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Office of Inspector General
Small Business Administration
February 1999 Update
Business Loans employees of proper procedures. The Acting
District Director agreed.
Audit Issued on Section 7(a) Loanmaking by
Charlotte District Office Finds Non- President of Washington Rehabilitation Clinic
Compliance in Some Instances. As part of a Indicted for Bank Fraud and Making False
nationwide audit, the Auditing Division issued Statements. The president of a rehabilitation
a report on the processing, disbursing and use clinic in Seattle, Washington, was indicted on
of proceeds relating to 30 Section 7(a) loans February 4, 1999, on two counts of bank
assigned to the North Carolina District Office. fraud, one count of making material false
The auditors determined whether 22 required statements to SBA, one count of making a
SBA procedures, designed to reduce risks, false claim of citizenship, and three counts of
were followed. The auditors found there was making false statements to a Federally
non-compliance with at least 1 of the 22 insured lender. In 1994, the man had received
procedures in 14 of the 30 loans. Non- an $80,000 SBA-guaranteed loan to purchase
compliances included: approval of a $71,000 chiropractic equipment for his clinic. The
loan to an ineligible applicant for an ineligible OIG’s joint investigation with the Federal
purpose, lack of Internal Revenue Service Bureau of Investigation (FBI) found that the
(IRS) tax verification (2 loans), lack of verifi- man made false statements to obtain the loan
cation of use of proceeds (7 loans), lack of and later converted loan proceeds to his
equity injection verification (2 loans), failure personal use. In addition, the investigation
to obtain a Statement of Personal History (2 found that, on his SBA loan application and on
loans), missing settlement sheets (2 loans), and his applications to obtain three Federally
lack of compensation agreements detailing guaranteed student loans, he falsely claimed
professional fees (2 loans). These non- that he was a U.S. citizen. Agents of the OIG,
compliances led to 3 loans with deficiencies: 1 the FBI, and the Immigration and Naturaliza-
loan was ineligible, 1 loan's proceeds were not tion Service (INS) arrested him in 1998 based
spent as approved, and 1 loan needed to on a warrant issued in 1984 by the U.S.
complete the IRS verification process. The District Court, District of Kansas. The out-
auditors made recommendations to correct standing arrest warrant did not appear during
deficiencies (the ineligible loan was know- an earlier check of the man’s criminal history,
ingly approved by SBA and therefore cannot but was discovered in his INS file. The war-
be corrected) and to remind lenders and SBA rant was based on his 1984 indictment for
making a false claim of citizenship; making guilty to all five counts on February 8,
false statements to obtain a Social Security 1999. In the plea agreement, the loan bro-
card; fraud and misuse of visas, permits, ker admitted his role in the submission of
and other documents; making false state- four SBA-guaranteed loan applications
ments to the U.S. Department of Education; containing altered tax returns. The loans
and misuse of a Social Security number. totaled $2,460,000, and losses to SBA and
(Updated from the October 1998 Update.) a participating lender. He also admitted
failing to report the firm’s gross receipts,
California Tax Preparer Pleads Guilty to for 1991 and 1992, resulting in a total tax
Conspiracy and Tax Evasion. A tax preparer in loss of approximately $520,000. The bro-
Pasadena, California, pled guilty on February kerage firm specialized in financing the
11, 1999, to one count of conspiracy to purchase of gas stations through the bank
defraud the Internal Revenue Service and and may have brokered as many as 160
eight counts of tax evasion. The OIG had been SBA-guaranteed loans having an aggre-
asked to join a criminal investigation already gate value of some $60 million. The
under way by the IRS and the FBI, based upon OIG’s examination of the loan files dis-
information that the tax preparer may have closed evidence of such fraudulent activi-
been responsible for the preparation of altered ties as false personal financial statements,
tax returns submitted to financial institutions false tax returns, and manipulation of
and to SBA on behalf of clients who had documents to falsely show that the bor-
received SBA-guaranteed loans. The OIG rowers made substantial initial cash injec-
reported the criminal prosecutions of two of tions. The OIG’s investigation of the loan
these clients last year. The investigation brokerage firm’s connection to the failure
confirmed that the "copies" of their Federal tax of the banking institution is being con-
returns, submitted with their SBA loan appli- ducted jointly with the IRS and the FBI.
cations totaling more than $1,060,000, had
been altered from those submitted to the IRS 2 The former owner of a gas station in
to substantially overstate their incomes. These Fontana, California, pled guilty on Febru-
discrepancies formed the basis for a search ary 8, 1999, to three counts of making
warrant that was executed on the tax preparer's false statements to a Federally insured
business. The charges to which he just pled lender. In return, the Government agreed
guilty were a direct result of the evidence to dismiss the other three counts on which
gathered during the search. The investigation he had been indicted. The OIG’s joint in-
is continuing. vestigation with the FBI disclosed that
man submitted a false Source of Cash In-
Investigation of California Loan Brokerage jection letter, a false personal financial
Firm Yields Further Results. New actions have statement, a false SBA settlement sheet,
resulted from an ongoing investigation of an and altered individual income tax returns
Inglewood, California, loan brokerage firm. for 1987-1989, with his application for a
$1,000,000 SBA-guaranteed loan. He
1 The principal owner of the loan broker- subsequently defaulted on the loan, leav-
age firm was charged in an information on ing an unpaid balance of $968,664. (Up-
February 2, 1999, with four counts of dated from the July 1998 Update.)
making false statements to a Federally
insured financial institution and with 3 A plumber doing business in Los An-
one count of subscribing to a false geles, California, was sentenced on Feb-
statement on a tax return. He pled
Page 2 February 1999 Activity Update of the Office of Inspector General
ruary 8, 1999, to $2,880 restitution to the bank or SBA that he owed his father and
SBA and 3 years probation, with the first two realtors a total of about $240,000 in
8 months to be served in halfway house connection with his purchase and sale of a
detention and home detention. He had prior business in southern California. He
pled guilty to one count of making a false defaulted on the SBA-guaranteed loans after
statement to a Federally insured lender. making only a few payments and he has since
The man submitted altered individual in- filed for both personal and corporate bank-
come tax returns for 1988-1990, as part of ruptcy. This investigation was initiated based
his application for a $500,000 SBA- on a Suspicious Activity Report filed by the
guaranteed loan. He subsequently de- lender.
faulted on the loan, leaving an unpaid
principal balance of $440,595. (Updated New York Businessmen Sentenced for Mail
from the June 1998 Update.) Fraud and Conspiracy. Three Long Island,
New York, businessmen who had each pled
4 A man who formerly operated an Ori- guilty to one count of mail fraud and one
ental rug business in Beverly Hills, Cali- count of conspiracy were sentenced in Octo-
fornia, was sentenced on December 7, ber 1998. Their sentences had been sealed and
1998, to 4 months incarceration, 4 months so were not reported until now. The business
home detention, 5 years supervised re- manager of an East Islip, New York, chiro-
lease, and $677,000 restitution to SBA. practic and physical therapy center was
He previously pled guilty to one count of sentenced to 5 months imprisonment. The
fraudulent receipt of money from a chief financial officer of an affiliated therapy
bank transaction. The man falsely repre- provider was sentenced to 3 months impris-
sented that the purpose of his $1,000,000 onment and a $5,000 fine. Lastly, the owner of
SBA-guaranteed loan from a bank was to the 2 concerns and another therapy provider
purchase rug inventory, when he actually was sentenced to 6 months imprisonment.
intended to (and ultimately did) use the Each defendant was also sentenced to 3 years
loan proceeds to pay debts associated with supervised release. The OIG’s investigation,
a real estate business he owned and to de- conducted jointly with the FBI, disclosed that
velop real estate. Neither expenditure was 2 of the men mailed reimbursement claims to
an eligible use of proceeds of an SBA- insurance companies for physical therapy that
guaranteed loan. (Updated from the June was never provided to patients. The 2 men also
1998 Update) forwarded fraudulent financial statements to a
California Saloon and Dance Hall Operator non-bank participating lender in January and
Indicted for Making False Statement. The May 1993 with the intent to obtain a $750,000
former president of a saloon and dance hall in SBA-guaranteed loan. Because the loan was
Durango, Colorado, was indicted on February never disbursed, neither SBA nor the lender
9, 1999, on one count of making false state- incurred a loss. Between 1988 and mid-1994,
ments to a Federally insured bank and one the third man, a doctor, continually misrepre-
count of making false statements to SBA. sented that a licensed physical therapist or
The charges, resulting from the OIG’s joint physician was rendering or overseeing his
investigation with the FBI, were regarding two patients’ physical therapy care. He caused
SBA-guaranteed loans, totaling $780,000, false claims to be mailed to insurance carriers
which his business received from the partici- regarding those services and conspired in the
pating bank lender in 1996. The investigation submission of the false financial statements to
determined that the man failed to disclose to
Activity Update of the Office of Inspector General February 1999 Page: 3
the lender. (Updated from the January 1996 Financial Statement on which he failed to
Update.) disclose several debts and overstated his
income. During the time period he was sub-
Mississippi Businessman Pleads Guilty to mitting the false loan documents, he had been
Bank Fraud. The owner of a trucking accesso- arrested and was awaiting trial for misappro-
ries business in Long Beach, Mississippi, pled priating Drug Abuse Resistance Education
guilty on November 24, 1998, to one count of funds in Carver County. He was ultimately
bank fraud. In return, the Government agreed convicted of these charges as well and is
to dismiss one count of misappropriation of currently incarcerated in a Federal prison.
SBA collateral and the other three counts of (Updated from the September 1998 Update.)
bank fraud on which he had been indicted.
The business obtained a $100,000 LowDoc *******
loan in 1996. The investigation found that the
man removed, disposed of, and/or converted
Disaster Assistance
to his own use various items of business
inventory that were pledged as collateral for
the SBA-guaranteed loan. He filed for bank- Investigation of North Dakota Private
ruptcy, leaving SBA with a potential loss of Business School Yields Further Results.
$87,000. The investigation also determined
that the man double-billed customers’ credit 1 The manager and prospective purchaser
cards, issued checks to several banks without of the private business school was in-
sufficient funds to cover them, forged signa- dicted on January 26, 1999, on 10 counts
tures to cash checks, and deposited closed (wire fraud, money laundering, making
account checks for a total bank fraud loss of material false statements, and failure to
$49,077. The OIG joined this investigation at refund unearned Federal student aid
the request of the FBI. (Updated from the July funds) in addition to the three counts
1998 Update.) (conspiracy and making false state-
ments to SBA) on which she had previ-
Former Deputy Sheriff in Minnesota Pleads ously been indicted. The woman was
Guilty to Wire and Bank Fraud. A former managing, and in the process of purchas-
Chief Deputy Sheriff of Carver County, ing, a private business school in Grand
Minnesota, pled guilty in U.S. District Court in Forks, North Dakota, when the Red River
Colorado on February 19, 1999, to one count flooded it in April 1997. She and four co-
of wire fraud and one count of bank fraud. defendants were previously indicted for
In return for his plea, the Government agreed perpetrating a fraud scheme against SBA
to dismiss the other six felony counts on which to obtain a $122,900 disaster loan for the
he had previously been indicted. The man had business school. The superseding indict-
personally guaranteed a $100,000 SBA loan ment alleges that she also 1) faxed
through a participating non-bank lender for a fraudulent Borrower’s Progress Certifica-
mail box franchise in Denver to be owned by tion forms to SBA, 2) laundered SBA dis-
his wife. A check disbursing $80,000 of the aster loan funds through the bank account
loan proceeds was issued for the purchase of of another school she owned, 3) failed to
this franchise. The OIG’s investigation re- make required student loan refunds of
vealed that the man forged an endorsement on about $543,765, and 4) made false state-
the check and used the funds for his personal ments to the U.S. Department of Educa-
benefit. He also submitted a falsified Personal tion (ED). This school and the five other
private business schools owned by her
Page 4 February 1999 Activity Update of the Office of Inspector General
closed on or about January 1998, and no January 25, 1999, to 6 months home
payments were made on this disaster loan. confinement with electronic monitoring, 3
The investigation was a joint effort by the years probation, 250 hours community service,
SBA/OIG, the ED/OIG, and the IRS and a $150 assessment. He previously pled
Criminal Investigations Division. (Up- guilty to 1 count of conspiracy and 2 counts
dated from the September 1998 Update.) of making material false statements to
influence SBA to disburse a $288,500 disaster
2 The former comptroller of the private loan. The amount of the loan was based on
business school was sentenced on Febru- representations to SBA as to what it would
ary 25, 1999, to 6 months home confine- cost the company to replace an airplane
ment, 3 years probation, and 100 hours destroyed by Hurricane Andrew. (Updated
community service. The account manager from the October 1998 Update.)
for a computer store in Fargo, North Da-
kota, was sentenced on February 26, *******
1999, to 50 hours community service, 2
years probation, and a $1,000 fine. The Small Business Investment Companies
comptroller of the school had pled guilty
to conspiracy to defraud SBA, and the Former Rhode Island Banker Pleads No
computer store official had pled guilty to Contest to Filing False Document. On March
mail fraud. A nine-count indictment had
1, 1999, a former bank official pled no contest
charged that the two men and three other in Rhode Island Superior Court to one count of
defendants participated in a scheme to
filing a false document and agreed to volun-
obtain the loan after the Red River tarily contribute $10,000 to the Rhode Island
flooded the school in 1997. According to
Violent Crimes Indemnity Fund. He had been
the indictment, the scheme included false vice president and part owner of a Rhode
statements that the business school had
Island bank and the principal of a Newport
purchased $91,372 worth of computers Rhode Island shipyard. Both businesses are
following the flood. (Updated from the
now defunct. He was indicted in 1994 on
December 1998 Update.) charges that he engaged in a racketeering
enterprise and obtained money under false
California Modeling and Talent Agency pretenses. The OIG’s joint investigation with
Owner Sentenced for Making False State-
the Rhode Island State Police disclosed that
ments. The owner of a modeling and talent the man had borrowed a total of $300,000
agency in Los Angeles, California, was
from two small business investment compa-
sentenced on February 8, 1999, to 5 years
nies under the pretense that the loan proceeds
probation, 2,000 hours community service, and
were to be used by the shipyard. In fact, they
$68,117 restitution to SBA. He had pled guilty
were diverted to the bank and investment
to two counts of making material false
bank. The FBI referred this matter to the OIG.
statements to SBA. (Updated from the
The matter was originally presented to the
October 1998 Update.)
U.S. Attorney’s Office; however, they deferred
prosecution to the State. (Updated from the
Owner of Florida Air Charter and Cargo
May 1994 Update.)
Transport Company Sentenced for Conspiracy
and Making Material False Statements. The
owner of a Miami, Florida, air charter and air *******
cargo transport company, was sentenced on
Activity Update of the Office of Inspector General February 1999 Page: 5
Former Owners of Section 8(a) Firm Settle
Agency Management and Financial Civil Fraud Case. The former owners of a
Section 8(a) company denied liability but
Activities
agreed on February 23, 1999, to pay the
Government $375,000 to settle findings that
Former SBA Job Applicant Debarred from
they violated the False Claims Act. The firm
Any Federal Employment Due to False
had applied to participate in the Section 8(a)
Statement. A man who in the summer of 1997
program in September 1993 and was approved
had applied for employment with SBA’s
in June 1994. Allegations were subsequently
Office of Financial Operations, Denver,
received that one of the owners had lied about
Colorado, was debarred on February 4, 1999,
his personal financial condition. An SBA/OIG
from competing in an examination for, or
audit revealed that one of the owners exceeded
accepting appointment to, any position with
the Section 8(a) personal net worth limit. The
the Government. In addition, the decision
OIG’s investigation confirmed that the owner
issued by the Office of Personnel Management
had submitted false statements to SBA and
(OPM) based on evidence provided by the
misrepresented his personal financial
OIG canceled any Federal job applications he
condition when he reported investment
previously submitted. The debarment will
property as his personal residence. To have
remain in effect for 4 years from the date on
accurately reported the property would have
which OPM’s review of the matter began. The
disqualified him as a Section 8(a) participant.
man previously pled guilty to one misde-
In February 1998, the matter was presented to
meanor count of making a fraudulent de-
the Civil Division of the U.S. Attorney’s
mand for wages by making false statements in
Office with jurisdiction over the matter. On
the application he submitted to SBA. The
December 18, 1998, the AUSA sent the
OIG’s investigation determined that, in
owner’s attorneys a demand letter and a draft
applying for a Financial Specialist position,
complaint for relief for the alleged violations.
the man had failed to disclose five occasions
The $610,000 sought therein was triple the
on which he had been arrested and/or impris-
amount of profits earned on the firm’s Section
oned. In addition, he falsely stated that he had
8(a) contracts, plus a $10,000 penalty. In
received two Bachelor of Science degrees and
March 1998, the owners sold the firm and
a Master’s degree and that he was a Certified
voluntarily withdrew from the Section 8(a)
Public Accountant. He also represented that he
program.
had not been fired from a job, when in fact he
had been fired by another Government agency Editor’s Notes:
for submitting a falsified job application. The
OIG initiated the investigation based on a The following identifies the use of adjectives in
referral from SBA’s Office of Human Re- these Updates to describe tax returns fraudu-
sources. In the fall of 1997, after the OIG’s lently submitted in support of loan applications:
initial inquiries confirmed that certain state- Fictitious tax returns: The applicant submits
ments in his application were false, SBA “copies” of tax returns never filed with the IRS.
withdrew the job offer previously made.
(Updated from the August 1998 Update.) Altered tax returns: The applicant submits altered
copies of tax returns actually submitted to the
IRS.
*******
Bogus tax returns: The applicant submits tax
returns containing false information to both the
Minority Enterprise Development IRS and SBA.
Page 6 February 1999 Activity Update of the Office of Inspector General
Most audit and inspection reports can be found
on the Internet at:
WWW.SBAONLINE.SBA.GOV/IG/REPORTS.HTML
Other IG related material can be found at:
WWW.IGNET.GOV
The Activity Update is produced by the
SBA/OIG, Phyllis K. Fong, Inspector General.
Comments or questions concerning this update or
request for copies of OIG audits, inspections, or
other documents should be directed to David R.
Gray, SBA/OIG, 409 Third Street, SW, Washing-
ton, DC, 20416-4110.
Telephone number (202) 205-6580
FAX number (202) 205-7382
If you are aware of suspected waste, fraud, or abuse
in any SBA program, please call the OIG Fraud
Line.
OIG FRAUD LINE (202) 205-7151
in Washington, DC metropolitan area
TOLL-FREE FRAUD LINE
(800) 767-0385
Activity Update of the Office of Inspector General February 1999 Page: 7
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