Records show that Jeffrey Grayson hid his company's debts with loans from Andrew Wiederhorn's Wilshire Credit
By Jeff Manning and James Long of The Oregonian staff
Sunday, March 18, 2001
In October 1997, Capital Consultants' Jeffrey Grayson discovered that an hors d'oeuvre company that owed his firm nearly $3 million appeared to be cooking its books as well as its line of party snacks.
The Hand That Feeds You was in deep financial trouble, and Grayson faced the unappetizing prospect of having to break the news to clients, mostly union pension funds.
So Grayson cooked Capital Consultants' own books and concealed the loss, records show.
As he had done in the past, Andrew Wiederhorn helped him out by providing the cash.
Wiederhorn was then chairman of Wilshire Credit Corp., which already had borrowed more than $116 million from Capital Consultants. According to loan documents, Wiederhorn had Wilshire Credit buy the snack-maker loans, with Grayson guaranteeing repayment with his clients' own money and his personal assets.
Grayson told the pension funds that he had found "a third party" to buy the loans and said in a quarterly report that Capital's investment in The Hand That Feeds You had been a great success, earning the clients a "time-weighted return of 17.93 percent over the last 12 months." In the report to his union clients, he didn't mention Wiederhorn's role or the guarantees.
This kind of financial back-and-forth between Grayson and Wiederhorn was a hallmark of their relationship.
From 1994 to 1998, Grayson rained $160 million of his clients' money on Wilshire Credit while Wiederhorn provided help that enabled Grayson to hide troubled investments from his clients. Wilshire Credit Corp. and other Wiederhorn companies routed millions of dollars to struggling Capital Consultants borrowers and even to Grayson himself.
Federal pension laws prohibit money managers such as Grayson from using their position for personal gain. The Employee Retirement Income Security Act -- ERISA -- requires that investment advisers invest pension money prudently and act solely in the interest of clients.
Some former Capital Consultants union clients now suing Grayson and Wiederhorn allege that Wiederhorn's efforts to help Grayson amounted to "bribes" and "kickbacks." The relationship led to losses estimated at more than $240 million, their lawsuits say.
Robert A. Shlachter, a Wiederhorn lawyer, said "We are precluded by ethical rules from commenting" while the lawsuits are pending. Wilson Muhlheim, an attorney representing Grayson, declined to comment, saying he didn't know about the transactions.
Sometimes the back-and-forth deals had many layers, as in The Hand That Feeds You episode.
Larry J. Tapanen, co-owner of the now-defunct company, was also a professional appraiser. Tapanen confirmed in an interview that from 1994 to 1996, he personally appraised assets Wilshire Credit pledged to Capital Consultants to obtain more than $100 million in loans.
Those loans were lost when Wiederhorn's Wilshire empire collapsed in 1999, and a dozen trust funds now allege in the lawsuits that Tapanen, Wiederhorn, Grayson and others "knew the appraisals were false and misleading."
Tapanen denied in an interview with The Oregonian that the appraisals he performed were inaccurate.
The Wilshire loans were hugely profitable to Capital Consultants, with Grayson charging his clients a 2 percent to 3 percent fee on the outstanding loan balances, an extraordinarily high fee by industry standards. The mutual back-scratching began no later than June 1994, according to an investigation by The Oregonian.
West State Inc., a struggling Portland ship repair firm, owed Capital Consultants more than $11 million and appeared to be headed for bankruptcy, according to company documents.
According to former Capital Consultants employees, the company couldn't make more loans to West State because the ship repair firm didn't have enough collateral.
On June 27, Capital Consultants loaned $3.65 million to Wilshire Credit, and Wilshire Credit the same day loaned $3.65 million to West State through a West State affiliate. According to the trustee appointed to oversee West State's bankruptcy, Wilshire Credit took a $576,750 loan fee for itself -- or 15.6 percent.
There was more: Despite the Wilshire Credit "loan," West State went out of business in October 1994. Before it closed its doors, however, Grayson put together another deal that he said was intended to save his investment, as well as employees' jobs. Capital Consultants documents show that the firm loaned money to a former West State executive to buy a competing ship repair firm. As part of the deal, the new company assumed more than $8 million of West State's debt to Capital Consultants.
But the ink was hardly dry on the deal when the new company - called Cascade General – began foundering, partly because of the huge debt payments it owed Grayson's firm. Flush with a steady flow of loans from Capital Consultants, Wilshire Credit once again came to the rescue. According to court proceedings, Wilshire Credit loaned Cascade General $2 million late in 1994. Then, according to loan documents, it loaned another $1.5 million in March 1995, helping the company survive.
Lawyers for both Grayson and Wiederhorn declined to comment. But shortly after he made the loans to the ship repair firms, Wiederhorn said in an interview: Capital Consultants "brought the deal to us. They wanted to share the credit risk. We looked at this as a troubled debt deal and priced it accordingly." Again, in December 1995, Grayson looked to Wilshire Credit to bail him out of an expensive personal jam.
The U.S. Department of Labor had sued him and his firm for allegedly overcharging the Oregon Laborers union on investment fees. To settle, Grayson had to come up with $1.7 million in 10 days. His solution: He went to Wiederhorn.
Over a two-week period in December 1995, Capital Consultants made a series of loans to Wilshire Credit totaling more than $10 million. On Dec. 27, Wilshire Credit received the biggest single chunk, $4.5 million. On that same day, the company loaned $5 million to C.F. Credit, a new California company organized by a Wiederhorn friend. Also on Dec. 27, C.F. Credit loaned $1.7 million to Grayson to repay the Laborers union, whose money he was lending to Wilshire Credit.
According to the union trust funds' lawsuit, Grayson also went directly to Wilshire Credit numerous times for additional personal loans. As of last week, Grayson still owed about $4 million to Wilshire Credit's successor companies, according to Wilshire Credit's current management. Wiederhorn is no longer with the company.
The pattern of Wilshire Credit bailing out Grayson or his trust fund investments repeated itself in the case of The Hand That Feeds You. That company was created in 1994 as the brainchild of Suzanne Perkins, a former Portland resident, and her then-husband, Tapanen.
Its main product was Suzanne's Ritzy Rollups, a party snack made of various spreads and meats on rolled-up Armenian flatbread.
Loan documents and internal Capital Consultants documents show that the firm began loaning money to The Hand That Feeds You in October 1994, drawing it mostly from trust funds of Oregon and Idaho Laborers unions and Local 290 of the Plumbers Steamfitters and Shipfitters in Portland.
The snack company began tostruggle financially in mid-1997. In October, according to internal company memos, Capital Consultants managers reported they believed The Hand That Feeds You had fabricated about two-thirds of the $900,000 in sales it reported on its books.
In an interview, Tapanen confirmed that the company's records were falsified. He was secretary and treasurer of The Hand That Feeds You but said he wasn't directly involved in the company's operations and didn't know about the alleged falsifications at the time.
In October 1999, Tapanen signed a judgment, agreeing to repay a Capital Consultants affiliate for the original $3 million in loans.
Perkins couldn't be reached for comment, despite repeated attempts to locate her.
Wiederhorn agreed to take the troubled loan but only on the condition that Grayson personally guarantee repayment of both principal and 14 percent interest. Grayson put up his home and his stock in Capital Consultants as collateral, according to the Dec. 31, 1997, guarantee document.
Wilshire Credit got other concessions from Grayson as well.
According to the loan guarantee, if Wilshire Credit didn't get paid on The Hand That Feeds You loan, Grayson agreed that Wilshire could deduct the $3 million from the amount it owed Capital Consultants clients' on its previous loans. Grayson also agreed that Capital Consultants would buy the loan back from Wilshire by July 1, 1998.
In the two weeks following the deal, Grayson sent another $12 million of his clients' money to Wilshire Credit. A year later, Wilshire defaulted on loans from Capital Consultants totaling $160 million.
Jeff Manning can be reached at 503-294-7606 or by e-mail at email@example.com.