There are two pension accounts listed in Mr. Simpson's financial statements, and they have value of about $4.1 million.
By the way, before you go on, Mr. Baker said to the jury a few minutes ago, that Mr. Simpson didn't have access to those pension accounts. Is that a true statement?
He ultimately will be drawing those out in another five years on a monthly basis. But in the interim, he uses them as collateral for loans, as part of his net worth financial statement. He has borrowed in the past from his pension plans.
In computing the $4,121,000, Mr. Simpson's financial statements of December 31, they computed the task at 62 and a half percent, which includes a penalty rate for early disbursement from a pension account balance.
Let me interrupt you one more time, sir. Just to avoid confusion, the numbers happen to be very similar between the $4,121,479, the balance in the pension accounts, and the 4,121,508 on the deferred taxes that Mr. Simpson listed. That's just coincidental?
Instead, the actual federal and California rate that Mr. Simpson will pay on that income when he removes it from the pension plan is 45.22 percent, or slightly over 45 percent.
Yes, sir. And if he uses it as collateral as a part of his borrowing package, he would have no tax consequences.
This overstates the tax liability on $4 million by 17.28 percent. And computing that amount, it's $712,000.
So, under your computation, then, Mr. Simpson's representatives overstated this component of the liability by $712,000?
And Mr. Simpson has a negative basis in that property and a very, very low fair market value. The computation includes the fact by Mr. Simpson's representatives that if he were to sell that property now with a large negative tax basis, approximately $1,900,000, that this -- he would incur a large tax penalty. In looking at the K-1, which is a federal tax form related to that building, however, we find that Mr. Simpson purchased his interest in that building many years ago, to the extent of 49 and a half percent, and more recently purchased another 49 and a half percent. So the entire amount of that accrued negative value in the partnership distribution accounts is not Mr. Simpson's, and they overstated it for that reason. We don't know exactly what the dollars are because the information has not been given to us. And we don't know what the prior status of those losses are, if they have been used, or if they're, in fact, available for carryover, to offset any gain that might be recognized in the future. But assuming that indeed he did buy another essentially 50-percent interest, and that the amount of the deficit at the end of 1994 was a million 685, then at the capital gains tax rate, the $4 million in taxes have been overstated by about $295,000.
Now, then, Mr. Simpson's representatives overstate a liability that reduces his net worth; is that right?
Okay. So, then, you're adjusting the liability by decreasing the amount of liability, and that would increase the net worth; is that right?
Another offset which was not taken into account in computing this $4 million is the tax effect of the civil defense attorney fees and the civil/criminal defense attorney fees that Mr. Simpson is attempting to deduct for tax purposes.
Well, if you have an expense and that reduces your income, you pay taxes on lesser income, lesser net income. In this case, if they deduct these from his income, he'll pay lesser tax because of these deductions. And you measure that at the tax rate in effect, which is slightly in excess of 45 percent, combined state and federal.
Okay. Now, finally, the last category is taxes on undisclosed assets. Could you explain that calculation, please.
Yes, sir. On Exhibit 753, I had two entries for the present value of his NFL pension and the value of his name likeness and trademarks.
Well, in these particular instances, that's another present value of future income, that's income that Mr. Simpson would receive; and therefore, he would have to pay taxes on that income when he receives it. Because I've measured it at present value, it's appropriate to apply a current tax rate for that amount. And I've done that so that would result in an increase in the tax liability that Mr. Simpson would have, the deferred tax liability of $1,329,694.
You said 1 million. So, adding these all together, you get to a net adjustment of how much?
Well, taking the reductions that I discussed earlier, and this addition, the net increase in taxes, adjusting the 4 million provided for in Mr. Simpson's statements, is $9,012,199.
All right. And that's reflected on the second page of Exhibit 753 that's in front of the jury?
So you've increased the tax liability by somewhat over $9 million, and that gives you a total tax liability of somewhere over $13 million?
And you subtracted that tax liability from the number we carried over from the first page, right?
Yes, sir. The excess of his assets over his liability of $28 million, reduced by $13 million in taxes, is $15,703,529.
(BY MR. GELBLUM) You did not include in the liability section the $8.5 million after compensatory damage awards that the jury rendered the other day. Why didn't you include that?
Because final judgment has not been entered in that amount. It's certainly something that the jury is aware of, but there's no final liability in that amount yet.
Now, from all the documents that you have looked at in connection with Mr. Simpson's finances, do you have any reason to believe that the information that you have been provided with understates his assets?
Well, there was a lot of information about the flow of cash that we asked for that we did not receive. For example, we do understand that Mr. Simpson, during the year, received approximately $1,250,000 on his interest in the Honey Baked Ham investment. And he also received about $1,750,000 in insurance proceeds to cover his insurance claims in this matter. The total of those is about $3 million. Yet, during the year, I don't see a commensurate decline in the liability that he has, although certainly, he used them to pay some liability, and I don't understand where the cash went. So I have no confidence that I've seen everything.
Can you determine what the total amount of deposits that were made into those bank accounts in December 1996 alone?
Well, I've got one for O.J. Simpson Enterprises. And do you have a set of them, because they're spread throughout in my --
Between those two accounts, one account had deposits of $68,000; the other one had deposits of $9,341; so it would be $77,341 dollars in deposits.
That amount is $15,703,529.
After the acquittal, at December 31, 1995, the reported net worth in excess of $8 million. [Then] That drop off is to about $538,000. And that's as of February 15, 1996 [the first litigation statement].
I'm reading it and I'm a judge, and if that's the purpose for which you're offering it, this confuses me, it doesn't help me; if it doesn't help me, how's it going to help the jury?
I don't understand where the cash went. So I have no confidence that I've seen everything.
I'm Mr. Freeman. [After Gelblum called him 'Mr. Roesler'] Now we're even.