For investor at center of Strouds probe, it's water off his back. (Up Front).

Walter Cruttenden III, the Newport Beach financier whose transactions with bankrupt Strouds Acquisition Corp. are being probed by the linen retailer's unsecured creditors, isn't the type of guy who gets obsessed with such complications.

With more than $5 million riding on the outcome, Cruttenden would rather talk about other things, like yoga or his unusual astronomical theory that the sun is part of a two-star binary system. He compares his Strouds investment to one of his favorite pursuits: surfing.

"Sometimes you catch some good waves and it's a good ride," Cruttenden, 53, said in an interview last week after a morning hitting the waves. "Now and then you get a big one and if it works it's exhilarating -- and if not, it's a wipeout."

A committee of Strouds' unsecured creditors launched an investigation earlier this month into whether management, lenders or secured creditors engaged in self-dealing prior to the company's bankruptcy filing in May.

Cruttenden specifically has come under fire for a set of loans he made to Strouds in 2001. The loans, including one from his non-profit group, the Yogananda Foundation, were elevated to secured status in January.

Cruttenden, who has been in the securities industry in Southern California for 25 years, now runs the risk of having his $5.4 million investment in Strouds relegated to unsecured status -- and potentially winding up unpaid.

"I'm not going to worry about it," Cruttenden said. "My lawyer tells me this stuff is pretty common in bankruptcies."

Biting back

Indeed, bankruptcies often lead to dogfights over whatever scraps might be left when a company goes bust. It's rarely a pretty sight, and Cruttenden isn't above a snarl or two.

He characterized the top 20 unsecured creditors, who have combined claims of $6 million, as "whining" in an effort to get more money from City of Industry-based Strouds.

"The creditors behind this so-called 'probe' stand to benefit financially if they can disqualify my claims and receive more of the dissolution proceeds themselves," he wrote in an emailed response to questions. "I suspect these are the same vendor/creditors that made millions of dollars selling product to the company at hefty prices over the last two years as Strouds lost bargaining power."

The vendors, Cruttenden claims, "actually made millions while I lost millions and now they want more."

The feud is expected to play out in the next few months as Strouds completes the liquidation of its 47 stores. Forensic accountants with BDO Seidman LLP have been hired by the unsecured creditors committee to delve further into deals made before the bankruptcy.

While the lawyers battle it out, Cruttenden has already moved Onto his next project: a documentary narrated by James Earl Jones that explores his own astronomical theories.

Earlier this year, he paid $16,000 to spend one night at Hawaii's Keck Observatory with famed "planet hunter" Geoffrey Marcy, an astronomy professor at U.C. Berkeley.

His enthusiasm for spirituality is well known, as are his investments in short-lived projects.

Since his early 20s, Cruttenden has been a follower of the Self-Realization Fellowship, a movement founded by an Indian immigrant, Paramahansa Yogananda, who preached selfenlightenment in Los Angeles in the 1920s. Years ago, he founded the Yogananda Foundation, which made a $1 million loan to Strouds.

"Walter Cruttenden marches to the beat of a different drummer," said Byron Roth, chief executive of Roth Capital Partners, the successor to Cruttenden & Co. (called Cruttenden Roth while both men were there).

'Bit of a dreamer'

Roth sued his former partner in 2000, claiming that Cruttenden violated a non-compete agreement by hiring several Roth employees. The two have since buried the hatchet with minimal legal fees, Roth said.

"He's unorthodox relative to your typical Wall Street banker," he added. "He's a bit of a dreamer, but he can deal with being wrong and move on to the next thing."

The Yogananda Foundation listed $1.7 million in assets in 2001, according to its latest 990 filing -- all in shares of Keith Cos., an Irvine-based engineering and consulting firm that came public in 1999 through E*Offering, an investment bank he founded and which is now part of Soundview Technology Group.

Cruttenden is the foundation's director, president and secretary.

"It makes investments and from its investment proceeds it makes grants," he said.

The grants include $179,000 to Sage Hill High School in Newport Beach, $10,000 to the Reason Foundation in Los Angeles, and $10,000 to the Yoga Room in Encinitas. Yogananda also gave $5,000 to the Ancient Wisdom Foundation in Athens, N.Y. and $1,000 to the Tijuana Christian Mission in National City near San Diego.

A third-generation multimillionaire, Cruttenden has deal-making in his blood. Born in Evanston, Ill., he moved to Southern California when he was 10 years old. His father and grandfather were both in the securities business.

His father, Walter Wemple Cruttenden Jr., built his own brokerage firm into a nineoffice operation but ran afoul of the Securities and Exchange Commission in 1970 for over-hyping two stocks. He settled the charges and was banned for life from holding a management title in the business.

Big wave

In 2000, the younger Cruttenden scored a huge win before the Internet bubble burst.

With the backing of several investors, he formed E*Offering, an online bank designed to take companies public, and sold it six months later to Wit Capital Group in a stock swap valued at $328 million.

Cruttenden was viewed as a white knight when he brought Strouds out of its first bankruptcy in April 2001. He blames the company's failure on a management that wasn't strict enough in setting prices for vendors.

"We couldn't have worked harder or invested more capital to make this thing go," he said. "Maybe (the unsecured creditors) just assumed there was some funny business.

Part of the problem was bad timing.

In Silicon Valley, where Strouds had six stores, the chain had routinely posted 20 percent declines in monthly same-store sales, a factor, Cruttenden said, that made it tough to turn a profit.

Marc Winthrop, a lawyer for Strouds, said unsecured creditors were given verbal assurances that they would be paid for any goods shipped. "The unsecured creditors believe the Cruttenden debt ought to be akin to equitable subordination," he said. "That it should not be. paid ahead of them."

Cruttenden maintains that "everything was done aboveboard."

Strouds' five-member board is cooperating with the unsecured creditors' investigation. The board includes Cruttenden, an associate, John Chan, and three executives from Fog Cutter Capital Group, a lender to distressed companies that bought a 49.5 percent stake in the company in March for $900,000.

Jeffrey Garfinkle, a lawyer for the unsecured creditors, said the investigation would focus on whether preferential payments, fraudulent money transfers or breaches of fiduciary duty occurred.

While the fate of Cruttenden's $5.4 million claim likely won't be resolved for some time, it also likely won't have a significant impact on his daily activities.

"I think $5 million is. a big deal to anybody," said Roth. "However, will it make him change his lifestyle? No. Surfboards only cost so much."