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) 📖

19. Falamarz Zahraie operated Pars Petro, Inc. and had financial trouble. He was not a U.S. citizen, so he enlisted his brother Daryoush to help obtain a fraudulent SBA loan through BLX. Daryoush “purchased” the gas station from his brother, but he didn’t really buy it, he simply gave the money to his brother to repay his existing debt. The check for the $240,000 equity injection was never cashed. The loan defaulted, and on November 18, 2003, the SBA paid a claim of over $700,000. Notably, Deaibes was not indicted.

Carruthers called the U.S. attorney’s office and learned that this investigation was ongoing and they were working up the chain. More surprisingly, he learned in November 2006 that the investigation by the U.S. attorney’s office in Michigan did not originate from our efforts. It didn’t come from the Justice Department, the SBA, or the SEC. Apparently, the Department of Homeland Security detected that some non-U.S. citizens of questionable backgrounds received SBA loans in Detroit through BLX. This triggered the U.S. attorney’s office to investigate, where it found the large BLX fraud.

Carruthers found that the first indictments in the case came on October 5, 2005. Husam Fakhoury was indicted for falsely indicating he was not on probation and had not been charged, arrested, or convicted for any criminal offense other than a minor motor vehicle violation, when, in fact, he was on probation after being convicted of conspiracy to transport and sell stolen motor vehicles. On the same day, Sharif Affas was indicted for falsely indicating he was a citizen when he was not.

According to Carruthers, when the U.S. attorney’s office dug through the cases, it discovered a much larger fraud against the SBA. While we were obviously excited to find these developments, it was galling that these were some of the same cases we told the SBA about in 2003—and it did nothing about them. The very agency being defrauded showed no interest, because it knew it was part of the problem. Either it had little interest in correcting the problem because the agency was politically motivated to lend money and not ask questions, was too underfunded to check, or had been co-opted by BLX. Or all of the above. The SBA’s lack of concern that taxpayers were being ripped off, are being ripped off, and will be ripped off—all in its name—is nothing short of appalling.

CHAPTER 29

Charges and Admissions

On January 10, 2007, the Associated Press reported that nineteen Detroit-area residents faced federal charges for allegedly defrauding the Small Business Administration out of nearly $77 million. Federal prosecutors accused Patrick J. Harrington, a “former” vice president of BLX of “overstating or misstating loan applicants’ financial qualifications, and with falsifying the amount of money they contributed toward the business, witness tampering and lying to a grand jury.” The indictment said the defaults cost taxpayers more than $28 million according to the article, which also noted that there had been six previous indictments against Michigan residents—three of whom awaited sentencing and three of whom were fugitives.

The indictment was dated December 14, 2006, but had remained sealed until January 9, 2007. It indicated Harrington had been a principal with Allied Capital SBLC Corporation since September 23, 1998. After Allied acquired BLC Financial, Harrington was an executive vice president of BLX until September 2006. BLX closed its office in Troy, Michigan, on August 1, 2006.

According to the indictment:

Typically, the fraudulent loans involved one of approximately five individuals, or groups of individuals (collectively referred to herein for convenience as the “brokers”), who were orchestrating the purchase and resale of gas stations (or gas station/convenience stores), or, in some instances, party stores, restaurants, or small motels. The broker would locate (and sometimes purchase) a property that was for sale, and then would find a person willing to “buy” the property at an inflated price using an SBA-guaranteed loan issued by BLX.

In some instances, the buyer was truly interested in owning and operating a business. In other instances, the buyer was a “straw buyer” who did not intend to operate the business or to make loan payments, but was paid (or promised payment) by the broker to serve as a buyer. The broker profited from the mark-up in the price of the property. Harrington profited by being compensated by BLX based, in part, upon the amount of loans he originated.

The indictment described various false representations, forged documents used in the loan fraud, Harrington’s efforts to persuade other witnesses to lie to investigators, and Harrington’s own lies to the grand jury on October 6, 2005. It listed a number of loans, including several that Kroll and Brickman had flagged and we had passed on to regulators.

The indictment was attached to an affidavit by Stanley C. Chappell, a senior special agent in the SBA-OIG. Chappell said he was “one of several OIG Special Agents who, along with Special Agents of the U.S. Secret Service, are investigating a large number of fraudulently-obtained SBA-guaranteed loans issued by BLX.”

Chappell swore he had “participated in numerous interviews of Patrick J. Harrington, who . . . has admitted that between approximately 2000 and July 2006, he, and other BLX employees working at his direction, originated and issued approximately 96 SBA-guaranteed loans knowing that the financial and other qualifications of the principal(s) of the small business borrower were fraudulently overstated and/or misstated, and that the satisfaction of the equity injection requirement was falsely and fraudulently documented, in order to fraudulently qualify the borrowers for the loans.”

With the story finally in the public domain and picked up by other media, Allied immediately began to spin. It assembled talking points that appeared in numerous analyst research reports despite the inconvenient fact that the “talking points” were false and misleading. The first report came from Merrill Lynch. Merrill had switched analysts covering Allied, with Ken Bruce replacing Michael Hughes. Bruce seemed more objective about Allied than Hughes. He actually said in his report after the indictment that Allied’s critics appeared to be right. He