INVESTIGATION INTO SMALL BUSINESS INVESTMENT

COMPANIES

THURSDAY, AUGUST 4, 1966

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE COMMITTEE ON GOVERNMENT OPERATIONS,

Washington, D.C.

The subcommittee met at 11:25 a.m., in room 3302, New Senate Office Building, pursuant to Senate Resolution 183, agreed to February 14, 1966, Senator Fred R. Harris (acting chairman of the subcommittee) presiding.

Members of the subcommittee present: Senator Fred R. Harris, Democrat, of Oklahoma, and Senator Karl E. Mundt, Republican, of South Dakota.

Also present: Jerome S. Adlerman, general counsel; Philip W. Morgan, chief counsel to the minority; John J. Walsh, investigator; Ralph Dunavant, GAO staff; and Ruth Y. Watt, chief clerk. Senator HARRIS. The subcommittee will be in order.

(Members of the subcommittee present at time of convening: Senators Harris and Mundt.)

Senator HARRIS. I want to apologize to those of you who waited. The Senate, as you know, is involved in consideration of very important legislation. We have had a quorum call this morning and some other Senate activities which have prevented us beginning before now. We do hope to be able to finish our day's schedule today.

The subcommittee will now call Mr. John J. Walsh of our staff, and Mr. John Nichols of the Small Business Administration. Mr. Nichols, I don't believe you have been sworn.

You do 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. NICHOLS. I do.

TESTIMONY OF JOHN J. WALSH (Resumed), AND JOHN B. NICHOLS

Senator HARRIS. Would you state your name, Mr. Nichols?

Mr. NICHOLS. My name is John B. Nichols.

Senator HARRIS. And your residence?

Mr. NICHOLS. 1627 Woodman Drive, McLean, Va.

Senator HARRIS. And your position?

Mr. NICHOLS. Division Chief, Office of Investment Company Operations, the Small Business Administration.

Senator HARRIS. Mr. Walsh, you are the same John J. Walsh who previously testified in these hearings?

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Mr. WALSH. Yes, sir.

Senator HARRIS. You understand you continue to be under oath? Mr. WALSH. Yes, sir.

Senator HARRIS. Mr. Walsh, did you and Mr. Nichols, in the course of the investigation for the subcommittee, examine into the history and operation of Bloomington Small Business Investment Co.?

Mr. WALSH. Yes, sir.

Senator HARRIS. Do you want to proceed first to testify concerning the licensing and change in ownership of that company?

Mr. WALSH. Yes, sir.

Senator HARRIS. Would you tell the committee what you found in regard to the company?

Mr. WALSH. The Bloomington Small Business Investment Co. was incorporated under the laws of Illinois and was licensed by the Small Business Administration as an SBIC on May 1, 1959. The original owner of Bloomington was Lawrence Rust.

On approximately August 1, 1961, Bloomington Small Business Investment Co. was purchased from Mr. Rust by Mr. Chris A. Huette and by Mr. Dean Koehl, both of Fairbury, Ill.

Our investigation showed that the funds used by these individuals for the purchase were borrowed from the Tinley Park Savings & Loan Association. Three personal loans were made by the Tinley Park Savings & Loan Association of Tinley Park, Ill., No. 544 for $7,500; No. 573 for $63,510; and No. 574 for $79,401.

The proceeds of these loans were deposited in the Midlothian State Bank of Midlothian, Ill., and were used to pay the purchase price to Mr. Rust.

At the time of the purchase, Bloomington had already received $220,000 in U.S. Government funds. After the purchase, an additional $440,000 was received by Bloomington.

I would like to also mention that our investigation has shown that as of September 22, 1965, the Bloomington Small Business Investment Co., an Illinois corporation, was involuntarily dissolved in the circuit court of Sangamon County, Ill., No. 1152-65-D in chancery.

I would like to offer for the record certain exhibits which relate to the information that I have testified to.

Senator HARRIS. And you testify that all of them have been authenticated by you and secured from their original source by you during this investigation?

Mr. WALSH. Yes, sir; I do.

Senator HARRIS. Very well. Without objection, the various documents will be marked "Exhibit No. 39," using the alphabet as may be necessary to identify the items. They will be received for the record. (Documents referred to marked "Exhibits Nos. 39A-39S" for reference and may be found in the files of the subcommittee.)

Senator HARRIS. What you are testifying to is that Mr. Huette and his brother-in-law, Mr. Koehl, were able to buy this existing small business investment company, the Bloomington Small Business Investment Co., purely on borrowed funds?

Mr. WALSH. Yes, sir; that is correct.

Senator HARRIS. What kind of security did they give to this Tinley Park Savings & Loan Association?

Mr. WALSH. The security given was a mortgage on certain property that belonged to Mr. Huette and Mr. Koehl called Dixie Gardens. My information is that the Tinley Park Savings & Loan Association foreclosed on this property on the nonpayment of the personal loans by Mr. Huette and Mr. Koehl, and that the Federal Savings and Loan Insurance Corporation, which has taken over the Tinley Park, which is defunct, is now in the process of trying to liquidate and dispose of these properties.

Senator HARRIS. Were the original loans by which they were able to buy this SBIC repaid?

Mr. WALSH. No, sir; they were not repaid.

Senator HARRIS. And the savings and loan association from which they were borrowed is now defunct?

Mr. WALSH. It is now defunct; yes, sir.

Mr. ADLERMAN. Among those exhibits, do you have two checks, one for $85,765 dated August 1, 1961, to Huette and Koehl?

Mr. WALSH. Yes, sir.

Mr. ADLERMAN. Do you also have in those exhibits the checks on Tinley Park Savings & Loan Co. in the amount of $79,401.12 made out to Huette and Koehl?

Mr. WALSH. Let me find those, sir.

Mr. ADLERMAN. It is item 574, I believe. It is on the last sheet, I believe.

Mr. WALSH. What checks were they, sir?

Mr. ADLERMAN. Let me show you these checks and see if they are included in the exhibit.

(The documents were handed to the witness.)

Mr. WALSH. Yes, sir; we have those.

Senator HARRIS. Senator Mundt?

Senator MUNDT. What do you know about the original owner, Mr. Lawrence Rust?

Mr. WALSH. We have not made any investigation of Mr. Rust, Senator. Our information was that he sold the company to Mr. Huette and Mr. Koehl. Our information has not disclosed that he has had any participation in the affairs that we investigated.

Senator MUNDT. Do you know whether Mr. Rust, himself, put up the money as an original owner or did he also borrow?

Mr. WALSH. I do not know that, Senator.

Senator MUNDT. He sold it rather promptly after he got it licensed. Mr. WALSH. It was originally licensed in 1959 and it was sold in

1961.

Senator MUNDT. Your investigation starts, then, with 1961?

Mr. WALSH. Our investigation started from the time of the sale. Senator MUNDT. What total loss do you think is involved to the Government in this transaction?

Mr. WALSH. Can we have the chart put up on probable loss? Senator MUNDT. I just want to find out the total amount of loss involved.

Mr. WALSH. The probable loss is going to be $660,000, which was the total advanced by the Small Business Administration to Bloomington, and in addition to that, the Federal Government will probably incur some additional losses. These losses come from the fact that the

Bloomington Small Business Investment Co. sold stock to the now defunct Tinley Park Savings & Loan Association and to the Hillside Park Savings & Loan Association, which is out of existence.

The Federal Savings & Loan Insurance Corp., which is liquidating the assets of these companies, has preferred stock totaling $180,000 which is on the books. This will probably be a loss.

Senator MUNDT. What we are discussing, then, is the total loss to the Federal Government in the general magnitude of $1 million? Mr. WALSH. Yes, sir.

Senator HARRIS. We will go next to the question of self-serving loans by the company, if you found any. Before we do that, I want to ask Mr. Nichols if he has anything to add at this stage as to licensing and changing ownership.

Mr. NICHOLS. No, sir; I do not, Senator Harris.

Senator HARRIS. This is the way you understand it on the change of ownership, the dates and so forth, from your investigation also? Mr. NICHOLS. Yes, sir.

Senator MUNDT. I would like to ask Mr. Nichols, because it may be as a responsible Government official involved in handling these matters and in reviewing them that he may have made a thorough check in reconstructing how we got into the situation that cost the taxpayers about $1 million.

Can you give us any further light on Mr. Rust, as to whether or not this original purchase was made in good faith by him and he attempted to operate it, or whether this was just the way in which they could move it into the hands of new owners to defraud the Government?

Mr. NICHOLS. On the basis of our information, Mr. Rust was a responsible businessman in Bloomington, Ill., and had adequate means with which to provide the funds to organize.

Senator MUNDT. So the record does not indicate any collusion by the original owner with the people who bought it on borrowed capital? Mr. NICHOLS. No, sir.

Senator MUNDT. I wanted to get that into the record. Thank you. Mr. ADLERMAN. Should we mark the chart in evidence, Mr. Chairman?

Senator HARRIS. We will go ahead and call it exhibit No. 40.

(The document referred to marked "Exhibit No. 40" for reference and will be found in the appendix on p. 291.)

Senator HARRIS. I will ask you if this chart presented to the subcommittee is the one to which you previously referred concerning the loss to the U.S. Government from the Bloomington Small Business Investment Co.?

Mr. WALSH. Yes, sir.

Senator HARRIS. Was it made under your direction and control and it is true and accurate?

Mr. WALSH. Yes, sir; it is.

Senator HARRIS. Very well.

Mr. Walsh, in the course of your investigation, did you investigate into whether or not any self-serving loans had been made by Bloomington Small Business Investment Co.?

Mr. WALSH. Yes, sir.

Senator HARRIS. Did you prepare a chart which would show that situation as you found it?

Mr. WALSH. Yes, sir.

Senator HARRIS. Is the chart which is presented to us now by you, a chart made under your direction and control and is it true and accurate concerning self-serving loans as your investigation revealed? Mr. WALSH. Yes, sir; it is.

Senator HARRIS. That chart will be admitted as exhibit No. 41. (Document referred to marked "Exhibit No. 41" for reference and will be found in the appendix on p. 291.)

Senator HARRIS. What did you find in regard to self-serving loans? Mr. WALSH. The investigation disclosed that loans were made to the companies appearing on this chart totaling $819,571, which we felt and so classified as being self-serving loans in that Mr. Huette and Mr. Koehl had an interest in these companies.

Senator HARRIS. What was the authority for the investigation of this company by SBA in 1963?

Mr. WALSH. The SBA records indicated that a formal order of investigation dated October 9, 1963, was issued by the administration, and that an investigation was thereupon conducted by Mr. Nichols and others.

Senator HARRIS. Mr. Nichols, it was under an order just referred to, dated October 9, 1963, that you conducted an investigation of this company in that year; is that correct?

Mr. NICHOLS. Yes, sir.

Senator HARRIS. Do we have a copy of that order for presentation?

Mr. WALSH. Yes, sir. It has already been introduced.

Senator HARRIS. It was in that series of documents?

Mr. WALSH. Yes, sir.

Senator HARRIS. Very well.

Mr. WALSH. I beg your pardon, sir. We do not have a copy of the order of investigation. What has been introduced is a summary of the findings of the investigation. It refers to the order.

Senator HARRIS. Was that summary made by you, Mr. Nichols?
Mr. NICHOLS. Yes, sir.

Senator HARRIS. Very well. It has already been received into evidence.

If you would, proceed, Mr. Walsh-and with your assistance, Mr. Nichols, as necessary-proceed through this chart to explain to us the self-serving loans which you found.

Mr. WALSH. The first name on the chart is the Mutual Mortgage Service, Inc. Our investigation disclosed that it was incorporated in Illinois on May 22, 1957. The incorporators were listed as Chris A. Huette, Fairbury, Ill.; Dean Koehl, Fairbury, Ill., and Hazel M. Huette, Fairbury, Ill.

The records of the Illinois corporation office indicated that Mr. and Mrs. Huette were officers and/or directors of this company from 1958 through 1962.

The records further indicated that it was involuntarily dissolved in the circuit court of Sangamon County on October 15, 1964.

The investigation conducted by Mr. Nichols showed that between August 9, 1961, and March 7, 1962, Bloomington Small Business Investment Co. disbursed a total of $132,500 to the Mutual Mortgage