Retirement investments give thousands of union members a stake in Wilshire Financial
By Jeff Manning and Jennifer Bjorhus
Sunday, October 10, 1999
Dean Kirkland, a strapping former NFL offensive lineman, and Andrew Wiederhorn, the heavily moussed financier, make an unlikely looking pair.
But Kirkland played a pivotal role in finding the cash that helped make Wiederhorn's Wilshire Financial Services Group one of Oregon's fastestgrowing companies in the mid-1990s.
Kirkland, an ambitious, 31-year-old salesman for Capital Consultants Inc. and scion of a proud Northwest labor family, traveled from Colorado to Kentucky and beyond selling union trustees on the merits of a Capital commercial loan portfolio, 50 percent of which consisted of loans to Wilshire Credit Corp.
Soon after Wilshire Financial went bankrupt in March, court documents revealed that Capital was its single largest creditor. Wilshire owed the Portland-based money management firm $195 million. Much of that money came from the retirement funds of union workers across the country.
At least 12 union pension funds representing more than 20,000 beneficiaries now have an indirect stake in the welfare of the once high-flying Wilshire companies.
When Wilshire Financial crashed into bankruptcy, most people who had invested in the company lost money – from sophisticated institutional investors to individuals who bought stock in what they thought was a promising local company. Wiederhorn lost more than $100 million on paper - and his job as chairman of Wilshire Financial. But Capital cut a deal with another company that keeps money flowing to its clients and makes the pension funds among the biggest stakeholders in Wilshire's long-term fate.
To be sure, Capital's clients continue to be paid on schedule. Eleven pension trustees or administrators interviewed by The Oregonian agree that their monthly interest checks have arrived as expected despite the bankruptcy.
But after the problems at Wilshire went public, some trustees were concerned enough about their exposure to Wilshire to demand that Capital put their money in other investments, Kirkland conceded.
Additionally, the U.S. Department of Labor's Pension and Welfare Benefits Administration confirmed that it has opened an investigation into Capital. A Portland union trustee interviewed by the agency said investigators asked him questions about Capital's investments in Wilshire Credit Corp.
The Labor Department, which regulates money managers who handle employee benefit plans, has investigated Capital in the past as well. Capital paid $2 million to the Oregon Laborers Employers Pension Trust to settle a lawsuit brought by the Labor Department that accused the firm of manipulating its investments to increase fees.
When Kirkland made his regularly scheduled client visits in the spring, he had to do some explaining.
Until the last half of 1998, the Wilshire group of companies was generating results that made everyone associated with it look good. At its height, Wilshire Financial employed more than 800 people. The Oregon Entrepreneurs Forum named Wiederhorn its 1998 Entrepreneur of the Year. The company's stock traded at about $30 a share.
Then in the fall of 1998, turmoil in Asian and Russian financial markets and unexpectedly high prepayment rates on subprime mortgage loans combined to frighten investors. Lenders called in loans throughout the specialty finance and subprime mortgage industry, collapsing numerous firms.
Wilshire Financial fell, too, and filed for Chapter 11 bankruptcy reorganization in March.
Kirkland, accompanied on at least one occasion by Capital Consultants Chairman Jeff Grayson, traveled the West to reassure clients. They told the clients that an unrelated third party had picked up Wilshire's obligations and would continue to meet the monthly interest payments.
No one involved with the deal would reveal details of that transaction nor would they divulge any details about the company that reportedly has agreed to assume the debt owed the union pensioners.
Kirkland, however, says he's proud of the job he's done at Capital and vehemently denied that his firm was imprudent in its dealings with Wilshire.
"Jeff Grayson has always been controversial; he's a very creative guy," he said. "It's kind of like smoke and mirrors. This has been alleged, that has been alleged. Sounds like spoiled eggs to me, partner. . . ."
Many union pension fund trustees remain highly loyal to Capital. "We were told that Wilshire investment would bring in double the return of a money market and the risk is about the same," said Clark Knauss, a trustee with two union pensions in Reno, Nev. "When Capital says they'll do something, they do it."
When Wilshire Financial Services Group got its start, Kirkland was still laboring in the trenches of college and National Football League stadiums.
The Vancouver, Wash., native started on the offensive line for the University of Washington Husky football team, helping the team win the Rose Bowl in 1991. He was talented enough to continue on in the NFL, where he played for four years with the Buffalo Bills.
Even during his time with the Bills, Kirkland spent summers working in the investment industry. When his football career ended, Kirkland joined Capital full time in 1995.
"I tell them that I went from crunching heads to crunching numbers," Kirkland said.
He proved as effective in the boardroom as he was on the gridiron, extending the reach of what had been predominantly a Pacific Northwest company across the country.
Kirkland's impeccable labor pedigree helped open doors for him, pension trustees said.
His father is Portland union chief Gary Kirkland, a trustee on at least three union investment boards in Portland. His grandfather is Earl B. Kirkland, a Portland labor legend and former head of the influential Columbia-Pacific Building and Construction Trades Council. The Kirkland Union Manors retirement complex in Southeast Portland is named after him.
"I kind of went out and did my own thing," Dean Kirkland said. "I'm all over, nationwide. I've got clients as far away as New York."
Kirkland declined to divulge how many new clients or how much additional money he's brought in to Capital, saying only that the total is in the "hundreds of millions" – a heady sum for a firm that Grayson said last November had total assets of $1 billion under management.
Among the products Kirkland was selling was a "collateralized notes" commercial loan program. Capital Consultants made the loans with its clients' money, promising them a stable, high-yielding, monthly return.
Much of the money -- about $150 million, Kirkland says – was steered to Wilshire Credit, a loan-servicing company. Unlike Wilshire Financial, Wilshire Credit was privately owned by Wiederhorn, former head of Wilshire Financial Services Group Inc., and co-founder Larry Mendelsohn.
Capital heavily invested the money of some of Kirkland's clients -- 5 percent, 10 percent or more of their total assets -- in Wilshire Credit.
Ron Edson, a pension trustee for Local 9 of the
International Longshoreman and Warehouseman's Union in Seattle, said his trust has 22 percent of its total assets in Capital's collateralized notes program. Kirkland confirmed that some clients had as much as 25 percent of their total assets invested in Capital's collateralized notes.
Those percentages surprised four lawyers and an accountant who all specialize in ERISA issues. The Employee Retirement Income Security Act, a 1974 federal law that governs pension fund investing, has no exact restrictions on asset allocation -- saying only that investments must be "prudent."
"Twenty-five percent seems high," said Tom Cristy, a Seattle lawyer and ERISA authority with the Perkins Coie firm. "But you'd have to analyze it. What else are they invested in? How risky really was it?"
The question of risk took on a new urgency when Wilshire Financial hit hard times last fall.
As part of the company's bankruptcy plan, Wilshire presented its lenders with an unpleasant deal. Wilshire would quit making payments on its debt to Capital clients. It would convert the debt to a 49.9 percent share of the stock of Wilshire Credit Corp.
Debt-for-equity swaps are common in bankruptcy. Companies go bankrupt in large part to get their debts legally reduced or discharged.
Oftentimes, the best even the largest creditors can hope for is stock in the company. That's what happened in this case, to Capital and to two Wilshire bondholders.
But the deal put Capital in a difficult position.
There is no ready market for Wilshire Credit stock. Unlike Wilshire Financial, Wilshire Credit's stock is privately held.
Even if Capital could sell Wilshire Credit's stock, that stock is worth a small fraction of what Capital's clients are owed. Capital's Wilshire Credit shares are convertible to Wilshire Financial stock, but not until June 2001. Even Wilshire Financial stock, which trades over the counter for about $1.30, would have to multiply significantly to equal the size of the debt owed to Capital's clients.
Capital, however, faced more immediate problems: paying clients' interest payments, which total more than $1 million a month, according to Kirkland.
Without Wilshire Credit paying its monthly loan payments, Capital had no way to pay its clients, who had invested in Wilshire and were expecting their monthly payments.
Capital informed its clients that it had come up with a solution. A third party, Sterling Capital LLC, had agreed to purchase Capital's stake in Wilshire Credit and also had agreed to assume the monthly payments.
In a second-quarter memo to clients, Capital said that Sterling, a private company registered in New Jersey, acquired all of the money manager's clients' interests in the Wilshire loans. The memo offered no details on Sterling. Grayson declined to comment, saying he was precluded for legal reasons from talking about his clients' investments.
Kirkland said Sterling acquired the 49.9 percent stake in Wilshire Credit formerly held by Capital Consultants and its clients. If Sterling also assumed responsibility for the principal of the loans, it owes Capital clients at least $150 million in addition to the interest payments.
The changes raised questions from some pension funds, but Kirkland reassured them.
"We had quite a bit of concern about it," said Dick Zier, an electrical contractor based in Billings, Mont., and trustee on the 8th District Electrical Pension Fund in Aurora, Colo. "There was some talk of pulling our money out of Capital Consultants. But we were assured that Sterling was coming in, that it was strong money."
Capital's union clients continue to be paid, trustees said.
Meanwhile, the Wilshire empire has been realigned. The new board put in charge of Wilshire Financial during its restructuring has since replaced Wiederhorn with a New York turnaround consultant. Wiederhorn, who wouldn't comment for this story, remains the head of Wilshire Real Estate Investment Inc.
The uncertainty about Wilshire and Sterling doesn't faze Kirkland, he said. He continues to roam the country, signing new customers for his company.
"You are going to have problems with any loan, whether it's real estate, collateralized notes or whatever," Kirkland said. "The important thing is, how do you deal with it? We're proactive. You find ways to come up with a solution and solve it.
"The bottom line," he added, "is they hired us to get a return, and, like it or not, we've performed."
You can reach Jeff Manning at 503-294-7606 or by e-mail at email@example.com.