Local 11 401(k) trust sues Capital Consultants, others

Some 300 anxious members of Portland-based Office and Professional Employees Local 11 met with trustees, financial advisers and attorneys of their 401(k) retirement fund Oct. 26 to find out the status of the plan since it was taken over by the federal government.

The Department of Labor (DOL) and Securities and Exchange Commission (SEC) filed separate lawsuits Sept. 21 against fund manager Capital Consultants, LLC, of Portland for alleged violations of Employee Retirement Income Security Act (ERISA) laws and the Securities and Exchange Act. The Labor Department seized all assets of the firm and appointed a permanent receiver for the company.

On Oct. 27, federal receiver Thomas Lennon filed a report in U.S. District Court in Portland stating that Capital Consultants and its owners, Jeffrey and Barclay Grayson, poured more than $450 million into commercial loans and other private investments that "were remarkably unsuccessful and have produced dramatic losses."

The extent of the losses is still unknown, but Lennon told the Oregonian newspaper that it could be more than half the loan assets, or more than $243 million.

Capital Consultants managed more than $1 billion for 340 clients, mostly pension trust funds and individuals. At least 60 of the clients affected are primarily union-sponsored pension, health and welfare plans governed by ERISA, according to a statement from the Labor Department's regional office in Seattle.

Trustees of the Local 11 401(k) plan filed their own lawsuit Sept. 29 against Capital Consultants, the Graysons, and 20 other entities and principals. Trustees from eight other local union pension and health and welfare trust funds have joined Local 11 in the lawsuit. They include: United Association Local 290 Plum-ber, Steamfitter and Shipfitter Industry pension, 401(k), and Health and Welfare plans; Office and Professional and Employees International Union Local 11 Health and Welfare trust; Idaho Laborers Pension Trust Fund; Oregon Laborers-Employers Defined Contribution and 401(k) Plan; Oregon Laborers-Employers Health and Welfare Trust Fund; and Oregon Laborers-Employers Pension Plan.

Other defendants named in the lawsuit are Wilshire Credit Corporation, Wilshire Financial Services Group Inc., Wilshire International Funding Group Inc., Portland Servicing Corp., Specialty Finance Investors LLC, Oxbox Financial Group LLC, Bear Stearns & Co., Andrew Wiederhorn, Lawrence Mendelsohn, Wilshire REal Estate Investment Trust Inc., Wilshire Servicing Corp., Daniel D. Dyer, Sterling Capital LLC, Oxbow Capital Partners LLC, Oxbow Capital 1999 Fund I LLC, Oxbow Capital 1999 Fund B, LLC, Brooks Financial LLC, and Beacon Financial LLC.

Those attending the Oct. 26 Local 11 meeting received copies of the lawsuit, which alleges that Capital Consultants defrauded the trusts of some $90 million by misleading trustees into believing their funds were being invested prudently. It charges Capital Consultants schemed secretly to give away the collateral of the company to which the investment firm had made loans using the trusts' money.

Trust attorney Morton H. Zalutsky said that $6.42 million of the $53.4 million Local 11 401(k) retirement fund was "under review" by the federal receiver. Most of that money was in the supposedly least risky of the fund options - cash management, balanced growth, and fixed income. A private investment fund that was described as the most risky of all the options also was under review.

Participants who had directed their money to one of six mutual fund options in the plan were not at risk of losing any money, Zalutsky said.

Peter Herrling of Portland-based Associated Third Party Administrators (ATPA) said that all money that isn't under review by the receiver has been transferred to interim fund manager Ferguson, Wellman, Rudd, Purdy & Van Winkle Inc. of Portland.

Local 11 participants have the option of re-allocating money in their portfolios on a quarterly basis. Herrling said that all monies re-allocated to one of the eight fund choices by Sept. 15, 2000 had been executed. In other words, if a participant directed money be moved from the cash management fund into a mutual fund by Sept 15, that order was completed and the money now in the mutual fund is not at risk.

Herrling said third quarter 401(k) statement won't go out until sometime in November and will reflect account values as of Sept. 30, 2000, with information as to how much of an individual's account is "under review." Money that is currently under review cannot be reallocated into another fund at this time, he said.

The trustees' lawsuit against Capital Consultants makes many of the same allegations as the federal lawsuits, and also seeks to restore losses to the trusts.

The suits claim that beginning in 1995, Capital Consultants loaned $160 million in client funds to Wilshire Credit Corporation, through the firm's collateralized note program. Wilshire acquired and serviced consumer loans purchased from third parties. Capital Consultants represented to the trusts that the note program was a low-risk investment, the suits charged.

Near the end of 1998, Wilshire had margin calls from its creditors. Assets in the cash collateral account were released to pay the creditors, which was a breach of fiduciary duty, the suits charge.

The government lawsuit alleges that Capital Consultants imprudently loaned plan and other client assets to Sterling Capital LLC; Oxbow Capital Partners, LLC; Brooks Financial LLC; and Beacon Financial Group, LLC to facilitate "paper sales" of all or a portion of the Wilshire loan at an inflated price and thereby conceal losses suffered by the plans on the original investment.

The government also claims Capital Consultants charged the plans excessive fees for investment management services by basing the fees on a percentage of the full amount of the Wilshire credit loans, even though the plans' investments had declined in value.

"We're going after anyone who received trust money that wasn't entitled to it," said Chrys Martin, an attorney for the law firm Bullivant Houser Bailey, which was hired to represent the trusts. "We'll sue anyone we believe did wrong by the trustees and the participants. We are looking under every rock."

The trusts have also hired a private investigator to gather information. Joe Gavalis of CTG & Associates told participants that he has been given "no restrictions on what or how to investigate" the matter. Gavalis said that in addition to the Department of Labor and SEC, investigations are under way by the U.S. attorney, Federal Bureau of Investigation and the Internal Revenue Service to determine if any criminal violations have occurred.

"That's what we're looking for - people who were lying, cheating and stealing," Gavalis said.

Participants asked numerous questions of the advisers, particularly whether or not the fund can ever be made whole - and when.

"We hope so, but we don't know," Zalutsky said. "And we don't know when we'll know." "I've been asked to find out where the money went and to get it back to you," Martin added.

Lennon's report to the District Court said that many of Capital Consultants' investment portfolios are equivalent to "junk debt, borrowers who are incapable of ever repaying principal, and collateral that has little or no value."

Lennon also reported that in 1999 and through the first nine months of 2000 Jeffrey Grayson "personally withdrew $3.6 million from Capital Consultants in the form of salary and other distributions."

Zalutsky told Local 11 pension participants that he began investigating Capital Consultants in January 2000 after receiving information alerting him of possible breaches of fiduciary duties. He said the private investigator was hired during the summer to assist in the investigation.

A press release issued by the nine trusts involved in the lawsuit said that "based on their investigation it is possible that additional defendants, as well as additional legal claims, will be added to the lawsuit.

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