The Oregonian

 

Feds Seize Capital Consultants

 

The firm's executives allegedly ran a Ponzi-like scheme to cover up the loss of $160 million of clients' money

 

 

 

By James Long and Jeff Manning of The Oregonian staff

Friday, September 22, 2000

 

Federal authorities seized control of Portland investment advisory firm Capital Consultants LLC Thursday and accused the firm's two top executives of running a "Ponzi-like scheme" to cover up the loss of as much as $160 million in client money.

 

In running the alleged fraud, regulators said, the money manager may have further deepened clients' losses to more than $200 million.

 

Much of the money came from at least 20,000 union members and retirees and their families, whose pension and benefits funds were managed by Capital Consultants.

 

A federally appointed receiver took permanent control of Capital Consultants' downtown Portland office Thursday afternoon.

 

Jeffrey L. Grayson, 58, and Barclay L. Grayson, 30, who are father and son and the senior executives of Capital Consultants, were banned from the office and preliminarily barred from managing pension money, a first step toward a possible permanent ban.

 

The court order appointing the receiver also froze the Graysons' personal assets.

 

The U.S. Department of Labor and the Securities and Exchange Commission obtained the order seizing the investment firm shortly after the agencies filed separate lawsuits in federal court. The lawsuits charged that the Graysons and Capital Consultants orchestrated what one SEC lawyer termed "one of the largest frauds perpetrated by an investment advisor."

 

"Essentially (the Graysons) took people's retirement money and (they've) stolen it through the Ponzi scheme," said the attorney, Kelly Bowers, assistant regional director of the SEC's office of enforcement.

 

Federal officials said the civil lawsuits don't preclude criminal prosecution that may result from an ongoing federal investigation that includes the Internal Revenue Service, the Federal Bureau of Investigation and the Labor Department.

 

The Graysons declined, through their lawyers, to comment on the civil actions. "We're trying to resolve this in the courts and don't think comment is appropriate at this time," said Milo Petranovich, a Portland lawyer representing Capital Consultants.

 

In a hearing in U.S. District Court on Thursday, attorneys for neither the Graysons nor Capital Consultants opposed the government takeover of the company.

 

The lawsuits describe a series of financial maneuvers that have been detailed in The Oregonian the past 11 months.

 

These events have their roots in a series of loans totaling $160 million that Capital Consultants extended to the former Wilshire Credit Corp. of Portland.

 

The Labor Department said, in its lawsuit, that the loans themselves were so risky from the outset that they violated federal laws governing the investment of pension money.

 

"We went after (Capital Consultants) because of their flagrant violation of the law in the handling of more than 60 union and retirement plans," said Bette Briggs, director of the Labor Department's pension oversight office in San Francisco.

 

The loans became a disaster for Capital Consultants in 1998 when Wilshire Credit and its affiliate Wilshire Financial Services Group nearly failed. Wilshire Financial went bankrupt in March 1999.

 

Rather than tell clients that their $160 million was gone, according to the lawsuits, the Graysons cobbled together an elaborate charade intended to hide the loss and convince clients that the investment was in fine shape. The Graysons told their clients that a New Jersey company, and later a Miami, Fla.-based operation, had agreed to assume the $160 million debt.

 

From 1999 to the present, clients continued to receive payments that Capital Consultants represented as interest payments on the Wilshire loans. But, the lawsuit charges, neither Sterling Capital of New Jersey nor Brooks Financial of Miami was capable of making the $1.5 million monthly "interest" payments.

 

According to The Oregonian's investigation, Sterling had virtually no assets and no business other than its relationship with Capital Consultants. Brooks was part of a low-rent family of used-car and furniture lenders in a seedy neighborhood of Miami.

 

To conceal the loss, the lawsuit said, Capital Consultants loaned another $71 million to Sterling and Brooks and related companies. Those companies, the lawsuit said, returned some of the money to Capital, which in turn presented the funds to its clients as "interest payments" on the original $160 million loans. Thus, the SEC's lawsuit said, Capital Consultants basically paid its clients back with their own money and told them the loans were paying off.

 

In the process, the lawsuit said, the Graysons may have expanded the $160 million black hole from the Wilshire debacle by as much as that $71 million.

 

Moreover, the lawsuit said, Capital Consultants continued to charge its clients a full 3 percent management fee on both the vanished $160 million loan and on the new $71 million loans that figured in the alleged Ponzi scheme.

 

The SEC's Bowers said his agency, along with the Labor Department, took Thursday's action to prevent losses suffered by the Graysons' clients from becoming even greater.

 

"Immediate action was necessary," he said. "Our purpose is to stem the flow of (union pension) plan assets. We hope to bar them (the Graysons) from ever dealing with (pension) plans in the future and if possible to recover assets," Bowers said.

 

U.S. District Court Judge Garr M. King appointed Thomas F. Lennon receiver of Capital Consultants. Lennon, a business turnaround expert based in LaMesa, Calif. entered Capital Consultants offices Thursday afternoon.

 

Lennon was appointed as a "permanent" receiver, meaning he will eventually shut down Capital Consultants for good. Lennon said he will retain a small fraction of the company's 40 employees to assist him.

 

"It looks like a real mess," he said.

 

Employees were told Thursday that the company is likely to be totally closed in four months.

 

Several Northwest union pension and benefit funds stand to lose millions of dollars. The Oregon and Idaho Laborers invested at least $20 million. The United Association Local 290 Plumbers Steamfitters and Shipfitters have about $17 million on the line. Local 11 of the Office and Professional Employees International Union has its entire 401(k) fund invested with Capital Consultants, though only some of that may be at risk.

 

More than a dozen lawyers attended the hearing. Petranovich represented Capital Consultants, while Norm Sepenuk represented Jeffrey Grayson and Steven B. Ungar represented Barclay Grayson. Mort Zalutsky represented three labor union trust funds including the laborers, plumbers and office workers, while Robert B. Miller represented the trustees of the same funds;

 

Nicolas Morgan and Bowers represented the SEC; Stacey E. Elias represented the Department of Labor; Marc D. Blackman represented Andrew Wiederhorn, former CEO of Wilshire Credit and Wilshire Financial; and Ronald H. Hoevet represented Larry Mendelsohn, Wiederhorn's top lieutenant at the Wilshire companies.

 

Larry Miller, a longtime member of the Oregon Laborers Union local 296, said members are extremely anxious about the fate of their retirement money. "The retirees are calling me up," said Miller, a rank-and-file delegate to the Laborers' district council, which oversees investment decisions. "They want to know if they are going to get their pension checks, and I have to tell them I don't know the answer."

 

You can reach Jim Long at 503-221-4351 or at

jimlong@news.oregonian.com.

 

You can reach Jeff Manning at 503-294-7606 or at

jmanning@news.oregonian.com.


Return to Laborers.org

(c) All orginal work Copyright Laborers.org 1998. All rights reserved..