Capital collapse detailed in pension reform hearing

Congress is considering legislation to change the rules governing employer-provided pensions, and on June 9, a U.S. Senate committee took testimony on pension fraud involving Portland-based Capital Consultants Inc. (CCI).

Among those testifying were Portland labor leader John Endicott; convicted felon and former CCI president Barclay Grayson; and a deputy assistant secretary from the Department of Labor.

John Endicott, business manager of Tualatin-based Local 290 of the United Association of Plumbers and Steamfitters, told senators that his union began investing in Capital Consultants in 1975, and by June 2000 had entrusted more than $159 million in pension and other trust money to the investment management firm. They lost much of that investment through “reckless and fraudulent schemes concocted by corrupt money managers,” Endicott said — ultimately more than $75 million. Most of the losses were in what Capital Consultants had described as an “insured, collateralized note” program — loans backed by collateral and insured against default. It turned out the loans were not backed by collateral nor insured. The loans failed, and Capital made matters worse by hiding the failures and shuffling money through dummy entities it controlled to make it seem like the loans were still performing.

“We had hired professionals to guide us,” Endicott said, “and those professionals had all assured us that Capital Consultants was doing a good job and our money was safe.”

Endicott called on Congress to clarify civil laws and regulations that apply to pension consultants and other professionals who advertise the ability to monitor employee benefit plan investment managers; to give the Department of Labor more clearly defined authority to act on the local level; and to enforce the criminal law.

“A man who robs a store of a few hundred dollars at gun point might be sentenced to 10 years in prison,” Endicott said. “The sentences in this case seem very light in comparison to the losses.”

Endicott was followed by Grayson, who now works in senior housing real estate acquisitions for Portland-based BDC Advisors. Grayson told senators that Capital Consultants managed over $1 billion in assets at its height, three-fourths of it from union benefit trusts. About half that amount was invested in privately originated loans and investments, including $150 million to Wilshire Credit Corporation, led by Andrew Wiederhorn. Wiederhorn used the money to acquire high-risk loans. The loans failed, and Wilshire defaulted.

But Capital kept loaning money to Wilshire, Grayson said, because his father, company founder Jeff Grayson, had received improper personal loans from Wiederhorn. Plus, Capital was receiving 3 percent fees on assets invested.

“Why did the union clients invest so much money into Capital’s private investment program initially” Grayson asked, “and why did the money keep flowing in for so long after Wilshire’s failure?”

The answer, Grayson said, was that union trustees were receiving gifts and gratuities from the elder Grayson and top Capital salesman Dean Kirkland, including golf, fishing and hunting trips, club memberships, lavish parties and expensive dinners, sporting events, and loans, cash, investments and employment that benefited union trustees and their relatives.

Like Endicott, Grayson had recommendations for Congress to prevent similar fiascos, including:

• Requiring training and licensing for all parties associating with union benefit funds, including trustees of the funds;

• Limiting gifts and gratuities received by trustees;

• Employing accountants and business experts at the Department of Labor to audit pension investments at least every two years, as well as all providers of services to unions to ensure that no conflict of interest exists; and

• Setting limits on investment alternatives and investment concentration.

“It took an extraordinary effort to uncover [Capital Consultants] misconduct,” said Alan D. Lebowitz, deputy assistant secretary of the Employee Benefits Security Administration (EBSA). EBSA is the Labor Department agency responsible for administering and enforcing the fiduciary, reporting and disclosure provisions that govern employee benefit plans. Lebowitz gave the Senate committee a detailed accounting of the investigation of Capital Consultants.

“The scheme was of great sophistication,” Lebowitz said, “and had a veneer of respectability provided by the cooperation of so many professionals, including attorneys, accountants and investment advisers.”

The Labor Department’s investigation began in October 1997 and led to 19 lawsuits against plan trustees; consent orders calling for the retirement or resignation of 51 plan trustees; and permanent injunctions barring 31 plan trustees and one investment adviser and his firm from serving as fiduciaries or service providers.

The investigation also led to criminal charges, which resulted in guilty verdicts or pleas from Barclay Grayson and Dean Kirkland of Capital Consultants; plan trustees John Abbott of the Oregon-Southern Wyoming-Idaho District Council of Laborers; Robert Mayhew of the Denver-based 8th District Pension Fund; John Lontine of Denver-based Sheet Metal Workers Local 9; Dennis Talbott of Akron, Ohio-based Sheet Metal Workers Local 33; and Andrew Wiederhorn and Larry Mendelsohn of Wilshire. Two other trustees, Gary Kirkland of Portland-based Office and Professional Employees Local 11, and Robert Legino of Denver Electrical Workers Local 68, were acquitted of gratuities charges after a lengthy trial.

Charges against Jeffrey Grayson were dismissed due to mental and physical impairment. Grayson suffered a stroke and is in a nursing home. The receiver sold Grayson’s property and his remaining assets have been frozen. He is currently drawing a monthly stipend to cover his living and medical expenses.

“[Capital Consultants] owed a duty of undivided loyalty to its benefit plan investors,” Lebowitz said. “It breached that duty on an almost unprecedented scale causing hundreds of millions of dollars in losses.”

© Oregon Labor Press Publishing Co. Inc.