Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New Epilogue (40 page)

The point of being a preferred lender is to make SBA loans
without
prior agency review. If an SBA-approved third party now needed to approve BLX loans, what was the point of being a preferred lender? It sounded like a face-saving compromise, where BLX could publicly
claim
to be a preferred lender without actually being one in practice.

On March 2, 2007, a senior staffer on the House Committee on Energy and Commerce invited me to speak at its upcoming hearing to consider legislation against telephone pretexting. A week later, I appeared before Congress on a panel of speakers (government officials and telephone industry lobbyists) and gave my views. I was the only victim of pretexting on the panel. The chair welcomed me by commenting that pretexting “is not a crime that has no consequences. Mr. Einhorn, the committee thanks you for coming before us and I am sorry, indeed, for what has happened to you and your family.”

I began: “My testimony is about a corporation and management team that in attempting to ensure their survival placed no limits on the exercise of their power. Pretexting is a brazen invasion of privacy. When a large corporation has its agents spy on private citizens in order to intimidate them and silence criticism, it threatens more than just the sanctity of the individual’s privacy; it threatens the freedom of the securities markets which we take for granted.”

I told Congress the Allied story: my speech; my concerns about its accounting and operational deficiencies; investment valuation; and how its small business lending unit defrauded the SBA and USDA government lending programs costing taxpayers hundreds of millions of dollars. I discussed how Allied, rather than own up to its problems, attacked me and stole my phone records.

I noted that while Allied and Walton initially denied stealing my records, the company’s recent admission of the theft raised more questions: Who obtained the records? Who else’s records did they steal? Who authorized the theft, and for what purpose? What did they do with this information? And what else might these agents have done to gather information about their critics?

Allied’s disclosure lacked both an apology and an explanation. My testimony continued: “After the Hewlett-Packard pretexting scandal, HP immediately apologized to the victims and promised to give the victims a full account. But, to date, I have heard nothing from Allied. No one has contacted me to apologize or explain who invaded my privacy and my family’s privacy. Allied has not yet admitted to taking anyone else’s records. Of course, they don’t deny it, either. It is simply not credible that Allied management did not know about this.”

The members of Congress seemed appalled by my story and they followed up with several questions. Congressman Michael Burgess from Texas prefaced his question to me by saying, “It won’t do any good for me to apologize to you, but I’ll do it anyway.” The chair asked the representative from the Federal Trade Commission whether it was investigating these business practices by Allied Capital. The response was that such investigations are not public, but the agency would be willing to have a private briefing with the Congressional staff. Chairman John Dingell indicated that the record would be held open for Allied Capital to offer any response. It never gave one.

Just as a former BLX employee called me after my speech in 2002, the Michigan indictments spurred two more former employees to get in touch. Steve Auerbach, a former loan “workout specialist” in BLX’s New York office, called me on April 12, 2007. He wanted to meet, but not in my office, suggesting a public place—a restaurant. I’m not sure why he wanted the cloak-and-dagger, but I agreed to meet with him at a Manhattan restaurant the following day.

Daniel Roitman and James Lin from Greenlight came with me, and Auerbach brought along Tim Williams. Williams and Auerbach both started at BLX in 2001, a few months after Allied Capital bought BLC Financial. Williams was the team leader of BLX’s workout group. Auerbach worked for Williams as one of the workout officers. Both left BLX in 2003. BLX fired Williams. Auerbach left after Len Rudolph, a senior BLX executive, told him Tannenhauser was about to fire him. Rudolph said he couldn’t prevent “the final nail” in Auerbach’s coffin, but referred him to a friend at Sterling Bank. Rudolph’s friend promptly hired Auerbach after a “two-minute interview” for an $80,000 a year job, then abruptly fired him for no apparent reason three weeks later. Because Auerbach had quit BLX rather than wait to be fired, he was not entitled to any of the benefits he would have received had BLX terminated him.

Williams and Auerbach had debated contacting me for the past two years. They claimed that after reading about me in the recent press in connection with the Harrington indictments and having difficulty getting new jobs, they decided to talk to me, hoping to share information. They were looking for help. They wanted the regulatory heat from the BLX investigation to
go away,
but it wasn’t clear why it was bothering them. Though they may have wanted to tell the government what they knew about BLX without getting into trouble themselves, they may have just wanted us to learn what happened. They wanted us to help them get an immunity deal. They also strongly resented Tannenhauser for the way he treated them.

Williams told us he had met with the FBI, SEC, U.S. attorney, SBA, and OIG. It was very unclear to what extent these were substantive meetings. For example, he told us the FBI came to his house to subpoena him. Auerbach only met with the SBA, but the SEC had been present.

Those inquiries started as information gathering, but at some point Williams, and possibly Auerbach, became the targets of the investigation. Williams and Auerbach said they did nothing wrong and had nothing to hide. They asked how they could have been responsible since they had no voting power on the loan-approval committee?

In their minds, BLX and Allied are one and the same—when we questioned them about it, they simply said, “BLX is a subsidiary of Allied”—but they always spoke of “Allied” and not “BLX” at lunch. Williams and Auerbach were surprised to read about Harrington’s indictment. Williams said he had never met Harrington, but talked over the phone during conference calls. Auerbach met him directly because Auerbach’s territory included Michigan. Harrington picked Auerbach up from the airport and drove him to various workout sites. Auerbach described Harrington as a real down-to-earth guy, low key, the nicest guy in the world. He spoke of how Harrington “talked about the Bible.” Basically, Auerbach didn’t think Harrington could have done all the things of which he was accused. Both Williams and Auerbach said that relative to other people at the Detroit office, Harrington was the nice guy.

They described CEO Tannenhauser as having a “Napoleon complex.” “Credit approval meetings were jokes,” Auerbach said. No one disagreed with Tannenhauser. Tannenhauser would start by saying how much he liked the borrower’s business, cash flows, financials, and the like, and how he thought BLX should lend the money no matter how speculative or bad the idea. He would go around the room and ask for opinions. Auerbach could only recall one person, Len Rudolph, who ever disagreed with Tannenhauser, which Auerbach remembered only happening in a single instance. “Tannenhauser approved everything unless it was truly insane,” Williams told us.

Williams read about some of the problem loans Greenlight had found. He thought those weren’t even the worst ones. “Some of the loans, you just had to laugh,” Auerbach said. The loan originators held all the power and influence at BLX. “Anybody in originations was a God,” Auerbach told us. This wasn’t the case in all the offices, but was true in many of the offices that employed their own underwriters. The underwriters were in a junior position to the originators and to office management. This put them in a bad position: If they rejected loans, it would hurt their bosses’ bonus. Never a good move.

Although there was a list of approved appraisers, the workout team had its own blacklist of appraisers they would not use because of “bad appraisals.” Those appraisers were used for originations. Tannenhauser would literally throw appraisal documents at people in meetings when he was unhappy with the workout valuations. Tannenhauser blamed the workout team for the large discrepancies between the collateral valuations when the loan was underwritten and when it was in workout. In Tannenhauser’s mind, it was always the workout valuations that were wrong and never the original valuations used to underwrite the loans.

Williams and Auerbach never understood why the original valuations were so high. In many cases, the description of the assets in the original appraisal did not match the description of the assets in the workout. It would be as if the appraisal were for a Bentley, but when they picked it up, it was a Hyundai. Tannenhauser would argue that if the original appraisal were for $1 million and the workout appraisal came in at only $300,000 eight months later, it was the workout person’s fault. Of course, the very rapid default gave a good indication which appraisal was wrong.

Then, they told us about some of the loans: There was a ridiculous USDA loan for about $4 million to build a “butterfly pavilion” in “the middle of nowhere” deep in rural South Carolina. Another loan was to Ashburn Hospitality, a hotel converted into rented rooms. The loan went bad. The owner collected rent, and then at 3 a.m. slipped foreclosure notices under people’s doors saying they had to leave that morning. The residents completely trashed the place. Williams and a realtor inspected the property and found a box labeled “mortal remains” in one room and a large rattlesnake in another.

They said the Bill Russell Oil property was similar to a movie set’s false-front building. They confirmed most of the general view of the USDA audit and joked about the $3,000 shack, where the appraisal cost more than the value of the property.

They discussed the shrimp-boat loans, telling us a Vietnamese broker was involved in loans where BLX would lend $1 million for a boat worth only $80,000. The loan would then go bad, but BLX would simply turn the boat back to the broker “to find another Vietnamese” to take a fresh $1 million loan. BLX just kept making the loans. Auerbach said BLX had the $80,000 appraisals and yet was aware that the broker was finding new borrowers to take new loans based on grossly inflated collateral values so that BLX did not take a loss.

Environmental issues were significant sources of problem loans. Auerbach said many loans did not have environmental problems identified in the original underwriting, but significant problems were found during the workout of the loan—sometimes barely a year later. In some cases, the cost of remediation exceeded the value of the remaining collateral. One example: A gas station loan, in which the station contaminated the well water used by the people living nearby. Remediation cost was $1 to $2 million and exceeded the collateral value of $750,000. BLX couldn’t foreclose on the gas station because it would have opened them up to legal liability to the people using the poisoned water. Instead, BLX abandoned the property.

Williams thought the Colorado loans were particularly noxious. There was a loan where the loan officer was Richard Ronci, who temporarily acted as the CFO of the borrower during the loan process. BLX’s defense to this obvious conflict of interest was that it was disclosed. The borrower sued, and a BLX executive flew to Colorado to settle. When I later looked at the records, this may have been the loan that Brickman discovered that revealed the $9 million loan transfer between BLX and Allied.