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we can subpena books and records, such as the individual books and records of the individual people who are controlling the licensee. We can subpena the individual books and records of the small business concern, as well as their principal.
Where in an examination we may, and we do, make routine checks of the small business concern, but if they tell us that their books are not available, that leads us to suspicion sometimes, which may lead to an investigation.
Senator HARRIS. Did you want to add something to that, Mr. Leisy? Mr. LEISY. No, sir.
Senator HARRIS. The determination whether it will be an investigation or will be an examination is simply an internal decision by SBA; is that so?
Mr. PHELAN. Yes.
Senator HARRIS. You don't have to go outside and get permission or order?
Mr. PHELAN. No, sir.
Senator HARRIS. In the fall of 1964, when one of your people went to visit the Putnam office, he failed to find anyone with knowledge of Putnam's activities. Isn't that so?
Mr. PHELAN. Yes, Senator.
Senator HARRIS. And you decided that that wasn't interesting enough to require an investigation, but would just be an examination?
Mr. PHELAN. Yes, Senator. An examination is the first step.
Senator HARRIS. If your curiosity had been excited enough to find out what was going on in this company, the first step would have been an investigation, I trust, and you would not have gone through an examination and waited for the second step.
Mr. PHELAN. You are right.
Senator HARRIS. All you did was just make an examination of the company and, as I understand it, you didn't look behind any of these transactions and SBA didn't examine into the portfolios. Is that correct?
Mr. PHELAN. Yes, Senator.
Senator HARRIS. Now on March 11, 1965, Putnam Investors submitted a request for an additional $100,000 of Government money. Is that correct?
Mr. PHELAN. Yes, Senator.
Senator HARRIS. Was that after the subcommittee expressed interest in Putnam Investors ?
Mr. LEISY. No, I don't believe it was.
Senator HARRIS. Why did it take so long to deny the request for additional funds?
Mr. LEISY. We were waiting for additional financial information on the company;
Senator HARRIS. Didn't you already have in your possession as of March 1965, information upon which to base the denial?
Mr. Leisy. I don't believe we had in our possession at that time sufficient financial information on the company on which to base the denial. The denial was based primarily on the financial condition of the company:
Senator HARRIS. I hand you what has been marked "SP-13” and “SP-14” and ask if those are the requests for additional Government funds and the denial to which you previously testified, the originals of which are in the SBA files?
Mr. LEISY. Yes, they appear to be.
Senator HARRIS. Without objection, they will be admitted into the record as exhibits 48 and 49, 48 being the request, 49A through 49F being the denial.
(Documents referred to marked "Exhibits Nos. 48 and 49 A through 49F” for reference and may be found in the files of the subcommittee.)
Senator HARRIS. Now SBA issued an order of investigation of Putnam on October 28, 1965. Is that correct?
Mr. LEISY. That is correct.
Senator HARRIS. That was based on information developed by this subcommittee. Is that correct?
Mr. LEISY. In large measure that is true, Senator.
Senator HARRIS. Did the investigation then continue from that date until December 1965?
Mr. LEISY. Yes, it did.
Senator HARRIS. What conclusions were arrived at by SBA as a result of that investigation!
Mr. FRIESS. Pretty much as stated by Mr. Walsh.
Senator HARRIS. That is, that things were in a terrific mess; is that right?
Mr. FRIESS. Yes, sir.
Senator HARRIS. What action did you take concerning this? Did you demand repayment?
Mr. LEISY. Yes, we did demand repayment.
Senator HARRIS. Now this is the $200,000 repayment, then, that was received and Mr. Boutin testified to recently?
Mr. LEISY. That is right, in the letter of February 16, 1966. The letter went out to the licensee accelerating the obligations of the SBIC to SBA based on the self-dealing and other violations determined by the investigation.
Senator HARRIS. I hand you what has been marked up to now as SB-8 for purpose of identification. I ask you if that is the order of investigation issued by SBA on October 28, 1965 ?
Mr. Leisy. What we have here, Senator, is a copy of the investigation report.
Senator HARRIS. That is the report itself?
Senator HARRIS. That is a true copy of the report, is it? Without objection that may be admitted in evidence as exhibit 50.
(Document referred to marked "Exhibit No. 50" for reference and may be found in the files of the subcommittee.)
Senator HARRIS. Now the Government was completely paid back on what it had loaned to Putnam, then?
Mr. LEISY. Yes, sir.
Senator HARRIS. Do you have any idea, does SBA have any way of knowing where the funds for repayment came from?
Mr. LEISY. We do not. Senator HARRIS. Do you know whether they came from the assets of Putnam?
Mr. LEISY. We do not know.
Senator HARRIS. Do you know what the situation is in regard to the rights of other creditors of Putnam Investors in addition to the Government?
Mr. LEISY. No; we do not.
Senator HARRIS. Do you have any way of knowing, does SBA have any way of knowing whether these same people, Finneran, Huck, Ivey, have loans outstanding in other SBIC's?
Mr. LEISY. You mean loans from other SBIC's?
Senator HARRIS. Any connection with an SBIC. Let us say that, then.
Mr. LEISY. Yes. I believe we do have information as a result of cross-checking a number of portfolios concerns reported to us by other SBIC's that these same individuals have at various times received loans from other SBIC's.
Senator HARRIS. Have you done anything about this, or are you doing anything about it? Does it concern you as much as it does me that these same people are involved with some other SBIC's?
Mr. LEISY. Yes, it does concern us that the same people apparently are borrowing or have borrowed from other SBIC's. “Our informa. tion indicates, the last time we made a check of it, that the total balances as near as we could make this kind of check, that these same principals owe other SBIC's have decreased very substantially.
Senator HARRIS. What have?
Mr. LEISY. Have decreased very substantially over recent months. I cannot be precise in terms of how much of a decrease, over what period of time.
Senator HARRIS. Will a part of the new examination program be to find out whether some of these named individuals are involved with other SBIC's?
Mr. LEISY. Yes. We will continually check as best we can to see whether or not common portfolio concerns or persons pop up in more than one SBIC.
Senator HARRIS. Don't you think, Mr. Greenberg, we ought to be pretty vigorous looking in these portfolios to find these fellows who have had pretty unsatisfactory operations!
Mr. GREENBERG. You may rest assured that will be done, Mr. Chair
Senator HARRIS. Will SBA take a particular interest in those companies which may have portfolios involving some of these people?
Mr. GREENBERG. That will be one of our primary concerns.
Mr. GREENBERG. What we propose to do when we get the system working is an attempt to set up a cross index of individuals, to see
if we can't get some relationship between various individuals and various companies.
Senator HARRIS. Can you do that on an IBM setup of some kind ?
Mr. GREENBERG. This is fairly difficult. We have not explored that, but we will certainly take that into consideration, sir.
Senator HARRIS. Mr. Adlerman, do you have any questions on Putnam Investors ?
Mr. ADLERMAN. No questions.
Senator HARRIS. Now we would like to quickly move to Bloomington, and hear from representatives of SBA.
Mr. GREENBERG. Mr. Chairman, may Mr. Nichols return, please? Senator HARRIS. Mr. Nichols.
You are the same Mr. Nichols who has previously testified and been sworn in this case ?
TESTIMONY OF JOHN B. NICHOLS—Resumed
Mr. NICHOLS. That is correct. Senator HARRIS. Now I hand you what has been marked exhibit SB 4, any one of the three of you, and ask you
if that is a true copy of a CPA certificate submitted to SBA July 23, 1963, concerning Bloomington SBIC.
Mr. NICHOLS. This is the independent accountant's report as of March 31, 1963 submitted to SBĀ on Bloomington Small Business Investment Co.
Senator HARRIS. Without objection, that will be admitted into evidence as exhibit No. 51.
(Document referred to marked "Exhibit No. 51" for reference and may be found in the files of the subcommittee.)
Senator HARRIS. Now does that certificate accurately reflect the true financial condition of Bloomington as of that date?
Mr. NICHOLS. It is so certified by the certified public accountant.
Senator HARRIS. But does it, in fact, represent the true situation in Bloomington as of that date?
Mr. Nichols. It might be a matter of opinion, Senator.
Mr. LEISY. Senator, If I may, these financial statements, as you know, include as probably the most significant asset item the portfolio of their investment in small business concerns. The SBIČ has an obligation at the time of each such financial statement to establish the values of those portfolio securities. Establishing such a value is probably one of the most difficult valuation problems that anyone can tackle, particularly for an SBIC that makes the kind of investment that we encourage them most to make, an equity type investment.
So that any report we receive from an 'SBIC, including one that we get at the year end as certified by an independent accountant, can only be regarded as the best judgment of the people who prepared and reviewed it.
Senator HARRIS. Well, the CPA report, too, would not necessarily show conflict of interest or any self-serving or self-dealing loans, activities of that nature, would it?
Mr. LEISY. Generally, it would not. There is a compliance report or Report 478, as required by our regulations, that the independent accountant is also required to send in to us along with the financial report, which shows any matters of compliance with regulations.
I think it is fair to say that in the process of most independent accountants' examination of an SBIC, they do not have or take the opportunity to examine every portfolio company in that kind of detail.
Senator HARRIS. That absolutely has to be a reporting and examining procedure that must be improved substantially, would you
not agree, Mr. Greenberg? Mr. GREENBERG. No question, Mr. Chairman.
Senator HARRIS. We have to figure out a routine way by which we can discover self-dealing and conflict-of-interest situations.
Mr. GREENBERG. Actually, Mr. Chairman, we have a new reportthe first report was dated May 31, 1966—which is called a program evaluation report, which gives a lot more information with respect to portfolio items than previously had been made available to us. We are at the present time reviewing the entire reporting procedure and requirements, and we hope to be able to tighten up enough so that we can with a minimum of effort disclose any such interest as you are talking about, sir.
Senator HARRIS. Very well.
Now when was this company chartered again? Can you refresh my memory? And when was it sold by Rust? Mr. LEISY. It was originally licensed May 1, 1959. Senator HARRIS. It was sold in 1961, as I recall, by Rust. Mr. LEISY. Yes, sir; in August of 1961.
Senator HARRIS. When it was sold by Rust to the new owners was there some investigation and check made of the new owners!
Mr. LEISY. Yes, there was.
Senator HARRIS. Substantially the same kind as you testified to earlier about Frontiers' new owners after the change?
Mr. LEISY. Yes, it would have been substantially the same kind of check performed, according to our records, on Messrs. Huette, and Gilboy.
Senator HARRIS. And who?
Mr. LEISY. No reference check, according to our records, was made at that time on Mr. Koehl. He was not reported to us at that time as involved in any way with the licensee. I believe his involvement with the licensee was only determined subsequently as part of the investigation.
Senator HARRIS. Was there no examination of Bloomington following this transfer of ownership, change of ownership, from 1961 until July 1963 ?
Mr. LEISY. Yes; that is right.
Senator HARRIS. Don't you think, Mr. Greenberg, that immediately following change of ownership of an SBIC, that that ought to be a period where we treat it perhaps with a little heavier surveillance than we might normally do with an operating SBIC! Mr.
GREENBERG. I agree wholeheartedly, Mr. Chairman. Senator HARRIS. That is one think we looked into in our banking inquiry by this committee, that the Government might take a little