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Are you represented by counsel ?
Mr. LEVENSON. I am, sir, but he could not be present.

Senator HARRIS. Do you want to proceed without the benefit of counsel ?

Mr. LEVENSON. I have the benefit of his advice.

Senator HARRIS. Do you understand that anything you say here may be used against you in some other legal proceeding?

Mr. LEVENSON. I do, sir.

Senator HARRIS. You have heard the testimony that this committee has received today, have you not, about the transactions in regard to Frontiers Capital Corp.?

Mr. LEVENSON. I have, sir.

Senator HARRIS. Do you have any answers or any statements that you wish to give this subcommittee to refute the testimony that we have heard insofar as it relates to you personally ?

Mr. LEVENSON. Just a very brief statement. Unfortunately, that dilemma they referred to had many horns, and I find myself on one of them.

I, too, am named in the indictment. Upon advice of counsel, it would be detrimental to our defense to answer any questions at this time.

So I reluctantly refuse. Senator HARRIS. Are you a defendant in the same indictment to which reference was made earlier ?

Mr. LEVENSON. Yes, sir.

Senator HARRIS. And on that basis, you do not desire to make any statement or explanation about the testimony, or the evidence the committee has received about your part in these transactions?

Mr. LEVENSON. I must reluctantly take that position.
Senator HARRIS. Very well.

On that basis, and under the procedures of the committee, the witness will not be compelled to testify or to take the fifth amendment. You may be excused.

Mr. LEVENSON. Thank you, sir.

Senator HARRIs. Mr. Greenberg, is there anybody here from the Small Business Administration who is familiar with the Frontiers Capital Corp., or who knows from the records what was done in regard to it, if anything, by SBA?

Mr. GREENBERG. I have Mr. Robert Leisy here, the Assistant Deputy Administrator.

Senator HARRIS. Would you come forward?
Would you stand and be sworn! ?

Do you solemnly swear that the testimony you are about to give before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God?

Mr. LEISY. I do.

TESTIMONY OF ROBERT B. LEISY Senator HARRIS. State your name, please.

Mr. LEISY. My name is Robert B. Leisy, Assistant Deputy Administrator for Investment, Small Business Administration.

Senator HARRIS. How long have you been in that position ?

Mr. LEISY. Since approximately August 3, 1964.

Senator HARRIS. Are you familiar with the Frontiers Capital Corp. case about which we have heard testimony here today?

Mr. LEISY. I am familiar in a general way with the administrative chronology of our dealings with the companies as an SBIC.

I am not familiar in detail with all of the transactions covered either in our investigation of the company or in Mr. Walsh's investigation.

Senator HARRIS. Do you know why Mr. Milton Hammer was denied permission to pay back in part the stockholders and the Government advance?

Mr. LEISY. It is my understanding from a brief review of our files on this case that generally he was denied because his request did not include repayment of the SBA funds before reduction of the private capital.

Mr. ADLERMAN. Wasn't there an offer on his part to reduce the size of the small business investment corporation that he owned, Frontiers, to a point where he would have $150,000 of private capital and $150,000 of Small Business money? Didn't he offer to return $200,000 to the Small Business Administration? But he was refused.

They said, “You can return the $200,000, but you cannot return any part of the private capital, except $35,000.”

That would have made it impossible for him to satisfy his stockholders.

I just wondered what was the reason. Why does the Small Business Administration refuse the return of funds, when a small business company advises that it is no longer practical or they don't find that they can do well any longer, and they want to offer to return the funds to the Government?

Why does the Government refuse to take them?

Mr. LEISY. I would have to review the files in detail again, Mr. Adlerman, but it may be-well, as I say, my understanding was that we had a disagreement on the timing of the repayment of the SBA funds.

Mr. ADLERMAN. Is there some regulation to that effect?

Mr. LEISY. There is a regulation that SBA funds would have to be reduced by repayment to SBA before private funds could be returned to the stockholders.

If their proposal met our timing requirements on that score, they might have then

Mr. ADLERMAN. Excuse me. I don't want to argue the question, but he did offer to return $200,000 and return $200,000 to his own private stockholders. I think it was in proportion, whatever the amount was. But this was not acceptable.

It seems curious that when a company says, “We can't make a go economically, we would like to do it on a smaller basis," that they are not allowed to do it.

Mr. LEISY. Perhaps he may have run into problems with our reduction in capital regulation.

I would have to review the exact regulation existing at the time of his request.

Senator HARRIS. There isn't any question that SBA could have received $200,000, and the stockholders could have received $200,000 at the time of that letter to the SBA? Is that so?

ship.

Mr. LEISY. I don't believe there is any question, Mr. Chairman, as to SBA's response denying the request as it was presented to us.

Senator HARRIS. Did SBA approve the sale by Hammer of Frontiers Capital Corp. on July 10, 1964?

Mr. LEtsy. Yes, SBA did approve amendment for change of owner

Senator HARRIS. What investigation was made of Levenson & Gordon, new owners of Frontiers? Do

you

know? Mr. LEISY. Generally, I can state that the investigation that was made then of the new owners was a less searching investigation than was referred to in earlier testimony this morning by Mr. Boutin as the kind of investigation we make under our new licensing standards.

Senator HARRIS. Do you know whether there was any investigation?

Mr. LEISY. I am sure there was an investigation, a name check with other Federal agencies.

Senator HARRIS. Is there any way that we could find out what sort of investigation was made of these people before the transfer was approved?

Mr. LEISY. Yes. I think we could search our own records as to exactly what steps were taken and supply that information to the committee, if it so desires.

Senator HARRIS. Did you know prior to today that we were going to be hearing testimony about Frontiers Capital Corp. and its difficulties?

Mr. LEISY. Yes, sir.

Senator HARRIS. And do you know the cases we are going to be hearing testimony about tomorrow and the next day?

Mr. LEISY. Yes, sir.

Senator HARRIS. Don't you think you would be well advised to commence to look into that before the committee asks

you

to ? You knew that you were going to be questioned about Frontiers Capital Corp. today following our other evidence on this corporation, didn't you?

Mr. LEISY. Yes.

Senator HARRIS. But you are not able to say what sort of investigation was made.

It was less than might be desired : Is that what you are saying?

I am guessing with you that it was less than might be desired, just from the facts of the case.

Mr. LEISY. Yes, Mr. Chairman. It was certainly less than we would do under our present practices. It is less than we would consider desirable, certainly, in view of the circumstances that have since come to light.

Senator HARRIS. We all know that.

What I am talking about is, do you know what kind of investigation was made?

Mr. LEISY. I can tell you that at the time that this request for approval was submitted to the agency, it was the agency's practice then to check as a matter of normal practice with the following agencies or records.

I would have to verify, if desired by the committee, precisely what agencies, and what results we had, in this particular case.

Senator HARRIS. It was the policy to do what?

Mr. LEIsy. It was the policy of the agency to check the following records or files during the time that this request for approval of change of control was received by the agency.

Senator HARRIS. And you are going to read the list ?
Go ahead.

Mr. LEISY. It was our policy on all such requests of this sort to check with the FBI, the Name Check Section of the Identification Division.

It was our policy at that time to check the Securities and Exchange Commission.

It was our policy at that time to check other SBA records, and going back to previous RFC files, concerning action there.

It was our policy to make a reference check on normally three references furnished to the agency.

It was our policy to make a police check in the areas where the principals lived.

It was our policy in some cases, usually if the sources I suggested previously suggested a problem, to make a check with the Internal Revenue Service.

Senator HARRIS. And the records would not indicate which, if any, of those agencies were checked with in this particular case, or would they?

Mr. LEISY. The records that I have with me today do not indicate precisely.

Senator HARRIS. Would you look into that and be able to testify tomorrow?

Mr. LEISY. Yes, sir.

Senator Harris. Also, do the same about the details concerning these other cases we are going to hear testimony on.

I don't know exactly what we are going to want to ask you until we hear the testimony, but I think you could be prepared in some detail on these cases that you know we are going to hear testimony about.

Frontiers Capital Corp. submitted, on November 3, 1964, a financial report, just after this purchase, concerning which there has been testimony. The financial report showed a loss of $49,198 in the preceding 6 months.

First, do you know if that is a correct statement, and, if so, what did SBA do, if anything, as a result of receiving that financial report?

Did you receive such a financial report?
Mr. LEISY. As of what date, Mr. Chairman?
Senator HARRIS. As of November 3, 1964.

I have a copy of it here. We will hand this to you. We will let you look at the financial report in the committee's files, to see if it refreshes your memory.

(At this point the document referred to was handed to the witness.)

Mr. LEISY. Mr. Chairman, do you want me to first confirm that we received this financial report for the period ending September 30, 1964!

Senator HARRIS. Yes.
Mr. LEISY. Yes; we did receive it.

Senator HARRIS. Without objection, that will be marked "Exhibit 12" and received in to the record.

(Document referred to marked "Exhibit No. 12" for reference and may be found in the files of the subcommittee.)

Senator HARRIS. Does it show a loss by Frontiers Capital Corp., of $49,198 in the last 6 months preceding the report?

Just look at the bottom of the financial report. It is carried there. Mr. LEISY. Yes, it does, Mr. Chairman.

Senator HARRIS. What, if anything, did SBA do after they received that financial report showing that loss? That is, if you know.

Mr. LEISY. I do not have that information with me, Mr. Chairman.

Senator HARRIS. Would you look into that and see if you can report on that tomorrow?

Mr. LEISY. Yes, sir. Senator HARRIS. I have a suggestion about the testimony of the SBA representatives in regard to the Frontiers Capital Corp. Why not confer with our staff about the questions we will want to ask about this particular case, and be able to testify on that tomorrow?

Also, be able to testify on these other two particular cases that we are going to go into.

We are going into these particular cases for the same reason that we asked GAO to pick out any six cases in the files which indicated that these companies had impaired capital. They chose six, and we put them in here, so that we might be able to generalize.

That is why we picked out these companies, to generalize about these kinds of cases. If the committee is going to be able to do that, in addition to the testimony that we have heard here, it will be necessary that SBA be able to come here and tell us what, if anything, they have done, what kind of notice they had, what they did.

It will only be by that method that we will be able together to arrive at any changes that ought to come about in administrative procedure and changes in legislation that may be needed.

Be ready to testify on all three of these cases. That will make the work of this committee go faster, and I think it will help us all as we try to see what might be done to avoid what obviously is a gross misuse of taxpayers' money, which has been testified to here in regard to Frontiers Capital Corp. today.

With that, you will be excused.
Tomorrow, we will go into those matters.
Mr. LEISY. Yes, sir.
Senator HARRIS. The committee will now recess until 10 a.m. tomor-

row.

(Whereupon, at 5:50 p.m., the subcommittee recessed, to reconvene at 10 a.m., Wednesday, August 3, 1966.)

(Member present at time of recess: Senator Harris.)

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