Fraud Friday – SBA Moves to Block SEC Payments to Small Business Capital Investors


December 20, 2013

By Bob Coleman
Editor, Coleman Report

Fraud Friday – SBA Moves to Block SEC Payments to Small Business Capital Investors Citing Loan “Irregularities”

After 18 months, the SEC receiver for Mark Feather’s Small Business Capital has proposed an initial payment of $19 million to the investors – a little less than 50% of the their investments.

However, SBA has filed a claim for $23 million, wiping out the proposed payout. The claim is a contingent liability from the company’s SBA 7(a) loan portfolio of $2.7 million and the 504 FMLP loan portfolio of $21.4 million.

Here are specific SBA 7(a) loan “irregularities” cited to the Court:

$ 477,000 – No evidence of lien position

$1.1 million – Borrower used approximately $49,000 to pay delinquent property taxes. Use of proceeds for this purpose not justified in Credit Memorandum and not authorized in Loan Authorization. Borrower is also subleasing 72% of the premises which does not appear to meet SBA occupancy percentage requirements. Additionally, appears loan was used to refinance debt where the prior lender was in a position to sustain a loss, contrary to SBA requirements.

$344,000 – Memorandum in file indicates that insurer declined to issue life insurance and reason for decline was confidential. No justification for waiver of life insurance found in file.

$250,000 – It appears the borrower used approximately $250,000 of the loan proceeds to pay off a home equity line of credit. No verification that proceeds were used for business purposes.

$30,000 – $30,000 in loan proceeds wired to owners’ individual checking account. No verification that proceeds were used for business purposes

$429,000 – Collateral property appears to have environmental contamination and no indemnification agreement obtained.

We’ll cover the SBA 504 loan “irregularities” next week.

More interesting tidbits from the Receiver. In a recent court filing he sheds light on the proposed sale of the SBLC license and loan portfolio.

The receiver writes, “I am currently in discussion with the SBA and believe it is likely the SBA’s contingent claim will be satisfied through a sale of 7(a) and 504 loan portfolios. I anticipate the buyer of each portfolio will assume any and all liability to the SBA arising from such portfolio as part of the purchase.

“I have been working with the SBA over the last six months to agree on procedures for the sale of the loan portfolio and the lending license. Much of this time has been spent waiting for the SBA to provide proposed procedures. As soon as an agreement is reached, I will seek Court approval of the sale procedures.”

See SBA’s claim here