The Oregonian




Grayson's Long Fall


Losses dig pit that founder of Capital Consultants is unable to escape





By James Long and Jeff Manning of The Oregonian Staff September 24, 2000





In August 1998, Jeffrey L. Grayson stood at a crossroads.


For the past four years, the Portland money manager had been pumping union money into a company founded by his friend Andrew A. Wiederhorn. But at that point, the company, Wilshire Credit Corp., was teetering on the edge of bankruptcy. Within weeks it would collapse, taking with it most of the $160 million Grayson's firm had lent Wilshire.


Grayson had several choices. He could try to save the investment. He could go to the clients, admit the loss and face the consequences. Or he could try to stave off the clients' wrath and – possibly -- federal regulators by concealing the loss.


Grayson says he chose the first route. Federal authorities say he chose the last and that it led down a twisting path to one of the biggest investment frauds ever committed by an investment adviser.


In lawsuits filed in federal court Thursday, the Securities and Exchange Commission and the Department of Labor accuse Grayson and his son Barclay of creating an elaborate plan to hide the investment loss. Calling it a "Ponzi-like scheme," federal officials say the Graysons covered up a loss that could top $200 million by funneling new investment money back to the unions as if it were interest on the old investments.


At stake are pension and benefit assets of at least 20,000 union members from Oregon to Ohio, from Arizona to Illinois.


A court-appointed receiver has taken over and will close the company that Jeffrey Grayson founded 32 years ago. Neither Grayson could be reached for comment. "We'll work it out in court," said Barclay Grayson's attorney, Steven Ungar.


Over the past two years, The Oregonian has detailed the relationship between Capital Consultants and the Wilshire companies and the tangled aftermath of the Wilshire bankruptcy.


For several decades, the elder Grayson has proved no stranger to complex transactions and to run-ins with federal authorities.


But the Graysons' long fall that ended in federal court last week had its beginnings six years ago when the elder Grayson teamed up with Wiederhorn.


Relationship formed


Grayson and Wiederhorn met and began to do business in 1994. The two were similar in drive and ambition. Grayson had co founded Capital Consultants in 1968. Only in his 20s at the time, he was already considered a financial whiz with a reputation for taking risks. Wiederhorn was just 24 in 1990 when he founded the Wilshire companies.


In other ways, though, the two financiers couldn't have been more different. With his small, wiry frame and moussed hair, Wiederhorn looked even younger than he was. Grayson, born in 1942 and suffering from multiple sclerosis, made his way around in a motorized wheelchair. His salt-and-pepper hair and heavy glasses attested to his age.


But unlike Wiederhorn, whose climb into Portland society was only beginning, Grayson had long since arrived.


The board room at the Oregon Museum of Science and Industry was named for him; he'd served the museum for 10 years as a director and part of that time as chairman. The University of Oregon was about to christen its former law school building Grayson Hall; as a distinguished alumnus, he was helping to lead the most successful endowment drive in the school's history, raising more than $250 million. He also had raised large sums for multiple sclerosis.


Throughout the 1980s and 1990s, Grayson was applauded regularly in The Oregonian's society pages. Here he'd be shown paying $4,000 for a bottle of wine to benefit a charity. There, buying a dog to benefit a museum. Or he'd sit front row at the opera, another object of his giving, or host a party at his West Hills home for visiting artists such as Itzhak Perlman.


Yet, there was a secretive and sometimes darker side. His parents were divorced. In 1961, his mother, Blossom, and her new husband, Samuel Palmer, were convicted of concealing assets in a business bankruptcy and sentenced to serve a year in jail. It was in all the newspapers.


"It's the one thing Jeff never talked about, and he was very, very sensitive about it," said a former Capital Consultants official.


Grayson saw his own name in the papers in December 1976, when the SEC suspended him and two other top executives of Capital Consultants for investing $278,468 of the Multnomah County Employee Retirement Fund in a bogus mortgage certificate.


Capital Consultants lost the county employees' account but continued to represent other unions.


In March 1982, a story appeared in newspapers about the wife of a pension trustee receiving a sales commission on Grayson's personal purchase of a $2.7 million Springfield shopping center. The pension fund was one of Capital Consultants' biggest clients.


In 1992, the U.S. Department of Labor looked into a lucrative consulting contract Grayson had with the chief executive officer of a company that Grayson was lending union pension money.


Despite all this, Capital Consultants maintained more than two dozen union trust clients by the late 1990s and managed roughly $1 billion.


In late 1995, after the two had been doing business for more than a year, Wiederhorn helped Grayson out of a personal bind.


The U.S. Department of Labor had sued Grayson and Capital Consultants for allegedly overcharging the Oregon Laborers-Employers Pension Trust on investment fees. Grayson, without admitting guilt, agreed to reimburse the trust fund $1.7 million within 10 days..


He was up against a deadline for repayment when he turned to Wiederhorn for help. Wiederhorn sent Grayson to a California company, C. F. Credit, which was owned by Wiederhorn's close friend and mentor, C.B. "Bud" Coleman, and Coleman's son-in-law David Frey.


Grayson got the money from C.F. Credit a few days before the company legally existed --the same day that Wilshire loanedthe company $5 million. Grayson told The Oregonian he was unaware that C.F. Credit got the money from Wilshire. And Wiederhorn told the newspaper, "I'm not going to be compelled to say anything."


Companies intertwine


The relationship between Grayson and Wiederhorn that had begun slowly would expand almost exponentially.


Wilshire specialized in buying portfolios of high-risk, high-interest loans at a discount and gambling that it could collect.


With funds from New York investment banks, as well as union investments supplied by Grayson, Wilshire grew fast. Everything was rosy as long as the money kept rolling in.


Throughout 1996 and 1997 and through much of 1998, Capital Consultants poured new loans into Wilshire Credit, which would total about $135 million when the crash loomed.


Capital Consultants collected its 3 percent fees -- $30,000 per million dollars loaned and Wiederhorn acquired a gated home and flew around in a company jet. Money was so plentiful that Wiederhorn once told a friend that he had rented a $620 hotel room at the St. Regis in New York just to take a shower after a long plane ride.


The labor unions seemed to be benefiting handsomely as well.


In the mid-1990s, Capital Consultants began peddling a new investment program it dubbed "collateralized notes." Wilshire investments became the single largest part of that program. As noted in the SEC's lawsuit filed last week, the Graysons' firm sold the notes as "low-risk," claiming they were almost as safe as "government securities or money market funds."


The unions seemed happy that the Wilshire investments paid off at a much higher rate than such conservative investments:

Paying at prime rate, plus 3.75 to 4.0 percentage points, they generally yielded well above 10 percent.


As Wilshire careened toward bankruptcy in fall 1998, however, signs of trouble were evident. By this time, Grayson had loaned Wilshire about 16 percent of the money under his company's management, far more than the Department of Labor lawsuit says was prudent.


Courting unions


How Grayson first began doing business with union pension fund managers is unclear. But by the late 1990s, he was carefully nurturing those relationships.


The Oregonian found in its investigation, for instance, that from 1996 to 1998, Capital Consultants helped finance expensive hunting and fishing trips for at least nine trustees from five different union trust funds.


They hunted moose in Alaska and elk in Montana and fished for salmon at a fancy resort in Sitka, Alaska. In one case, the newspaper found, Capital Consultants picked up the tab for a $22,000 moose-and-caribou hunt on the Alaska Peninsula.


A host for many of the outdoor trips was Capital Consultants' chief collateral-note salesman, Dean Kirkland, a former NFL football player and the son and grandson of prominent Oregon labor leaders. One of Kirkland's traveling companions was Bob Legino, a trustee of the $400 million Eighth District Electrical Pension Fund in Aurora, Colo., and chairman of the fund's investment committee.


Legino remembered trips to Alaska and Montana. But Capital Consultants, he maintained, only paid outfitters and charter fees.


The Oregonian found that in August 1998, Grayson gave John Abbott, head of the Oregon and Idaho District Council of Laborers and co-chairman of three of the trust funds that were investing with Capital Consultants, a consulting contract worth as much as $950,000. Abbott had helped steer millions to Capital Consultants as co-chairman of three Laborers Union trust funds.


Grayson gave Abbott the contract just as the union official was being forced from his Laborers office for misappropriating funds. Capital Consultants also bought a $35,000 membership at the swanky PGA West Golf Club in La Quinta, Calif., near the Abbotts' home, and made it available to Abbott.


Beginnings of the crash


But in October 1998, it was all about to end.


The high-risk loan market was becoming turbulent, spooked by international financial turmoil. The investment banks were demanding additional collateral on the loans they'd made to Wiederhorn's business. Wilshire was poised to go under.


Wiederhorn told Grayson that their only chance of saving both companies was for Grayson to make a last-ditch effort to save Wilshire.


At first, Grayson tried to stave off calamity by giving Wilshire the $19 million he'd set aside in cash as short-term protection for the approximately $135 million that Capital Consultants had loaned, to that point, to Wilshire Credit Corp. Then he threw in a final $6 million, bringing the total to $160 million.


Wilshire crashed anyway.


Grayson had bet his company, using client money, and he'd lost.


Hiding the loss


The next month, Grayson embarked on what he depicted to clients as a heroic attempt to save their investments. The government lawsuits, however, characterize his moves as the beginnings of a cover-up.


In a Jan. 26, 1999, letter, Grayson told the pension trusts he'd located a New Jersey company, Sterling Capital, to take over the $160 million Wilshire loans. Grayson told the trusts that Capital Consultants had exchanged the debt for a future option on some stock in the Wilshire Financial Services Group exercisable when Wilshire emerged from bankruptcy.


Grayson, in effect, was telling his clients that an unknown company had promised to pay them $160 million for their future stake in the nearly dead Wilshire. But few of the trust funds seemed to question it. For one thing, "interest" payments kept arriving.


What Grayson hadn't told his clients was that he'd enlisted a friend, Tacoma businessman Daniel D. Dyer, to organize Sterling. He also didn't mention, the lawsuits said, that Capital Consultants would be loaning more of their money to Sterling so that Sterling could make the payments.


When the Sterling deal began to fall apart almost immediately, the lawsuit continued, Grayson contacted a Florida auto-and-furniture loan executive, Timothy Gamwell, with a complicated proposition to simulate payments on the defunct Wilshire debt.


Gamwell organized several new companies at the address of his Miami finance business, and Capital Consultants poured more than $60 million into them.


The federal lawsuits filed last week said part of that money was simply returned as "interest" on the Wilshire loans.


But in the end, Grayson's maneuverings were futile.


After three decades as prominent financier, socialite and philanthropist, Grayson was barred, along with his son, from Capital Consultants' offices and from the investment industry. Charged with securities fraud and federal pension law violations, they face an uncertain future.


Shortly before the hammer fell, the ever-optimistic Grayson continued to defend his efforts to bail out the loans. "I went to a (union) meeting the other night," he said in a May interview, and a "client stood up and said, 'You should receive a medal for what you've done.' "


Grayson said: "We had legal opinions every which way to make sure we did it right. It just amazes me it's gotten so much attention."


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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