The Oregonian





Money Manager Accused Of Deception


Portland's Capital Consultants covered up failed investments and misled clients for years, a court-ordered administrator says



By Jeff Manning and James Long of The Oregonian Staff

Saturday, October 28, 2000



Portland money manager Capital Consultants LLC repeatedly made reckless loans, concealed problem investments and deceived clients, says a court-appointed receiver in charge of liquidating the firm.


In a devastating report issued Friday, Thomas Lennon alleges that Jeffrey and Barclay Grayson, formerly the top executives of Capital Consultants, poured more than $450 million into commercial loans and other private investments that "were remarkably unsuccessful and have produced dramatic losses."


The extent of those losses is still unclear. But Lennon told The Oregonian he believed it will be "substantially more" than half the loan assets, or more than $243 million.


In the report he filed Friday in U.S. District Court in Portland, Lennon said the Graysons' firm showed "an extensive history of concealment of loan problems by the use of loan restructurings, maturity extensions, new advances, debt-for equity swaps and the like, all to avoid the necessity of declaring loans in default."


Lennon was appointed receiver Sept. 21, the day the government seized control of Capital Consultants. The U.S. Department of Labor and the U.S. Securities & Exchange Commission filed lawsuits that day alleging that the firm and the Graysons had defrauded clients and were involved in a Ponzi-like scheme that cost clients more than $200 million. Capital Consultants allegedly lent client money to other parties with the understanding that the recipients of the money would use some of it to make payments on earlier failed loans held by Capital Consultants.


The Graysons voluntarily left their jobs and handed over the company to the government. A federal grand jury also is investigating.


"This was a several-year cover-up of major proportions," Lennon said in an interview Friday. "This seems to be a series of transactions deliberately disguising the problems at Capital Consultants and misleading Capital Consultants' clients."


Wilson Muhlheim, a lawyer for Jeffrey Grayson, said he hadn't read Lennon's report and couldn't comment. Steven Ungar, a Barclay Grayson lawyer, said, "My client will at the proper time respond to the allegations made against him. He will do so, however, within the legal system, not through the press."


Since the government took over the firm and froze the Graysons' assets, a small group of friends has formed a trust fund to help Jeffrey Grayson financially. Lennon said in his report, however, that in 1999 and through the first nine months of 2000, Jeffrey Grayson "personally withdrew" $3.6 million from Capital Consultants "in the form of salary and other distributions."


Grayson owned and operated Capital Consultants for 32 years. The firm's downfall, the report indicated, had its roots in a series of loans to the former Wilshire Credit Corp., a Portland financial firm headed by Andrew Wiederhorn. The Capital Consultants loans to the Wiederhorn company grew from $10.5 million in July 1995 to $150 million by April 11, 1996 -- under terms increasingly favorable to Wilshire.


"The receiver has been unable to locate files demonstrating that Capital Consultants engaged in any significant underwriting analysis prior to entering into the (Wilshire loan) agreement," Lennon said in the report. "More significantly, there appears to be no Capital Consultants due diligence prior to amending the (loan) agreement to dramatically increase the amount from roughly $10 million to $150 million."


Wiederhorn's empire began to crumble in the fall of 1998, a victim of turbulent economic times and its own enormous debt. Capital Consultants continued to lend more money to Wilshire until Wilshire collapsed, eventually carrying Capital Consultants with it.


Lennon alleges in his report to the federal court that Wilshire Credit failed to make monthly interest payments on its huge debt to Capital Consultants from December 1998 to April 1999. The Graysons, he said, never told their clients. Instead, Capital Consultants made the payments itself with cash reserves it had set aside to protect its clients invested in the Wilshire loans, Lennon said in his report.


The Graysons then concealed the loss, Lennon said, and misled clients into thinking that the Wilshire loans were still performing as promised. Capital Consultants told its clients that companies in New Jersey and Florida were taking over the Wilshire debt and would continue to make the interest payments. What the clients didn't know, Lennon said, was that the companies -- Sterling Capital of New Jersey and Brooks Financial LLC and Beacon Financial Group LLC of Florida - were paying with money provided by Capital Consultants.


By effectively throwing good money after bad to conceal the Wilshire disaster, Lennon said, the Graysons deepened the loss from $160 million to more than $200 million.


After Wilshire, Lennon's report indicated, the firms with the biggest potential loss in the Capital Consultants portfolio are Brooks, Beacon and a related company, Creditmart. The three companies, run by the same management and operating from the same address in Miami, owe Capital Consultants nearly $80 million.


Tim Gamwell, head of the three finance firms, couldn't be reached for comment Friday.


Lennon said Capital Consultants did such a poor job of evaluating its borrowers that the firm "holds a large number of the equivalent of junk debt; borrowers who are incapable of ever repaying principal, and collateral that has little or no value."


Other problem loans abound in the portfolio, Lennon said, estimating that more than $13 million worth of loans are already in default.


Many of the companies have managed to stay current on their interest payments, he said, but he added that "there are serious questions whether several large borrowers will ever be able to pay off the principal balance."


Lennon singled out a number of borrowers:


• A-Fem Medical Corp. -- Capital Consultants invested more than $14 million in the Beaverton-based maker of feminine hygiene products. It has suffered significant losses the past three years and never attained meaningful revenue.


• Legends -- Capital Consultants loaned about $17 million to the developer of this high-end Portland condominium project. "The project failed and the remaining 50 unsold units were obtained by Capital Consultants through a deed in lieu of foreclosure," Lennon reported. The building is probably worth between $5 million and $7 million, Lennon adds, resulting in a 50 percent loss for Capital Consultants.


• Former Smith's Home Furnishings stores – Lennon estimates that Capital Consultants invested about $26.1 million in Smith's retail buildings, which he now says are worth about $12.5 million, a loss of more than 50 percent.


You can reach Jeff Manning at 503-294-7303 or by e-mail at or


James Long at 503-221-4351 or by e-mail at

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