Unions go after Wilshire auditors
Three accounting firms are named in $150 million suit
In a case reminiscent of the Enron scandal, trustees of 25 unions are suing three accounting firms that aided in the sale of Wilshire Credit Corp. securities to finance flawed, high-risk deals.
The lawsuit, filed in Multnomah County Circuit Court last week, alleges that Arthur Andersen and Deloitte & Touche are liable for the sale of securities that allowed Capital Consultants and its now-defunct investment partner, Wilshire Credit Corp., 'to conceal massive defaults, to release collateral, to mislead plaintiffs' and to release its executives from personal liability.
'If our clients had known about the fraud that Capital or Wilshire was perpetrating, they never would have invested,' said Daniel Shanley, a Los Angeles attorney representing the unions and private investors.
Under federal law, a firm can be held liable if the information provided for a securities sale is later proved to be wrong.
'We don't need to prove the accounting firms did something wrong or didn't tell us something; all we have to prove is they participated in the sale of the securities or materially aided in the sale,' Shanley said.
Deloitte was Wilshire Credit's auditor and conducted due diligence before issuing the firm's notes. Arthur Andersen's Los Angeles office replaced Deloitte as auditor for Wilshire entities, said Kerry Miller, a Chicago attorney representing Andersen.
Sam Lance White, one of the Deloitte partners in charge of the Wilshire account until being forced to resign in 1996, was later convicted of securities fraud.
PricewaterhouseCoopers, which was retained by Capital to conduct a compliance audit, also is named in the lawsuit.
The unions, including the Sheet Metal Workers International Association Local No. 9, are seeking the return of $150 million in health and retirement funds.
Capital's chief executive, Jeffrey Grayson, awaits a trial to begin March 26 but is in discussions with the U.S. attorney's office to reach a plea agreement. His son, Barclay, who persuaded his father to talk, was sentenced to two years in a federal prison. Assistant U.S. Attorney Lance Caldwell confirmed talks with Jeffrey Grayson but said the only deadline for the agreement is the trial date. The elder Grayson could face up to 20 years in prison if convicted.
Grayson's willingness to cooperate with prosecutors in the fraud case Ñ and perhaps implicate union officials and Wilshire Credit principals Andrew Wiederhorn and Lawrence Mendelsohn Ñ is considered significant enough to possibly reduce Barclay Grayson's sentence.
'He (Barclay) could reap a benefit from the court if Jeff Grayson pleads guilty, but there is no reassurance of that,' said Stephen Ungar, Barclay Grayson's attorney. 'The judge decides if you get a sentence reduction, so there is no guarantee.'
After almost a year of negotiations, Judge Garr King on March 12 approved Barclay Grayson's agreement to pay plaintiffs $500,000 for his role in the estimated $360 million in Capital losses.
Wiederhorn, who has since launched Fog Cutter Capital Group, and Mendelsohn currently are under federal grand jury investigation.
Meanwhile, the Office and Professional Employees International Union Local 11 is the latest union to settle a class-action suit over retirement and benefit losses from Capital's investments.
Union's trustees will pay $953,000 to members who charged they 'breached their fiduciary duties.'
'I'm disappointed and certainly saddened that these funds were significantly underinsured, and at the end of the day the participants are paying a price for that,' said Daniel Feinberg, a Los Angeles attorney who represents Local 11 and two other unions. 'We got the best settlement we could get for the participants, given the environment.'
Six unions sued their trustees soon after Capital was taken over by a federal receiver in September 2000.
Trustees for one of them, Oregon Laborers, agreed March 7 to pay
$4 million to cover losses, which have been tallied at $40 million. The class-action settlement also calls for the trustees to pay retirees a supplemental check of $500 in July 2002.