The Oregonian



Feds Suspected Investment Firm Years Before Bust


Reports allege Capital Consultants illegally gained from pension funds five years before it was closed




By James Long and Jeff Manning of The Oregonian staff

Sunday, May 20, 2001




By the mid-1990s, two federal agencies were independently informed by their own investigators that Capital Consultants was profiteering illegally from its management of union pension trust fund investments but did little to stop to it, an investigation by The Oregonian shows.


It wasn't until five years later that the U.S. Department of Labor and the Securities and Exchange Commission swooped in and shut down the Portland investment-management firm. By that time, the losses to the pension funds and other clients approached $300 million. An SEC official has described it as the biggest fraud by a pension-fund manager in U.S. history.


SEC correspondence obtained by The Oregonian shows that the agency sent a letter to Capital Consultants chairman Jeffrey L. Grayson in September 1995, accusing his company of systematically misrepresenting the value of certain private investments and collecting overblown fees from clients.


Four years earlier, a Labor Department investigator made stronger accusations in reports filed with that agency.


The reports, obtained by The Oregonian under the Freedom of Information Act, say Capital Consultants violated conflict of-interest laws by taking millions in consulting fees from a borrower. Capital Consultants, the reports said, collected the fees from Crown Pacific Ltd., a Portland-based timber firm, while advancing the company tens of millions in high risk financing from client accounts. Most of the money came as loans from the Oregon Laborers-Employers Pension Trust and 18 other pension funds.


The Labor Department reports, filed in 1993, also alleged that Capital Consultants illegally boosted its income by switching many pension investments out of safer stocks and bonds and into riskier "private placements" such as the Crown financing for which it charged higher fees. The Laborers' trust, according to the reports, saw a 640 percent jump in management fees during the first year of the change.


Roger Krage, Crown Pacific's senior vice president for corporate services, said there was nothing unusual or improper about his company's relationship with Grayson's firm. Krage denied that the consulting fees paid to Capital Consultants had anything to do with the loans.


"Our dealings with Capital Consultants were just as normal as our deals with our other financial advisers," he said. "We paid Capital Consultants to help us raise capital. And in fact they did bring us some capital. It was business."


Krage said he didn't know the tight restrictions that Grayson operated under as a manager of pension money. The first he heard that there might be a problem was when he was contacted by Labor Department officials, he said.


Wilson C. Muhlheim, a Eugene lawyer who represents Grayson, said: "We're going to continue to say no comment. There are attorney-client issues and Fifth Amendment issues that we have to preserve."


Labor Department files reports


Crown was under financial siege at times while it was borrowing from Capital Consultants. But the company did repay Grayson's firm.


Although Grayson and Crown officials both denied at the time that the "consulting fees" Crown paid Capital Consultants had anything to do with specific loans, Labor Department investigator Judy Owen cited dates and transactions that suggested a connection.


On March 24, 1993, after 18 months of digging, Owen submitted 42 pages of reports and 245 exhibits to Dennis F. Quigley, then deputy area director of the Pension and Welfare Benefits Administration in Seattle. Quigley signed his approval and sent copies to the pension regulator's national office in Washington D.C. Eleven months later, Owen submitted a supplemental report and 18 exhibits documenting what she said were additional violations by Capital Consultants since the previous reports.


The investigation was complicated by the fact that the Labor Department hired Grayson as an expert witness in pension-investment litigation in California, paying him $5,000 in consulting fees in 1992 even as Owen was trying to build a case against him and his company.


Bette Briggs, regional director of the Department of Labor's Pension and Welfare Benefits Administration in San Francisco, told The Oregonian in a recent interview that her agency did not seek criminal charges against Grayson in the Crown Pacific case "because there were really no losses to the plan, no witnesses had come forward and there was no smoking gun (evidence) of any fraud."


She declined to further comment, citing an ongoing criminal investigation against Grayson and others in connection with the collapse of the former Wilshire Credit Corp. and resulting losses to Grayson's pension fund clients.


But on Dec. 12, 1994, Charles Lerner, then national enforcement director for the Labor Department's pension office, sent a letter to a Capital Consultants lawyer proposing that Grayson and his firm consent to an injunction barring them from managing retirement funds.


Lerner, who dealt extensively on Capital Consultants' dealings with Crown, also proposed that Grayson and Capital Consultants repay acquisition fees to the Laborers' pension fund and "pay to client plans the profits that Capital Consultants and Grayson received from Crown."


Grayson hired a high-powered team of former senior Labor Department officials to fend off the accusations. The team included David M. Walker, a former assistant secretary of labor for pension and welfare benefits, and Robert N. Eccles, former head of the agency's pension litigation office.


On Dec. 22, 1995, Grayson settled with the Labor Department by agreeing to repay the Laborers' pension $2 million for "overcharges" on fees. The settlement did not require him to admit wrongdoing and made no mention of Crown Pacific or the $5.2 million in consulting fees it paid to Capital Consultants. The settlement did not bar Grayson or Capital Consultants from continuing to manage retirement funds.


Walker, who is now the U.S. comptroller general and head of the congressional watchdog General Accounting Office, and Eccles, a Washington attorney, also wrote testimonial letters at Grayson's request professing that neither Grayson nor Capital Consultants had done anything illegal.


SEC audit suspects violations


Less than a week after the 1995 Labor Department settlement, the SEC notified Grayson that its own audit of Capital Consultants had turned up what the department regarded as numerous violations of anti-fraud provisions of the Investment Advisors Act.


Daryl Hagel, San Francisco branch chief of the SEC investment management examinations office, sent Grayson a 12-page letter accusing him and Capital Consultants of inflating fee earnings from clients by using unrealistic appraisals to hike the value of investments and refusing to lower the value of loans that were in default.


For instance, Hagel said, Capital Consultants added unpaid interest to the "value" of non-performing loans instead of lowering the value because payments weren't being made. In one 1994 case, Hagel said, an inflated appraisal apparently cost one pension fund client $58,000 in overcharges.


Hagel, now the SEC's assistant district administrator, refused to comment on the Capital Consultants case. It's unclear whether the SEC took any action against Grayson's firm, other than sending the letter.


In response, Capital Consultants notified the SEC on March 26, 1996, that it had adopted updated private investment policies as well as investment valuation and appraiser selection procedures.


"Evidence of connection" cited


Labor Department investigator Owen focused her report on Capital Consultants relationship with Crown Pacific, then a timber startup. Owen wrote that Grayson was charging his clients management fees and one-time "acquisition" fees for financings made to Crown. At the same time, Grayson also was collecting consulting payments from Crown -- $5.2 million in all.


Between the consulting fees and the management fees and the acquisition fees, Owen wrote, Capital Consultants' involvement with Crown Pacific "provided at least 24.4 percent of Capital Consultants' total revenues for the three years between 1989 and 1991."


Owen cited federal statutes that prohibit an investment adviser from investing money recklessly or for any reason other than the exclusive benefit of its clients.


Owen provided what she termed "evidence of connection between loans and consulting fees." On Oct. 3, 1988, she reported, Crown paid Capital Consultants a $250,000 consulting fee on the same day the two companies signed a financing deal. Capital Consultants pocketed the fee as it agreed to help arrange the "necessary capital and financing for a leveraged buyout of Cavenham Forest Industries."


Owen also cited a March 9, 1989, memo that Crown executive Krage wrote to Grayson recapping a meeting in Grayson's office during which Crown agreed to pay Capital Consultants for "advisory services." In the same memo, Krage noted Capital Consultants' promised Crown a $12 million loan for buying Scott Paper timberlands.


Owen said in the report that Krage insisted there was nothing wrong with the consulting-fee arrangement.


Again, in March 1991, Capital Consultants agreed to lend Crown $39.5 million. Owen reported that in the same month, Crown paid Capital Consultants $400,000 in consulting fees. Grayson insisted to Owen, however, that the payment was not for the loan, but for his assistance with Crown's unsuccessful effort to buy Roseburg Lumber.


Asked to explain why Crown paid Grayson $400,000 although the Roseburg purchase never materialized, Owen reported that Krage, "stated that Crown traditionally paid Capital Consultants a 'nonsuccess-oriented' fee" for consulting, which meant Grayson's firm got paid whether or not it accomplished anything, Owen said in her report.


Owen went to Grayson seeking records of his extensive consulting work for Crown but came away empty-handed. Grayson "stated that he has no documentation of any kind to verify the work he performed for Crown." Grayson told Owen that all his agreements with Crown were "verbal" and that his work was also "verbal," she reported.


"Grayson, denies any tie between his receipt of consulting fees from Crown Pacific and Capital Consultants' loan of plan money to Crown," she concluded.


In December 1995, the Labor Department walked away from the case after Grayson agreed to repay the Laborers' pension $2 million in alleged overcharges.


By 1998, the Labor Department again was investigating Capital Consultants, this time prompted by charges from another labor trust fund client that the firm and Grayson had violated federal pension law. Labor Department investigators remained on the case for the next two years, through the collapse of Capital Consultants' largest borrower, Wilshire Credit, and through what they would later describe as the Ponzi-like scheme Grayson devised to conceal the millions of dollars in losses.


By the spring of 2000, a federal organized crime strike force was taking a close look at Capital Consultants and Wilshire Credit. In July, the SEC launched its own investigation. In September, a decade after Owen began her investigation, the Labor Department and SEC got court orders removing Grayson from the company and shutting it down for good.


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


James Long can be reached at 503-221-4351 or by e-mail at


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