The finance firm that failed to repay union pension funds lets executives out of a $93 million obligation during a restructuring
By Jeff Manning and James Long of The Oregonian staff
Friday, March 30, 2001
On June 8, 1999, the two owners of Wilshire Credit Corp. excused themselves from repaying at least $93 million they owed the firm, according to internal company documents obtained by The Oregonian.
Much of Wilshire Credit's money came from union pension funds managed by Portland money manager Capital Consultants LLC.
Andrew Wiederhorn, Wilshire Credit's chief executive officer, signed the cancellations of "approximately $65 million"of indebtedness for himself and "approximately $28 million" for Wilshire Credit co-owner Lawrence Mendelsohn. The debt forgiveness occurred at the same time as an ongoing financial restructuring of the Wilshire family of companies that also allowed Wilshire Credit to get out from under $160 million in debt to Capital Consultants.
A court-appointed receiver now liquidating Capital Consultants estimates that Capital Consultants clients mainly union pension funds -- have lost more than $200 million, including principal and interest.
Robert Shlachter, a Portland lawyer representing Wiederhorn, said he is "precluded by ethical rules" from commenting. Gordon Greenberg and James Sanders, lawyers for Mendelsohn, didn't return phone calls.
Capital Consultants was Wilshire Credit's primary source of funding and began lending the firm millions of dollars from union trust funds and other sources as early as 1994.
The following year, Wilshire Credit's financial statements began to show tens of millions of dollars in items sometimes described as "distribution to stockholders" and sometimes as "shareholder loans." Wiederhorn and Mendelsohn were the firm's only shareholders.
Wilshire Credit's "distribution to stockholders" stood at $47.8 million by Dec. 31, 1996. A year later, the distribution had risen to $59.8 million. By Sept. 30, 1998, documents related to the bankruptcy of Wilshire Credit's Wilshire Financial affiliate show "distribution to stockholders" of $74.5 million.
Wilshire Financial bankruptcy documents from Feb. 1, 1999, refer to the $74.5 million as "shareholder loans."
How all of that money was used isn't clear. But a prospectus that Wilshire Financial filed with the Securities and Exchange Commission in 1996 says that Wiederhorn and Mendelsohn used about $30 million in loans from Wilshire Credit to buy and help fund two California savings banks that became a key to their Wilshire financial operations.
At least one Capital Consultants manager objected to the Wilshire Credit loans to Wiederhorn and Mendelsohn. In a draft letter dated Feb. 13, 1997, and addressed to Wiederhorn, Linda M. Lucas, then Capital Consultants chief operating officer, accused Wilshire Credit of violating its loan agreement on a number of fronts, including Wilshire Credit loans to Wiederhorn and Mendelsohn.
"In our view," Lucas wrote, "such distributions represent cash that should have been retained within Wilshire Credit as the source for Wilshire Credit's eventual repayment of the principal balances of its loans from Capital Consultants."
Lucas noted that Wiederhorn and Mendelsohn had used a portion of the money on the banks but pointed out that "the loans do not appear as assets on Wilshire Credit's disclosed balance sheet, and that omission is likely to adversely affect Wilshire Credit's ability to repay Capital Consultants."
Neither Lucas nor Ken Wittenberg, her attorney, could be reached for comment on the contents of the letter.
Later, in a May 21, 1998, opinion on Wilshire Credit's 1997 financial statements, auditor Arthur Andersen LLP, noted that the company had accounted for "loans to principal stockholders as an asset . . . that in our opinion should be reported as a decrease in stockholders' equity."
The debt cancellations came during the restructuring of Wilshire Credit and its affiliated Wilshire companies in spring 1999.
As part of that process, Capital Consultants chairman Jeffrey Grayson signed away Wilshire Credit's obligation to repay the Capital Consultants debt in exchange for stock of far smaller value. Grayson, Wiederhorn and Mendelsohn also signed mutual promises not to sue one another.
A federal criminal investigation has been under way since last year, involving the U.S. Justice Department, the FBI, Labor Department and the Internal Revenue Service. Barclay Grayson, the former president of Capital Consultants, has pleaded guilty to mail fraud, and John D. Abbott, a former official of the Oregon-Idaho laborers union, has pleaded guilty to taking nearly $195,000 in payoffs from Jeffrey Grayson and filing a false income tax return.
"I just think it's repulsive," said Kurt Needles, whose clients include a Denver-area union benefits fund that may have lost as much as $1.3 million on the Wilshire loans and other Capital Consultants investments.
"They didn't do this to rich people or big corporations," Needles said. "They did it to working people who are making $25,000 to $40,000 a year. These are secretaries and blue collar workers. How long is it going to take them to make up a 30 percent loss of their pension?"
Jeff Manning can be reached at (503) 294-7606 or by e-mail at email@example.com.
James Long can be reached at (503) 221-4351 or by e-mail at firstname.lastname@example.org