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greater interest for at least a period after change of control in addition to the better routine procedures which we are also now instituting.
Mr. GREENBERG. In that regard, Mr. Chairman, on our licensing procedures, when a license is issued we examine the licensee within 6 months, or when a request for Government funds is made, whichever is earlier. So this concept will be applied in the future and we will extend it to the other institutions.
Senator HARRIS. Very well. Now what caused you to make an examination in July 1963 of Bloomington?
Mr. NICHOLS. AŠ I testified this morning, Mr. Chairman, it was the information we received about the involvement of the Chatham Bank of Chicago and Mr. Huette's connection with that bank and with Bloomington SBIC.
Senator HARRIS. Was that called to your attention by press inquiries to SBA?
Mr. NICHOLS. It was actually information in the press, Mr. Chairman.
Senator HARRIS. We have already got in evidence the report of that investigation, and you stated then that the matter was referred to the Department of Justice.
Mr. NICHOLS. Yes, sir.
Senator HARRIS. Were there any steps, that you know of, that were taken or can be taken under the present procedure or under the procedure then existing to conserve the assets of Bloomington SBIC?
Mr. LEISY. The only step that could be taken, as Mr. Campbell testified a little earlier today, in the case of an SBIC on whom we have sufficient evidence of wrongdoing, would be to secure an injunction through the courts.
Senator HARRIS. But that was not done in this instance?
Senator HARRIS. Mr. Huette, I think your file shows, wrote SBA December 1963 asking to sell additional stock. Is that correct? To refresh your memory, I will hand you here what has been marked “SB-10" for purposes of identification and ask you if that is the letter or, if you can, to identify what it is.
Mr. LEISY. That is right, Mr. Harris.
Senator HARRIS. The letter and the reply are true copies of the originals, I presume, that are in your files.
Without objection, then, they will be admitted together as exhibit. 52 A and B, Å being the letter to SBA, and B being the letter from SBA.
(Documents referred to marked "Exhibits Nos. 52A and 52B” for reference and may be found in the files of the subcommittee.)
Senator HARRIS. The letter from SBA to Huette is dated what?
Mr. LEISY. The date at the top of the letter does not show at the top. I can't verify the date at this time.
Senator HARRIS. The letter from Huette to SBA was what? December 1963 ?
Mr. LEISY. Excuse me, I have the reply date. Senator HARRIS. First let me say this. The letter from Huette to SBA, what date is it?
Mr. LEISY. It was received at SBA on December 23, 1963.
Senator HARRIS. December 23, 1963. Now when did SBA reply?
Senator Harris. Why was SBA so long in replying to a request to sell additional stock? Do you have any reason for that delay?
Mr. LEISY. I can only conclude from looking at the handwritten letter, a handwritten letter from the company to SBA and certainly not complete, or not complete in terms of the information required for this kind of request, that we did not feel we would want to take any
action on this request until we were further along with the investigation that we had in process at that time.
Senator Harris. Is that what you said in your reply?
Senator Harris. It said in reply that you were holding it in abeyance?
Mr. LEISY. Yes, sir.
Senator Harris. On July 2, 1964, Mr. Richard Kelley, Deputy Administrator, wrote Bloomington and demanded the assignment of securities which were supposedly earmarked for SBA. Is that correct? I hand you what has been marked SB-11.
Mr. LEISY. I believe that is correct.
Senator HARRIS. And ask you if that is a true copy of the original of that demand in your file.
Mr. LEISY. Yes, sir.
Senator HARRIS. Without objection, then, that will be admitted and marked "Exhibit 53."
(Document referred to marked "Exhibit No. 53" for reference and may be found in the files of the subcommittee.)
Senator HARRIS. Explain to me what do we mean by demand assignment, and what do we mean by earmarked?
Mr. LEISY. The requirement of the loan agreement with the SBIC is that they earmark or segregate portfolio items equal to at least 150 percent of the money that we have loaned to them under section 303. Senator HARRIS. Was that done in all instances ? Mr. LEISY. It was done in all instances at that time, yes.
Senator Harris. Supposedly, then, if Bloomington had complied with the regulations as of that time there would be portions of their portfolio, that is portions of their loans earmarked for SBA or segregated for SBA. Is that correct? Mr. LEISY. That is correct.
Senator HARRIS. In the amount of 150 percent of what, the amount of whatever had been loaned by SBA?
Mr. LESy. In the amount of 150 percent that had been loaned to the company under section 303 of the act.
Senator HARRIS. What was the resolution, then, of the demand for the assignment of those securities which Mr. Kelley made in July 1964? Were the securities assigned, in compliance with that demand?
Mr. LEISY. No, I don't believe they were.
Mr. LEISY. I can only conclude that they were not assigned because the SBIC was not responsive to our demands for the assignment.
Senator HARRIS. Now is it true that Bloomington was dissolved by the court on September 22, 1965?
Mr. LEISY. Yes. That was testified by Mr. Walsh earlier today and, according to our information, that is correct.
Senator HARRIS. Then what effect does that have, if you can tell me, on the obligation of Bloomington SBIC to SBA, the effect of dissolving in court? What happened to the obligation?
Mr. LEISY. I will have to refer you to our Assistant General Counsel for a legal answer to that question, Mr. Chairman.
Senator HARRIS. Is he here?
TESTIMONY OF ROGER L. CAMPBELL-Resumed
Mr. CAMPBELL. Senator, I do not know the exact legal effect of the dissolution of that corporation by action of the secretary of state of Illinois upon our creditor position at this time.
Senator HARRIS. Mr. Campbell, you have previously been sworn? Mr. CAMPBELL. I have.
Senator HARRIS. Mr. Campbell, what caused the dissolution action in court?
Mr. CAMPBELL. I do not know that, Senator.
Senator HARRIS. You don't know if it was some kind of institution action or legal action?
Mr. CAMPBELL. I assume it was their failure to maintain a corporate relationship with the State of Illinois.
Senator HARRIS. Failure to file reports perhaps?
Mr. CAMPBELL. Failure to file reports or failure to pay franchise fees, or whatever the State requires.
Sénator Harris. Who had been receiving the interest and principal payments on the loans of the Bloomington SBIC since the dissolution? Does anybody know that?
Mr. LEISY. I do not know.
Senator HARRIS. The situation is this: that Bloomington Small Business Investment Co. no longer exists as a corporate entity. It has been dissolved by the circuit court in the State of its incorporation. Is that correct?
Mr. LEISY. That is as I understand it, Mr. Chairman.
Senator HARRIS. No one that we know can tell us what that did to the legal obligation that the company had to SBA as of that time; is that correct?
Mr. LEISY. I believe that is correct, Mr. Chairman.
Senator HARRIS. No one can tell this subcommittee who is receiving the interest or holding the assets of that company or has been receiving or holding them since the dissolution of the corporation; is that correct?
Mr. LEISY. I cannot tell you, based on any records that we have available.
Senator Harris. Can anybody else present?
(Information furnished follows:)
PORTFOLIO OF BLOOMINGTON SBIC
Counsel for Bloomington SBIC stated, by letter dated February 17, 1965, that all securities held by Bloomington SBIC had been turned over to the United States Attorney in Chicago, Illinois.
At least one borrower made regular re-payments, by mail, until June 1965, to Chris A. Huette, a principal of Bloomington SBIC.
A civil complaint has been referred by SBA to the Department of Justice, but is being held in abeyance pending preparation and presentation of related criminal proceedings.
Senator HARRIS. Bloomington Small Business Investment Co., the last time you had information about it, had some loans I presume which were not self-serving, did it not?
Mr. LEIsy. Yes, according to our information.
Senator HARRIS. Has SBA instituted civil action against Bloomington or its principal owners?
Mr. CAMPBELL. Mr. Senator, a similar complaint has been sent by our agency to the Department of Justice in the spring of this year.
Senator HARRIS. What has happened to that?
Senator HARRIS. Now what about surety bond coverage? Has anybody made an investigation to make sure there is surety bond coverage here that the Government might be against ? Does anybody know?
Mr. LEISY, We have no information, Senator.
BOND COVERAGE-BLOOMINGTON SBIC
Bloomington SBIC does not have surety bond coverage. None is required under the Act or Regulations. However, fidelity bond coverage is required by the Regulations.
Pursuant to Section 107.711 of the Regulations, all Licensees are required to maintain a fidelity bond covering each officer or employee who has control over or access to cash, securities, or other property of the Licensee. The minimum amount of such bond is based upon the total amount of the assets of the Licensee plus the unpaid balance of loans and investments which the Licensee has contracted to service for others.
Bloomington SBIC bad assets between one million and two million dollars and was required to have a minimum fidelity bond coverage of $75,000. Until September 1, 1963, oomington SBIC had a fidelity bond coverage of $50,000, at which time the coverage was increased to $75,000, in order to comply with the Regulations.
Because of the contractual relationship between the parties, any action based upon recovery on the fidelity bond must be instituted by the Licensee or in its behalf.
Senator HARRIS. Now the estimated total loss is $18 million. The estimate of Bloomington's loss was set at what figure? Do any of you know? I may have to ask Mr. Kelley about that.
Mr. LEISY. Can we consult a minute on that, Mr. Chairman?
Senator HARRIS. Yes. My indication is that the estimate of loss that the Government would sustain on Bloomington was $330,000 of the $660,000 the Government advanced. In other words, it was estimated there would be a 50-percent recovery by the Government on this small business investment company. Is that correct?
Mr. LEISY. Mr. Chairman, that may have been correct on the date of your information. Subsequently, according to the information I have here in front of me which I will verify for the record, if you would like, on June 1 we revised that loss estimate to the total of $660,000.
Senator HARRIS. About June 1, 1966 ?
Senator HARRIS. Then revised upward by the same amount, the overall of $18 million of which this $330,000 was a part?
Mr. LEISY. Yes, sir.
Senator HARRIS. So at least it will be $18,330,000 loss if you had changed this figure?
Mr. LEISY. Yes. If that were the only figure that were changed.
Senator HARRIS. Do you think the basis of estimating the Government's loss in the Bloomington situation which revises the total estimated Government loss of $18 million is typical of the type of estimates that were made in regard to other SBIC's and possible Government loss with them?
Mr. LEISY. As I previously advised this committee staff when we first furnished the estimate of loss to them, the estimate which totals $18 million was the result of looking at a large number of companies in a relatively short period of time with varying degrees of accuracy of estimating, depending on the situation in each particular company,
There is absolutely no question, as Mr. Boutin testified, that that estimate of loss needs continuous refinement; in other words, substantial refinement.
Senator HARRIS. Would it not be a proper conclusion to say “refinement upward”?
Mr. LEISY. I can't reach that conclusion today, Mr. Chairman.
Senator HARRIS. Have you had any other changes in estimates as regards particular companies?
Mr. LEISY. Since that estimate was prepared, yes, Mr. Chairman.
Senator HARRIS. How many changes in estimates have you had by companies?
Mr. LEISY. I can't tell you precisely how many changes we have had. I think it is clear that as we get more and better information on each of these companies that we will need to revise the estimates in a substantial number of cases.
Senator HARRIS. Is there anybody present who can tell us how many companies on which we have changed the estimate of the Government Joss?
Mr. LEISY. I don't believe so, Mr. Chairman.
Senator HARRIS. How do you know we have changed that since then!
Mr. LEISY. I know that we have changed the estimate in some cases.
Senator HARRIS. How do you know that? The only one you have testified to is Bloomington, and you can't produce anybody else who