Does Everything Add Up At Westinghouse Credit?

For Westinghouse Electric Corp., last year was a low-water mark. Sick real estate loans in its high-flying financial-services business produced two shocking write-offs totaling $2.6 billion and sent its stock tumbling. But after recording a $1 billion loss for the year, management vowed the worst had passed.

The bad news from its Westinghouse Credit Corp., however, may not be over. Several current and former executives predict that still-weak real estate values will result in yet another write-off, ranging from $500 million to $1.5 billion. Although Westinghouse insists that its loss reserves are adequate, there's also talk within the company of further restructuring, including selling off nonfinancial assets such as its radio stations. Perhaps most troubling of all, the parent company can't seem to get the Securities & Exchange Commission to sign off on a new $500 million preferred-stock offering. While the SEC usually allows offerings from blue-chip companies to go forward in a few days, it has been scrutinizing this one since Westinghouse registered for it on Feb. 7.

What's the delay? The SEC won't say, but one top Westinghouse official says regulators have barraged the company with "stacks" of written questions and have had a running dialogue with company lawyers about a host of sticky issues. These include shareholder allegations in several lawsuits that the company fraudulently hid from investors the deteriorating condition of its financial-services unit. Although it's not a full-scale SEC investigation, says an individual close to the situation, that would be the next step if regulators found any wrongdoing. Westinghouse, which denies any misdeed, insists there's nothing unusual about the SEC taking so long to approve its stock offering.

`COLOSSAL COVER-UP.' Westinghouse may not have broken any laws at Credit Corp., but it clearly went to extraordinary lengths to avoid write-downs from 1987 through mid-1991, a BUSINESS WEEK investigation shows. Unhindered by the stiff property-valuation regulations required of banks, the company often inflated the value of its real estate portfolio, shareholders allege in several lawsuits. Further, Credit Corp. routinely used questionable and sloppy accounting practices, according to interviews with more than three dozen current and former Westinghouse employees, investors, and customers. In a response to written questions from BUSINESS WEEK, Westinghouse denies the shareholder allegations and says it always operates in accordance with generally accepted accounting principles.

Some insiders complained of problems brewing at Credit Corp. as far back as 1987. But one reason senior management failed to disclose Credit Corp.'s real estate woes sooner was to preserve their yearend bonuses, investors and insiders allege. "This is a case of colossal cover-up and mismanagement," claims Richard D. Greenfield, one of the lead attorneys in a class action filed on behalf of shareholders in the Pittsburgh U.S. District Court accusing Westinghouse of misrepresenting its financial condition. There was no effort to preserve bonuses, says Westinghouse.

The storm hit Credit Corp. in the late 1980s, when the torrid real estate market began to cool. In 1988, William A. Powe, then chairman of Credit Corp., adopted a strategy that was supposed to help it ride out its problems. Rather than taking over the floundering properties on which Credit Corp. held loans, he began shifting ownership of many of them to partnerships he had formed with a cadre of longtime Credit Corp. customers, including the Tonti brothers of New Orleans, Krisch Hotels Inc. in Roanoke, Va., and Jerrold Wexler of Chicago (table, page 83), according to a lawsuit filed against Westinghouse by the Tontis.

The Tontis claim they got 50% equity in the partnerships owning the buildings and the option to buy some of them outright. They say Credit Corp. issued them mortgages for an amount equal to the original mortgages with the understanding that the Tontis did not have to pay them back. This way, the Tontis allege, Westinghouse believed it didn't have to take writedowns on its problem real estate loans. "There was tremendous flexibility in an unregulated environment," says a current manager. "They would do anything they considered legally defensible." Powe, who resigned from the company last October, declined to comment.

NO DEALS. The Tontis say they were supposed to manage 30 troubled properties and try to arrange refinancing. But Westinghouse never wanted to go through with any refinancing deals, the Tontis allege. In the fall of 1990, the Tontis had lined up a $300 million package to refinance several Sunbelt apartment complexes with Llama Co. of Fayetteville, Ark., an investment boutique owned by Alice L. Walton, daughter of Sam Walton. But Westinghouse backed out of this deal and others, according to a source close to the Tontis, because it "didn't want to publicly acknowledge the declining value of its real estate portfolio and take writedowns." The company insists it did nothing wrong.

Early this year, the Tontis filed suit in U.S. District Court in Albuquerque alleging violation of their partnership agreements with Westinghouse. The company says it is talking to the Tontis about resolving "what is actually a business dispute" out of the courts.

At other times, shareholders allege Westinghouse artificially inflated its properties' values and avoided getting independent appraisals. Work papers from Westinghouse's auditors, Price Waterhouse, obtained as part of a shareholder lawsuit's discovery, show that the appraisals of numerous delinquent buildings were based on distant future dates when it was assumed they would have high operating income and occupancy rates. Charles E. Kimball, an independent real estate economist who is familiar with Westinghouse's Florida properties, describes this approach as highly unusual. The projects are so overfinanced, he adds, that they have "no chance of succeeding."

In late 1990, owners of the 25-floor Daniel Building in Greenville, S. C., hadn't made a mortgage payment to Westinghouse in over a year on a balance of $17 million, according to court documents. At the time, the loan wasn't written down even though the 1968-vintage building had a current value of $9 million. The reason: Westinghouse's appraisal assumed it would sell for $34 million in the year 2000. This was despite a 25% vacancy rate and an asbestos problem that its owner, Howard E. Phillips, says will cost $14 million to resolve.

Other times, Westinghouse would use "what if" appraisals that ignored the condition of raw land, according to court papers. As of December, 1990, the owners of a partially completed office complex called Centrepark near the Palm Beach (Fla.) airport had not made a payment in more than a year on a balance of $26.6 million. Assuming the remaining 36.5 acres would be developed and fully leased, Westinghouse valued the land at $11 million, shareholders allege. Still, there was no writedown to reflect the $15 million difference. Calling its methodology "appropriate" and its appraisals "reasonable," Westinghouse says it will demonstrate in court that it was not trying to defraud investors.

NUMBERS GAME. Some former Credit Corp. executives describe an antiquated accounting system and insufficient support systems during the unit's boom years--charges that Westinghouse denies. Vallerey Stylianoudis, the corporate accountant from 1987 until early 1988, claims in an interview that Credit Corp.'s accounting was so disorganized that she "couldn't complete financial statements according to accepted accounting standards."

Getting the numbers to come out right was a quarterly ritual, she says. Top Credit Corp. executives and Price Waterhouse representatives would gather at headquarters in the Disco Room--named for its flashy metallic furniture and modern lighting--and emerge with numbers that balanced, she says. "Ridiculous," says Westinghouse. Price Waterhouse did not respond to BUSINESS WEEK's calls seeking comment.

Failing to acknowledge troubled real estate loans was the most common device Credit Corp. used to show quarter-to-quarter gains, Stylianoudis and other former executives say. For the third quarter of 1987, Credit Corp. made no mention of mounting problem loans in Texas and Oklahoma in its financial reporting, and reserves were held to a minuscule $24 million, 60% below the year-earlier level, Stylianoudis says. That quarter, Credit Corp. posted a 21% earnings increase, to $31 million. While alleging no illegality, a current executive says it was routine for "accountants to put in the numbers they were told to by management." Replies Westinghouse: "Credit Corp. management and Price Waterhouse acted professionally in all respects."

Westinghouse describes Stylianoudis as a disgruntled former employee. She is definitely not a happy one: Fourteen months ago, she filed a federal lawsuit alleging her boss ruined her Westinghouse career because she refused his sexual advances. The suit is pending. Her boss denied making any advances, and Westinghouse disputes her claims.

FAT BONUSES. Still, someone evidently wants to keep her quiet, she says. Before being let go last December, she supplied information about alleged improper bookkeeping to federal agencies, including the SEC. Soon, her car was allegedly run off the road near her Westinghouse office, and her family received numerous telephone death threats, she claims. As a result, she and her family have moved to Washington, D. C., where she is completing law school and working as an intern in the SEC's enforcement division. The Federal Bureau of Investigation confirms it is investigating the alleged threats, which she says have continued. Any suggestion that Westinghouse was involved is "preposterous," says the company.

Paul E. Lego, who became Westinghouse chairman in July, 1990, at first bought into Powe's strategy that Credit Corp. could weather the storm without a major hit. But by fall, 1990, there was no denying there were big problems.

Lego has said that he brought in Lazard Freres & Co. in September, 1990, to help devise a new strategy. By December, Lego said that Lazard was assigned an in-depth asset review, which wasn't completed until February, 1991. But one former top-level executive says that Lazard actually started meeting with Credit Corp. officials in June, 1990, and the company suspected by November that some kind of write-off would be necessary. Shareholder attorney Greenfield is certain of it. Based on his discovery in the class action, much of which is under protective order, "the board and Westinghouse management had detailed information by late summer about the problems," he says. Westinghouse denies it.

The chronology might not be important except that Westinghouse awarded fat 1990 bonuses based on unaudited record earnings of $1 billion, announced on Jan. 17, 1991. On Feb. 27, 1991, Westinghouse announced the first billion-dollar write-off, about half from real estate, and lowered earnings by 73% for 1990. Lego explained in a March, 1992, interview that the board considered the first write-off an extraordinary item and chose to leave the bonuses in place.

But it was just the beginning. Laurence A. Chapman, then chief financial officer at Credit Corp., resigned last August after refusing to sign off on financials, according to a half-dozen current and former executives. He had complained the first write-off was severely inadequate and that accounting practices were improper, they say. After the second big hit last October, Chapman was rehired as treasurer at the parent company. He declined to comment.

Despite the pain of the write-offs, Credit Corp. still isn't back on its feet. Its strategy of putting the skids on new real estate loans while unloading assets is going nowhere in the current market: Of the $1.8 billion in real estate assets Credit Corp. put on the block, it has sold less than $200 million.

If Westinghouse doesn't get some relief from an improving economy, it might have to consider more asset sales. Management has shown it is willing to consider just about anything. Last November, a senior management group, including Lego, went to Tokyo to renegotiate power-plant licensing agreements with Mitsubishi Heavy Industries. There, Westinghouse explored the idea of selling Mitsubishi the whole company for a premium of 20% over its $3.7 billion book value, according to a source who was involved in the talks. Westinghouse denies such talks ever took place.

`DREAM WORLD.' Now, the company's cash requirements are mounting, and several Wall Streeters question whether Westinghouse can successfully float new, reasonably priced debt. Westinghouse says it has plenty of cushion, with two-thirds left on the $6 billion line of bank credit it lined up last December. Still, trying to sell more shares now--when its common stock is 40% off its 52-week high of 30--suggests a certain desperation.

Lego naturally would like to assuage such fears, so he continues to talk optimistically about a turnaround. "1992 will be a year of working to get our problems behind us," he said at an Apr. 29 annual meeting. But plenty of investors remain skeptical. "This company is in some sort of a dream world," says one investment banker who is familiar with Westinghouse. For many, it has been more like a nightmare.

      OCTOBER, 1990 Three months after becoming CEO of Westinghouse, Paul Lego 
      assures analysts that all is well at Westinghouse Credit Corp. and that no 
      write-offs are expected
      JANUARY, 1991 Westinghouse announces unaudited record earnings of $1 billion; 
      its top executives collect hefty yearend bonuses
      FEBRUARY, 1991 Citing worsening economic conditions, the company releases 
      audited earnings that include a $975 million hit
      OCTOBER, 1991 Westinghouse takes another $1.7 billion write-off, producing a $1 
      billion loss for 1991. William Powe resigns his post as chairman of Credit Corp.
      FEBRUARY, 1992 Westinghouse files a registration statement to issue preferred 
      shares, needed to bolster WCC
      APRIL, 1992 The SEC is still scrutinizing the proposal and, according to one 
      top Westinghouse executive, looking into shareholder allegations of 
      questionable accounting. Westinghouse says there is nothing unusual about the