A PERSONAL STATEMENT BY ANDREW WIEDERHORN
June 5, 2004
WHY I SETTLED
A PERSONAL STATEMENT BY ANDREW WIEDERHORN
In the nearly four years since the collapse of Capital Consultants, I have done everything in my power to assist the government in its investigation. I waived privilege to make the records and testimony of my attorneys and accountants available to government investigators. I turned over every piece of paper over which I had any control. I had the attorneys representing me conduct their own investigation and turn over their findings to the government. I took and passed three lie detector tests.
I did all this not simply because it was the right thing to do, but because I had nothing to hide. I knew that every agreement between Wilshire and CCI was a bona fide business transaction, not a corrupt, backroom deal. I knew that Wilshire was represented by highly respected and very capable lawyers in every one of these transactions. I knew that Wilshire’s own financial problems were the result of irrational market forces, not fraud or phony accounting. And once I read the stories about CCI’s post-Wilshire activities, I knew that if CCI had simply been honest with its clients instead of compounding their losses in a classic Ponzi scheme, it would probably have weathered the storm and been fine.
What I and the many excellent business lawyers who represented me and Wilshire over all the years didn’t know about was 18 USC §1954. Had I or my lawyers been aware that, regardless of the circumstances, it was a crime to give “any thing of value” to a pension fund adviser, neither they nor I would have acquiesced in Jeff Grayson’s demand in October 1998 for the return of his personal guaranty. But we didn’t and so we did.
Throughout the government investigation, my defense counsel and I honestly hoped that the reality of the situation would cause the government not to prosecute me. When it became clear to us that they felt compelled to do so, I was faced with the most difficult decision of my life. Rather than going to war with the government for years at tremendous cost and facing untenable risks, I decided that my obligations to my family and Fog Cutter came first and settled. The agreement announced today brings closure to the CCI-Wilshire investigation and allows me, for the first time in nearly four years, to again devote my time and energy to the present and the future, not the past.
As for the false tax return count, the sale of the SFI notes to Longpond was designed by tax attorneys and accountants and resulted in no tax benefit to me.
The Facts as I Know them to Be
The Return of Jeffrey Grayson’s Guaranty on The Hand That Feeds You:
From 1989 through January 1999, I was a principal shareholder of and controlled Wilshire Credit Corporation (WCC). WCC was originally based in Los Angeles, but moved to Portland in 1990. From December 1996 through August 1999, I was the Chief Executive Officer of Wilshire Financial Services Group Inc. (WFSG) and an officer and/or director of its subsidiaries and affiliated companies. Larry Mendelsohn, who had been a professor of mine at USC and a business contact after I graduated, purchased a one-third interest in Wilshire in 1993. This 2/3:1/3 ownership ratio became the basis of all our joint business ventures.
I first became aware of Jeffrey Grayson while still in high school and working as a busboy at a restaurant in Portland that he frequented. He was then known as an influential and civic-minded businessman.
Wilshire’s basic business was identifying, valuing, and acquiring loan pools marketed by loan originators such as banks, credit cards, and finance companies, etc. [often sub-prime and/or non-performing], and servicing them [i.e., getting people to pay]. It borrowed money from third parties to finance these acquisitions. A year or two after WCC relocated to Portland, I first approached Mr. Grayson to see if the investment business he ran, Capital Consultants, Inc. (CCI), might be interested in investing in the loan pools being acquired and administered by WCC. From my point of view, and I think the view of the Portland financial community in general, CCI was the No. 1 local investment manager and had a reputation for being tough. I was generally aware that CCI provided investment management services to clients, some of whom were pension plans, and that Mr. Grayson was ultimately responsible for CCI’s investment decisions. Mr. Grayson told me that Wilshire didn’t have a sufficient track record to warrant investment by CCI.
By 1994, Wilshire had established what I believed to be a more than adequate track record. We had lending/investment relationships with major institutional investors like Sun America, Cargill, and GE/Kidder Peabody, more than $450 million invested in thousands of assets [primarily loans and loan pools], and over 100 employees. I therefore again approached Mr. Grayson to see if CCI was now interested in directing some of the funds under its management to WCC.
CCI undertook a due diligence investigation of WCC in the Spring of 1994. That investigation concluded that WCC had in excess of $19 million in collateral available to pledge as security for a investment loan by CCI. In June 1994, CCI made its first investment -- a $4.5 million loan secured by collateral valued by CCI’s independent appraisal at $19.5 million.
In February 1995, CCI made another, similar loan to Wilshire. CCI made several more loans to WCC throughout the Spring of 1995 and it became apparent that it was likely to continue to do so. CCI and WCC therefore agreed to enter into a Master Loan Agreement to set the general terms and conditions of loans from CCI to WCC, thereby simplifying the documentation needed for each specific loan. Wilshire was represented in this matter, as it was in all its business activity, by the Stoel Rives law firm. Mark Peterman, a partner at Stoel Rives, was our principal attorney. CCI was represented, as it was in all its business activities, by the Lane Powell law firm.
The lending relationship between Wilshire and CCI continued to grow after the Master Loan Agreement was signed. By mid-1998, CCI had nearly $150 million in loans to Wilshire. While this was a lot of money, Wilshire was itself growing exponentially during this time. In late 1996, the “banking” part of our business, WFSG, went public; a first round of financing raised $105 million; a second, $344 million. Each round was preceded by the issuance of a prospectus prepared by independent professionals [including the law firms Proskauer Rose and Gibson & Dunn] and attracted such sophisticated institutional investors as Bear Stearns, SalomonSmithBarney, General Electric [formerly Kidder Peabody], and CreditSuisse. By mid-1998, the Wilshire companies controlled loan/real estate assets valued [by these institutional investors, not us] at $3 billion, were earning substantial profits [WFSG earned over $17 million in the first half of 1998 alone], and employed 800 people. Ironically [in hindsight], because we had become so successful and achieved such credit-worthiness, the money we were borrowing from CCI had become the most expensive money available to us and we had begun seriously considering ending [or significantly renegotiating] our relationship with CCI.
In late 1997, Mr. Grayson contacted me about the possibility of Wilshire purchasing two non-performing loans that CCI had made on behalf of its clients to a catering company called The Hand That Feeds You (THTFY). Together, the loans totaled approximately $4.0 million. I sent an email describing Mr. Grayson’s proposal to Mr. Mendelsohn, Wilshire’s President, Ken Kepp, a Senior Vice President, Chris Tassos, our Chief Financial Officer, and Mark Peterman at Stoel Rives. We decided to pursue the proposal and Mr. Peterman assumed responsibility for negotiating terms that would insure that Wilshire would make money on the deal. No one, including Mr. Peterman, questioned the propriety of Wilshire agreeing to acquire these loans from CCI. I know now that he [and the ERISA specialists at Stoel Rives] were completely unaware of 18 U.S.C. §1954 [as was I]. Had Mr. Peterman [or any of the ERISA specialists at Stoel Rives with whom he consulted] informed me or anyone else at Wilshire that these purchases might be in violation of law, they would not have been made.
Once Mr. Peterman assumed responsibility for negotiating the terms of Wilshire’s purchase of these loans, I had virtually no role in this transaction. I now know that four attorneys at Lane Powell [Robert Maloney, Bryan Powell, Rich Williams and Leigh Stephenson-Kuhn] were involved in the transaction on CCI’s behalf.
Because the loans were non-performing and were not otherwise fully secured, Wilshire offered to purchase the THTFY loans from CCI on the following terms: (1) the loan term would be short [six months]; (2) the interest rate would assure Wilshire of a profit; and (3) repayment of principal and interest would be guarantied by Mr. Grayson and CCI. The lawyers, primarily Mr. Peterman and Mr. Powell, spent approximately three weeks negotiating and drafting the loan agreements. These included a Certificate of Authority that Mr. Peterman insisted be provided by counsel for CCI to assure Wilshire that CCI had the authority of its clients to engage in the transaction, that CCI’s execution and performance under the Loan Purchase Agreement would not conflict with any CCI agreements, and that the transaction complied with all laws, including ERISA. In early January 1998, CCI provided Wilshire with a Certificate of Authority signed by Mr. Maloney. I know now that two ERISA specialists on the CCI side who were fully aware of the WCC-CCI borrowing relationship [Leigh Stephenson-Kuhn of Lane Powell, who was advising Mr. Maloney, and Robert Eccles of O’Melveny & Myers, formerly the government’s chief ERISA lawyer, who was advising Mr. Grayson and CCI] approved the transaction and authorized the representations contained in the Certificate of Authority. In mid-January 1998, a Wilshire entity purchased the loans. It anticipated earning at least $200,000 on this transaction.
In the spring of 1998, Mr. Grayson contacted me to request that CCI be taken off the guaranty. I forwarded Mr. Grayson’s request to Mr. Peterman. He spent the next several months negotiating a guaranty modification with CCI’s counsel. At one point, Mr. Grayson emailed me to express unhappiness about how demanding Mr. Peterman was being. I simply forwarded that email to Mr. Peterman. I did not ask him to cut any corners.
The negotiations between Mr. Peterman and the Lane Powell lawyers resulted in two Amended and Restated Guaranties. CCI itself was removed as a guarantor; in its place, the stock of CCI [all of which was owned by Mr. Grayson and his sons Blake and Barclay] was pledged to secure the guaranties. Because Mr. Grayson and his sons owned 100% of CCI, Wilshire was effectively in the same position it had been with the original guaranties. At the time of the Amended and Restated Guaranties, CCI paid Wilshire all interest that had accrued and Wilshire extended the deadline for CCI to repurchase the loans to December 31, 1998.
In the summer of 1998, within weeks of receiving the Amended and Restated Guaranties, Russia defaulted on bonded indebtedness and the Southeast Asian economy collapsed. Though completely unrelated to Wilshire or its market sector, these events triggered a “flight to quality” among investors that threw our sector into turmoil. This caused our secured lenders to devalue the loan portfolios which secured their loans to Wilshire and lead to a series of margin calls that drained us of all cash. This was a market condition that has been extensively reported and well-documented and resulted in the insolvency of many financial services firms much larger than Wilshire.
As a bank holding company, WFSG was subject to regulation by the Office of Thrift Supervision (OTS) and compliance with its capital requirements. In September 1998, Wilshire’s cash crisis briefly put WFSG out of compliance and the OTS threatened to take formal regulatory action if it happened again.
Throughout September and early October 1998, I was spending most of my time on the road in an effort to stem margin calls and give Wilshire the time it needed to weather what I believed [and continue to believe] was an irrational market response to the economic events in Russia and Southeast Asia. These efforts were not as successful as they needed to be, and we did not get assurances that we would have the cash available on October 15, 1998, that we needed for WFSG to stay in compliance with OTS requirements.
Under the Master Loan Agreement between CCI and WCC, 15% of all loans was held in a cash collateral account at Bear Stearns. As of early October, 1998, there was $19.3 million in that account. I believed that money was Wilshire’s only viable source for the cash needed to keep WFSG in compliance with the OTS. Wilshire therefore approached CCI to seek its agreement to release this money. After days of intense negotiation, either on October 13 or October 14, 1998, CCI agreed to release the cash collateral [and advance Wilshire an additional $6.0 million secured by its last available collateral] on October 15, 1998, in exchange for alternative security [including $30 million in corporate notes and guaranties, approximately $19 million in WFSG and WREIT stock and personal guaranties by Mr. Mendelsohn and me].
After this agreement was reached but before it was formally executed on October 15, 1998, Linda Lucas, an executive at CCI, called Mark Peterman and told him “there’s one more document - return the guaranty.” Mr. Peterman communicated this demand to Ken Kepp, me, and Mr. Mendelsohn. We assumed that she was communicating a demand that originated with Mr. Grayson. Because we had to have the cash that CCI had already agreed to release to us, we concluded that we had no choice but to acquiesce. Therefore, Mr. Peterman brought the guaranties to the closing on October 15, 1998, which took place at the Lane Powell offices. He handed them to Ms. Lucas in front of the several Lane Powell lawyers who were present, including Rich Williams, Jeff Wolfstone, and Mr. Maloney. I specifically recall Ms. Lucas and Mr. Maloney standing together when Mr. Peterman handed her the guaranty. A number of weeks later, Mr. Maloney informed Mr. Peterman that the physical return of the guaranties was not sufficient and demanded that formal releases he had prepared be signed. We again acquiesced.
At no time did Mr. Peterman or any other lawyer suggest to me or, to my knowledge, Mr. Mendelsohn that releasing the guaranties violated the law.
The Capital Loss Claimed for the Sale of the SFI Note to Longpond:
In mid-1998, my personal accountants at Arthur Andersen and my tax attorneys at Cohen, Primiani & Foster, prepared a projected tax computation that showed that my wife and I would owe substantial capital gains tax for that year. They suggested that we identify capital assets that had declined in value that could be sold to offset these gains and therefore reduce the amount of tax we would owe.
At the end of 1998, our accountants and tax attorneys identified a series of loans to a company owned by some family members, known as SFI, that we could sell to recognize a capital loss. I arranged to have an entity known as Longpond, owned by another relative, purchase the loans at a price I determined. The sale resulted in a capital loss being reported on our 1998 tax return. Ironically, because of all the financial reversals we suffered in 1998, this reported loss did not reduce our tax obligation.
As a result, the transaction had no financial impact on the government’s tax revenue.