SUMMARY: The following details OIG activities for the month of November 2011 as they relate to: Business Loans, Disaster Loans, Government Contracting & Business Development, and Agency Management.
Maryland Investment Firm and Three Others Indicted
On November 8, 2011, a capital investment firm and its owners, two brothers, were indicted on one count of conspiracy to commit bank fraud, six counts of bank fraud, one count of aiding and abetting and one count of criminal forfeiture in U.S. District Court, District of Maryland. An associate was also charged with one count of conspiracy to commit bank fraud and two counts of bank fraud for his part in the scheme. The indictment, which was unsealed on November 16, 2011, relates to a scheme to fraudulently obtain SBA-guaranteed business loans with resulting losses alleged to be over $37 million. The investment firm specialized in securing loans for individuals interested in purchasing or refinancing small businesses in the Mid-Atlantic area. According to the indictment, the three subjects encouraged prospective borrowers to apply for business loans through SBA’s Section 7(a) program using the services of their investment firm. The indictment alleges that the three submitted SBA loan applications and supporting documentation containing fraudulent personal financial statements, which may have included monthly bank statements, to loan originators and underwriters on behalf of their clients, thereby falsely enhancing the creditworthiness of the borrowers and their businesses. This is a joint investigation with the Federal Bureau of Investigation (FBI).
Texas Man Pleads Guilty to False Statements
On November 14, 2011, in the Southern District of Texas, a man pled guilty to a superseding Criminal Information filed on the same date, charging him with making false statements. The investigation revealed that the subject submitted a contract to purchase a motel for $2,350,000. He then conspired with others to create another company as a straw seller in order to artificially inflate the sales price to $2,950,000. The subject submitted fraudulent documents to the SBA lender in support of this scheme and paid the straw seller $400,000 of the required cash injection outside of closing, of which $308,000 was secretly returned to him prior to closing. This allowed the subject to apply some of the same funds toward the remaining balance of the cash injection, thereby reducing the out of pocket funds he had to pay in rder to purchase the property. At closing, the straw seller received approximately $196,000 that was identified as seller’s proceeds. The $196,000 was then covertly funneled to a company owned by the subject who was the buyer in the transaction. This is a joint investigation with the FBI.
Three Sentenced in Texas for Loan Scheme
On November 16, 2011, three individuals were sentenced in the Southern District of Texas for their participation in a scheme that involved producing fraudulent loan documents to receive SBA 7(a) guaranteed loans totaling $2,479,000. All three individuals had previously pled guilty to conspiracy to commit wire fraud. One defendant was sentenced to 5 years probation, $77,911.76 restitution payable to SBA, and a $100 special assessment. Another defendant was sentenced to 5 years probation and a $100 special assessment. The third defendant was sentenced to 5 years probation, $88,001.47 restitution payable to SBA, and a $100 special assessment. This is a joint investigation with the FBI and the Internal Revenue Service, Criminal Investigations.
Michigan Commercial Loan Broker Sentenced
On November 16, 2011, a Michigan-area commercial loan broker was sentenced to 61 months incarceration, 3 years supervised release, and $8,976,448.77 in restitution to be paid jointly with his coconspirators. The subject previously pled guilty in U.S. District Court for the Eastern District of Michigan to one count of conspiracy to commit wire fraud. He and his colleague were previously charged for their involvement in a scheme to falsify equity injections and loan disbursements on Housing and Urban Development (HUD) settlement statements involving twelve SBA-guaranteed loans. The investigation revealed that the he acted as a broker and recruited “straw buyers” to falsely obtain SBA-guaranteed loans. This is a joint investigation with the U.S. Secret Service.
Mississippi Man Pleads Guilty in Disaster Loan Scheme
On November 4, 2011, a Mississippi man pled guilty in U.S. District Court, Southern District of Mississippi, to a Criminal Information charging him with one count of false statements. The guilty plea was the result of an investigation that disclosed that he had provided false statements to the SBA to receive benefits. The subject and his wife, who was also charged, applied for and received a $1 million Disaster Loan to repair business properties located in Mississippi and Louisiana damaged by Hurricane Katrina. The investigation revealed that they did not use the funds as detailed in the Loan Authorization Agreement. They submitted fraudulent receipts to the SBA to hide the fact that they used a portion of their $389,923 proceeds to purchase a 43-foot yacht. This is a joint investigation with the FBI.
Government Contracting & Business Development
Georgia Businessman Indicted on Wire Fraud
On November 8, 2011, the president of a Georgia business was indicted in U.S. District Court, Northern District of Georgia, on 14 counts of wire fraud and one count of major fraud. The indictment alleges that he fraudulently used the status of a legitimate service-disabled veteran to obtain government contracts set-aside for Service-Disabled, Veteran-Owned Small Businesses (SDVOSB). He allegedly established his own business as an SDVOSB company owned by the veteran, then created a joint venture between the legitimate veteran-owned business and his own in order to obtain SDVOSB set-aside contracts. The joint venture received two contracts totaling over $1 million from the Department of Veterans Affairs (VA) before the SDVOSB status of the joint venture was challenged. In February 2008, the SBA ruled that neither the joint venture nor president’s business qualified for the program, primarily because of the veteran’s lack of participation in the business. Despite this ruling, the president continued to operate his firm as an SDVOSB business and received three additional SDVOSB contracts, totaling approximately $1.7 million, after allegedly forging the veteran’s signature on contracts, correspondence and checks and using other means to give the appearance that the veteran ran this business, when, in fact, he did not. This is a joint investigation with the Department of Veteran’s Affairs OIG, the Department of Agriculture OIG, the United States Army Criminal Investigations Division, and the Department of Homeland Security OIG.
Audit of SBA’s Fiscal Year (FY) 2011 Financial Statements. On November 14, 2011, pursuant to the Chief Financial Officer’s Act of 1990, the Independent Auditors’ Report and accompanying reports on internal control and compliance with laws and regulations were issued for the fiscal year ending September 30, 2010. The audit, which was performed by KPMG LLP under a contract with the OIG, found that SBA’s consolidated financial statements presented fairly, in all material respects, the financial position of SBA as of and for the years ending September 30, 2011 and 2010. The financial statements also presented fairly, in all material respects, SBA’s net costs, changes in net position, budgetary resources, and combined statements of budgetary resources for the years then ended. With respect to internal control, the independent auditors continued to report a significant deficiency related to Information Technology security controls. In addition, KPMG’s test for compliance with certain laws, regulations, contracts, and grant agreements determined that the Agency did not fully comply with the Debt Collection Improvement Act of 1996 because it did not consistently follow Treasury guidelines for referring delinquent debts for collection.
Report on Special-Purpose Financial Statements.
On November 15, 2011, pursuant to Office of Management and Budget (OMB) Circular A-136, Financial Reporting Requirements, and the Treasury Financial Manual, the Independent Auditors’ Report on Special-Purpose Financial Statements was issued by KPMG LLP on SBA’s reclassified balance sheet as of September 2011 and 2010, and the reclassified statements of net costs and changes in net position and Federal trading partner note for the year then ended. The independent auditors reported that the statements, including the Federal trading partner note, presented fairly in all material respects the financial position of SBA as of September 30, 2011 and 2010. Also, the results of operations and the changes in net position for the period then ended were in accordance with generally accepted accounting principles.