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BLX also made a $1.35 million loan to Farmington Petro-Mart, another Detroit-area gas station, and again listed Farran as the borrower. When interviewed by Carruthers, Farran said he knew nothing about the gas stations or the loans. He said he worked as an engineer at the Ford Motor Company. He implied that he was related to Al-Jufairi (we later learned he was a brother-in-law), who was listed as the contact person on this loan. “I guess I have a call to make to Abdulla, don’t I?” Farran said. The loan, of course, went into default.

Al-Jufairi was also listed as the incorporator of Golfside Petro-Mart LLC, which borrowed about $1.3 million from BLX, a loan that defaulted, as did a $1.35 million BLX loan to the Jefferson Fuel Mart. Al-Jufairi brokered that loan, and the records indicated it was a sham transaction between related parties at an inflated value financed by BLX. Also, $200,000 of the loan proceeds went to Hussein Chahrour, who pled guilty and received two years’ probation in a cigarette smuggling ring. He received a light sentence in exchange for testimony against other members of the ring, which used some of the smuggling proceeds to finance the Lebanese terrorist group, Hezbollah. Kroll said it was evident that the Detroit office of BLX barely reviewed the loan applications created by Al-Jufairi, again flouting SBA requirements. Including the Al-Jufairi loans, a total of eleven BLX gas station/convenience store loans in the Detroit area went into default for a combined $11.2 million.

In Norfolk, Virginia, Kroll found that BLX made a loan to the Town Point Motel, which the police closed just months later, claiming the motel was a center for the local drug trade. The owner of the motel stopped making loan payments and the city of Norfolk eventually tore it down.

Colleton Inns was a motel in Walterboro, South Carolina, where BLX held a junior loan. After it failed, a senior officer at Walterboro Bank (which held the senior loan) told Kroll, “I sold the motel on the courthouse steps for a little more than the total owing on the first mortgage. . . . BLX walked away with nothing, losing at least $1.1 million.”

Kroll found that since the beginning of 2000, there had been more than one hundred bankruptcy filings on loans issued by BLX. As with Al-Jufairi and Patel, Kroll found that delinquent borrowers often had ties to the independent loan brokers used by BLX. Sometimes the borrower and the broker were the same person. Some banks told Kroll that so many BLX loans went into default that the company earned a reputation of being the lender of last resort in the Preferred Lending Provider world.

BLX was pretty much getting away with this fraud, but occasionally regulators noticed. The early default of the $1.6 million loan to Magnet Properties LLC in Georgia triggered an audit in 2002 by the SBA’s Office of Inspector General (OIG), which found numerous lending violations (see www.sba.gov/ig/2-35.pdf). The SBA audit said that “the deficiencies in the subsequent loan application package of (Magnet) were concealed” and the loan did not meet agency eligibility criteria. The audit found that Patel paid himself $170,000 from the loan proceeds and used the loan to refinance the earlier SBA loan. This was a clear violation of SBA rules, which state, “No proceeds of a PLP [Preferred Lending Provider] loan may be used to either refinance or pay off an existing SBA loan.”

The OIG concluded that BLX’s actions “were egregious acts and warrant SBA action to seek civil fraud remedies against the lender.” The company’s failure “to follow prudent lending practices, and materially comply with SBA requirements, undermined the integrity of the Section 7(a) business loan program.” The OIG recommended suspension of BLX’s PLP status in the Georgia District Office “due to its failure to comply with SBA regulations, policies and procedures for originating loans.” In addition, BLX had to repay the nearly $750,000 reimbursement to the SBA. Ultimately, the SBA did not pursue civil fraud remedies or suspend BLX’s license in Georgia. As we would see many times, the SBA has been strangely forgiving of BLX’s misdeeds.

Even some former BLX employees whom Kroll interviewed were amazed at how the company conducted its business. “It was appalling how BLX operated,” one former BLX executive told Kroll. “They had poor underwriting talent, no proper training (and), because there was no regulator overseeing them, they assumed the SBA would never look at them. They were pure sales people who never saw a bad loan deal. It is a recipe for disaster.”

Former BLX employees also indicated that the company rushed to produce loans because the compensation of senior executives was tied to the volume of new loans. They also said that BLX would keep impaired loans that were in foreclosure or bankruptcy on its books so they wouldn’t have to be written off. “It is clear that BLX is hiding its actual loan losses from Allied shareholders,” a former BLX employee told Kroll.

Around this time, another of Carruthers’s sources told a story from his tenure at BLX. The ex-employee believed that BLX should take a $10 million write-down for bad loans. BLX didn’t want to do it. The employee approached Robert Tannenhauser, BLX’s CEO, and advocated the write-down and said the appraisals didn’t support the carrying values.

Tannenhauser’s response: “F**k the appraisals.”

CHAPTER 20

Rousing the Authorities

Greenlight’s law firm, Akin, Gump, Strauss, Hauer & Feld LLP, arranged meetings in August 2003 with the SBA, the SEC, and New York Attorney General Spitzer so that Kroll could share its report. At the SBA meeting at its office in Washington, D.C., Jock Ferguson, who led Kroll’s field effort; Rich Zabel from Akin, Gump; and I met with David R. Gray, counsel to the inspector general of the SBA; Robert Seabrooks, assistant inspector general for auditing; Mark R. Woods, assistant inspector general for investigations; and Garry Duncan, with the Atlanta field