The Oregonian


Business News



One Party In Capital Consultants Case Sure To Win Big -- All Those Lawyers







In May, dozens of lawyers from across the country as well as many of their clients converged on Pioneer Courthouse in Portland to begin high-stakes settlement negotiations in the Capital Consultants legal case. As the antagonists squeezed into the antiquated 126-year-old building, court staff adopted an unusual tactic to maintain order: They color-coded the attorneys.


Clerks adorned the estimated 50 lawyers and as many clients not just with name tags but also with red or blue dots to differentiate between the accused and the accusers.


But even with color-coding, it can be difficult to keep track of who's who in the sprawling case, the largest and most sensational thicket of litigation ever to hit Oregon courts. Instead of the mano a mano, Perry Mason vs. Hamilton Burger scenario familiar to television courtroom dramas, this case boasts at least 150 lawyers representing thousands of parties with divergent claims and agendas.


Union grunts, wealthy business executives, private companies and three federal agencies joined the legal fray after Capital Consultants' collapse in September 2000. The parties have filed more than 20 civil lawsuits, three criminal cases and one bankruptcy. The case has drawn more than 10 judges, including seven federal judges in Portland.


"It has an awfully broad scope," said Stephen Kanter, a professor at Lewis & Clark Law School and former dean of the school. "I can't think of anything else comparable in the time that I've been here in terms of magnitude."


The case has moved with lightning speed by the standards of normal civil litigation. Mediation, begun in hopes of avoiding expensive and protracted litigation, has drawn enormous tentative settlement offers from more than 21 defendants and potential defendants that could provide more than $90 million to investors.


The case still provides ripe fodder for critics of lawyers and the legal process. Five law firms are on the hot seat along with Capital Consultants founder Jeffrey Grayson, accused of aiding and abetting Grayson's schemes. Plus, the assembled attorneys arguing the cases will receive millions in legal fees, regardless of how much investors lose. In certain cases, lawyers' fees will come off the top of the liability insurance money intended to protect Capital Consultants' victims.


"Look around the room and think how much money is being spent on lawyers and litigation," grumbled U.S. District Judge Garr King at a Dec. 5, 2000, hearing attended by 43 attorneys.


Lawyers in force In September 2000, as he rose to speak at one of the first court hearings of the Capital Consultants legal case, Portland lawyer Stephen English looked at the overflowing gallery, surprised that an initial hearing would attract so many spectators.


About 60 onlookers, some of them standing and others forced to grab seats in the vacant jury box, jammed the courtroom.


"It dawned on me that I recognized most of them," English said. "One by one, virtually every single person in the courtroom stood up and identified themselves as counsel for someone or other. Then another 10 or so came in on the speaker phone."


Portland's 12 largest law firms, 17 of the top 25, have a piece of the case.


English's firm, Bullivant Houser Bailey, has emerged as the lead plaintiffs' firm. Bullivant's clients -- several Oregon union trusts -- were the first to sue Capital Consultants and its top executives, Jeffrey and Barclay Grayson, on Sept. 29, 2000, just eight days after the U.S. Securities and Exchange Commission and Department of Labor shut down the investment firm.


Bullivant, Portland's fourth-largest firm, has worked closely with lawyers from Miller Nash, the city's third-largest, and Esler Stephens & Buckley, enlarging the focus of the suit to include Capital Consultants' accountants, appraisers, borrowers and business allies. Though unnamed in the initial complaints, English and his team also took aim at three law firms: Lane Powell Spears Lubersky and Los Angeles-based O'Melveny & Myers, both of which did work for Capital Consultants, and Stoel Rives, which represented Jeffrey Grayson's longtime ally, Andrew Wiederhorn.


Some parties are both plaintiffs and defendants, such as the union trustees who filed fraud charges against the Graysons and also have been accused of negligence by their own union members.


An ongoing criminal investigation also has sent the Graysons and many of the players in the civil suits scrambling for criminal defense lawyers. Federal prosecutors reckon that 40 attorneys with white-collar criminal experience – nearly every single such lawyer in Portland -- are involved in the case.


The receiver in charge of liquidating Capital Consultants opened another front of litigation in dealing with the investment firm's troubled portfolio of loans. The receivers' lawyers have initiated action against 17 companies or individuals.


"I've worked on cases where the dollar amounts are larger," said Robert Shlachter, a Portland attorney for Wiederhorn. "But in terms of the number of parties and the different issues, it's more complex than any case I've ever worked on."


Legal fees abound


The legal gold rush offends some, who fear that the attorneys will prosper at the expense of the union workers and other investors who have already lost hundreds of millions of dollars.


"It's simply disgraceful to me when so much of these working men and women's money will be eaten up in the process," said Sid Lezak, a former federal prosecutor and longtime Portland criminal lawyer not involved in the case.


With rates ranging from $150 to $500 an hour, the lawyers are

racking up legal fees that dwarf what many of the victims will earn in their lifetimes. Jeffrey Grayson's five lawyers alone billed their client nearly $530,000 between September 2000 and August 2001. Since the court froze Grayson's assets, the court must approve all legal payments. Judge King approved payment of about $380,000 and gave Grayson permission to spend another $100,000 on his criminal defense.


Grayson pleaded not guilty in October to 22 felony charges of conspiracy, mail fraud, witness tampering, money laundering and paying illegal gratuities to a former union trustee. As a concession to the court, Grayson's Chicago defense attorney, Harvey Silets, volunteered to lower his fees to $295 an hour from his normal rate of $495 an hour.


Facing no such financial constraints, Grayson's fellow defendants Wiederhorn and his longtime partner Lawrence Mendelsohn have paid their lawyers at least $1.8 million. And they didn't even have to come up with the money. Wiederhorn's and Mendelsohn's former employer, Wilshire Financial Services Group of Portland, disclosed in recent SEC documents that it was required to cover their legal costs under the terms of their employment contracts.


Many of the lawyers are being paid out of the same pool of insurance money that could be used to help defray the clients' losses. For example, the union pension trustees accused by union workers of negligence are funding their defense with money from their liability insurance policies. Because of the way these policies are written, every dollar that goes to the lawyers is one less dollar that will go to the union workers should they prevail in their claims.


It was in hopes of minimizing legal costs that King ordered the case into mediation, a move widely lauded by the attorneys involved. Instead of a courtroom environment, Edward Leavy, a federal appeals court judge who agreed to mediate the case, conducted a sort of shuttle diplomacy among various antagonists housed in different meeting rooms.


Nearly every lawyer involved in the mediation gives Leavy enormous credit for conducting the process with a deft mix of patience, folksy charm and formidable intellect. Though nothing is final, several key players along with their insurers have agreed to enormous settlements.


Capital Consultants, Wilshire Financial Services Group, Wiederhorn and several related parties covered by a common insurer tentatively agreed to pay about $40 million. Insurers for union fund trustees agreed to pay about $16 million to settle the class-action claims filed by union workers. Lane Powell Spears Lubersky has offered about $25 million. Most recently, Stoel Rives and former Stoel Rives partner Mark Peterman, who did work for Wiederhorn and Wilshire, agreed to pay an estimated $12.5 million.


Although the mediation formally ended in August, Leavy continues to conduct negotiations between several of the accused and the plaintiffs' attorneys, who hope ultimately to get $100 million or more in settlements. Those attorneys point out that the legal fees, while sizable, pale in comparison to the potential mediation payday.


Though the money will help defray the unions' losses, not all of the former Capital Consultants clients are happy with the results. A handful of union members don't like the secrecy of the settlements.


"I think that people ought to be able to know what happened," said Gayland German, a retired member of the Oregon Laborers Union and one of the plaintiffs in the members' suit against their trustees.


"This is a very tough issue," said Kanter, the law professor. "There are advantages to an actual trial. Things do get on the record, and they get out publicly. On the other side of the coin, if every single allegation in this instance went to trial, you'd have trials going out for the next decade, probably. And the outcomes might not be that satisfactory."


Close counsel


The key point in the mediation came early on when Lane Powell agreed to settle.


Though it was never named a defendant in the lawsuits, plaintiff's attorneys quickly viewed Lane Powell as a chief target. Lane Powell had worked for Capital Consultants since 1984 and played an instrumental role in many of its controversial investments, including several deals in 1998 and 1999 that federal investigators later alleged was a Ponzi-like scheme intended to conceal enormous investment losses.


Robert Maloney Jr., a senior Lane Powell partner, was Capital Consultants' primary lawyer. Over the years, Maloney fiercely defended the firm and his close friend, Grayson, from disgruntled clients and government investigators alike.


Capital Consultants was one of Lane Powell's largest clients, generating 5 percent of its revenue in 1998 and 1999 and 4 percent in 2000.


But Lane Powell's long relationship with Capital Consultants ended abruptly in September 2000, just as federal investigators were moving in to take control of the company.


Maloney wasn't even in the country at the time. He had left earlier in the month for a personal sabbatical in Ireland. Later, Lane Powell agreed to hand over more than half a million pages of Capital Consultants legal documents to the plaintiffs and has continued to provide certain information over Grayson's objections.


Lane Powell officials will not comment on how or why or even when Maloney stopped serving as Grayson's lawyer. An SEC attorney said, however, that Lane Powell itself made the decision to end the relationship.


"Maloney's name started showing up in a lot of things we were looking at," said David Hwa, a SEC lawyer who led its investigation. "He may have been too involved for us to deal with him as counsel for (Capital Consultants). Lane Powell was smart enough to keep Maloney out."


As the Capital Consultants problems surfaced, Lane Powell faced internal issues. The firm and its revenue had become significantly smaller in preceding years as some prominent partners opted to go elsewhere. In 1998, former Lane Powell managing partner Edwin Harnden and 11 others defected and formed their own firm, Barran Leibman. Lane Powell also stopped practicing insurance defense and certain other types of legal work, which prompted it to further downsize and cut a number of associate attorneys.


"The number of lawyers had gone down and revenues had declined because we chose to shrink the firm," said Milo Petranovich, a Lane Powell attorney.


But the internal changes had nothing to do with Lane Powell's decision to settle, Petranovich said. Rather, the firm decided it made sense to concentrate on the future rather than "spend the next three years of our lives" fighting the lawsuits.


"We think the legal services we provided to Capital Consultants were first-rate," Petranovich said. "But we believe Judge King wisely encouraged anyone who might be involved in the Capital Consultants-Wilshire collapse to try to resolve the claims in a speedy, cost-effective way."


Law firms sued


The plaintiffs sued the law firms that declined to settle during mediation, including O'Melveny & Myers of Los Angeles and Weiss Jensen Ellis & Howard of Portland, both of which did work for Capital Consultants. They also sued Stoel Rives and former Stoel Rives partner Peterman, who represented Wiederhorn and Wilshire as well as McCarter & English, a Newark, N.J., firm that did work for Sterling Capital, a player in the alleged Ponzi-like scheme.


Stoel agreed to settle last week. O'Melveny officials claim Grayson lied to them.


The Oregon State Bar, responsible for investigating lawyers' possible ethics violations, is taking a hard look at the case. Instead of waiting for a third-party complaint, as it typically does, the bar organization's disciplinary office is gathering pleadings and other information on the lawyers' roles.


Jeffrey Sapiro, the bar organization's disciplinary counsel, said his office hasn't opened a formal investigation.


The messy allegations may continue to swirl through Portland's legal community for years. Kanter, the law school professor, said, however, that it's essential all the claims are thoroughly investigated.


"Obviously, anytime there are allegations of misconduct by lawyers it's never a positive," Kanter said. "But it seems to me that it is important to have them aired even if it does look bad for lawyers in the short term. You certainly don't want to have any kind of cover-up or sweeping it under the rug or pretending that there weren't problems if there were."


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


Return to

(c) All orginal work Copyright 1998. All rights reserved..