The Oregonian




Loan to Wilshire Spurs Questions


Capital Consultants, a Tacoma man and Sterling Capital of New Jersey are drawn into the company's financial woes



By Jeff Manning and James Long of The Oregonian staff

May 1, 2000



As Wilshire Financial Services Group careened toward bankruptcy early in 1999, Jeff Grayson appeared to pull a financial rabbit out of a hat.


His investment advisory firm, Capital Consultants, had lent $160 million of clients' money to Wilshire Credit, a Wilshire affiliate. And the money, which belonged mostly to at least a dozen labor union pension trusts, was poised to go down the drain.


Then, in a Jan. 26, 1999, letter to his Capital Consultants clients, Grayson announced that a "third party" had agreed to take over the troubled Wilshire loans and repay the full $160 million, plus interest, that Wilshire Credit owed.


This seemed to be great news for at least 20,000 union members and their families who were counting on income from the loans to help finance their retirement. Grayson said he had called for bids and selected a company in New Jersey that offered to fully assume the loans.


Grayson identified the bidder as Sterling Capital, a Newark, N.J., investment company.


What Grayson didn't mention in the letter was that Sterling Capital had existed for just nine weeks and had no operating history. And an investigation by The Oregonian has found that part of Sterling's money came from a Grayson business associate, Daniel D. Dyer of Tacoma, who had borrowed millions from Grayson's Capital Consultants. Dyer and several associates put $4 million into Sterling, according to a November 1999 document filed with the U.S. Securities and Exchange Commission.


In addition, the attorney listed as Sterling's registered agent also handled paperwork for other Dyer companies.


Dyer turned down repeated requests for an interview, but Grayson recently told The Oregonian that Dyer wasn't an owner of Sterling but had a relationship with the company "which I'm not familiar what it was, nor did I really care."


"All I was concerned about, what we as a company were concerned about, is that payments came to our clients," Grayson said.


Grayson described Sterling as a "bankruptcy remote company" that was set up "just to make payments to our clients."


A bankruptcy remote company, explained University of Oregon law professor Steve Bender, is a fairly new kind of corporate legal structure created to favor creditors through bylaws or other provisions making it difficult for the company to declare bankruptcy. Usually, he said, the company holds a single asset.


"The most important thing," Grayson said, "was that the owners of Sterling were agreeable to purchasing the Wilshire notes. That's all (the union pension fund trustees) are concerned about. And if those payments came in every month, which they have, then in fact it made it a pretty good transaction."


A federal grand jury in Portland is looking into the activities of Wilshire Financial Services Group before Wilshire entered bankruptcy last year. Capital Consultants is among the areas of interest, sources say.


U.S. Internal Revenue Service agents served subpoenas at Wilshire's Southwest Portland offices Wednesday. The agents spent hours sifting through Wilshire financial records Wednesday and Thursday. They subpoenaed company records as well as a Wilshire manager, a Wilshire representative confirmed.


The grand jury subpoenas came as a federal task force is studying, among other things, Wilshire's dealings with Capital Consultants. Since the bankruptcy, Wilshire Financial, the parent company of Wilshire Credit, has been operating with new management. The U.S. Labor Department recently opened a criminal investigation into the circumstances surrounding the Wilshire Credit loans. That investigation has been joined in the past few weeks by the FBI, the U.S. Internal Revenue Service and the Justice Department.


Troubling news for unions


Separately, some union pension fund trustees, as well as rank-and-file union members, have become uneasy about Sterling and the fate of the loans they made to Wilshire. At least four union pension trusts have asked Capital Consultants to get them out of Sterling, and one of the four also asked to get out of all private placements by Capital.


And more than a half-dozen union officials or union pension trust consultants have told The Oregonian within the past month that they have been unable to get information they sought about Sterling.


A letter Nov. 3, 1999, from Dean E. Kirkland, a Capital Consultants senior vice president and chief salesman to the unions, turned aside a query from Oregon Laborers Union official L.R. Steward by explaining that Sterling was "a privately held third party" and did not disclose its financial statements.


Kirkland assured Steward, however, that Sterling was "in no way affiliated with Wilshire Credit Corp. or Capital Consultants.


"Although Sterling Capital's financial statements are not made available to the public by the borrower, our due diligence of the borrower indicates that the sale of our clients' notes was both prudent and appropriate," said Kirkland's letter, a copy of which The Oregonian obtained.


Kirkland wouldn't talk about the letter, citing client confidentiality. He did say that the Sterling deal protected the interests of Capital Consultants' clients. "It's a lot better than them getting nothing," he said.


One union attorney and a union pension trustee said Sterling has made no principal payments on the $160 million debt, despite Grayson's pledge that such payments would begin in April 1999.


Grayson referred questions about principal payments to Bob Maloney, his firm's Portland attorney. Maloney said "I couldn't tell you one way or another without having a look through the records of CCI (Capital Consultants) to determine that."


Matt Frazier, a trustee on the Eighth District Electrical Pension Fund board in Aurora, Colo., told The Oregonian he wants some answers. "What about the principal?" he said.


Sterling's ties to Dyer, Grayson Sterling Capital first saw the light of day Nov. 24, 1998, according to articles of incorporation filed in New Jersey. Dyer's relationship to Grayson goes back at least to 1990, when Dyer, a Tacoma businessman, tried to buy a downtown Tacoma office building from a client of Grayson's. More recently, Dyer and Grayson discussed the possibility of Dyer's buying Capital Consultants.


The purchase never materialized. But sometime before Aug. 6, 1998, Grayson's Capital Consultants loaned a Dyer company at least $8 million, and the Dyer company later that year bought C.J.M. Planning, a New Jersey broker-dealer that would become involved in Sterling.


Here's how it went:


Sterling was created Nov. 24, 1998. Although it listed as its officers several people with no obvious connection to Dyer, a lawyer who had worked for other Dyer companies filed Sterling's articles of incorporation and listed its address as the same as his Newark law office.


Dyer and several unnamed associates put $4 million into Sterling, according to a prospectus filed with the U.S. Securities and Exchange Commission in connection with another company.


The prospectus -- for the Oxbow Fund, a venture capital fund that Dyer helped create -- listed Sterling as an Oxbow holding. It also revealed that Oxbow's investments were controlled by a C.J.M. subsidiary that in turn Dyer controlled. It described Dyer as chairman of C.J.M. and chairman of the investment manager, C.J.M. Asset Management, which steered Oxbow's investments.


When Grayson announced the Sterling rescue to his union clients in January 1999, he said little about Sterling but emphasized that it was "associated" with C.J.M. Planning. In his letter to the clients saying their loans were being rescued, he offered reassurances that C.J.M. "has been in business over 27 years and secured capital in excess of $1 billion primarily for mutual funds and other investments."


But there was no mention in the letter of Dyer's role in C.J.M. or Dyer's investment in Sterling or the fledgling status of Sterling, or the multi-million dollar loan that Capital Consultants had extended to the Dyer company that bought C.J.M.


(The Dyer company, Oxbow Capital Partners, still owes the Oregon Laborers-Employers Pension Trust Fund more than $7 million it received through Capital Consultants.)


Grayson told The Oregonian he recalled discussing the Dyer connection "with a couple of clients" but declined to name them except to say they were "major" clients.


"I can't talk about our clients," Grayson said.


Nor would Dyer or other Sterling principals discuss why the company would get involved with the Wilshire Credit loans.


Stock value doesn't measure up


The Wilshire Credit stock that Sterling owns in lieu of the loans is convertible to publicly traded Wilshire Financial stock in June 2001. At today's trading value, Sterling's shares would be worth about $9.4 million, a considerable distance from the $160 million that the unions and a few other Capital Consultants clients have at stake -- and from the obligation that Sterling has undertaken.


In his Jan. 26, 1999, letter announcing the Sterling deal to the pension trustees, Grayson said Sterling regarded Wilshire as a promising investment that would pay off handsomely when Wilshire recovered from bankruptcy. The deal, he said, eventually would give Sterling as much as 42 percent of the recovered Wilshire Financial corporation and offer a springboard to full control.


Minutes of the Idaho Laborers Pension Trust on Dec. 2, 1999, quote Grayson as saying the last independent valuation of Sterling's position in Wilshire, by the accounting firm of Moss Adams "came in at about $172 million."


However, Grayson didn't explain how Moss Adams arrived at that figure, and no explanation was forthcoming when Ron Gedenberg, president of Laborers Union Local 296 in Portland asked Kirkland for proof that Capital Consultants had hired Moss Adams.


"Due to certain confidentiality requirements, Capital Consultants is unable to provide a copy of this agreement," Kirkland said in a March 14 letter The Oregonian obtained. "However, it is anticipated that an updated valuation of the Sterling loans should be completed in the near future."


Gedenberg said he didn't remember whether he ever got an answer to his Moss Adams question.


Jim Gaffney, Moss Adams' managing partner in Portland, declined comment on his firm's work for Capital Consultants.


Grayson, meanwhile, declined to explain how Sterling would obtain $160 million to repay the unions and other lenders actually more than $200 million including interest over the five-year loan.


While the unions collectively have received monthly interest payments from Sterling of $1 million to $2 million, it is clear that the money isn't coming from Wilshire Credit stock dividends. Wilshire Credit has never paid a dividend and is unlikely to do so in the near future, company officials confirm.


How Sterling is raising the money remains unclear, and Sterling officials have refused comment.


Wilshire Financial's stock is currently trading over the counter at $1.125 a share. Unless the company starts paying dividends, the stock would have to increase in value 17-fold for Sterling to break even.


Jeff Manning can be reached at 503-294-7606 or by e-mail at


James Long can be reached at 503-221-4351 or by e-mail at


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