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Federal Authorities Take Control Of Investment Firm, ERISA Violations Charged


By Tom Alkire

Monday, September 25, 2000


PORTLAND, Ore. - Federal authorities secured court orders Sept. 21 that appointed a permanent receiver and froze assets of Capital Consultants, LLC, a local investment fund management firm (Herman v. Capital Consultants, D. Ore., No. CV00-1291, 9/21/00; Securities and Exchange Commission v. Capital Consultants, D. Ore., No. CV00-1290, 9/21/00).


The U.S. Department of Labor and the Securities Exchange Commission charged Capital Consultants with violations of the Employee Retirement Income Security Act and the Securities and Exchange Act. Capital Consultants manages more than $1 billion for 340 clients, most of which are pension trust funds and individuals, according to court documents.


At least 60 of the clients are primarily union-sponsored pension, health and welfare plan clients governed by ERISA, said a statement from the Labor Department's regional office in Seattle. The court orders and complaints filed in the U.S. District Court for the District of Oregon Sept. 21 were the result of an investigation conducted by the Labor Department's Pension and Welfare Benefits Administration and SEC.


The union plans have lost over $100 million and the department hopes its lawsuit will restore these losses, said Bette Briggs, director of the PWBA regional office in San Francisco. Obtaining a permanent receiver was an important step in protecting the ERISA plans and other investors, at Capital Consultants from further losses, she told BNA Sept. 22.


The complaints by the department and SEC allege that Capital Consultants imprudently loaned $160 million of client money to a Portland-based company that acquired and serviced consumer loan portfolios from third parties. When this investment soured the regulators claim that Capital Consultants was not forthcoming with its clients, but used more client money to hide the results of the initial investment.


"In fact, the defendants have funded loan payments on the $160 million loan through a Ponzi-like scheme, whereby they have loaned an additional $71 million of client funds to the entities that purportedly purchased the $160 million loan to enable them to make the loan payment,"one of the court documents said.


Beginning in 1995 Capital Consultants began making loans to Wilshire Credit Corp., a financial firm that acquired and serviced consumer loans purchased from third parties. Over the next three years some $160 million of client funds was loaned to Wilshire Credit, according to court records.


"From the outset, the terms of the WCC loan were unduly favorable to the borrower," said the department's complaint. For example, the loan was interest only with no periodic principal pay back provision other than a stipulated maturity date.


As Wilshire Credit's problems mounted, amendments were made -- such as lower interest rates and extended maturity dates -- to the loan agreement with Capital Consultants that increased the risks to the clients' funds even more, the department charged.


In late 1998 Wilshire Credit and its other related firms were in trouble and faced collateral calls from lenders. The Welsher companies were forced to sell assets affecting Welsher Credit's ability to pay off the $160 million loan from Capital Consultants.


In early 1999 a restructuring agreement released Wilshire Credit from obligations under the $160 million loan in exchange for stock and future conversion rights in a subsidiary of Wilshire Financial Services Group, Inc. If Capital Consultants could actually exercise these conversion rights at the maximum ratio, the value of its original investment would be $13.4 million today, the complaint said.


From 1999 until earlier this year Capital Consultants also loaned an additional $71 million in client funds to various entities that purportedly purchased the $160 million loan, the court documents said. For example, Sterling Capital, LLC was established in late 1998 in order to purchase the loan. Later in 1999 Brooks Financial, LLC, was formed and borrowed money from Capital Consultants to purchase part of the $160 million loan from Sterling. These transactions were done in order to disguise the fact that the loan had lost most of its investment value, the records said.


Finally, the complaints alleged that Capital Consultants did not disclose the problems with the loans and other information to its clients. The firm charged the clients its 3 percent management fee based on the face value of the loans, not on their true discounted value, the court records said.


The department's complaint charged that Capital Consultants' actions violated ERISA in a number of ways including the prudent person standard, that the company imprudently loaned additional money to conceal losses of the original investment and charged excessive fees.


The SEC's complaint charged fraud violations of the Securities and Exchange Act and the Advisers Act.


The defendants in the case included Capital Consultants as well as its founder, chief executive officer and principal shareholder, Jeffrey L. Grayson, 58; and his son, Barclay L. Grayson, 30, a minority shareholder and president of Capital Consultants.


The Sept. 21 court order issued a preliminary prohibition against both Graysons and Capital Consultants from doing business with any plan governed by ERISA. The department's lawsuit seeks to permanently bar the defendants from doing business with any ERISA plan, and it seeks to require them to restore all losses suffered by the pension and benefit plans.


Court documents did not reveal the names of the union pension plans involved. Briggs also declined to tell BNA the names of the plans. However, local published reports have indicated a number of construction union plans involved with Capital Consultants including the Oregon Laborers-Employers Trust Fund, the Portland Plumbers and Steamfitters pension fund and the 8th District Electrical Pension Fund in Aurora, Colo. Other union plans mentioned in local published reports include the Local 11 of the Office and Professional Employees International Union and Local 9 of the International Longshoreman and Warehouseman's Union in Seattle.


Copyright © 2000 by The Bureau of National Affairs, Inc., Washington D.C.

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