Specialists question a loan a financial adviser received with help from the ex-head of Wilshire Credit Corp.
By Jeff Manning and James Long of The Oregonian staff
Portland financial adviser Jeffrey L. Grayson steered millions in union pension money into high-interest loans to Wilshire Credit Corp. after Wilshire co-owner Andrew A. Wiederhorn helped him find a loan from a company that Wilshire financed, an investigation by The Oregonian has found.
The lender, C.F. Credit LLC of Albany, Calif., was newly organized and controlled by C.B. "Bud" Coleman, a close friend and mentor of Wiederhorn's, and David Frey, a lawyer for Coleman.
If the $1.7 million that Grayson received actually came from Wilshire, the transaction may have violated federal statutes that prohibit pension-fund investment advisers from benefiting personally from their control of the money, according to six pension-law experts across the country.
"Federal pension law imposes a fiduciary duty of loyalty upon pension plan investment advisers and forbids them from entering into certain transactions that could pose a conflict of interest," said Dan Feinberg, an attorney who specializes in pension issues for the Sigman, Lewis & Feinberg law firm in Oakland, Calif.
Arthur Bachman, a Philadelphia lawyer who wrote parts of the federal Employee Retirement Income Security Act – Erisa said the circumstances of the Grayson transaction suggested that "an investigation into prohibited transactions should be commenced."
Grayson, 57, chairman of Capital Consultants LLC of Portland, told The Oregonian that he violated no laws. "I don't want to talk about it, but the way I got my money, the way that we did it, is totally legal," Grayson said. "It was cleared by attorneys."
Wiederhorn, 34, also declined to talk about the loan, and neither the government nor the pension plans have accused Grayson or Wiederhorn of impropriety.
Wiederhorn's flagship company, Wilshire Financial Services Group, went bankrupt in March 1999. As part of that bankruptcy proceeding, Capital Consultants' clients gave up the $150 million that Wilshire Credit owed them, and accepted, in exchange, Wilshire Credit stock now worth about $6.8 million, based on current trading values. Capital Consultants' attorneys say the company also received "other consideration" outside the bankruptcy proceeding but say they can't discuss it.
The U.S. Department of Labor, which enforces Erisa, recently opened a criminal investigation into Capital Consultants' overall dealings with Wilshire, in parallel with a civil investigation the agency has been conducting since Oct. 9, 1997.
More recently, the FBI has gotten involved. Portland FBI spokesman Gordon Compton said his agency was watching the investigations closely "in the event that potential violations of federal criminal laws may come to light."
The loan to Grayson developed this way:
Late in 1995, Grayson said, he went to Wiederhorn about his need for a fast $1.7 million loan to settle a lawsuit the Department of Labor had brought against him and his firm.
Among other things, the department alleged that Grayson and Capital Consultants Inc., as the firm was then known, had violated Erisa by overcharging the Oregon Laborers-Employers Pension Trust on investment fees. Part of the Dec. 22, 1995, settlement required Grayson and Capital to repay the union trust fund $2 million and come up with the first $1.7 million within 10 days.
Wiederhorn, Grayson said in an interview, suggested C.F. Credit in the San Francisco Bay Area, among other possibilities. Grayson described the loan he subsequently received from C.F. Credit as a straightforward business transaction approved by attorneys.
California corporation records show that C.F. Credit was a brand-new company headed by Coleman and Frey. Coleman had been a longtime supporter of Wiederhorn and was affectionately known inside the Wilshire companies as "Uncle Bud."
The company was so new, in fact, that it had not yet been registered to do business when it lent Grayson the $1.7 million. According to records in the California secretary of state's office, C.F. Credit LLC was registered Jan. 2, 1996. C.F. Credit's loan to Grayson closed six days earlier, on Dec. 27, 1995 -- the same day that Wilshire Credit Corp. lent $5 million to C.F. Credit, according to loan documents obtained by The Oregonian.
Coleman said he knew nothing about the Grayson loan and declined further comment. Frey, a Lafayette, Calif.-based attorney listed as C.F.'s second principal, also declined comment. Grayson acknowledged he borrowed money from C.F. Credit but said he was unaware that C.F. borrowed money from Wilshire Credit Corp.
"I'm not privy to that stuff," Grayson said. "I don't know how much (C.F.) borrowed or where they got their money from." Grayson acknowledged that Wiederhorn mentioned C.F. Credit after he asked him where he could get a loan, but he said Wiederhorn mentioned other possible sources as well.
Wiederhorn declined any discussion. "I'm not going to be compelled to say anything," he said. "You're not going to find out anything."
Robert A. Shlachter, Wiederhorn's attorney, said, "If you've got a loan document, you've got a loan document. My understanding is that C.F. Credit is a separate entity, so there's really nothing for us to comment on."
Shlachter did say he thought C.F. Credit "had been around awhile" and was not a new company when Grayson took out the loan. State records show, however, that C.F. Credit Inc. was formed as a California corporation on Nov. 5, 1990, and was dissolved on Dec. 16, 1993. C.F. Credit LLC – a California limited-liability company and a different legal entity wasn't established until two years later, at the same time Grayson was looking for money.
At the time Grayson got the $1.7 million from C.F. Credit LLC, his company, Capital Consultants, had already steered some clients' money to Wilshire companies. Multnomah County property records show, for instance, that Capital Consultants lent Wilshire Properties-1 Inc. $875,000 in April 1995.
By 1999, Capital Consultants had put $150 million into Wilshire companies. When Wilshire Financial Services Group, Wiederhorn's flagship company, filed for Chapter 11 reorganization, Capital Consultants was Wilshire's third-largest financier, according to Bankruptcy Court records.
Most of the $150 million that Capital Consultants sent to Wilshire was union pension money from at least 12 plans covering more than 20,000 beneficiaries, according to eight sources formerly with Capital Consultants. The Northwest regional union funds included the United Association 290 of the Plumbers, Steamfitters & Shipfitters Union; the Office and Professional Employees International Union Local 11; Seattle's Local 9 of the International Longshoremen's and Warehousemen's Union; and the Laborers pension.
For several years, the relationship between Capital Consultants and Wilshire companies seemed mutually profitable. Capital Consultants' clients earned a handsome interest rate on their money -- the prime rate plus 2 to 3 points -- the kind of interest normally associated with high-risk bonds. Capital Consultants earned high fees, and Wilshire Credit got a dependable flow of money. Wilshire companies bought and serviced loans, primarily at a high-interest-rate, so-called "subprime" real-estate loans, acquired in blocks from banks across the United States.
Despite the bankruptcy, Capital Consultants' clients say they continue to receive monthly interest payments on the Wilshire Credit debt.
Some union pension fund trustees remain fiercely loyal to Capital Consultants.
Bob Mayhew, a trustee of the Eighth District Electrical Pension Fund based in Aurora, Colo., said, "We have drug Capital Consultants over the coals for five years. It seems to me a stop should be put to it."
Ron Edson of the longshoremen's union in Seattle said, "We haven't lost any money. They've been very good and pretty much upfront."
But it was unclear how much the trustees knew about the relationship between Grayson and Wiederhorn. Gerald Fullman, a management trustee of the plumbers pension trust, said he hadn't heard about the Grayson loan. "I don't know that to be the case, and I don't want to know," he said. "That's a question I wouldn't ask."
When Wilshire Financial Services Group filed for bankruptcy, essentially all the union money had been lent to Wilshire Credit Corp., which was privately owned by Wiederhorn and an associate, Lawrence A. Mendelsohn. But the bankruptcy court declared Wilshire Credit to be a Wilshire Financial subsidiary. The court allowed Wilshire Credit to erase the debt it owed Capital Consultants' clients and give them, instead, 49.9 percent of Wilshire Credit stock.
If and when Wilshire Credit ever declares a dividend, the court ruled, Capital Consultants' clients would get 49.9 percent of that dividend. But Wilshire Credit officials told The Oregonian last Thursday that no dividends would be distributed in the foreseeable future, as the company struggles to recover.
The bankruptcy restructuring also promises Capital Consultants the greater of $19.4 million or half the liquidation value of Wilshire Credit, if the company is ever sold or disbanded.
In a letter sent to The Oregonian on Friday, Mark A. Long, an attorney with Schwabe Williamson & Wyatt, a Portland law firm representing Capital Consultants, said that beyond this, Capital Consultants received "substantial other consideration" for its clients, but that because this took place outside the bankruptcy proceeding, details can't be publicly disclosed.
Senior officials of Capital did say, however, that they are pinning their hopes on the stock. The Wilshire Credit stock will be convertible to publicly traded Wilshire Financial stock in June 2001. At today's value, the stock would be worth about $6.8 million -- a far cry from the $150 million that Capital Consultants sank into Wilshire.
In his letter, Long also said that "for a variety of reasons" calculating the value of the Wilshire Financial stock at its current trading level "would produce a substantial understatement of the true value" of the stock "with grossly misleading consequences."
Wilshire's connection to C.F. Credit adds a new wrinkle to the saga of Wiederhorn's company's nosedive from toast of the local business community to bankruptcy court. The new managers of Wilshire Financial terminated Wiederhorn in August 1999. Wiederhorn has sued his old company for defamation and wrongful firing.
The new managers have responded with a counterclaim accusing the wunderkind founder of the Wilshire companies of improperly taking $5 million from the organization when it was in financial distress.
One of the assets the new Wilshire managers found when they took over Wiederhorn's former empire last June was Grayson's debt to C.F. Credit. It had become a debt to Wilshire in October 1997. Wilshire Funding, one of the multiple Wilshires that Wiederhorn created before his organization came tumbling down, had bought the Grayson loan whose collateral included Grayson's West Hills home and his 62.5 percent stake in Capital Consultants.
Grayson, in other words, directly owed at least $1.7 million to a firm that his company was still furnishing with pension funds. C.F. Credit filed a certificate of dissolution in California on Oct. 16, 1998.
The extent of the relationship between the late C.F. Credit and Wilshire Credit is not clear, but C.F. Credit listed the same Portland post office box as Wilshire Credit in a Uniform Commercial Code filing in California as early as May 23, 1996.
Jeff Manning can be reached at 503-294-7606 or by e-mail at firstname.lastname@example.org.
James Long can be reached at 503-221-4351 or by e-mail at email@example.com .