Small Business Lender to Pay $26.3 Million for Sham Transactions

Ciena Capital LLC, a private, non-depository lender located in New York City, has reached an agreement with the United States to settle fraud claims related to its small business lending for $26.3 million, the Justice Department announced May 6. Ciena and a subsidiary, Business Loan Center (BLC), a small business lending company licensed to originate and service loans under Section 7(a) of the Small Business Act, are alleged to have submitted false claims for payment on loans made through the Small Business Administration (SBA).

SBA, through various lending programs, provides financial assistance to small businesses by guaranteeing up to 85 percent of the value of loans made by private lenders. Thursday's settlement resolves allegations that Ciena and BLC falsely certified that they complied with SBA regulations when they submitted claims for payment on loans they originated, underwrote, and serviced. Some of these loans defaulted shortly after they were made as a result of Ciena's and BLC's disregard of SBA rules, regulations, and underwriting requirements. Other loans were originated by former BLC Executive Vice President Patrick Harrington, or his office, during his tenure. Harrington pleaded guilty to conspiracy to defraud the United States and was sentenced to 10 years in prison for his prominent role in the fraudulent loan scheme, which included falsifying loan documents, inflating property appraisals, and using straw purchasers to engage in sham transactions. This settlement also resolves allegations that the defendants' parent company, Allied Capital Corporation, is liable for the acts of its subsidiaries.

The United States will not tolerate fraud in lending programs designed to assist small businesses, which are so vital to our nation's economy," said Tony West, assistant attorney general for DOJ's Civil Division. "We will pursue those who seek to take unfair advantage of programs designed to help people start a business and earn a living."

The settlement for $26.3 million, which includes a credit for $18.1 million previously negotiated by and paid to SBA, resolves a lawsuit filed by James R. Brickman and Greenlight Capital Inc., under the qui tam, or whistleblower provisions, of the False Claims Act. Under that act, private citizens can bring suit on behalf of the United States and share in any recovery. Brickman and Greenlight Capital will receive $4.3 million as their share of the government's recovery.

On Sept. 30, 2008, Ciena and several of its subsidiaries filed petitions for bankruptcy under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. The May 6 settlement must now be approved by the Bankruptcy Court.

"As a result of strong collaboration between SBA's attorneys, the SBA Office of Inspector General, the Justice Department and the U.S. Attorney's Offices in Atlanta and New York, we have recovered a significant amount of the loan loss stemming from Ciena's operations," SBA General Counsel Sara Lipscomb said.

"The size of these payments sends a strong message that the government will not tolerate fraud, waste or abuse of SBA programs, " said SBA Inspector General Peggy E. Gustafson.

This law enforcement action is in part sponsored by the interagency Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. It includes representatives from a broad range of federal agencies, including SBA, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch and, with state and local partners, investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information on the Financial Fraud Enforcement Task Force, visit www.stopfraud.gov.

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