The Oregonian


Agency Slow To Halt Capital's Scheme





The Capital Consultants debacle that cost union trust funds and other clients more than $350 million could have ended months earlier if the U.S. Department of Labor had acted promptly on evidence of fraud gathered by its own investigators The Oregonian has found.


The regulatory agency began scrambling only after the U.S. Securities and Exchange Commission – tipped partly by stories in The Oregonian -- entered the case in July 2000. The SEC quickly built a strong case against Capital Consultants based mainly on evidence that had been in the hands of the Labor Department for months. The SEC wanted to move fast and threatened at one point to close Capital Consultants with or without the Labor Department's help.


The agencies filed simultaneous lawsuits in September 2000 to close the Portland investment advisory firm. The lawsuits came nearly two years after the Labor Department began investigating Capital Consultants -- and 10 months after the department finished gathering most of the evidence used by the SEC to put Capital Consultants out of business.


The labor investigation file, according to eight sources including three government officials who have seen it, showed that Capital Consultants was using new client money to hide enormous losses.


The Labor Department refused The Oregonian's request to see the report and would not discuss it or reveal the date it was completed. Department officials defended their role in the Capital Consultants affair.


"Investigations, particularly complicated investigations involving multiple parties and complicated financial transactions, can and often do take a long time to piece together," said Alan Lebowitz, deputy assistant labor secretary for pension law enforcement. He would not comment further citing an ongoing criminal investigation of Capital Consultants.


Details and exhibits


As early as December 1999, Labor Department investigator Judy Owen finished piecing together the alleged coverup, and in February 2000 she sent a detailed report with dozens of exhibits to the agency's legal office in Washington, D.C. Owen works for the Pension and Welfare Benefits Administration, which enforces the nation's pension laws.


Owen, a Seattle-based accountant-investigator, began pursuing Capital Consultants in October 1998. She was well-acquainted with the firm and its flamboyant chairman, Jeffrey L. Grayson, having caught Grayson in the early 1990s accepting $5.2 million in potentially illegal consulting fees from a borrower of union trust funds.


Grayson settled with the Labor Department in 1995 by paying $2 million to one of the trust funds.


In the new investigation, Owen fastened her attention on $160 million that Grayson's firm had lost in failed loans to the former Wilshire Credit Corp. The documents that Owen dug out of Capital Consultants showed that Sterling Capital LLC, a New Jersey company, had bought the Wilshire Credit loans at full value and agreed to keep up the monthly interest payments.


Later, she obtained documents showing that Brooks Financial LLC of Florida had bought most of the loans from Sterling and would also continue to make the expected interest payments.


Owen, who declined to be interviewed, concluded that Grayson's arrangements with Sterling and Brooks were draining additional union pension money for no legitimate purpose.


As Owen pursued her investigation, she began to hear from accountants in the pension trust community who shared her concerns about Capital Consultants.


Fluff and bull


One of these, Denver accountant Kurt Needles, an auditor for two Colorado union trust funds, recalled telephoning Owen early in 1999 pleading for information on the Wilshire loans. Needles' clients had invested $1.3 million in Capital Consultants loans. It was nearly 25 percent of the assets of one of the funds.


As an auditor he was legally bound to try to verify the value of the loans -- and he didn't trust Capital Consultants.


"You asked 'em a question and you got fluff," Needles told The Oregonian, "You asked them another question and you got bull -- and fluff. You couldn't get a straight answer."


Needles said he asked Owen whether she thought the Wilshire Credit loans were worth what Capital Consultants claimed. Owen, he said, "told me that (the Department of Labor) would be issuing a report by the fourth quarter of '99."


The fourth quarter came and went, and no report appeared. Needles said he couldn't get anything else out of the Labor Department, although he suspected Capital Consultants was lying to his clients.


The investigation was dragging partly because the Pension and Welfare Benefits Administration has little power to force a party such as Capital Consultants to hand over documents in a timely fashion. The administrative subpoenas it issues have no legal backing and can be ignored. The agency must negotiate for what it gets.


In the Capital Consultants investigation, the agency had to funnel its requests through Capital Consultants' lawyers and return again and again as the need for more documents became clear.


After more than a year of digging, Owen had the documents she needed to write a half-inch thick report, which she submitted, along with dozens of exhibits, to her district supervisors in Seattle. District officials approved the report in February and sent it, along with the exhibits, to the Labor Department's legal office in Washington, D.C.


The way she saw it, the pension funds at Capital Consultants were being exposed to continuing serious losses and the situation was urgent. But the Department of Labor lawyers moved slowly.


Waiting for witnesses


As spring passed into summer the Labor Department solicitor's office was still mulling the recruitment of an expert witness to testify about whether the loans were reckless.


Capital Consultants, meanwhile, continued to pour millions from its clients' trust funds into the alleged coverup of the $160 million loss.


One of the frustrated bystanders was Needles, the Colorado accountant.


Needles told The Oregonian he learned that the investigation had ground to a virtual halt in March 2000 when Owen went on maternity leave. "She didn't come back to the office until May," Needles said. "I couldn't call anyone because Judy was the only one who knew anything."


As the search for an expert witness dragged into July, officials in the SEC's Los Angeles office were reading news accounts of the Capital Consultants debacle in The Oregonian, which had been publishing stories about the firm's involvement with Wilshire Credit since October 1999. They were also hearing from some private investors who had invested with the firm. Someone at the SEC got a copy of Owen's report.


David Hwa, a senior SEC lawyer, said his agency's investigators soon determined that Grayson had engineered a massive fraud scheme and that the longer he was allowed to remain in business, the steeper would be the losses facing investors.


"If we find fraud," Hwa said, "we start working around the clock. We know exactly what we want to do -- we want to go to court, we want to grab everything we can and we want to put these guys out of business because we think they're still doing this, they're still ripping off people, we want to stop that as fast as we can."


With the Owen file as their road map, nearly a dozen SEC lawyers and investigators began putting together an emergency lawsuit to seize Capital Consultants. Lifting whole sections of their case substantially from documents that the Labor Department's lawyers had had in hand since February, the SEC was ready by the end of August -- less than two months later --to file for an injunction in U.S. District Court in Portland.


"They gave us a ton of information from the stuff they had found," Hwa said, "which really helped us shorten our investigation and tie up a lot of loose ends."


Hwa also acknowledged that the more streamlined SEC could act faster than its sister agency. "The way the Department of Labor is organized," he said, "they have to go through clearance from a bunch of different people, from their people in San Francisco back to D.C. and that sort of thing.


"We don't have to go through those layers, so we can work a lot quicker."


An annoying two weeks The Labor Department planned to file a companion lawsuit alongside the SEC's, but the SEC planned to move fast and it let the Labor Department know it would have to keep up.


The lawsuit drafted by the SEC lawyers described Capital

Consultants' use of new client money to conceal the loss of the Wilshire loans as a "Ponzi-like" scheme, and petitioned the court to appoint a receiver and end what an SEC official described as "the biggest fraud by a pension fund manager in U.S. history."


The SEC planned to file the lawsuit Sept. 1, 2000 -- but got a jaw-dropping surprise from the Labor Department on the eve of the filing.


During a last-minute telephone conference call with Labor Department officials, the SEC legal team learned that the other agency's lawyers had just given Capital Consultants a legally binding pledge not to sue the firm for two weeks.


Such a "tolling agreement" is used by lawyers to delay the filing of a lawsuit long enough for the parties to reach agreement. In return for the delay the potential defendant agrees to waive the statutory deadline for filing the suit, if efforts at settlement fail.


In this case, the SEC team was dumbfounded by Labor's agreement because there was no apparent problem with the statute of limitations, and Capital Consultants was hemorrhaging pension money every minute it remained in operation.


Most of the SEC lawyers on the conference call, one witness said, argued angrily that that agency should file its lawsuit as planned, with or without the Labor Department. The SEC people had worked long hours to put the case together, and some feared that Grayson might sabotage their efforts at any moment by throwing his company into bankruptcy. That, they feared, would let him keep control of Capital Consultants' records long enough to sanitize them.


The Labor Department officials on the call, faced with major embarrassment if the SEC filed alone, pleaded with the SEC to wait.


According to a source, Kelly Bowers, chief lawyer in the SEC's Los Angeles office, finally overruled his staff and said his agency would delay to let the Labor Department catch up. Bowers declined to comment. When the two agencies filed their lawsuits simultaneously in federal court Sept. 21, they issued public statements praising the interagency cooperation.


For Grayson's clients, the lawsuits came too late to prevent some of the losses, which a court-appointed receiver recently estimated will reach $355 million.


Still, the Labor Department found reason to celebrate. In a ceremony in Washington, D.C., last spring, the department bestowed its "Secretary's Exceptional Achievement Award" on the lawyers and others involved in the Capital Consultants case. The award cited an "extraordinary team effort (that) protected retirement, health, vacation and other benefits of more than 50,000 workers."


But not everyone is in a partying mood.


"I just wished," said Needles, the Denver accountant, "that something would have happened before all my funds lost so damn much money."


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

Return to

(c) All orginal work Copyright 1998. All rights reserved..