Union Fund Temporarily Halts Distributions

Oregon Laborers Cites Concerns About Loans Its Investment Manager, Capital Consultants, Made To Wilshire Credit

By Jeff Manning of The Oregonian staff

Monday, June 5, 2000

The growing controversy over loans made to the former Wilshire Credit Corp. by a Portland investment adviser has begun to hit some Oregon union members in the wallet. The Oregon Laborers-Employers Trust Fund has temporarily suspended new distributions to members from its Defined Contribution and 401(k) fund. The union cites uncertainty about the value of loans from the fund that Portland investment manager Capital Consultants LLC made to Wilshire Credit.

"At this time, distributions will not be made from the Oregon Laborers-Employers Defined Contribution and 401(k) Plan," fund trustees notified union members in a May 25 letter. "The reason is that the Plan's professionals are reviewing the value" of the loans, the letter said. "We hope that distributions will be made in the near future."

As of June 1999, the most recent Laborers pension records obtained by The Oregonian, nearly one-fifth of the Laborers defined contribution assets was invested in Wilshire. Capital Consultants -- entrusted to invest about $10.8 million of the $34 million fund -- in turn lent about $7 million to Wilshire Credit.

The freeze does not apply to the Oregon Laborers defined benefit retirement fund, which is considerably larger, at about $215 million in total assets. Capital Consultants lent about $3.75 million of the Oregon Laborers defined benefit fund to Wilshire.

In all, during a four-year period, Capital Consultants lent $160 million, most of it from retirement funds from a variety of unions including the Oregon Laborers, to Wilshire Credit before its parent company, Wilshire Financial Services Group, entered bankruptcy in March 1999.

The bankruptcy court forgave Wilshire Credit's huge debt to Capital Consultants, giving the investment adviser Wilshire Credit stock instead.

Wilshire Financial since last summer has been headed by new management and isn't involved in this matter.

Capital Consultants' clients have continued to receive the interest due on the debt from a third-party company that Capital Consultants says agreed to assume the debt. But the ultimate value of the loans is uncertain.

The Oregon Laborers Union has about 5,000 members, including construction workers, road paving crews and hod carriers around the state. The freeze affects new retirees and anyone else attempting to withdraw money from the fund under union rules that allow members to get incremental payouts from the fund if they worked fewer than 300 hours in the preceding year.

It's an income boost that dozens of union members count on, union sources said. Those annual payouts typically begin in May. But this May, few if any of the payouts were made, union officials said.

"There are a lot of people who are upset," said Al Stroup, a construction worker from Scappoose. "I wouldn't be drawing my money out. But it still bothers me."

Another union member said the trustees did the right thing in freezing distributions from the fund in light of the uncertainty about the value of the Wilshire loans. "What troubles me is that they (the trustees) can't get the information they need," said Larry Miller, a 26-year-member of the Laborers Local 296 in Portland. "Our members are deserving of their money."

Capital Consultants has vigorously defended its actions and vowed that its clients will be repaid in full. In a special May meeting, Jeffrey L. Grayson, who founded Capital Consultants, pointed out to the Oregon Laborers-Employers trustees that Wilshire interest payments have continued as promised.

Reached Friday, Grayson disputed that the Laborers had frozen the fund. "That's not correct," he said. He would not elaborate, saying that his attorney has advised him not to talk publicly about the matter.

Mort Zalutsky, a Portland attorney representing Oregon Laborers, confirmed that no distributions have been made out of the fund since early May and that the fund has been frozen pending new information about the loans in question. Zalutsky declined further comment. Trustees of the Laborers fund either weren't available or declined comment on the freeze.

Capital Consultants made the loans to Wilshire Credit from 1995 to 1998. But after Wilshire Credit's parent company's bankruptcy, Capital Consultants reassured members that an obscure New Jersey company, Sterling Capital LLC, had agreed to assume the Wilshire Credit interest payments.

Revelations of a multimillion-dollar personal debt owed by Grayson to a Wilshire affiliate even while he was steering millions of his clients' dollars to Wilshire Credit, as well as financial connections between Capital Consultants and principals of Sterling, have led to intense scrutiny of Capital Consultants, both by its union pension trust clients and federal investigators.

The U.S. Departments of Labor and Justice as well as the Internal Revenue Service and FBI are looking into the matter.

A federal grand jury also has been gathering evidence. The reorganized Wilshire Financial that has since last summer been headed by new management isn't borrowing money from Capital Consultants and isn't a subject of the federal investigation.

Trustees of both the Office and Professional Employees International Union Local 11 401(k) fund and the Oregon Laborers pension trust notified members in May that they, too, are taking a close look at the ties between Capital Consultants and Wilshire and Sterling.

Officials familiar with Oregon Laborers said they are waiting to see the results of a long-promised appraisal of the Wilshire-Sterling notes before allowing its members access to their funds from the Defined Contribution Plan.

Capital Consultants has been telling clients since January that Moss Adams, a Portland auditing and accounting firm, was in the process of completing the valuation. Laborers officials now hope to see the finished valuation by June 15.

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