All I could manage when I read this was a "wow".
Westside Express deal cost TriMet millions
The agency contracted with a rail car company it knew was failing, and eventually had to seize control of it
Fredrick D. Joe/The Oregonian
TriMet pumped millions of dollars into a shaky Colorado company in recent months, keeping it alive despite mismanagement so it could finish the agency’s new commuter rail cars.
The agency handed $5.5 million to the nearly bankrupt Colorado Railcar Manufacturing on top of $17 million awarded to the company for four specialized cars. TriMet expected to easily reclaim $3 million of the extra payments, but a court fight jeopardizes that hope.
The mess explains in part why TriMet is late launching its new westside commuter service, and it shows what can happen when a public agency makes a risky choice to do business with an unproven vendor.
TriMet contracted with Colorado Railcar in 2005 even though agency officials knew the company was losing money and had little cash. They said they were aware of past business troubles of the company’s owner, Tom Rader.
TriMet’s general manager, Fred Hansen, told The Oregonian that Rader’s past was “not a major concern” because the problems happened years earlier.
Almost from the moment Colorado Railcar started work in late 2006, the company fell behind schedule. Company officials disguised the truth about why and then stalled TriMet by repeatedly claiming that new financing was just about in hand.
The company’s financial condition worsened through 2007, forcing TriMet to speed up payments to help. Company officials diverted some of the money to other work.
In early 2008, TriMet took charge of Colorado Railcar’s finances. It paid $1 million in interest to the company’s lender and covered unpaid bills, the rent and even the company owner’s $37,000-a-month salary.
TriMet executives defend their actions, saying they aggressively safeguarded the agency and public money. They said circumstances forced tough choices to get the rail cars done and shipped to Oregon.
Details about Tom Rader’s troubles running two other projects are chronicled in publicly available documents — Philip Morris documents posted online and court and securities filings related to Rader’s problems with a Florida company. TriMet officials said they knew of Rader’s past and it was not a “major concern.”
The Philip Morris debacle
Rattlesnake salad, lobster bisque and buffalo chili were on the lunch menu in 1995 as Rader hosted his customers from Philip Morris, the cigarette company.
Rader was a gifted salesman, and Philip Morris the year before handed his company, Rader Railcar Inc., a $28 million contract to build one of the most luxurious trains to ride the American rails. Within months of that high-toned lunch, Philip Morris was suffering financial indigestion from its dealings with Rader. The project was behind schedule and costs were mounting by the millions.
Time after time, Philip Morris executives trekked to Colorado to investigate the problems. They described in reports their concerns with the lack of controls, inadequate engineering and ever-escalating costs. The company finally forced Rader to hire an outside project monitor.
It wasn’t enough, as a brutally frank internal memo reported a year later. Rader and his executives “don’t know how to supervise people; results in much of rework; engineering also stinks,” the memo said.
Evaluating manufacturing flaws, another tobacco executive wrote of Rader’s operation that there was a “fine line between stupidity and dishonesty and I think we’re right on it.”
By the spring of 1997, the $28 million train had become a $70 million train, and costs continued to mount. Philip Morris finally stopped the project, ordering Rader to cut the unfinished train into scrap.
Call it Debacle II
As the Philip Morris deal unraveled, Rader had other problems. He had set up a second company called Rader Railcar II. This business took over work unrelated to the Philip Morris project, including a $10 million contract with a Florida company.
The contract was with First American Railways, a company Rader helped found. The company went public, raising millions to buy Rader’s train cars. Work quickly fell behind schedule.
“He ran out of money,” said Ray Monteleone, former president of First American Railways. “We had to feed him hand-to-mouth.”
Monteleone sent officials to Colorado to monitor the books and help manage affairs.
“We had to run his company to get those cars delivered,” Monteleone said.
It wasn’t enough. The company reported to shareholders that Rader Railcar II missed one schedule and then an amended one for delivery of the cars.
Rader Railcar II still owed Florida three cars when it announced in November 1997 that it was shutting down. The firm blamed tardy payments from the Florida operation.
That was news to First American, which fired back that not only had Rader Railcar II been paid on time, it had received advance payments as well. In 1998, First American Railways went bankrupt, blaming the late delivery of the cars for slow business.
The Westside Express Service, now scheduled to start in February, is designed to carry 4,000 passengers daily between Beaverton and Wilsonville. They will ride on self-propelled passenger cars, picked by TriMet to save fuel costs over locomotive-led trains.
In 2004, two companies said they could build what TriMet wanted, although neither had a customer using such cars. One international manufacturer quickly dropped out because it couldn’t find enough business to justify production.
That left TriMet with Tom Rader’s undercapitalized company.
Rader, 62, made millions in 1987 from selling a company that created Alaska rail tours. He moved into rail car manufacturing, starting in a former blimp hangar in Tillamook. Rader didn’t respond to interview requests or written questions, but associates and records portray a man with a passion for railroads and a genius for spotting opportunity.
One of his companies garnered notoriety in 1997, when cigarette maker Philip Morris canceled its order for a luxury train because it was behind schedule and over budget. Philip Morris paid Rader’s company $70 million before giving up.
His next company sputtered to a close when it couldn’t finish rail cars for a highly publicized Florida tour train. The Florida company said delayed deliveries strangled its business, forcing it into bankruptcy.
Rader was back in business in 1998, this time as Colorado Railcar Manufacturing. His opportunistic nature soon had him on a new track, designing rail cars for public transit.
TriMet knew the risk
When TriMet chose Rader’s company to build its cars, his company had only one other order on its books for a new car. Agency officials knew the company had little cash on hand and had slipped into the red in 2004.
Jim Fronk, TriMet procurement director, said in an internal memo dated Feb. 23, 2005, there was “some level of risk” in doing business with Colorado Railcar.
He recommended TriMet “mitigate that risk” with unusual contract restrictions, a lien on all parts of TriMet’s cars while under construction and a requirement for a $3 million letter of credit.
Fronk didn’t mention Rader’s business history in that memo or in an update he wrote seven months later.
TriMet executives insisted in interviews that they knew of what one characterized as Rader’s “checkered past.”
Neil McFarlane, TriMet executive director for capital projects, said agency officials didn’t seriously consider changing course despite the discoveries. Colorado Railcar had the “perfect product” for the commuter service, he said.
Yet, McFarlane said, “We knew that if this company got into trouble it did not have deep pockets to reach into.”
In contract negotiations in 2005, TriMet asked Colorado Railcar for a performance bond worth $8.5 million, or about half the contract. Such a bond could be turned into cash for TriMet if it had to take over rail car construction.
Colorado Railcar executives contended such a bond was too expensive. TriMet backed down and agreed to a $3 million letter of credit, projecting it would cover even a worst-case scenario.
Besides, Hansen said, the company said Rader was pledging his own assets to guarantee the letter of credit. If the company owner was putting his home and others assets on the line, he must mean business, Hansen concluded.
Rader never made that pledge, company officials now say, but TriMet officials didn’t know that when they signed the contract.
A ‘recovery plan’
In November 2006, Colorado Railcar went to work stitching together the first of 5,000 parts needed for one TriMet car.
Within weeks, TriMet engineers visiting the plant in Fort Lupton, Colo., detected that tasks were being done out of sequence. Construction also was slower than expected. Nosing around, they picked up rumors that workers didn’t have the parts they needed because unpaid vendors wouldn’t ship them.
Back in Portland, TriMet officials weren’t panicked. TriMet routinely encounters delays in major projects and just as routinely demands a “recovery plan” from contractors. In its plan, Colorado Railcar said it was a month behind on one car.
TriMet’s notes of a Feb. 22, 2007, conference call record Rader’s optimism that he would soon have $15 million in new financing. Vendors would be paid and parts would flow, Rader said. Colorado Railcar would catch up and make the date for a strength test of the rail cars.
This was crucial to the Westside Express Service. By spring 2007, TriMet had acquired five miles of route and contractors were laying rail. The work would be of no use without rail cars that one TriMet executive described as the “heart of the project.”
McFarlane, TriMet’s executive director, decided to dig deeper into Colorado Railcar’s affairs. He wrote to Rader that “TriMet is now required to exercise due diligence” in examining the company. He demanded more detailed information than requested before the contract was signed. McFarlane also dispatched a high-level team to Fort Lupton, about a half-hour north of Denver.
This time, Rader said he was just a week from financing. According to TriMet, he warned the visiting TriMet officials that if he couldn’t get the financing, “all bets are off.” Those notes characterized Rader and his executives as “engaging” and “candid.”
Rader didn’t share that he had recently acquired another venture -- the American Orient Express luxury train. He assumed $6 million in debt but didn’t put up any cash. He later used Colorado Railcar money to operate what one accountant described as his “personal toy.”
The acquisition helped cement the big loan package Rader had been chasing. In May 2007, Hilco Financial, a Chicago financier of troubled companies, loaned Rader’s companies $17 million.
TriMet officials figured that the sophisticated lender wouldn’t pour money down the drain.
“We all sighed a big sigh of relief,” said Tuck Wilson, TriMet special counsel managing the commuter project.
The loan relaxed TriMet’s vigilance.
“It produced a little higher level of confidence than it should have,” Hansen said.
An insider’s tip
Rader’s companies chewed through the Hilco millions over the summer of 2007, and vendors once more were pounding on the door for payment.
TriMet helped out, speeding up payments and advancing sums for parts on order. The agency was assured its money would be used only for TriMet cars. That wasn’t the case.
In fall, Wilson learned from a company insider that TriMet’s money had been diverted to another project. He called Rader.
“He expressed some embarrassment. I expressed frustration. It was a painful conversation,” Wilson recalled.
For TriMet, the company’s thin credibility had evaporated.
“Were we being lied to? The answer is yes,” Hansen said.
Wilson hired Conrad Myers, a Portland forensic accountant, to investigate Colorado Railcar’s finances.
Myers’ confidential report in late November 2007 contained a trainload of bad news.
“CRM will not survive beyond the end of the year without appropriate emergency action,” Myers wrote.
Wilson worked through the Thanksgiving weekend on his own recovery plan. He figured TriMet’s best hope was to take control of Colorado Railcar. Otherwise, he feared, the company would go bankrupt.
If that happened, the rail cars would be locked up in litigation and the commuter service would be postponed.
He crafted a take-it-or-leave-it deal for Rader: TriMet gets control of your company or we cancel the contract now.
He had backing for the unprecedented move all up the line, including from Hansen, the agency’s general manager.
“You have to be very flinty-eyed,” Hansen said.
In return for control, TriMet promised to pay the company’s other costs and past-due bills unrelated to the rail cars. Another customer, state-run Alaska Railroad, later joined the pact and shared those costs.
The deal was still being put to paper when Myers returned to Colorado in late December for another look. His bleak report: Colorado Railcar needed money immediately to cover paychecks. The next day, TriMet wired $545,000.
But that was almost the good news compared to what else Myers reported.
He estimated Colorado Railcar would need an additional $5 million to keep going. That was on top of the $17 million TriMet was under contract to pay.
Trapped by circumstances, TriMet saw no choice but to pay.
Rader kicked out
Tom Rader didn’t show much appreciation for TriMet’s help.
He was furious when he found out Wilson had called another Colorado Railcar customer to share the unfolding developments. He jumped Wilson by phone in a call Wilson vividly recalls.
“On top of his other issues, he had an anger management problem,” Wilson said.
It was the last time the two men talked.
TriMet cinched up control of Colorado Railcar’s spending, knocking Rader’s children off the company payroll. The agency paid for power, phone service and factory rent.
In April, Hilco lost patience with Rader and used its loan agreement to force a change in command. Rader was tossed out of his own company, only to preside over the collapse of his luxury railroad. He was replaced in Fort Lufton by a veteran of the rail car business.
That veteran, Larry Salci, was appalled at what he encountered. The shop floor was a mess. Without access to the right cranes, workers dragged 200,000-pound rail cars across the concrete floor, gouging and grinding as they went.
With Salci on board and TriMet controlling the money, work stepped up on TriMet’s cars. Two arrived in Wilsonville in June, and two more in September. A TriMet lawyer sent the company a letter of “thanks and congratulations.”
The letter also asked Colorado Railcar to repay $5 million within 60 days.
Money keeps flowing
Agency officials thought they would easily recover $3 million of that sum by cashing the letter of credit.
Beyond that, Hansen said, “I didn’t hold out much hope.”
But in October, a judge temporarily blocked TriMet’s claim to the letter. The agency’s expectation of a routine banking transaction turned into a legal fight over whether TriMet engaged in fraud. The agency forecasts that disputing that allegation will cost it an additional $100,000.
Meanwhile, money flows from TriMet to Colorado Railcar. The agency explained that it needs Colorado Railcar engineers to commission the new cars.
TriMet was supposed to get that service under its original contract, but that money is long gone. Now, TriMet has to cover engineers’ pay and other company costs. Those additional costs so far total $653,000.
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