Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New Epilogue (34 page)

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 to the hotline, asking the office to audit six of the more suspicious USDA loans. After several weeks, Brickman had not heard back about his hotline complaint, so he sent an e-mail asking the USDA why it had not gotten back to him. David Lewis, a USDA official, called Brickman, but didn’t say much.

After not hearing anything for several months, through the FOIA we learned why the agency did not respond to the hotline complaint. “We are declining this as an audit matter due to lack of available staff,” the USDA wrote. “We are planning to conduct an audit of this lender’s activities in fiscal year 2007.” In other words, the agency didn’t have enough money in its current budget to determine if it was losing money.

One would think that when confronted with the Bill Russell audit, BLX would rush to pay-up and settle. Hardly. The Arkansas office sent an “Adverse Decision Letter” to BLX demanding repayment. BLX filed an appeal. A hearing was scheduled on July 25, 2006, on Long Island, New York. BLX had made an FOIA request for information and appeared to be trying to delay things.

I sent Greenlight’s general counsel to the hearing. Each side flew four people up from Arkansas and Washington. A USDA hearing officer came in from Connecticut the night before with twelve boxes of documents. The gathering lasted five minutes. The parties pre-agreed to a sixty-day delay. The government agreed to withdraw its adverse finding for sixty days to negotiate a settlement.

Then we learned that the auditor who wanted to do the audit left the USDA for a position in another government agency. He signed off with the “hope” that his proposed audit of BLX will go forward in October/November.

In November 2006, the Arkansas USDA office sent a fresh draft demand letter for the Russell Oil loan to be repaid to the national office. Brickman heard from the Arkansas office that the national office wanted to “do a little housekeeping and close the file.” Brickman responded, “You mean they want to sweep this under the rug?”

“Exactly right,” the USDA rep said.

In a follow-up conversation a couple of days later, Brickman expressed concern about the closing of the file. The USDA rep said, “This is not the only case that obviously they have problems with us.”

“They is BLX or USDA?” Brickman asked.

“BLX has other loans we have guaranteed that—” the USDA rep replied.

“Look odd?” Brickman said.

“Yeah. And there are some issues that I wish I were free to discuss that would make your skin crawl.”

A few minutes later Brickman asked, “Why do you think Washington, D.C., is putting pressure on you to hide or not do anything? The SBA is doing the same thing.”

“I don’t know,” the USDA rep responded. “We are just employees. This is off the record.” (When the rep was subsequently approached for permission to use the material for this book, the rep not only granted permission, but sounded pleased a book was being written about this.) The USDA rep continued:

Somebody is in bed with them. Okay. Who did they get in bed with? And we don’t know that. We don’t have a clue as to if there is or not. The questions that came back to me when we sent the letter out back to the national office had nothing to do with the facts of the letter. They asked about a couple of internal things. And it’s just, I guess, so hard to prove and has a chance of receiving so much publicity you know if they could just get it to go away, it just goes away. I just don’t know all the answers to that.

Later, the USDA rep clarified that the internal things meant, “We are getting criticized. And I was told from the get go that is what would happen. The first person to get criticized would be me.”

CHAPTER 26

The Smell of Politics

The SBA failed to act on BLX, and, worse, kept renewing the company’s status as a Preferred Lending Provider. The SBA pushed back hard on our whistle-blower complaint. Though the investigations have been open a long time and the fraud is obvious, the U.S. attorney in Washington, D.C., had not yet acted. Further, the SEC allowed Allied to become a bigger problem by routinely approving registration statements for new stock sales. It doesn’t make sense—until one reviews Allied’s political connections.

Allied is based in Washington. The headquarters is on Pennsylvania Avenue. It was founded by George Williams Jr., who began his career in the FBI. As mentioned earlier, Sweeney worked at the SEC. Lawrence Hebert, who sits on Allied’s Board, was the CEO of the politically connected Riggs National Bank until its money laundering for, and illicit assistance to, the Chilean dictator Augusto Pinochet caused scandals, which induced Riggs’ sale to PNC Bank in 2005.

Walton was a director of Riggs from 1999 until its sale. J. Carter Beese Jr., an SEC commissioner from 1992 to 1994, was another director of Riggs and ran its venture funds.
Forbes.com
reported he was a senior adviser to Allied Capital. He appeared as a representative of Allied at an SEC roundtable in 2004. Ironically, Beese Jr. was known to be particularly active on corporate governance issues at the SEC. He was named by a federal judge and the SEC to be trustee of a $250 million stock fund to be distributed to victims of accounting fraud.

In July 2004,
The Hill
, a newspaper that covers Congress, reported that some bankers were encouraging their colleagues to contribute to Senator John Kerry’s presidential campaign because of a proposal by President George W. Bush to cut all subsidies to the SBA’s 7(a) program. As a senator, Kerry was the ranking minority member of the Senate Committee on Small Business & Entrepreneurship, which oversees the SBA. In 2007, he became chairman of the Committee, when the Democrats took control of the Senate.
The Hill
article reported that Deryl Schuster of BLX “sent an e-mail to industry members encouraging them to contribute to Kerry’s campaign. ‘Just think what the SBA loan programs puts [sic] in our pockets!’ wrote Schuster, who lives in Kansas.”
The Hill
article continued:

Schuster also wrote that the head of Business Loan Express, Robert Tannenhauser, was a member of Kerry’s fundraising committee and was trying to raise more than $100,000 for the Democrat’s effort to defeat Bush.

“We would like to get at least the $100,000 mark, which would give the 7(a) industry incredible visibility with Mr. Kerry and his campaign committee,” Schuster wrote. “With Mr. Tannenhauser at the helm of this effort no group will receive more credit than the SBA lending industry.”

Schuster himself was a former SBA district and regional manager. I wondered whether the presence of a former senior SBA official at BLX impacted the agency’s oversight of the lender.

Once the SEC investigation of Allied started, Allied accelerated its political efforts. Starting in September 2004, Allied added the following to the corporate description it includes at the bottom of every press release: “In serving our shareholders, we help build U.S. companies and create and sustain jobs. The company’s private finance portfolio includes investments in over 100 companies with aggregate revenues of in excess of $11 billion, supporting more than 100,000 jobs.” The message to authorities and politicians couldn’t be clearer: If you put us out of business, 100,000 people will lose their jobs. Of course, that isn’t what would happen. The companies Allied invests in would carry on their work. Allied is not a large employer, with only 170 employees at the end of 2006.

Allied created a political action committee (PAC) in October 2004, four months after the company announced that the SEC was investigating it. By the end of 2005, the PAC had $116,000. The contributors were mostly Allied employees, including officers, directors, and their families. Joan Sweeney was in for $7,500 in 2004 and 2005, and Penni Roll and her husband contributed $10,000. Robert Long, the Allied executive who had lunch with me at the investor day meeting in 2002, contributed $12,500. Most of the PAC money was going to senators and members of Congress who oversaw the SBA, including Senator Olympia Snowe, the chairwoman of the Senate Committee on Small Business & Entrepreneurship.

Bill Walton also contributed $10,000 to the PAC during those two years. But he was also busy elsewhere. From 2000 to 2005, Walton made a total of $116,000 in political contributions. He gave money to President Bush, the Republican National Committee, and the National Republican Senatorial Committee, which received $35,000, the largest contribution of his that turned up in the records. Republicans got most of his money. Senator Mel Martinez of the Banking Committee got $3,000; Congressman Donald Manzullo, chairman of the House Committee on Small Business, got $1,000; Sue Kelly, another member of that committee, got $5,000; Senator Snowe received $1,000; Senator Jon Kyl of the Senate Finance Committee got $2,000; and Congressman Michael Oxley, chairman of the Committee on Financial Services, got $3,000. Seven members (six Republicans and one Democrat) of the Senate Committee on Small Business & Entrepreneurship received a total of $9,000, and a PAC set up for the possible 2008 presidential run of George Allen, a member of the committee, got $5,000. The lone Democrat was Evan Bayh, who received $2,000, with another $5,000 going to his PAC.

Separate from the PAC, Tannenhauser, his family and other Allied employees, including Sweeney, contributed to the campaign of Nydia Velázquez, the top-ranking Democrat of the House Small Business Committee and a member of the Financial Services Committee. She often complains that the SBA doesn’t initiate loans fast enough to help small businesses. Tannenhauser and his family, including a son and daughter, made more than $266,000 in political donations from 2000 to 2006. Most of it went to Democrats, including $20,000 to Velázquez. I’m sure the focused giving to elected officials who oversee the SBA is no coincidence.

In March 2005, after the U.S. attorney launched a criminal investigation, Allied added Marc Racicot to its board of directors. His resume: former head of the Republican National Committee; former chairman of the Bush/Cheney Reelection Committee; and former governor of Montana. In the spring of 2006, the company added Edwin L. Harper, another well-connected player, to its board. He presently is a senior vice president for public affairs and government relations at Assurant, a large specialty insurance company. Previously, he worked in the White House for Presidents Nixon and Reagan. Allied was obviously stacking the political deck to head off the investigations.

Remember the “bad cop” SEC lawyer Mark Braswell, who aggressively questioned me about the purpose of my speech and relationships with other fund managers? He left the SEC four months later, in September 2003, to become a partner with the Venable law firm in Washington. According to the Venable’s press release, he was to “concentrate on corporate investigations, white collar & securities litigation and compliance.” Braswell registered as a lobbyist for Allied in October 2004. Braswell was not generally a lobbyist. In fact, we couldn’t find a record of any other lobbying clients. How could it be proper, or even legal, for a lawyer who obtained confidential material from us, including e-mails, trading records and testimony about Allied, to leave the government and go work for Allied while our dispute was ongoing? (Allied was no stranger to lobbying. From 2001 to 2006, the company spent more than $1 million on lobbyists, including $60,000 to Venable.)

Greenlight’s lawyer sent a letter to the Office of Inspector General (OIG) of the SEC outlining the Braswell situation and explaining how it violated established ethics rules. In December 2006, the SEC’s OIG was heavily criticized for not investigating the accusation of former SEC enforcement attorney Gary Aguirre that the SEC impeded him from fully investigating possible insider trading by Pequot Capital Management based on possible tips from Morgan Stanley CEO John Mack. It doesn’t appear that they have done any better on the Braswell issue. To date, the SEC has taken no action.

I told Floyd Norris, the respected business columnist for
The New York Times
, about Allied hiring Braswell. He called Allied to hear its side. Allied’s response was that Braswell was not in the room during my SEC testimony!

I had to pinch myself. I scrambled to make sure I was not mistaken. I got a picture of Braswell from his new firm’s Web site, and, yes, he was the same guy in the SEC interview room. Greenlight’s lawyers also went through their notes and confirmed Braswell’s attendance. We asked the SEC for a transcript of my testimony, which removed any remaining doubt.

Norris wrote a column on July 15, 2005, describing Allied’s recent decision to stop reporting BLX’s summary financials and its hiring of Braswell as a lobbyist. Norris wrote:

Calling Business Loan Express, and most of Allied’s other operations, “private companies” strains credulity. In reality, they are subsidiaries of Allied, which owns all or nearly all of their stock. But Allied treats them as investments and discloses as little information as it can. It can do that because it is classified as a business development company.

Companies that hide facts invite suspicion. In 2002, Greenlight Capital, a hedge fund run by David Einhorn, published a report questioning Allied’s accounting. Mr. Einhorn soon found himself being questioned by enforcement lawyers from the Securities and Exchange Commission, and he blames Allied for complaining about him.

One of the SEC lawyers doing the questioning, Mr. Einhorn says, was Mark K. Braswell, who is now a partner in the Venable law firm in Washington. Last fall, after Allied disclosed the SEC had started an informal inquiry into Allied’s books, he registered as a lobbyist for Allied. (© 2005,
The NewYork Times Company.
Reprinted with Permission.)

Norris said that Braswell wouldn’t tell him what kind of work he was doing for Allied, but said “he did not represent it in the government investigations and had made no inappropriate disclosures to Allied about SEC cases. He said he followed all ethics rules.”

Norris also noticed the curious shareholder behavior. They didn’t seem to care that Allied was withholding information or anything else they did as long as the distribution kept coming. “The shareholders do not appear bothered by the fact Allied keeps the financial results of its wholly owned subsidiaries secret,” he wrote. “The question is whether the SEC will do anything about Allied’s decision to hide even more information from its owners.” Allied’s stock, which traded around $29 a share at the time, did not react to Norris’s story.

Meanwhile, Allied gave the appearance of cleaning up its act. After a few years of gradually writing down the problems created in the recession and with the benefit of improved conditions in the capital markets, Allied had fewer absurd valuations, such as loans to bankrupt companies carried at cost. Allied improved the optics of its valuation process. First, it promoted a long-standing senior executive to the new title of “chief valuation officer.” Obviously, promoting an existing manager, who might have been part of the problem, was unlikely to solve the problem. Second, it hired Duff & Phelps and JMP Securities to provide “valuation assistance.”

Valuation opinions are often for sale on Wall Street. For obvious reasons, the “valuation assistance” Allied sought was far less than appraisals or fairness opinions for its investments. The valuation firms were not retained to perform due diligence on the companies, visit them, speak to their managements and so forth in order to recommend a value to Allied. According to Duff & Phelps’ standard engagement letter, it “will not be responsible for determining Fair Value.” Its role “is limited to being an advisor and providing additional support to your existing valuation policy and process as well as providing negative assurance with respect to the Fair Value determined by management for each investment.”