Wiederhorn Bailout Tapped Union Pensions, Records Show
Capital Consultants lent millions from an investors' protection fund, loan documents reveal
Sunday, February 25, 2001
Of the tens of millions of dollars that Portland's Capital
Consultants lent the doomed Wilshire Credit Corp. in the fall of 1998, at least $14.5 million went directly to bail Andrew Wiederhorn out of a jam with federal bank regulators.
It wasn't just any kind of money: According to loan documents recently obtained by The Oregonian, it came from the client protection fund that Capital Consultants Chairman Jeffrey Grayson promised he would set aside when he lent $130 million to Wilshire Credit Corp. The loans ultimately proved almost worthless to the clients -- who were mainly union pension trust funds.
What's more, to secure part of the loans, Wiederhorn, Wilshire Credit's chairman, put up collateral that included 2-week-old IOUs from a fledgling company whose officers included his wife Tiffany's brother, sister and stepfather, as well as Wiederhorn's brother, Ted.
Besides the money that went to the bank, Capital Consultants agreed that Wilshire Credit could turn around and lend up to $1,040,000 to Wiederhorn's top business associate, Lawrence Mendelsohn, Wilshire Credit's president. Mendelsohn subsequently used that agreement to borrow $650,000, said Ron Hoevet, his Portland attorney.
Hoevet said there was nothing irregular about the October 1998 loans. "I don't think anybody was deceived about what the situation was," Hoevet said. "They needed those loans to meet margin calls and other obligations that were being demanded."
Robert Shlachter, attorney for Andrew Wiederhorn, declined to comment, as did Roy Pulvers, an attorney for Ted Wiederhorn and the fledgling company, Specialty Finance. "We will litigate this matter in the court, not the press," Pulvers said. Barry Caplan, attorney for Tiffany Wiederhorn, also declined to talk about the case.
R. Scott Palmer, a Eugene attorney whose firm represents Grayson, said he couldn't comment, citing pending litigation.
When he got the new loans from Capital Consultants, Wiederhorn signed papers asserting that Wilshire Credit wasn't in financial trouble, that he and his company had "not experienced any material adverse change in its finances, business operations, affairs, or prospects."
But Wilshire Credit's wobbling affiliate, the Wilshire Financial Services Group, was at the time under siege from investment bankers and on the brink of collapse. Thirty-eight days after Wiederhorn obtained the new loans from Grayson, he announced that Wilshire Financial was "restructuring" in lieu of bankruptcy.
Three months after that, Wilshire Financial filed a Chapter 11 petition in bankruptcy court in Delaware. The bankruptcy was finalized in June 1999. Wilshire Credit was drawn into the bankruptcy of its affiliate and wound up giving up its assets to a newly formed company.
As part of the proceeding, Grayson signed away his clients' claims to recover the loans -- now totaling some $160 million -- and excused Wiederhorn and Mendelsohn and their various companies from ever repaying the debt and promised not to sue them.
In September, the U.S. Securities and Exchange Commission and the Department of Labor filed civil fraud suits that forced Grayson and his son, Barclay, out of Capital Consultants. The SEC suit accused the Graysons of running a Ponzi-like scheme in a vain attempt to conceal the loss of the $160 million.
A federal judge appointed a receiver to liquidate Capital Consultants, and a federal grand jury is pursuing a criminal investigation into the dealings among the Graysons and Wiederhorn, Mendelsohn and others.
Wiederhorn would later blame the demise of his Wilshire operations on global financial turmoil that scared lenders into pulling back on commitments to the company. But some of his problems, federal records indicate, were of Wiederhorn's own making.
In the fall of 1998, just before Wilshire began giving off death rattles, Wiederhorn was in serious trouble with the U.S. Office of Thrift Supervision over Wilshire Credit's irregular dealings with a California savings bank that he also controlled.
The regulators had caught Wiederhorn's Wilshire Credit illegally lending money from The First Bank of Beverly Hills, a subsidiary of Wilshire Financial.
Wilshire Credit serviced the bank's loans, collecting payments from customers and taking care of paperwork. But instead of passing the money promptly to First Bank, the Office of Thrift Supervision found, Wilshire Credit re-lent millions to its own customers.
It was a flat-out violation of federal banking laws, the agency said, demanding that Wiederhorn reimburse about $14.5 million by Oct. 16.
Detaining First Bank's money, the agency said, amounted to forcing the bank to make loans to Wilshire Credit with no assurance that Wilshire Credit could repay. This put the bank's federal deposit insurance at risk.
"Wilshire Credit Corp.," said an OTS cease-and-desist order that Wiederhorn signed, "knowingly or recklessly participated in a violation of law and regulation, (or) a breach of fiduciary duty or an unsafe or unsound practice which caused or is likely to cause a significant adverse effect on First Bank."
The thrift supervision office's demand for return of the money worsened an already serious financial bind that the Wilshire operations faced. Some of Wilshire Financial's own lenders were clamoring for their money, forcing the company to dump assets quickly to pay them. Between Oct. 14 and Oct. 30, according to SEC filings, Wilshire Financial sold off more than a quarter of its total assets, using the proceeds - more than $500 million – to pay the bankers. Wilshire lost $48.7 million on the sales, the SEC statements said.
Wiederhorn could hardly hope for sympathy from the regulators because he'd already signed solemn promises three times in as many years, as a bank board member, to halt serious violations of federal banking laws.
He turned to Grayson for help.
Grayson to the rescue
In a hectic few days in October, Wiederhorn and Grayson cobbled together two complicated new loans. Capital Consultants lent Wilshire Credit $19.3 million on Oct. 15 and another $6 million on Oct. 16. The loan documents show that Wiederhorn and Mendelsohn pledged much of their remaining personal fortune as security for the new loans. Wiederhorn even drew his wife and brother into the fray.
For the Oct. 15 loan. Wiederhorn and Mendelsohn pledged all of their stock in both Wilshire Financial and an affiliate, Wilshire Real Estate Investment Inc. Wilshire Credit also pledged $14.2 million in two promissory notes it held from other Wilshire affiliates.
As collateral for the Oct. 16 loan, Wiederhorn and Mendelsohn pledged their stock in Wilshire Credit. Wiederhorn also included two promissory notes showing that he and his wife, Tiffany, were owed $5.5 million by a small New England company, Specialty Finance Investors LLC.
The Specialty Finance notes were dated Sept. 30, 1998 – two weeks before Grayson accepted them to secure part of the new advances. The Wiederhorns supposedly had lent the money even as Andrew Wiederhorn searched for cash to rescue his failing Wilshire operations.
Specialty Finance had been organized May 15, 1998, by two Portland attorneys, Mark H. Peterman and Steven H. Hull, who did work for Wilshire Financial. Although Specialty Finance's legal papers were filed in Oregon, the company's business address was 3,000 miles away, in Hallowell, Maine, the home of Wiederhorn's older brother, Ted.
Ted Wiederhorn owned a third of the company, and Tyler Berchtold and Noel Schaub, a brother and sister of Tiffany Wiederhorn, each owned a third.
According to company internal documents obtained by The Oregonian, Specialty Finance's first manager was Don Berchtold, Tiffany Wiederhorn's stepfather. Two weeks later, the documents show, Berchtold was replaced by Ted Wiederhorn, who served until Sept. 1 when he was replaced by Chris Tassos, then chief financial officer of the Wilshire Financial Services Group.
The details are relevant because under the company's operating agreement, only the manager could authorize Specialty Finance to borrow money. But the IOUs that Andrew Wiederhorn gave Capital Consultants appeared to be signed by Ted Wiederhorn and were dated Sept. 30, 1998 -- a month after Tassos replaced him as manager.
In a federal fraud and racketeering lawsuit filed by Portland's Bullivant Houser Bailey law firm on behalf of eight union trust funds, the trustees allege that the IOUs were unauthorized and unenforceable and "were concocted to be used in a scheme to obtain the release of the cash" from Capital Consultants.
In any case, the collateral eventually would prove of little worth to Capital Consultants' clients. Jeffrey Grayson released Wilshire Credit, Wiederhorn and Mendelsohn from most of their obligations as the parties signed mutual releases during Wilshire Financial's 1999 bankruptcy.
Of the money that Grayson furnished Wilshire Credit and Wiederhorn to get out of trouble, $19.3 million was not just client money, but a special kind of client money. Grayson had persuaded labor union pension fund trustees and a few other investors to put large sums into Capital Consultants' "collateralized notes," partly by emphasizing the safety of loans secured by such notes.
Fifteen percent of each loan was to be held back in a cash-collateral account to protect the clients against the possibility of a default by a borrower. The reserve fund could provide a temporary stopgap to continue making interest payments that, for example, the pension funds relied on to pay retired members.
But on Oct. 15, 1998, Grayson cleaned out the $19.3 million in the cash collateral account and lent it to Wilshire Credit.
A copy of the Oct. 15 loan agreement obtained by The Oregonian shows that about $14.5 million was wired directly from a cash-collateral account Bear Stearns & Co. to the First Bank of Beverly Hills. Another $4.3 million was transferred to an account at Prudential Securities. The loan documents show that Prudential had a pending margin call against Wilshire Financial for $3 million. The remaining $517,930 in the cash collateral account was turned over to Wilshire Credit "to satisfy the general obligations of the borrower," according to the loan documents.
Mendelsohn's attorney said his client used the $650,000 he obtained from Wilshire Credit to pay off margin calls on his personal stock so that he could then pledge the stock free and clear as security for the October loans.
Despite the mutual releases signed by Grayson and Wiederhorn during the Wilshire Financial bankruptcy, the union trust funds have taken aim at both men in an effort to recover their money.
Eight of the funds allege in a lawsuit filed in federal court in Portland that Grayson and Wiederhorn "secretly schemed and conspired" to loot the investments and evade responsibility by signing the releases. That case and others are headed toward mediation, scheduled to begin in May.
Although Grayson has lost his company, Wiederhorn is still at the helm of the former Wilshire Real Estate Inc. in Portland and recently bought millions of dollars worth of commercial real estate in England. Wiederhorn recently renamed the company, Fog Cutter Capital Group, after a favorite drink of his served at Trader Vic's.