Capital Consultants lent clients' money to a Miami firm it now says is actually making their loan payments
By Jeff Manning and James Long of The Oregonian staff
June 18, 2000
For more than a year, Capital Consultants LLC, a Portland money manager, has repeatedly told clients that their investments in Wilshire Credit Corp. were safe -- even though the $160 million in loans had nearly vanished in the 1999 bankruptcy of Wilshire's high-flying parent company.
Jeffrey Grayson, Capital Consultants' chairman, assured these clients -- mainly labor union pension trust funds -- that a previously unheard of white knight from New Jersey had saved the day by taking over the clients' almost valueless loans and making all the interest payments they were owed.
But lately, faced with some increasingly skeptical and angry clients, Capital Consultants has revealed that the New Jersey savior isn't really their main benefactor after all. Instead, Grayson recently told some pension trustees, most of the loan payments actually are coming from another obscure company -- this one in Florida.
Brooks Financial LLC, a Miami used-car and furniture lender that was formed a year ago, was now the main source of payments, Grayson said.
And, it turned out, Capital Consultants was the main source of money for Brooks. An investigation by The Oregonian has found that a week after the Miami company was formed in June 1999, Capital Consultants began lending some of its clients' money to Brooks -- a series of advances that totaled $38 million.
Dan Feinberg, an Oakland, Calif., lawyer and pension law expert familiar with the case, said "it's very unusual to be loaning money to a company that has allegedly assumed the loan you made to another company. The reason it is unusual is that it doubles your credit risk because you've made two loans, but, in effect, one company is paying both of them."
Timothy Gamwell, a Miami businessman who organized Brooks, would not confirm that his company had bought the Wilshire debt, referring questions back to Capital Consultants. "If that's what they said, that's what they said," Gamwell told The Oregonian. "Whatever they've said, then that's what we're doing."
Capital Consultants says that none of its clients has lost money and that interest payments have been made on time. Grayson told The Oregonian that the Florida company, which buys and services used-car loans, earns 40 percent to 50 percent on its business -- enough to repay Capital Consultants its own debt as well as the Wilshire interest.
That means Brooks is paying about $1 million a month to cover the Wilshire interest, Grayson said in a recent interview. In addition, Brooks is paying another $4.5 million a year to service its own debt to Capital Consultants. Grayson added that his efforts to salvage the Wilshire loans were given the legal go-ahead by a lawyer and pension law expert.
"In order to do this, we had to get a legal opinion," Grayson said. "We got an 11-page opinion from our lawyers in Washington, D.C., so that it's not a violation" of federal law.
A federal grand jury in Portland is looking into Capital Consultants' handling of the Wilshire loans, as well as Grayson's relationships with several union pension plan trustees and Wilshire founder Andrew Wiederhorn.
An organized crime task force that includes agents of the U.S. Labor Department, the Internal Revenue Service and FBI is conducting the probe under direction of the Portland U.S. attorney's office.
Within the past month, at least two union pension trusts have launched their own investigations. Last month, the Oregon Laborers-Employers Trust temporarily suspended payments to union members out of its defined contribution 401(k) fund while it figured out the value of the loans Capital Consultants made on its behalf.
Those payments reportedly have resumed.
Capital Consultants lent the $160 million to the former Wilshire Credit Corp. in 1995-98. When Wilshire Credit's parent, the Wilshire Financial Services Group, went bankrupt in 1999 a bankruptcy court traded the debt for 49.9 percent of the stock of Wilshire Credit.
At the time, Capital Consultants told its clients that the Wilshire interest payments would be paid by Sterling Capital LLC, an obscure, Newark, N.J., firm. A principal of the spankingnew Sterling, it later turned out, was Daniel D. Dyer, a Tacoma businessman whose company owed millions to Capital Consultants.
As recently as early this spring, Capital Consultants maintained that Sterling was making the Wilshire interest payments. "Sterling Capital LLC continues to make payments under its loan documents with Capital Consultants as anticipated," the investment adviser reported to trustees of the Local 290 Plumbers, Steamfitters & Shipfitters Industry health and welfare trust on March 16.
But in May, Grayson admitted that for more than a year, Sterling wasn't the main source of payments. Instead, he said, Brooks Financial was making two-thirds of the payments.
Grayson declined in a recent interview to identify the source of the remaining one-third. Little information is available on Brooks, which is privately held and barely a year old. It is affiliated with Florida Automobile Finance Co., which buys, services and finances auto loans to people who are considered poor credit risks. Florida Auto's sales in 1999 totaled a modest $6 million, according to a Dun & Bradstreet report.
Florida Auto's headquarters at 2215 N.W. 36th St. in Miami is a nondescript two-story building whose close neighbors include a Kentucky Fried Chicken restaurant, a used-car lot and a private eye's office. The front door has security bars, and a sign hanging from a corner of the building advertises "auto loans."
Capital Consultants has lent money not just to Brooks, but to at least five related companies sharing the same building and many of the same officers and directors. Since 1998, Capital Consultants has lent these companies more than $70 million, according to Capital Consultants' reports to pension fund trustees.
The flow of money from Capital Consultants to the Miami companies increased in June 1999 when Gamwell formed Brooks. Brooks had been in existence for just six days when Capital Consultants started lending it money.
Though Brooks does the bulk of its business in Florida, its articles of organization were filed in Oregon. Lane Powell Spears Lubersky, Capital Consultants' primary Portland law firm, faxed Brooks' registration papers to the Oregon secretary of state.
As collateral for the Capital Consultants loans, Grayson said that Brooks pledged portfolios of used-car and furniture loans and an option on two-thirds of the Wilshire Credit stock that Capital Consultants got in Wilshire Financial's bankruptcy restructuring.
Gamwell defended Grayson's use of client money in an attempt to salvage the Wilshire debt. "Let me ask you something," he said, "have you ever been in business? Have you ever had a loan go bad? If Capital Consultants has this relationship with Wilshire and it owes this money to its clients, if it tries to structure something to get the clients paid, then why is that bad?"
You can reach Jeff Manning at 503-294-7606 or by e-mail at firstname.lastname@example.org.
You can reach Jim Long at 503-221-4351 or by e-mail at email@example.com.