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25.1C). One other building in Arkansas was shown in similar condition, also with no proof that it was operating when BLX closed the loan (see Figure 25.1D).

Figure 25.1A Photos from Bill Russell Audit

 

Figure 25.1B Photos from Bill Russell Audit

 

Figure 25.1C Photos from Bill Russell Audit

 

Figure 25.1D Photos from Bill Russell Audit

 

According to the report, in a 2005 meeting with BLX, CEO Robert Tannenhauser told the inspector general’s office that he was not aware if anyone ever visited the properties before the loan closed. Two BLX vice presidents attended the meeting, but they were recent hires and didn’t know much about the loan. The vice president who processed the loan was no longer with BLX, and that officer, through his lawyer, said he wouldn’t talk to the OIG.

Finally, the report found that loan proceeds were siphoned off for impermissible purposes. Part of the proceeds went to a loan arbitrator who had negotiated down Bill Russell Oil’s existing debt. BLX paid the arbitrator out of the B&I loan proceeds, which is not allowed under the program’s rules. “In a fax to the arbitrator, dated December 20, 2000, the lender’s loan officer wrote that he had stuck his neck out to pay him the initial $75,000,” the auditor’s report said. Nowhere in the loan documents was this payment listed. “The lender knew this was not an authorized use of loan funds.”

After the loans went bad, BLX ordered another appraisal in 2002 so it could liquidate the properties and get some of the money back. That appraisal came in at $1.2 million, much closer to the first appraisal.

The OIG audit recommended that BLX pay back the $2.4 million, plus accrued interest, that the USDA paid on its guarantee, and that BLX be debarred from the B&I loan program. Debarment from one government lending program would automatically prevent BLX from participating in any other government loan program. So debarment would disqualify BLX from the SBA program as well. The USDA did not agree with the OIG’s debarment recommendation and suggested that debarment should only be used as a threat to ensure BLX reimbursed the loss.

In February 2006, Brickman tracked down the USDA auditor of the Bill Russell Oil loan. The auditor told Brickman that BLX’s attorneys in Little Rock wanted to form a marginally funded corporation to purchase at a tax auction the twenty contaminated properties discussed in the audit. That way, if litigation arose about pollution cleanup or health claims, the liability would fall on the marginally funded corporation, which would simply go bankrupt and cease to exist. All the damages, liabilities and other charges would not show on Allied or BLX’s financial statements. The auditor said the “SEC was very concerned about this proposal.”

One would think that after discovering an enormous fraud like this, the USDA would look into other loans by the same lender. It doesn’t work that way. After we discovered the Bill Russell Oil fraud, Brickman obtained information on all of BLX’s B&I loans from the USDA under FOIA.

Brickman found that BLX made B&I loans to gas stations, truck stops, a butterfly pavilion, a mushroom company, a sports emporium, a general store, a paper-box manufacturer, an ice skating rink, and others. Of the roughly fifty loans that BLX made under the USDA program from 1998 to 2003, the USDA paid guarantees on more than 42 percent of the loans totaling $41 million. However, as was the case with the SBA loans, only two loans had been charged-off, suggesting an unusually slow loan workout process. Brickman searched for news on the other loans and found a number of borrowers filed bankruptcy or showed clear evidence of default. This brought the total of identified problem loans to an astounding 65 percent of BLX’s portfolio of USDA loans.

Brickman compiled a lengthy summary of several defaulted USDA B&I loans and gave them to the USDA auditor. Brickman showed evidence that USDA loans were used to bail out other lenders, thereby transferring losses from private lenders to taxpayers. He found that BLX made loans to people who had previously defaulted on USDA loans and made USDA loans that bailed out SBA loans. BLX passed defaulted loans from one government agency to another.

The auditor compiled that information, along with his own work and analysis, into a letter to USDA headquarters, trying to debar BLX. As the auditor wrote Brickman, “Sometimes the wheels of government turn slow, but there are a few of us that keeps [sic] trying to protect taxpayers’ money.”

In February 2006, the regional auditor sent a memo to Philip Cole, the director of the Rural Development and Natural Resources Division of the USDA. The memo indicates that OIG disagreed with the USDA’s decision not to debar BLX. Instead, it suggested examining BLX’s overall history of delinquent and foreclosed loans. The memo agreed with Brickman’s default figure and summarized problems with a number of other B&I loans that Brickman identified to the OIG. The memo suggested a meeting in the Rural Business Service (RBS) national office to discuss debarring BLX. It said based on additional research, “BLX’s loan portfolio appears to be marginal or substandard loans.” The memo said that $43 million out of a $130 million portfolio were either delinquent, in default or in liquidation.

In early March 2006, Brickman heard from the OIG that there was a meeting at the RBS national office to discuss debarment of BLX. They were “receptive.” An answer was expected in thirty days. David Gray, the OIG’s chief attorney, previously held the same position at the SBA and was familiar with BLX. We had met with him at the SBA in August 2003. He wanted to actively pursue debarment. The auditor said he had spoken with an examiner from the SEC and the U.S. attorney’s office in Washington.

Then, it seemed that the auditor ran into a roadblock. He suggested that Brickman send a complaint to the OIG’s hotline, which he said would force them to act. So Brickman sent an e-mail

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