Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New David Einhorn (best classic books of all time .TXT) 📖

Several months earlier, the FBI agent in San Diego told me he had discovered who obtained my phone records, though he could not tell me who it was. Now, I learned the Department of Justice transferred the investigation to Washington, D.C., where it was in the hands of the team investigating Allied. I could draw my own inferences about who obtained my phone records. The prosecutors and agents took notes and seemed smart, serious, and capable. I left feeling optimistic.

CHAPTER 25

Another Loan Program, Another Fraud

BLX’s loan fraud didn’t stop with the SBA 7(a) program. The U.S. Department of Agriculture (USDA) guarantees Business and Industry Loans. The USDA’s Rural Business-Cooperative Service runs the loan program, which guarantees about 75 percent of the loan value. The loans are intended to help develop rural areas and increase employment, improving the economic and environmental climate in rural communities. Like the SBA, the USDA allowed unscrupulous lenders to abuse the program and does not provide enough oversight to catch them.

BLX underwrote a $3 million B&I loan to Bill Russell Oil in June 2000. Like Bill Walton of Allied, the Bill Russell referenced is not a retired basketball star. (Brickman is still looking for a Kareem Abdul-Jabbar loan fraud.) The company, an oil-and-gasoline distributor in Rector, Arkansas, operated gas stations in southeastern Missouri and northeastern Arkansas. By June 2000, it already had about $1 million in loans to other creditors. The EPA cited Bill Russell Oil for numerous violations concerning fuel storage and ordered a cleanup. Bill Russell Oil was supposed to use some of the proceeds of the BLX loan to correct the violations. The company had weak collateral and virtually no prospects of paying the BLX loan back or even making interest payments. In November 2000, BLX made a fresh $400,000 SBA 7(a) loan to the company. Almost a year to the day after BLX made the USDA loan, the USDA paid out its guarantee. The SBA paid on its guarantee on the smaller SBA loan in November 2001, though the SBA data indicates that the agency was eventually repaid in full.

Bill Russell Oil ignored the EPA demands to comply with its environmental rules and did not return the agency’s phone calls. The Justice Department eventually filed a complaint. In April 2005, the District Court for the Eastern District of Arkansas granted a judgment against the company for $83 million. This triggered an audit of BLX’s loan by the Office of Inspector General (OIG) of the USDA.

In September 2005, the USDA issued a forty-page audit recommending that BLX repay the guaranteed amount of the loan and be kicked out of the Business and Industry Loan program. (The audit at www.usda.gov/oig/webdocs/34099-07-TE.pdf does not name BLX or Bill Russell Oil. Instead, it refers to them as the “lender” and the “borrower,” respectively.) The audit report describes the kind of behavior that Kroll, Carruthers and Brickman found on many of BLX’s SBA loans. In particular, the auditor found that BLX misrepresented the value of the borrower’s property. For example, when the borrower obtained an appraisal of the collateral, the appraiser noted that the Environmental Protection Agency (EPA) had closed several of the stations and that the agency had required upgrades at the properties. When the appraiser asked the company to provide documents to better determine the value of the properties, the borrower said it could not because its records were destroyed in a fire. The appraisal in March 1999 came in at $1.5 million, which wasn’t enough for a $3 million loan.

“We concluded that the lender misrepresented the value of the 20 properties to the state office by concealing the March 1999 appraisal,” the report said. “State officials said they would not have guaranteed the loan if the March 1999 appraisal had been made available prior to issuing the loan note guarantee.”

Instead, according to the report, BLX recommended a different appraiser, who reappraised the properties at $4.3 million. Presto! There was now enough collateral for the loan. However, the $4.3 million appraisal assumed a value based on property improvements that had not been made. BLX was responsible to verify the improvements and did not. In fact, the new appraiser certified that some of the properties had already been upgraded, and he included a list of these improvements in the appraisal report. He also said he had seen reports on the properties that said the environmental concerns were minor. When later asked by the OIG auditor to provide these reports, the appraiser said he could not find them.

The audit also found that six months before the loan closed, the state of Missouri revoked the borrower’s motor fuel license, and two months before the loan closed the EPA inspected some of the properties and found more than sixty violations. Despite these events, BLX certified that no major changes had occurred.

In addition, the audit found that BLX misrepresented the condition of the properties. BLX knew that the borrower had not only failed to upgrade nineteen of the twenty properties, but that several were not even open at the time the loan closed. BLX falsely certified that the upgrades had been made and that 95 percent of the properties were operational.

The most striking parts of the audit were photographs of properties that showed buildings that were just shells, falling apart and abandoned. The pictures revealed that there was little chance these properties were operational in the recent past, as BLX certified. For example, a tornado damaged a property in Missouri a month before the loan closed. It’s hard to tell in the photo, but a building might have once stood on the site (see Figure 25.1A). Another Missouri property had been declared unfit for human occupancy a week before the loan closing (see Figure 25.1B). Another photo showed an abandoned, falling-apart gas station in Missouri that neither BLX nor the borrower could prove was operating at closing (see Figure