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.