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) 📕

Meanwhile, Brickman continued digging into BLX’s loans. He discovered a large number of dubious shrimp-boat loans. In fact, the company became the major lender of SBA guaranteed loans in the shrimp-boat industry. The data showed that BLX made no shrimp-boat loans in 1998, but made 20 percent of all such loans in 1999. That number climbed to 58 percent in 2000 and 75 percent in 2001 and 2002.

The sudden and rapid increase in the percentage of loans was particularly suspicious because cheaper shrimp from fish farms, foreign competition, higher fuel prices, and falling shrimp prices hurt the industry operating out of the Gulf of Mexico. Moreover, SBA rules required shrimp-boat loans to have a certificate from the National Marine Fisheries Service (NMFS), indicating that the NMFS declined to provide assistance to the borrower but had no objection to the SBA’s providing a loan. However, the NMFS determined that it would not provide certificates due to the overcapacity of the industry.

Brickman obtained a representative letter from the NMFS to BLX, which read, “My management also expresses the opinion that none of the fisheries in the country needs additional capacity and no Government agency should be extending financing which increases harvesting capacity. In this regard, we will be unable to provide you with documentation of our consent to the proposed financing.” While other lenders responded by abandoning the industry, BLX stepped into the void and issued loans, despite the missing certificate. Over 70 percent of BLX’s shrimp-boat loans eventually defaulted, and most of these loans came out of the Richmond office of the convicted felon McGee.

Brickman found one case where BLX made a $1.1 million boat loan in 2002 to Hung Vu. Hoa Nguyen witnessed the loan. Hung Vu defaulted in 2004, and BLX bought the boat with a “credit bid” of $1,000. Brickman’s work indicated that the real value was about $300,000. BLX then made a $750,000 loan to Hoa Minh Nguyen on the same boat. The second loan allowed BLX to delay recognizing a loss and increased the liability to the U.S. taxpayer. (In an interview, Hung Vu indicated that he was a mechanic and never made any equity injection. In fact, the boat belonged to two of his uncles who already had financial problems on other boat loans.)

Brickman also found that BLX made a $480,000 SBA-backed loan to Master Chase Enterprises for two old shrimp boats in 2001. When the loan showed strain, BLX tried to defer the problem by making a second SBA-backed loan for $40,000. After the boats’ owners filed for bankruptcy in 2003, BLX repossessed the boats and sold them for a total of $60,000 in January 2004. Brickman estimated that once fees and other costs were figured in, the loans had a loss of about $500,000. He also noted that the SBA had not taken a charge-off on the $480,000 loan as of the end of 2006. This was typical of BLX: delay charge-offs in order to manipulate SBA lender statistics.

Brickman generated detailed and well-documented write-ups for every defective loan he found. He discovered abundant evidence of impropriety. He concluded that BLX violated many SBA policies, including making loans to borrowers who were already in default on debt to other lenders; not verifying equity injections; inflating collateral values; and using false or doctored bills of sale to support fictitious transactions.

Even when the SBA happened to find problems with BLX, it favored a “lender-friendly” approach. On November 4, 2004, SBA’s OIG provided BLX with a list of “paid in full” loans that had been improperly paid off with the proceeds of a new SBA loan. BLX responded on November 15, and conceded that the loans were ineligible and volunteered to repay the government for two of the loans. The SBA Loan Programs Division responded that it “. . . appreciated the lender’s offer to repay the guaranties . . .” but that it was imposing too harsh a penalty on itself and recommended a “repair” instead.

In one of the loans, Yogi Hospitality purchased a Ramada Inn in Petersburg, Virginia, from Host and Cook, Inc. in December 2000. The SBA loans to both entities were originated in BLX’s Richmond office, headed by McGee. In the documentation, BLX had failed to identify the loan as a change-of-ownership transaction or that there was an existing SBA loan to the seller. In response to the SBA’s suggestive e-mail, BLX decided not to reimburse the SBA for that loan and claimed the borrower had made all principal and interest payments for three and a half years until March 2004, when the borrower ran into financial difficulties.

In contrast, a subsequent report by the SBA’s OIG found that six months after funding, BLX granted a deferment so the borrower made no principal payments from June 2001 to July 2002 and during other periods. Further, “the lender also neglected to mention” that the loan was a $1.33 million second mortgage behind a $1.6 million first mortgage held by Richmond Bank, and also failed to mention the property had been appraised at $3.6 million at origination, but had been reappraised to only $940,000 in August 2004. The SBA loan was a complete loss.

Brickman and Greenlight filed a “whistle-blower” suit relating to the shrimp boat loans in December 2005 under seal, as required, so that the government can conduct a confidential investigation before notifying the defendants. Due to the fact that this litigation is currently on appeal, there are some aspects that I am not permitted to discuss at this point. As a result, I have limited the narrative and excluded parts of the chronology, documents, and interactions with the government. I don’t believe any of the excluded material is exculpatory to Allied or BLX in any way. But it is important for you to know that this discussion is not quite the full story.

Greenlight’s lawyer and I flew to Atlanta (where the case was filed) to meet with Justice Department lawyers and