Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New by David Einhorn (tohfa e dulha read online TXT) 📕

knew Jim Carruthers, the partner at Eastbourne Capital who was doing a lot of digging into BLX on his own. As a result, the two crossed paths on several occasions. I instructed Kroll to cooperate with Carruthers but not reveal it was Greenlight that had retained the company. I was not interested in word getting into the market, the media, or to Allied that we hired Kroll—until Kroll completed its work. This led to several awkward conversations I had with Carruthers in which he informed me that someone hired Kroll and the Kroll investigator was quite experienced and was doing a great job. I sheepishly listened and encouraged Carruthers to share with Kroll, but to make sure it was a two-way street.

Carruthers developed several former BLX employees as sources. One of them gave him an internal August 2001 delinquency report that detailed $135 million of delinquent loans, or about 20 percent of the company’s portfolio. Allied had consistently said that BLX delinquencies were less than half this amount. Kroll used the delinquency report as a road map to the troubled loans. They talked to banks, brokers, former employees, and some of the borrowers.

In August 2003, Kroll completed a twenty-three-page report on BLX, with two binders of source document exhibits each six inches thick. Kroll found “a series of loans originated by BLX that appear to be frauds against the SBA.” Kroll wrote, “Further audits of BLX loans could uncover violations of SBA loan issuing rules and regulations and lead to the possible recovery by the SBA of many tens-of-millions of dollars from BLX.”

Kroll confirmed and documented BLX’s misconduct as the former employee who had contacted me had outlined and as Carruthers had discovered. BLX made loans that could never be repaid. Kroll found that in numerous cases BLX flouted many SBA underwriting requirements. The SBA provided the same type of lax governmental oversight that contributed to the savings-and-loan crisis in the 1980s.

What’s more, Kroll discovered that BLX issued new SBA loans to borrowers to pay off existing SBA loans, a clear violation of SBA eligibility rules. Kroll found cases where BLX did not confirm that borrowers made the required equity contributions; let borrowers take fees from loan proceeds; did not verify details in loan applications; and failed to properly assess a borrower’s credit history, capitalization adequacy, repayment ability and collateral. Kroll also found that BLX accepted inflated real estate appraisals. As SBA rules summarize, “The lender must analyze the borrower’s proposal as to whether it is a reasonable and appropriate undertaking for the business.” Kroll found that BLX violated this principle and many other more technical SBA underwriting requirements.

Kroll said that BLX focused on generating a high volume of new loans and said it heard indications that loan officers were not encouraged to be careful. BLX made its money based on loan volume and left most of the credit risk to U.S. taxpayers under the SBA program. This caused them to emphasize the quantity rather than quality of loans.

Kroll found that several borrowers received their loans and never even made a single payment. BLX relied on independent loan brokers to generate volume. Kroll reported that former BLX employees, who worked as loan underwriters, said that most loan approval decisions were based solely on the information in the loan application paperwork provided by the loan broker without verification.

Kroll found possible fraud in loans originated in Michigan, New York, South Carolina, Georgia, and Virginia, where Matthew McGee, the convicted felon I discussed in Chapter 11, ran (and still runs) the Richmond office. Kroll said McGee was obviously overstepping SBA restrictions limiting his responsibilities after he was released from prison in 1997. Kroll said many of the loans out of the Richmond office defaulted.

When BLX hired McGee, the SBA approved the hire, provided that McGee not be involved in the financial affairs of the company or have credit approval responsibility. Kroll found that McGee routinely exceeded this authority by overseeing the acquisition, processing, and underwriting of all SBA loans in the Richmond office, often personally presenting them to the loan approval committee. Once approved, he would oversee the issuance of the new loans. Separately, the SEC had banned McGee from affiliating with an investment company. As Allied is an investment company, it appears that McGee violated his SEC ban because we have seen no evidence that Allied obtained an SEC waiver.

The fraudulent loans were pervasive and seemingly blatant. In one case in Georgia, BLX extended a $1.6 million SBA loan to Magnet Properties LLC, a motel company that operated a Howard Johnson Express Inn owned by Mangu Patel, who had already defaulted on another SBA loan in 1998. (Indeed, over the years, BLC/BLX would make several SBA-backed loans to Patel, many of which flouted agency lending rules and many of which defaulted. Kroll found that Patel himself often acted as the broker on some of these loans.) The new loan soon went into default, and BLX lost more than $1 million, three-fourths of which the SBA reimbursed on the taxpayer guarantee.

Kroll detailed problems with a number of other fraudulent motel loans in the South and a number of fraudulent gas station loans in Detroit and New York. Kroll found a motel loan where a month before the transaction the property had been “split,” separating the motel from the adjacent restaurant, administrative building and parking. BLX funded a loan based on the entire property, but had collateral for only the main motel. The owner put up a makeshift wooden fence to divide the property and sold the separated property free and clear.

In another example, BLX loaned $1.35 million in 2001 to Ryan Petro-Mart LLC, naming Amer Farran as the borrower and incorporated by Abdulla Al-Jufairi, a loan broker who brought many deals to BLX. We later learned that Abdulla Al-Jufairi (also spelled Al’Jufairi in some documents) and Pat Harrington, the head of the Detroit BLX office, were business partners. The tax assessment for the property was only $443,000, about $900,000 below the loan amount.