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) 📕

the following items. First, the bank-lending environment for small business loans remains very competitive and, as a result, BLX continues to experience significant loan prepayments in its securitized portfolio. This has also had an effect on BLX’s ability to grow its new loan origination volume. Second, the Office of the Inspector General of the SBA and the Department of Justice have been conducting investigations into the lending activities of BLX and its Detroit office. These investigations are ongoing.

I was on an airplane when I read this. I think even the pilots heard my “OH MY GOSH!”

This disclosure was new and meant that they knew this was serious. Allied does not disclose bad news unless it was really bad news. The fact that Allied buried this disclosure in an obscure part of the 10-Q meant that management didn’t want anyone to notice it, but needed to provide legal cover so they could later say they had, indeed, disclosed the material development. Of course, the disclosure wasn’t where you would expect an important regulatory development. For example, it wasn’t under “Legal Proceedings.” Allied’s disclosure under Legal Proceedings continued to say that the investigations by the SEC and U.S. attorney in Washington primarily pertained to “portfolio valuation and our portfolio Company, Business Loan Express, LLC,” giving the misimpression that the investigations were about valuation rather than lending practices. A week had passed since the filing. Was I the first person to actually read page eighty-two? It was so obscure, even Brickman missed it.

I also pointed out the disclosure to Carruthers, who did a search of legal databases and found a number of indictments in Michigan. On March 16, 2006, a federal grand jury issued a four-count indictment against Mohammed Mustafa, Ahmed Qdeih, and Abdulla Al-Jufairi. The indictment described the fraud as follows:

Al-Jufairi was one of the principals of Global Construction, LLC, which did business as APCO Construction and Management (“APCO”). APCO was engaged in the renovation and construction of gas stations and gas-station mini-marts. . . . Additionally, Al-Jufairi had a friendly relationship with one or more employees of BLX, essentially acting as a loan broker for BLX.

Advance Auto Service Center, Inc. (“Advance Auto”) was a Michigan corporation owned by Mustafa, its president, and Qdeih, its secretary. Advance Auto purchased a gas station/convenience store business at 25025 Hoover, Warren, Michigan in approximately January 1999, financed by a promissory note with a ten-year term.

On or about March 15, 2001, Mustafa and Qdeih signed a formal application and related papers on behalf of Advance Auto for a $1.1 million SBA-guaranteed loan to be issued by BLX. The stated purpose of the requested loan was—$712,500 to be used for land acquisition (i.e. the purchase of the real property); $150,000 to be used for construction, repairs and renovations; and the balance applied to working capital, debt repayment, and closing costs. The borrowers were to contribute $37,500 toward closing costs; and $22,000 toward debt-refinancing. The total amount to be contributed by the borrowers, $129,500, represented the “owner’s equity injection” required by the SBA as a condition of issuing it’s [sic] guarantee of 75% of the loan. The loan was approved.

Al-Jufairi was the person who introduced Mustafa and Qdeih to BLX, and acted as an intermediary between BLX and Mustafa and Qdeih during the processing of the loan.

The indictment indicated the $129,500 owner equity injection had not been made.

The $150,000 loan disbursement intended as payment to APCO for work it had supposedly already done was not paid to APCO. Rather, the $150,000 loan disbursement check was deposited into the account of Qdeih’s brother-in-law, less a cash-out of $25,000 which was deposited into an account of Al-Jufairi and his wife.

The loan went into default, and on or about September 1, 2005, the SBA purchased its guaranteed 75% share with allowable interest, paying a total of $798,186.18 [to satisfy its guarantee].

On June 13, 2006, the same federal grand jury issued a four-count indictment against Wladimir Mizerni, Halina Mizerni, and Abdulla Al-Jufairi. This indictment related to the Ryan Petro-Mart fraud that listed Amer Farran, Al-Jufairi’s brother-in-law. As mentioned in Chapter 19, Farran had indicated he worked as an engineer at the Ford Motor Company. Notably, Farran was not indicted.

The indictment raised many of the same allegations as the earlier indictment. The equity injection of $240,000 had not been made on the $1.3 million loan. There were forged documents. The SBA paid a claim of $1,039,260.01. According to the SBA’s Web site, “Arrest warrants have been issued, and all three defendants are fugitives. It is believed that the part-owner and his wife have fled to Australia, and the loan broker has returned to his native Qatar.”

Also on June 13, 2006, the federal grand jury issued a five-count indictment against Roman Novatchinski, Wladimir Mizerni, and Al-Jufairi. This indictment related to Palace One Stop Shop. According to the indictment:

Although it was intended from the outset that Mizerni was going to be an equal owner of the gas station with Novachinski, Mizerni was not listed as a member of Palace One Stop Shop, L.L.C., and his name did not appear on any of the loan documentation because Mizerni already had an SBA-guaranteed loan for a different gas station and he would not have been eligible to receive another SBA-guaranteed loan.

The indictment also accused Novatchinski of falsely stating that he was a U.S. citizen, that he had managed a Shell gas station between 1990 and 1994 and that he claimed to have $430,000 of cash on hand and in the bank. None of this was true. Again, the $250,000 equity injection was not made, and there were fraudulent and forged documents. The SBA paid a claim of over $1 million for its guarantee on Palace One Stop Shop on November 6, 2002.

Also on June 13, 2006, the federal grand jury issued a three-count indictment against Falamarz Zahraie and Daryoush Zahraie. This indictment related to D&F Petro, Inc. This was one of the loans associated with Imad Deaibes, who defaulted on several loans that I discussed in Chapter