The Oregonian
April 23, 2002 Tuesday SUNRISE EDITION
Correction Appended
LOSING ALL THAT MATTERED TO HIM
SOURCE: JEFF MANNING and JAMES LONG – The Oregonian
Summary: Capital Consultants founder Jeffrey Grayson is expected to plead guilty to 2 counts in court today All his life, Jeffrey Grayson courted respectability. The money, the charities, the mansion, the Bentley — he spent a lifetime acquiring the status symbols. And, for a while, he had everything. Newspapers regularly chronicled his civic good deeds. He courted the image of community benefactor and financial seer. He paid the tab with the proceeds of his high-flying investment firm. As founder, chairman and CEO of Capital Consultants, he was a widely admired money manager with a billion dollars invested. His client list included some of the state’s most astute business people. Nick Greve, a Portland jewelry store owner and longtime Grayson friend, says that, for Grayson, money was a means to an end. Grayson figured, Greve says, that “If you made enough money, you’ve won. It’s a scorecard. It’s the only scorecard we have.” But by any scorecard, Grayson has lost everything that mattered to him. On Sept. 21, 2000, the federal government seized his firm and ousted him for running what the Securities and Exchange Commission called “the biggest fraud by an investment manager in U.S. history.” The SEC said Grayson ran “a Ponzi-like scheme to mask his firm’s massive losses.” A federal judge froze his assets. Labor unions and private clients filed lawsuits to recoup losses that could reach $400 million. And his oldest son was sentenced to prison. Grayson’s social standing has crumbled with his financial holdings. Many of Portland’s movers and shakers are reluctant to talk on the record about their former relationships with him. The $2 million West Hills home is for sale. The courtside Blazers tickets are history. Grayson, 59, is expected in Portland’s U.S. District Court today to plead guilty to mail fraud and to helping file a false income-tax return. He could spend the rest of his life in prison. “It’s like a Greek tragedy,” says a former Capital Consultants executive. “The gods gave this person great gifts. He was bright; he had good sense for finance. Yet they also gave him a deep flaw.” * Grayson and a twin sister, Janet, were born in Salem on . Their father, N. Philip Grayson, owned a small chain of clothing stores.
The family moved to Portland where the elder Grayson went into wholesale plumbing and lighting. The Graysons settled into a spacious Eastmoreland home.
Besides the twins, the Graysons had a younger son, Joel, and two daughters, Nancy and Stephanie.
The twins attended Duniway School and later Cleveland High, which draws many of its students from fashionable neighborhoods. Phil Knight, the future Nike sportswear mogul who grew up a few blocks from the Graysons, attended Cleveland four years ahead of Jeffrey and Janet.
Social competition was intense. “We had a real structure of social service clubs,” says Marilee Tillstrom, a classmate. “It was like, you make the club or you die.”
In this milieu, the Graysons stood out. “They were like the rally king and queen,” Tillstrom recalls. “They were so popular. When I look back on high school and think of who was always involved and enthusiastic, it was Jeff Grayson at Cleveland.”
Larry Bruun, now a Portland construction executive, remembers that “Jeff was more outgoing than his sister. She was quiet, shy, cute.”
- Philip Grayson and his wife, Blossom, divorced in the 1950s. She remarried Samuel Palmer, a Portland lighting-store owner.
Jeffrey Grayson went on to the University of Oregon, where he continued the sort of winning game he’d pursued at Cleveland.
He pledged a popular fraternity, Beta Theta Pi, and shaped his university life around it. At 5-foot-6 and less than 160 pounds, he wasn’t destined for the football team, but did make cheerleader one year, jumping, yelling, revving up the fans.
Then, in eerie foreshadowing of what would happen to him four decades later, his mother and stepfather fell from respectability.
A federal jury in June 1961 convicted the couple of concealing assets in the bankruptcy of their Southeast Portland lighting fixture store. Blossom Grayson also was convicted of perjury. A judge gave them both a year.
It isn’t clear where Samuel Palmer served his time, but Blossom Grayson was packed off to a minimum-security federal prison at Terminal Island, Calif., where she did six months, with time off for good behavior, before being paroled.
The 11-day trial and the publicity that went with it were hard on Jeffrey Grayson, still a University of Oregon student. “It’s the one thing Jeff never talked about,” says a longtime friend, “and he was very, very sensitive about it.”
After getting a business degree, Grayson headed for law school at Willamette University. His roommate was Charles “Butch” Swindells, a future Portland business leader who’s now ambassador to New Zealand. He would team up with Grayson in 1968 to form Capital Consultants.
Neither Grayson nor Swindells had much interest in law. Grayson’s real passion was following the stock market. After his freshman year at Willamette, he quit and took a securities analyst job at what was then the U.S. National Bank. Swindells stuck it out another year and then joined a brokerage.
Then Grayson’s twin sister died in a car wreck on the eve of their 25th birthday.
Janet Grayson had set herself on a different course than her brother, taking a job as a social worker. Her VW Beetle was mangled in a collision in Salem, and she died the next day. Janet’s death, by all accounts, devastated her twin.
In 1968 Jeff Grayson and Swindells, both in their mid-20s, formed Capital Consultants. They were bright and energetic, friends say, but had obvious differences about how to run an investment company. Swindells, they say, was a by-the-book kind of guy, while Grayson enjoyed deal-making, racing to the edge of the financial cliff.
Starting an investment-management business required a lot of salesmanship — the ability to talk potential customers such as pension-fund trustees into handing over their money.
Grayson was a natural. He was also a rare animal in the then-buttoned-down business of investment advice — a risk-taker who was willing to push boundaries to get an eye-catching rate of return.
He also felt certain rules didn’t apply to him, says a former Capital Consultants executive. “There was this feeling that he didn’t need to bend his will to the law or anything else.”
Grayson became known for cooking up highly creative — and sometimes spectacularly profitable — commercial and real estate deals. And even if the deals didn’t work out as hoped, Capital Consultants could still charge a hefty fee.
There were other advantages. These weren’t publicly traded stocks, the value of which could be clearly established. These were loans or private stock.
“No independent third party could tell you how much these investments were worth,” says the former Capital Consultants executive. “Only Jeff could.”
The deals often were extraordinarily complex, contributing to Grayson’s reputation for financial wizardry. “If you could draw a line through the deal to explain it, and it was A, B, C and D, it was way too easy,” says another former Capital Consultants official. “The only way Jeff would do it was if it was A to Z to C to T to B to G — I mean it would go back and forth until it’s so complicated that only he can figure it out, and he’s brilliant for doing it.”
*
Capital Consultants hooked up early with union pension funds. The financial community knew vast sums were piling up in the funds without much federal oversight. But while many other advisers plodded along with conservative investment strategies, Grayson offered to make the trust funds some real money.
“He was one of the only games in town,” says one former pension fund adviser. The brokers who swung money to Grayson could count on Grayson to do his trades through them.
By 1976, Capital Consultants was the Northwest’s biggest independent money manager. It handled $140 million for the Multnomah County employees retirement fund, the Tektronix pension trust and other blue-chip clients.
But then the U.S. Securities and Exchange Commission swooped in and suspended the firm’s brokers licenses for mishandling union money.
The SEC said Capital Consultants bought a bogus mortgage certificate with $278,468 from a pension trust fund. The Great Western Mortgage Co. of Portland, the SEC said, had already sold the certificate to a California union pension fund before peddling it again to Capital Consultants as an investment for the Multnomah County Employee Retirement Fund.
Grayson claimed Great Western had deceived him. But a union lawsuit said Grayson and Swindells and Capital Consultants knew, or should have known, Great Western was nearly bankrupt and used the $278,468 to help pay a debt Great Western owed one of Capital Consultants’ private clients.
The fund fired Capital Consultants, but the company continued to expand its list of labor clients. Problems followed.
An Oregon attorney general’s investigation in 1981-82 delved into some of the relationships between Capital Consultants and various labor officials.
A March 1982 report revealed that half of a $32,000 commission on a shopping center Grayson bought ended up in the hands of a woman married to a pension fund trustee doing business with Capital Consultants.
In 1992, the U.S. Department of Labor looked into Grayson’s business deals with Crown Pacific. The department said Capital Consultants had a conflict of interest because Grayson took a consulting contract from Crown while lending union pension money to the company. Grayson denied the charge, and the department never pursued the matter.
*
When he was 42, Grayson learned he had multiple sclerosis.
One of his responses was to live big. He bought a BMW motorcycle and led friends on roaring jaunts to destinations such the Oregon coast. Terry Baker, a Portland lawyer and former Heisman Trophy quarterback at Oregon State University, remembers his one and only trip with the financier. “I ended up totaling out my motorcycle,” Baker said, “and Jeff’s motorcycle had a sidecar, so I ended up going to the hospital in his sidecar, and I got about 50 stitches.”
Within three years of his diagnosis, Grayson was in a wheelchair. Signing his name became a chore. After a time, he needed help from a personal assistant just to get out of bed, to take a shower, to get dressed.
But close acquaintances don’t think the disease changed his approach to life. “The die was cast,” says one. “He was already doing things that were risky. He wasn’t acting out of character.”
The disease didn’t change his drive, either. He went on the board of the Oregon chapter of the National Multiple Sclerosis Society and he personally helped friends who were struck by debilitating illness.
When Terry Baker’s late brother, Gary, who rode motorcycles with Grayson, came down with Lou Gehrig’s disease in 1993, Grayson gave him a motorized scooter and had an access ramp installed on his friend’s porch.
If a civic cause needed money, he could be counted on to plunk down $4,000 for a bottle of wine, say, at a benefit auction. An invitation to Grayson’s West Hills home might mean hobnobbing with visiting artists such as violin virtuoso Itzhak Perlman. During those years a society columnist deemed an invitation from Grayson and his wife, Susan, as one of Portland’s 10 most desirable.
He sent his two sons to the exclusive Thacher Prep School in Ojai, Calif., and later hired them both at Capital Consultants.
Grayson also served as board chairman for the Oregon Museum of Science and Industry, and the museum’s board room is named for him. He was president of the Chamber Music Northwest board. He was, however, rejected for membership in the prestigious Waverley Country Club.
“Jeff was in the midst of a compulsion,” says one of his former associates, “a profound need to succeed.”
*
During the last half of the 1990s, Grayson’s world came unhinged.
In 1995 he repaid $2 million to a client to settle a Labor Department lawsuit filed against him and his company for overcharging a union client. To raise the money, Grayson borrowed $1.7 million from a California company, which borrowed the money from Wilshire Credit Corp.
The chain of events posed a potentially serious conflict-of-interest for Grayson. Wilshire Credit eventually would borrow — and default on — $160 million from Capital Consultants.
Andrew Wiederhorn, the young Portland financier, owned and operated Wilshire Credit. Late last spring, a federal grand jury began looking into potential criminal violations in Grayson’s relationship with Wiederhorn and others.
Grayson also established a financial relationship with John D. Abbott, co-chairman of five Oregon laborer’s union trust funds. The laborers steered nearly $100 million to Capital Consultants while Abbott was at the helm.
Abbott has since admitted taking almost $190,000 in illegal payoffs from Grayson, who also gave Abbott a consulting contract potentially worth $1 million.
As things spun out of control, many Capital Consultants managers left. Grayson’s younger son, Blake, was one. But Barclay Grayson went down with the ship.
Barclay and his father split shortly after the SEC seized the company on Sept. 21, 2000. Barclay cooperated with federal prosecutors, and on March 20, 2001, pleaded guilty to mail fraud. He agreed to testify against his father in exchange for a reduced sentence.
Jeff Grayson e-mailed friends and acquaintances saying he was “devastated and shocked” that his son was going to prison.
“As many of you know already,” he said, “I have neither spoken to nor seen my son, Barclay, since about Sept. 25, 2000. Consequently I missed our traditional get-togethers on Thanksgiving, Christmas, and his birthday.”
Grayson’s social and philanthropic world fell apart, too. He had served as co-chairman of the University of Oregon’s endowment drive, raising a record $255 million for his alma mater. And he personally pledged $1.5 million. The university rewarded him by naming a building after him and his wife.
After Grayson lost Capital Consultants to the federal regulators, the university returned the $850,000 that Grayson had actually paid. The money went to the federal receiver and will, presumably, revert to Capital Consultants clients.
And last summer the university stripped the Graysons’ names off the building.
With his oldest son making a deal, Jeffrey Grayson said he expected federal prosecutors to “come after me full-bore.”
And they did. They hit him with a 22-count indictment in October. He agreed he would plead guilty to two counts and cooperate in the government’s investigation of Wiederhorn. The counts — which stemmed from sending deceptive financial statements through the mail and helping John Abbott submit a false tax return — carry a maximum penalty of eight years in federal prison.
“He did some wrong things,” says Nick Greve, “there’s no question about it. But my true belief is, when this all got started, he didn’t launch this Ponzi scheme to get rich.
“His aim was to save his company and his reputation, not get fabulously wealthy.”
You can reach Jeff Manning at 503-294-7606 or at jmanning@news.oregonian.com and James