Chron/Tom Abate on The financial wizard behind Pacific Lumber controversy

Note: Tom Abate is the founder of the North Coast Journal. The current owners of bought it from Tom and his wife, Mia,

The financial wizard behind Pacific Lumber controversy
Tom Abate, Chronicle Staff Writer
Sunday, June 12, 2005

In 40 years of doing business, Houston financier Charles Hurwitz has perfected the art of acquiring companies with borrowed money, the most infamous example being the junk-bond-financed takeover of Pacific Lumber in 1986.

That deal made Hurwitz and the Maxxam Corp. he controls anathema to many Northern Californians, who think he turned a company once known for stewardship into one reviled for cutting old-growth redwoods.

But Hurwitz, 65, may end up being judged the victim of one event that followed the buyout.

Several years ago, he sued federal banking regulators. He charged that they tried to blame him for the failure of a Texas savings and loan institution in order to bully him into selling Pacific Lumber's last groves of old growth, including what is now the Headwaters preserve.

That counter-punch lawsuit has already been argued before Houston Federal District Judge Lynn Hughes, who could rule at any time. Hughes once compared the government's prosecution of Hurwitz to mafia-like strong-arm tactics. Court-watchers say he seems favorably disposed toward Hurwitz's contention that the government should repay the $72 million he spent to defend himself against the charges, which have by now either been dropped or settled.

A Texas native who did a two-year stint in the Army after college, Hurwitz began his business career as a stockbroker in 1965, and soon became a pioneer in hedge funds. In 1978, he acquired a 13 percent stake in a now- defunct firm that had -- prior to his involvement -- disassembled the London Bridge and rebuilt it, stone by stone, as the centerpiece of the Lake Havasu City resort in Arizona.

In 1980, Hurwitz assumed control of that company, which, through a subsequent series of transactions ultimately became Maxxam Corp.

Today, Hurwitz owns 74.9 percent of Maxxam's stock. Maxxam owns Pacific Lumber, a handful of real estate ventures and two racetracks, one for greyhounds and the other, Sam Houston Race Park, for horses. Income from Pacific Lumber makes up about 57 percent of Maxxam's revenue, which totaled $361.1 million last year. In its last 29 quarterly financial reports, it has posted losses in 21 quarters and profits in eight.

Maxxam used to be larger by virtue of its 62 percent stake in Kaiser Aluminum, which it bought with $930 million in debt financing in 1988. But Kaiser filed for Chapter 11 bankruptcy protection in February 2002. Although Maxxam still owns the shares, they are essentially worthless, and it has no operational control over the reorganizing firm.

The Pacific Lumber buyout that thrust Hurwitz into the public eye involved storied names like the now-defunct Drexel Burnham Lambert investment bank and its junk-bond specialist Michael Milken, who paid a $200 million fine and served two years at the minimum security federal prison camp in Dublin in connection with his activities during the 1980s.

The case Hurwitz is pursuing against federal banking regulators grew out of a relationship among the Pacific Lumber deal, Drexel Burnham Lambert and United Savings Association of Texas. United was a financial institution in which Hurwitz held a minority share before it was declared insolvent in 1988.

In a controversy that has led to investigations, court cases and bickering for 17 years, the Federal Deposit Insurance Corporation suspected that United Savings had invested heavily in junk bonds issued by Drexel in return for Drexel's support of Hurwitz's acquisitions.

Two federal agencies, the FDIC and the Office of Thrift Supervision, ultimately brought charges against Hurwitz and Maxxam, alleging they contributed to the mismanagement that caused United Savings to fail.

By 2002, both federal cases had collapsed, and Hurwitz began turning the tables in a legal action that argues that officials of the Clinton administration, under pressure from environmentalists, encouraged bank regulators to lean on Maxxam to induce it to sell its old-growth redwoods.

Hurwitz's case was heard last June, and a decision on his claim for $72 million in sanctions could come at any time from the same federal judge who, in a ruling critical of the two federal agencies, once wrote: "systematic falsehoods are the tools of Cosa Nostra, not res publica."