Cookie-Jar Capitalism
Elizabeth MacDonald 02.12.07

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Why hold up a bank? At the SBA you just need a smile and a fountain pen.

Ripping off the Small Business Administration is a great American pastime. Now, says the U.S. attorney in Detroit, foreign-born borrowers and loan brokers originally from the Middle East have been swept up in the latest scandal to hit Allied Capital Corp. (nyse: ALD - news - people ), which invests in entrepreneurial companies. Last month the feds handed down fraud charges involving its Business Loan Express (BLX) unit, one of the country's largest SBA lenders.

The point of entry for the alleged scam is Patrick Harrington, 44. The former BLX executive vice president is charged with bank and wire fraud and conspiracy for issuing 76 fraudulent SBA loans worth $77 million, says a recent indictment handed up by a federal grand jury in Detroit. It claims that Harrington--who was compensated based on loan volume--overstated borrowers' financial qualifications, helped inflate property values and falsified the amount of money borrowers contributed toward their businesses. Prosecutors say he approved millions of dollars in loans to foreign nationals who faked their work experience or credit history. Harrington, says his attorney Clyde Pritchard, "is adamant that he was never involved in issuing 76 fraudulent loans." Still, the SBA, which can guarantee up to 75% of a loan, appears to be out $28 million so far.

The ringleader, say other indictments, is Abdullah Al-Jufairi, a Qatar native. He and Harrington "were friends," concedes attorney Pritchard. "Al-Jufairi was a real nice man, according to Pat." He also once co-owned with Harrington a gas minimart, the Michigan & Prospect Petro Mart in Ypsilanti, and (so says the indictment) brought in pals and relatives as straw men.

Here, say the feds, is how the scheme worked. Brokers like Al-Jufairi would buy a property--a gas minimart, a restaurant or a small motel--and find a buyer willing to purchase it at an inflated price using an SBA-guaranteed loan issued by BLX; the broker profited from the markup in price, and the loan would typically default. In one case Al-Jufairi is said to have brought Mohammed Mustafa, a Kuwaiti, and Ahmed Qdeih, a Palestinian, to Harrington, who gave them a $1.1 million loan to buy a gas station. BLX paid Al-Jufairi $11,000 for bringing the two in the door--he then gave BLX fake documents showing he had made $210,000 in renovations that he never did. Mustafa and Qdeih then paid Al-Jufairi $150,000 from their BLX loan for the supposed renovations, but the money went into a bank account owned by Qdeih's brother-in-law; Al-Jufairi and his wife got $25,000. (Mustafa's lawyer says Harrington misled his client; both men have pleaded not guilty.)

Authorities say Al-Jufairi is hiding out in Qatar.