U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16720 / September 21, 2000
SECURITIES AND EXCHANGE COMMISSION v. CAPITAL CONSULTANTS, LLC, JEFFREY L. GRAYSON, AND BARCLAY L. GRAYSON, Civil Action No. 1290 KI (D. Ore.)
The Securities and Exchange Commission ("Commission") announced that on September 21, 2000, it filed a complaint alleging securities fraud against Capital Consultants, LLC, a registered investment adviser located in Portland, Oregon, that manages over $1 billion for 340 clients, principally union pension trust funds and individuals, and against its principals Jeffrey L. Grayson and his son Barclay L. Grayson. Without admitting or denying the allegations in the Commission's complaint, the Defendants stipulated to a preliminary injunction from future violations of the federal securities laws and asset freeze and the appointment of a permenant receiver over Capital Consultants.
The Commission's complaint alleges that the Defendants are currently operating an undisclosed Ponzi scheme using client funds to make interest payments to clients invested in a failed and bankrupt $160 million loan that Capital Consultants made to Wilshire Credit Corp. In early 1999, the loan to Wilshire Credit was discharged in bankruptcy. The Defendants, however, have continued to report to clients that the loan's value is $160 million, stating that Capital Consultants had sold the loan to two other entities and that they are making the loan payments.
The Defendants, however, have failed to inform the clients that they have lent an additional $71 million of client funds to the two entities to make the payments on the loan to Wilshire Credit. The Defendants have also omitted other material information, including the fact that the entities that purchased the Wilshire Credit loan have the right to terminate their purchase agreement at any time, for any reason, and without further liability. Moreover, the Defendants, until very recently, billed their clients invested in the Wilshire Credit loan a 3% annual management fee based on the purported $160 million value. The Defendants also continue to sell to clients participation interests in the loan at the full cost.
The Commission's complaint alleges that the Defendants have violated and are continuing to violate the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Capital Consultants, aided and abetted by the Graysons, has violated and is continuing to violate the advisory antifraud provisions of Sections 206(1) and (2) of the Investment Advisers Act of 1940.
In a related action, the Defendants were sued by the Department of Labor for ERISA violations. The Commission acknowledges the assistance of the Department of Labor in the investigation of this matter.