Small-business | Fox Business | July 18, 2020
“Last November, a federal judge ordered an asset freeze against a California company that the Federal Trade Commission accused of pretending to be working with the Education Department and promising student-loan debt relief that never materialized.
Six months later, the company, Arete Financial Group, got a lifeline from the federal government’s Paycheck Protection Program. Arete, which the FTC said helped cheat borrowers out of at least $43 million, received as much as $1 million to help keep its operations afloat, according to Small Business Administration figures disclosed earlier in July. Company executive Carey Howe has denied the FTC’s allegations in court. He declined to comment on the case or the PPP loan.
The loan reflects in part the government’s push to quickly lend more than $650 billion to businesses of all sorts based on an honor system that took companies’ claims at face value and offered the promise of loan forgiveness.
That approach undoubtedly sped up aid to small businesses in need of a lifeline. But it also benefited borrowers with troubled pasts, including criminal convictions, civil complaints and investigations of wrongdoing by owners or businesses themselves, according to a Wall Street Journal review of hundreds of loan recipients.
Among the recipients the Journal found:
* A Missouri televangelist and a Texas multilevel marketing company that were each warned by regulators about allegedly touting fake coronavirus treatments.
* A Christian university based in California that pleaded guilty to a felony charge related to a $35 million money-laundering operation.
* A private-equity firm accused by investors and a state securities regulator of running a Ponzi scheme.
* A San Francisco construction engineering firm whose chief executive was indicted for allegedly bribing a city official to obtain a contract it wasn’t qualified to receive.
Run-ins with the law, whether civil or criminal, weren’t an automatic disqualification from the program. The SBA asked loan applicants to certify they weren’t engaged in any illegal activity when they sought the aid and to answer questions about past criminal indictments and convictions by business owners.
Key disqualifying factors were whether owners still had stakes in the business and when the alleged crimes and indictments took place. That left plenty of room for companies with troubled pasts or questionable business practices to obtain aid, the Journal’s review suggests.
“It is very hard to create the situation that will catch every one of the tricky players,” said Karen G. Mills, who headed the SBA under President Obama from 2009 to 2013. The result is that “some bad actors who should not have gotten the money put their hands in the pot.”
Ms. Mills added that the program is still effective in saving small businesses and that disclosure of borrowers’ names is crucial to ensuring that the loans reach their intended recipients. (Dow Jones & Co., publisher of The Wall Street Journal, has joined a lawsuit to force the SBA to disclose all borrowers’ names.)
The Government Accountability Office said in June that the PPP loan program faces a significant risk of fraud because of the number of loans approved and limited safeguards
The SBA distanced itself from the loan-approval process when it released a partial list of loan recipients earlier this month. “A small business’s receipt of a PPP loan should not be interpreted as an endorsement of the small business’s business activity or business model,” the agency said at the time.
An SBA spokeswoman said that all loans are subject to review and that those over $2 million will automatically be reviewed for compliance.
The loans were made by banks, which fronted the cash under a government guarantee for 100% of the balance. The SBA asked loan applicants to certify that they weren’t engaged in any illegal activity when they sought the aid and to answer questions about past criminal indictments and convictions involving business owners. Banks were allowed to rely on those certifications, leaving it up to the agency to weed out bad actors.
In some cases, criminal and civil complaints are pending as the companies tap the taxpayer rescue loans to stay afloat.
In New York City, the private-equity firm GPB Capital Holdings LLC is the target of several class-action lawsuits claiming that the firm operates as a Ponzi scheme. GPB itself has stated in a regulatory filing that it has been facing a variety of investigations, by the Securities and Exchange Commission and financial regulators in several states, including Massachusetts, which brought a civil fraud claim against the company in May.
The company is seeking to dismiss the class-action lawsuits and denied the Massachusetts fraud allegations in a response filed on July 10. GPB has also said it will “respond as necessary and as required” to the various investigations.
GPB and at least two of its affiliates in late April received PPP loans totaling upward of $1.6 million, according to data disclosed by the SBA and information provided by a GPB spokeswoman. […]”
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