Accusations Widen In Capital Consultants Case
Two ex-employees of the former Portland consulting firm, and the investment bank Bear Stearns, become defendants
By Jeff Manning and James Long of The Oregonian staff
Saturday, March 31, 2001
Wilshire's top officers told they are suspects
Union pension fund trustees and the U.S. Department of Labor expanded their lawsuits in the Capital Consultants financial scandal Friday.
In an amended complaint filed in federal court, the trustees added to their list of defendants two former employees of the defunct Portland investment advisory firm and a prominent New York investment bank.
The trustees also filed a lawsuit in Multnomah County Circuit Court against the Portland accounting firm Moss Adams LLP and Consilium Inc., an appraisal company, both of which did work for Capital Consultants or its borrowers.
The lawsuit accuses the firms of securities violations, professional negligence, breach of fiduciary duty, breach of contract and fraud. It alleges they knowingly provided Capital Consultants with false appraisals of collateral that the former Wilshire Credit Corp. and others used to obtain loans from Capital Consultants.
John Barker, a Moss Adams attorney, said his client did nothing wrong and "is confident that when the facts are presented to a judge and jury for decision on the actual causes of the investment losses, the decision will be that the losses are attributable to the decisions of other parties, along with financial conditions beyond anyone's control."
In their expansion of a fraud suit filed in U.S. District Court in Portland, the union trustees elaborated on the role allegedly played by Wilshire Credit owners Andrew Wiederhorn and Lawrence Mendelsohn in Capital Consultants' collapse last September.
The firm's clients lost more than $200 million, most of it from $160 million in failed loans from Capital Consultants to Wilshire Credit. The amended complaint alleges that most of the $160 million was "misappropriated by Wiederhorn directly or through companies he controls."
Wilshire, the lawsuit alleges, misapplied proceeds for improper purposes such as "loans" and inappropriate "shareholder distributions to Wiederhorn and Mendelsohn."
As The Oregonian reported Friday, Wiederhorn and Mendelsohn excused themselves from repaying at least $93 million they took from Wilshire Credit in loans and distributions. Wiederhorn canceled the debts for himself and his associate on June 8, 1999.
The union funds alleged that Wiederhorn and Capital Consultants chairman Jeffrey Grayson engaged in a long pattern of "circular loan transactions" intended to mislead Grayson's clients.
Capital Consultants, often with Wilshire Credit's help, "would use money newly obtained from trust funds and other investors to create the illusion that payments were being made on other obligations in which (Capital Consultants) had invested trust funds," the lawsuit said.
When Jeffrey Grayson realized that Wilshire would not repay its loans, the lawsuit said, Grayson, Wiederhorn and their businesses and some professional advisers created transactions "to disguise the failed Wilshire investment through what became the largest Ponzi-like scheme ever perpetrated by an investment advisor."
That alleged scheme came to an end last September when the U.S. Department of Labor and the Securities and Exchange Commission sued Capital Consultants and the Graysons, ousted Jeffrey Grayson and his son, Barclay, the firm's president, and got a receiver appointed to liquidate the firm.
Shortly thereafter, dozens of union trust funds sued Capital Consultants and its former executives, as well as Wiederhorn, Mendelsohn and others, and a criminal investigation is under way.
Attorneys for Wiederhorn, Mendelsohn and Jeffrey Grayson were not immediately available for comment.
The amended federal lawsuit also accuses Linda Lucas, former Capital Consultants chief operating officer, and Dean Kirkland, former Capital Consultant salesman to the union funds, of repeatedly and knowingly making false statements to the firm's clients.
The lawsuit alleges that Lucas kept false financial records and that she and Kirkland knowingly participated in transactions prohibited by federal pension law.
Neither Kirkland, a member of a prominent Oregon union family, nor his attorney could be reached immediately for comment.
Lucas declined comment. Her lawyer, Ken Wittenberg, said his client "denies she has any liability in this case and she's eager for all the facts to come out."
The trustees also added Bear Stearns, the storied Wall Street firm, as a defendant in the lawsuit, accusing it of improperly removing $5.1 million from a cash collateral account it held for Capital Consultants. Although the account belonged to Capital Consultants, the lawsuit said, Bear Stearns took money that it claimed it was owed by Wilshire Credit.
Bear Stearns could not be reached immediately for comment.
All the accusations were in connection with the defendants' roles in Capital Consultants' collateralized notes program that was central to the dealings between the Graysons' firm and Wiederhorn's and Mendelsohn's Wilshire Credit Corp.
More than 80 union trust plans from all 50 states had money invested with Capital Consultants and provided $113 million of the $160 million lost in the Wilshire Credit investments.
The Labor Department's amended lawsuit, also filed in federal court, raised questions about two Capital Consultants loans with parties other than Wilshire, alleging that the transactions resulted in losses for the trust funds.
Jeff Manning can be reached at 503-294-7606 or by e-mail at firstname.lastname@example.org.
James Long can be reached at 503-221-4351 or by e-mail at email@example.com.