Oregon Fund Manager Agrees to Plead Guilty

Jeffrey L. Grayson agreed Apr. 16 to plead guilty to two felony counts in connection with the collapse of his union pension management firm, Capital Consultants LLC of Portland, Or., which will likely result in a prison term. Grayson is cooperating with federal prosecutors in hopes of getting a lighter sentence and has provided new information on Andrew Wiederhorn’s role in the firm’s downfall. Wiederhorn was the chief executive officer and controlling stockholder of Wilshire Credit Corp., which defaulted on $160 million in loans and contributed to the collapse of Capital Consultants. Total client losses, mostly from union members, are estimated to be $355 million.

The U.S. Atty.’s Office in Portland filed revised charges against Grayson, accusing him of two felonies: one count of mail fraud and one count assisting the filing of a false tax return. The charges, filed as a criminal information, described Wiederhorn’s involvement in deals that allegedly compromised Grayson’s independence as an investment manager. Wiederhorn has not been charged, but the U.S. Attorney has notified him that he is the subject of an ongoing grand jury investigation.

“Grayson,” said the charges, “received financial benefits from Wiederhorn and others which influenced his actions and decisions on behalf of investors.” Marc Blackman, a criminal defense attorney for Wiederhorn, said his client did nothing wrong. Wiederhorn, he said, got approval from leading attorneys and accountants for all the deals he did with Capital Consultants.

Blackman suggested that Grayson, who has multiple sclerosis and uses a wheelchair, is cooperating with authorities because he is in poor health and “faced the possibility of dying in prison,” given the potential criminal charges against him. Under those circumstances, Blackman said, “He’d say whatever he thought the government wanted to hear.”

Grayson began cooperating with the U.S. Attorney after his son, Barclay Grayson, was sentenced to an unexpectedly long two-year prison term. Harvey Silets, a Chicago criminal defense lawyer representing Grayson, said his client hoped to get his son a reduced sentence. “Mr. Grayson,” Silets said, “is attempting to resolve some critical issues in his life.” Grayson and his son had been estranged since the government seized Capital Consultants in Sept. 2000. The two charges against the elder Grayson carry a total maximum penalty of eight years imprisonment.

The charges against Grayson will supercede his indictment in Oct. 2001 on 22 counts of fraud, conspiracy, money laundering, witness tampering and paying illegal gratuities to a pension fund trustee. According to the new charges, Grayson was influenced by his relationship with Wiederhorn to make decisions that led to client losses now estimated at $355 million. “Grayson, and others, devised a scheme . . . to defraud his investors of their right to honest service,” the court document states.

Union trust funds suffered most of the losses on loans from Capital Consultants to Wiederhorn’s Wilshire Credit Corp. The five union hit the hardest: Or. Laborers Union, Idaho Laborers Union, the Office & Prof’l Employees Int’l Union Local 11 in Portland, United Ass’n of Plumbers & Pipe Fitters Local 290 in Portland, and the Eighth District of the Int’l Bhd of Elec. Workers, which covers Idaho, Utah, and Colorado

Grayson is the third player in the scandal to plead guilty. Barclay Grayson pled guilty in Mar. 2001 to one count of mail fraud and will begin his sentence in May 2002. He was president of Capital Consultants.

John D. Abbott, an ex-co-chairman of the Or. Laborers-Employers Pension Trust and four other LIUNA trust funds, pled guilty in Feb. 2001 to taking nearly $190,000 in illegal payoffs from Jeffrey Grayson and filing a false income tax return.  Abbott, also ex-secretary-treasurer and business manager of the LIUNA’s Dist. Council of Or., S. Idaho, and Wyo., was sentenced in Nov. 2001, to two concurrent terms of 15 months in prison and one year probation. He must pay $195,400 in restitution plus back taxes. Prosecutors say Grayson “willfully counseled, advised and aided in the preparation and presentation” of Abbott’s return, which allegedly understated the labor official’s earnings by $76,000.

Capital Consultants’ demise set off a flurry of investor lawsuits against Grayson, Wiederhorn, union trustees, and others. Wiederhorn; his former company, Wilshire Financial Services Group; and other related defendants have tentatively agreed to pay $40 million to settle the claims. The suits claimed that Wiederhorn and Grayson had “an undisclosed corrupt relationship” that skewed Grayson’s investment decisions. They said the loans and other financial favors from Wiederhorn to Grayson amounted to “bribes and kickbacks.”

Grayson’s new criminal information further details the transactions between Capital Consultants and Wilshire that began in 1994. By 1998, Capital Consultants had loaned Wilshire Credit $160 million, making the Wiederhorn firm by far the largest borrower from Grayson’s company. The loans represented more than 15% of Capital Consultants’ total assets, an unusually high concentration of investment. Wiederhorn was on the rise at the time, running a promising finance company that specialized in buying and selling high-risk mortgage loans. Grayson used client money to help fund Wiederhorn’s Wilshire Credit.

Wilshire Credit, in exchange, helped bail out troubled companies financed by Capital Consultants or agreed to purchase problem loans from Grayson’s firm.  In the summer 1994, Portland ship-repair firm West State Inc. was in dire need of additional capital despite the millions of dollars Capital Consultants had already poured into the operation. In June of that year, Wilshire Credit stepped in and loaned $3.65 million to West State through an affiliated company, Astoria Metals. Investors later accused Grayson of simply routing his clients’ money through Wilshire Credit and paying Wilshire Credit more than $500,000 for its troubles.

The pattern repeated itself months later, when Wilshire Credit loaned $2 million to Cascade General, another struggling ship-repair firm backed by Capital Consultants. The Grayson-Wiederhorn relationship became more direct in December 1995 when Grayson needed $1.7 million to settle a suit filed against him and his company by the Dep’t of Labor. Wiederhorn arranged for a San Francisco firm, C.F. Credit, to loan Grayson the money. C.F. Credit, co-owned by Wiederhorn’s uncle C.F. Coleman, has since admitted that it reloaned money to Grayson that it had received from Wilshire Credit. Grayson later borrowed additional funds directly from Wilshire.

Wilshire Credit agreed in December 1997 to buy another failing loan from Capital Consultants — a $3 million debt owed by defunct sandwich-maker The Hand That Feeds You. This time around, however, Wilshire Credit wanted some guarantee of repayment. Grayson agreed to put up his West Hills home and his stock in Capital Consultants as collateral.

The new criminal information against Grayson said the allegedly secret deals between Grayson and Wiederhorn “conflicted with Grayson’s fiduciary duty, through Capital, to render honest service to investors.” It adds, “Grayson’s decisions regarding loans by Capital to Wilshire Credit were influenced by his conflicting interest in the reciprocal transactions.” [Oregonian 4/17/02; Bloomberg 4/18/02]