Trustees claim that Andrew Wiederhorn and his wife improperly took more than $5 million from pension funds
By Jeff Manning and James Long of The Oregonian staff
September 30, 2000
Trustees of nine Northwest union trust funds sued Portland financier Andrew Wiederhorn and his wife on Friday, charging that they siphoned off more than $5 million in union pension money.
The suit, filed Friday in U.S. District Court, also charged that Capital Consultants, which was lending union pension money to Wiederhorn's company, defrauded its clients and misled them about millions it had loaned to Wiederhorn's Wilshire Credit Corp. In all, the trustees seek recovery of at least $75 million that they claim they lost in their dealings with Capital Consultants, which the federal government seized and placed in receivership Sept. 21.
Besides the Wiederhorns, the suit named Capital Consultants LLC, and Capital Consultants' principal owners, Jeffrey Grayson and his son Barclay, and other defendants.
Meanwhile, in a separate suit filed earlier this week, two members of the Oregon Laborers Union sued trustees of their retirement and benefits funds accusing the trustees of breaching their fiduciary duty by handing over the retirement money to Capital Consultants.
The two suits follow two lawsuits filed last week by the U.S. Securities and Exchange Commission and the U.S. Department of Labor, which claim that Capital Consultants and the Graysons misled clients about the loss of $160 million in improper loans to Wilshire Credit and conducted a massive Ponzi-like scheme to cover up the loss. Kelly Bowers, assistant director of enforcement for the SEC's Los Angeles office, called it one of the largest pension frauds of all time.
In large part, the trustees' charges against Capital Consultants mirror the federal government's claims.
But the suit does include new allegations about the relationship between Jeffrey Grayson and Wiederhorn and allegations about the fate of some of the union's money.
The lawsuit alleges that in a series of transactions, Wiederhorn and his wife siphoned off millions of dollars that Capital Consultants had loaned to Wilshire Credit and then returned about $380,000 to Capital Consultants.
The suit cites a complex series of loans and notes passed among Wiederhorn; his wife, Tiffany; his brother Ted; and Capital Consultants.
Ted Wiederhorn isn't named as a defendant in the suit. He couldn't be reached for comment.
The trustees say that in October 1998, with Wilshire Credit on the brink of failure, Capital Consultants lent $6 million to Wilshire Credit, all from its various clients. With $154 million of client money already lent to the company, the new loans brought the total to $160 million.
On Oct. 16, the lawsuit alleges, Wilshire Credit changed its loan agreement with Capital Consultants to permit Wilshire Credit to lend $6 million to Andrew Wiederhorn personally, using money clients placed with Capital Consultants.
Wiederhorn then lent $5.2 million to Specialty Finance Investors LLC, which is managed by Ted Wiederhorn, the lawsuit alleges. Specialty Finance Investors, in turn, gave a promissory note for $5.2 million to Tiffany Wiederhorn, which she retained, the lawsuit alleges.
The lawsuit also claims that Specialty Finance gave Tiffany Wiederhorn an additional promissory note for $380,147, which she transferred to Capital Consultants.
Wilshire Credit and the Wiederhorns "knew or should have known that the more than $5 million exchanged between them were comprised of ill-gotten trust assets and that the series of transfers constituted a breach of the trusts," the lawsuit states.
Tiffany and Andrew Wiederhorn couldn't be reached for comment. Robert A. Shlacter, a Portland attorney representing them, declined to comment on the allegations. He did mention that, as the lawsuit notes, Capital Consultants and the Graysons issued a "global release" of collateral to Wilshire Credit and Wiederhorn on June 8, 1999, forgiving any debt and releasing them from all obligations.
Lawrence Mendelsohn, Wiederhorn's partner and president of Wilshire Financial Services Group, an affiliated company, was also named a defendant in the suit. Neither Mendelsohn nor Ronald Hoevet, attorney for Mendelsohn, could be reached for comment.
The trustees claim in their suit that as far back as December 1995, a company funded by Wilshire Credit had extended a $4.2 million line of credit to Jeffrey Grayson.
C.F. Credit, a company controlled by C.B. "Bud" Coleman, a relative of Andrew Wiederhorn, lent $1.7 million to Grayson in December 1995. Ultimately, Grayson borrowed more than $4 million from C.F. Credit, the lawsuit alleges, adding that the debt was later transferred to Wilshire.
The trustees also named as defendants four other Wilshire companies and Bear Stearns & Co. of New York.
Bear Stearns was named because it held cash collateral accounts that the trust funds allege Capital Consultants improperly released to Wilshire and Wiederhorn. Bear Sterns officials couldn't be reached for comment.
Fifty-nine trustees in all were named as plaintiffs representing the Oregon Laborers-Employers Pension Plan and Trust; the Oregon Laborers Defined Contribution and 401(k) Fund; the Oregon Laborers Health & Welfare Plan; the Idaho Signatory Employers' Laborers Pension Plan; the 401(k) Retirement Fund of the Office & Professional Employees International Union Local 11; the OPEIU Health and Welfare Trust Fund; the United Association Union Local No. 290 Plumber, Steamfitter and Shipfitter Industry Pension Trust; the Local 290 Health and Welfare Plan; and the Local 290 401(k) Plan and Trust.
Meanwhile, some union members feel the trusts should have moved against Capital Consultants and the Graysons long ago.
Larry Miller and Gayland German, two longtime members of the Oregon Laborers, filed their class-action lawsuit Tuesday. They named the 14 trustees of their retirement and benefits plans as well as one former trustee.
In their lawsuit, Miller and German allege that signs of trouble at Capital Consultants were abundant over the years. The firm and Jeffrey Grayson agreed to repay $2 million to the Laborers in 1995 after they were sued by the Department of Labor, which alleged that Capital Consultants overcharged the trust on management fees.
Still, the Laborers trustees continued their relationship with Capital Consultants.
The union members' lawsuit also mentions the deals that Capital Consultants cut with one powerful Laborers trustee.
"Trustees cannot just be rubber stamps," said Dan Feinberg, the Oakland, Calif., lawyer representing Miller and German. Lee Clinton, chairman of the Oregon Laborers-Employers Pension Trust and one of the named defendants in the workers' suit, would not talk about the case. "You know all of this will wind up in the courtroom, and I don't want to comment," Clinton said.
Jeff Manning can be reached at 503-294-7606 or at firstname.lastname@example.org.
Jim Long can be reached at 503-221-4351 or at email@example.com.