Office of Inspector General Monthly Update - January 2008

Business Loan Programs

Ongoing Investigation Results in Indictments.

The
following cases is part of an ongoing investigation,
being conducted jointly with the U.S. Secret Service,
relating to a scheme in which a lender’s former
executive vice president and others conspired to
fraudulently qualify loan applicants for SBAguaranteed
loans.

• On January 23, 2008, the former owner of a gas
station and convenience store in Allen Park,
Michigan, pled guilty to a Superseding
Information charging him with making a false
statement to the SBA in order to obtain an
$880,000 SBA-guaranteed loan. The guilty plea
relates to his falsely stating that he would be the
sole owner of the business when, in fact, he would
only own 30 percent. In addition, he falsely
represented that he was contributing $300,000 as
his equity injection. Although his loan is in
default, the lender canceled the SBA guaranty
during the course of this investigation, so SBA
suffered no loss.
• On January 23, 2008, the former managing
member, of a gas station and convenience store in
Auburn Hills, Michigan, was sentenced to 24
months probation, the first 9 to be served in home
confinement. He was originally charged in a fivecount
federal indictment, along with both his
undisclosed partner and the seller of the property,
with conspiracy, false statements, and wire fraud
in connection with a $1,335,000 SBA-guaranteed
loan that was used to purchase the gas
station/convenience store. He later pled guilty to
superseding Information charging him with one
count of making false statements, specifically with
claiming to be 100 percent owner when actually he
was only a 50/50 partner. He defaulted on the
SBA-guaranteed loan and SBA paid a claim of $1,019,943.56; however, the lender subsequently
refunded this amount and canceled its guaranty
pursuant to a settlement agreement with SBA.
The indictment charges against the former
managing member were dismissed at his
sentencing; however, those charges will remain in
effect against the undisclosed partner and the
seller of the property, both of whom are
international fugitives.
• On January 15, 2008, a Michigan man pled guilty
to a criminal Information charging him with two
counts of conspiracy. The first count involves the
Michigan man and his co-conspirators making
false statements relating to SBA-guaranteed loans
made by a Michigan lender and Tennessee lender.
The false statements relate to counterfeit bank
documents and checks used to verify the required
borrower equity injection on at least nine SBAguaranteed
loans. The second count relates to
conspiracy to defraud a bank in a non-SBA matter.
• On December 14, 2007, the former president of a
gas station and convenience store in Detroit,
Michigan, was charged in a six-count criminal
Information with conspiracy to defraud the U.S.
government, false statements, and aiding and
abetting. According to the Information, the former
president conspired with others to make false
statements regarding his education, employment
history, net worth, required equity injection, and
the percentage of the business that he owned. He
defaulted on the loan and SBA paid a claim to the
lender of $570,303.01. The lender has since
refunded this money and canceled its guaranty
pursuant to a settlement agreement with SBA.

Company and Texas Man Ordered to Pay Penalties.

On January 3, 2008, a lithium power company and a
Texas man were ordered to pay civil penalties to the
U.S. Government as a result of a partial summary judgment entered on September 27, 2007. The
company and the Texas man were ordered to pay
$4,972,365 in actual damages and $43,000 in civil
forfeitures, for a total of $5,015,365 (plus post
judgment interest of 3.28%). The SBA OIG began
investigating the company and the Texas man after an
allegation was received from the National Aeronautics
and Space Agency (NASA) OIG and the Defense
Criminal Investigative Service (DCIS) that the
company had fraudulently obtained ten research
contracts, totaling over $3 million, under the Small
Business Innovative Research (SBIR) program. The
court ruled that the company misrepresented its
history, status, physical facilities, and previous work
performed. The SBA OIG is conducting this
investigation jointly with the NASA OIG, DCIS, and
Army Criminal Investigation Division.

Pennsylvania Business Manager Sentenced.

On
January 9, 2008, the business manager of a now
defunct Philadelphia, Pennsylvania supermarket was
sentenced to six months home confinement, three
years probation, and restitution of $993,000 to be paid
jointly and severally with other defendants charged in
this case. The business manager previously pled guilty
to an Information charging him with one count of wire
fraud and one count of aiding and abetting. He had
obtained a 75 percent SBA-guaranteed loan in the
amount of $993,000 through a New Jersey lender to
assist his business. In support of the loan application,
he provided forged power of attorney documents in
order to improperly pledge collateral. Further, he
submitted false documentation that showed he had
provided a cash injection of $250,000 into the business
when in fact he had not. Currently, two other
defendants charged in this matter are awaiting judicial
action. This investigation is being conducted jointly
with the Federal Bureau of Investigation (FBI).

Texas Men Sentenced.

On January 7, 2008, the sellers
of an investment company, doing business as gas
stations and convenience stores, were sentenced in the
Northern District of Texas to 36 months probation and
ordered to pay restitution in the amount of
$492,187.24. Each of the sellers pled guilty on
September 14, 2007, to one count of conspiracy to
commit wire fraud. In addition, the purchaser of the
gas stations and convenience stores pled guilty on
October 30, 2007, to one count of the same charge.
The investigation disclosed that, in order to obtain two
SBA-guaranteed loans in the amounts of $500,000 and
$1,100,000 for the purchase of the businesses, both the sellers and the purchaser conspired to falsify the
capital injection requirements by submitting fraudulent
loan applications and supporting documents to the
lender and SBA. The purchaser is awaiting
sentencing. The OIG is conducting this investigation
jointly with the FBI.

Construction Contractor President Charged.

On
January 8, 2008, the president of a now defunct
construction company in Spokane, Washington was
charged in a superseding indictment with two counts
of mail fraud, one count of false statements on a loan
application, and two counts of false statements to the
SBA. The construction company obtained SBAguaranteed
surety bonds in order to perform public
works contracts for state agencies and city
municipalities. The indictment alleges that he falsely
stated he had paid subcontractors and suppliers; falsely
claimed to the surety company that the construction
company was out of funds when, in fact, he had
diverted and was continuing to divert contract
proceeds of approximately $87,000 to his personal
use; made false statements to a federally-insured
financial institution regarding a mortgage loan; and
falsely stated to the SBA that he had not defaulted on
prior surety bonds. The SBA suffered a loss of over
$500,000 due to the construction company’s defaults
on several contracts (the SBA’s surety bond program
guarantees 70 percent of the surety company’s losses
on bonded jobs the SBA has guaranteed). This matter
was referred to the OIG by the National Insurance
Crime Bureau (NICB). The OIG is conducting this
investigation with the FBI and the NICB.

Suspended Attorney Pleads Guilty.

On January 15,
2008, a suspended New Jersey attorney pled guilty to
one count of wire fraud, one count of money
laundering, and one count of aiding and abetting. He
acted as a loan broker and assisted a borrower in
obtaining an SBA-guaranteed loan in the amount of
$993,000 through a small business lender in
Livingston, New Jersey. In exchange for a 10 percent
fee, the attorney conspired with the borrower to submit
forged power of attorney documents, fraudulent tax
records, and false cash injection documentation. The
borrower was previously sentenced, and another coconspirator is awaiting sentencing. The OIG is
conducting this investigation jointly with the FBI.

Disaster Loan Program

OIG Issues Report on the Adequacy of Supporting
Documentation for Disbursements.

On January 29,
2008, the OIG issued a report, Review of the Adequacy
of Supporting Documentation for Disbursements. This
report is the last in a series resulting from our review
of SBA’s efforts to expedite loan disbursements during
its “90-in-45 Campaign”. The campaign was initiated
in the fall of 2006 to disburse funds on approximately
90,000 loans approved for the Gulf Coast Hurricanes
within 45 days. We initiated the audit in response to
an employee complaint that loans processed during the
campaign were disbursed without receiving the
required supporting documentation.
We reviewed general information on 40 of 1,154
statistically sampled loans disbursed by the 10 case
managers within the Fort Worth Processing and
Disbursement Center who had made the highest
average daily disbursements during the “90-in-45
Campaign.” The review disclosed that nearly half (19)
of the 40 loans reviewed were disbursed by SBA
without securing the proper documentation needed to
protect SBA’s interest in the collateral and to
document that insurance proceeds were used to offset
the SBA loans. In total, 55 documents were missing
for the 19 loans in question. Projecting the sample
results to the universe of 1,154 loans, we estimated
that SBA disbursed 554 loans without securing all of
the documents required to make disbursements.
We made three recommendations to the Associate
Administrator for Disaster Assistance to correct the
identified deficiencies. The Agency agreed with our
findings and recommendations and stated that it would
contact the borrowers associated with the 19 loans to
request the missing documents; review the 1,154 loans
and, in cases where all required documents were not
obtained, contact borrowers to obtain the missing
documents; and establish written procedures to ensure
that all required loan documents are obtained and
noted in loan files prior to disbursements over
$10,000.

Alabama Resident Indicted.

On December 26, 2007, a
Mobile, Alabama resident was indicted on one count
of false statements and one count of false
statements/overvalued statement of assets. The
indictment alleges that he altered a bill of sale for his
houseboat, which was used as his primary residence, in order to secure a disaster loan in the amount of
$21,800. It also alleges that he provided false
statements to the SBA regarding the use of the loan
proceeds. This case was referred by an insurance
company.

Financial Consultant Enters Into Agreement.

On
December 28, 2007, the U.S. Attorney’s Office
(USAO) for the Southern District of New York
entered into a non-prosecution agreement with a
financial consultant who obtained a $140,600 disaster
loan in May 2002, pursuant to the declared disaster
after the terrorist attacks on September 11, 2001. He
stated on his application that he had started a
consulting business in May 2001, and that his business
had suffered as a result of the attacks. The
investigation revealed that, instead of being used as
working capital, the loan proceeds were deposited into
the trust account of his attorney. A portion of the
proceeds were paid to another company, co-owned by
the financial consultant, and the remaining funds were
disbursed to him and his attorney. The attorney was
recently convicted in federal court of fraud involving
misuse of his escrow account and was sentenced to
4 years imprisonment. Due to this fact, the age of the
case, and the ambiguities involved with prosecuting
working capital loan cases, the USAO declined to
prosecute. Instead, it entered into a non-prosecution
agreement that states that the financial consultant,
under threat of prosecution for non-compliance, will
pay the SBA an initial $5,000 and will thereafter make
minimum $1,000 monthly payments until the loan is
paid in full. This case was referred to the OIG by a
former FBI agent now working as a private
investigator.

Texas Couple Convicted.

On January 16, 2008, the
president of a Texas lumber company was convicted in
the U.S. District Court in the Eastern District of Texas
on three counts of making false statements to the SBA,
and her husband was convicted on one count of the
same charge. The couple provided false statements to
SBA in order to obtain a $25,800 Economic Injury
Disaster Loan (EIDL). Both the husband and the wife
purported to own several vacant lots in Texas that they
knew did not belong to them, and offered these lots to
SBA as collateral in order to obtain the EIDL.
Louisiana Resident Indicted. On January 18, 2008, a
resident of Metairie, Louisiana was indicted on four
counts of wire fraud relating to $69,100 in Hurricane
Katrina disaster loan assistance he received from the SBA. The indictment alleges that he transmitted
facsimiles of altered building permits in order to
induce SBA to release funds on both a $19,500
disaster home loan and a $49,600 disaster business
loan. The investigation revealed that the building
permits were for work performed prior to Hurricane
Katrina. In addition, he allegedly kept insurance
proceeds assigned to the SBA and used loan proceeds
to purchase a new home, car, and boat. This case was
initiated based on an anonymous complaint through
the OIG Hotline.

Statutory/Regulatory/Policy Reviews

In an effort to proactively identify and correct
potential Agency inefficiency and management
problems at the onset of policy and regulatory
development, the OIG reviewed, cleared, and/or
provided comments, as appropriate, on 3 Agency
initiatives, including proposed legislation, SBA
Standard Operating Procedures, and Agency notices
containing directives to its employees.

This monthly update is produced by the SBA OIG,
Eric M. Thorson, Inspector General.
The OIG has established an e-mail address
(oig@sba.gov) that we encourage the public to use to
communicate with our office. We welcome your
comments concerning this update or other OIG
publications. To obtain copies of these documents
please contact:
Beverly Menier, SBA OIG
409 Third Street SW., 7th Floor
Washington, DC 20416
E-mail: OIG@SBA.GOV
Telephone number (202) 205-6586
FAX number (202) 205-7382
Many OIG reports can be found
on the Internet at:
http://www.sba.gov/IG/igreadingroom.html
If you are aware of suspected waste, fraud, or
abuse in any SBA program, please call the:
OIG FRAUD LINE at (202) 205-7151
or
TOLL-FREE at (800) 767-0385