Mr. KELLEY. Let me see, I can check that number, Senator. I think I mentioned in this talk that there were 70 cases either in litigation or under investigation. Many of those 70 cases had been referred to the Department of Justice or were in the process of being referred.

Senator MUNDT. Specifically how many convictions were obtained? Mr. KELLEY. I don't think I can give you a specific answer to that, Senator. I just don't recall the figure, but I can give you an estimate. I would say we are talking about a half dozen cases at the outside. Mr. ADLERMAN. I think I can throw some light on this. Senator MUNDT. All right. Go ahead.

Mr. ADLERMAN. I have checked with Justice on this. I got this verbally. Twenty-eight criminal cases, 28 cases which might involve a violation of the law, were referred to Justice, 18 of which were sent back to the SBA because of insufficiency of material or lack of proper investigation and so forth. Six of them are pending. They presented four cases to the grand jury, and they got four convictions. The balance of the cases went into the Civil Division. I didn't check on that.

Mr. KELLEY. I might quote a figure that was quoted by the House Small Business Committee general counsel in this respect. I have to refer to that because I didn't get that specific figure before leaving the agency. He stated that 43 cases were referred to the Department of Justice on civil actions. Only 10 were completed and these were done primarily by SBA attorneys, none by Justice alone. Thirty cases was the figure quoted there that were referred to the Department on criminal references and the Department declined 20 of these. Thirteen cases had been with the Department over 1 year.

Senator MUNDT. Have some been longer that 2 years?

Mr. KELLEY. Yes. To my knowledge there were at least five. I don't know whether there were more than that or not.

Senator MUNDT. Five had been longer than 2 years.

Mr. KELLEY. Five had been at least 2 years and maybe longer.
Senator MUNDT. Have some been there as long as 3 years?

Mr. KELLEY. I don't know, sir.

Mr. ADLERMAN. In the Frontiers Capital case the transactions took place in 1964, about the middle of the year. When was that case referred to Justice?

Mr. KELLEY. I don't know, Mr. Adlerman, but I think it was brought out in the testimony here today; I think it was fairly recently. Mr. ADLERMAN. Wasn't it in June of this year?

Mr. KELLEY. I believe that is the case.

Mr. ADLERMAN. A little over a month ago?

Mr. KELLEY. I believe that is the case.

Mr. ADLERMAN. Isn't that due to the fact that we were investigating and getting into these things that aroused the interest of your own organization and they investigated, too, and they sent it to Justice but only sent it to them about a month ago!

Mr. KELLEY. I think this case was certainly stimulated by the referral, certainly stimulated by your investigation. Now, we had many different problem companies on which there were indications of problems the question of deciding the priorities-and I think the result here was that there was a step-up in the priority as a result of this.

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Mr. ADLERMAN. That is true. I can understand that you might have priorities. But here is a case where it appears there were conflicts of interest, there were violations of regulations. There evidently was fraud. These events occurred over 2 years ago, and it took you more than 2 years to get it to the Justice Department.

Mr. KELLEY. Mr. Adlerman, as I have said, I can't really defend the slowness with which we have acted in some of these cases that you have cited. My only reply to that is that we had some 250 or so problem companies.

Mr. ADLERMAN. I am not defending the Justice Department or anything of that sort, but I think we ought to set the record straight here on what happened as far as the criminal cases. I didn't check the civil cases, but I also think on the other side your office was negligent in referring some of these cases.

Mr. KELLEY. Yes; I think some of them should have been referred to Justice sooner, but the point that I am making is that many that were referred to Justice stayed there far too long and during that time we were prohibited from taking further action with respect to those cases. For instance, we cannot investigate if it was something that the FBI should properly be brought in on. So our general instruction, as I understand it, was to stop investigation as soon as there was any indication that there might be fraud, either civil or criminal, and then refer it to the Department of Justice at which time the FBI would be brought in to complete the investigation if they felt there were enough indications

Mr. ADLERMAN. What did you do to interest the Department of Justice? Did you make any effort to get them to move on these cases? Mr. KELLEY. Yes. As I have said, Mr. Adlerman, first I met with assistant, one of the Assistant Attorneys General. I did not feel I got too much satisfaction there. Then our Assistant General Counsel started to work on a regular basis with the next tier of people feeling that if a little closer personal relationship was set up, that we would overcome some of these delays. That did not seem to be too successful either.

Mr. ADLERMAN. Are you talking about civil or criminal cases? Mr. KELLEY. I am talking really about both kinds. I think our primary delays were probably in the civil division as opposed to críminal, but I think there were some instances in both.

Senator MUNDT. I have just one other question, Mr. Kelley. That grows out of the fact that press reports in the last few months indicated that SBA had sold loans and debentures from SBIC's to financial institutions.

Mr. KELLEY. Yes.

Senator MUNDT. Tell us what you know about this and what are the implications of those operations?

Mr. KELLEY. SBA sold about $110 million worth of debentures of SBIC's to institutional investors in the early part of this year.

Senator MUNDT. Were those sold without recourse?

Mr. KELLEY. No; they are sold with full recourse to the Govern

ment.

Senator MUNDT. Which would be then, if I understand it, that you have $500 million for which you are accountable, including contingencies of a hundred million dollars.

Mr. KELLEY. No, this does not create any additional contingency, I don't believe. In other words, SBA sold loans that it had made to raise additional funds for the agency's operations, not just for the SBIC program. It could have, of course, borrowed these funds from the Treasury if the agency had sought an appropriation.

Senator MUNDT. Maybe I don't quite understand the operation, but don't you have a $400 million revolving fund in the SBIC? Mr. KELLEY. Yes.

Senator MUNDT. You can make loans to smaller SBIC's to the total amount of that $400 million.

Mr. KELLEY. Yes, to any SBIC that qualifies.

Senator MUNDT. Which, if they all go bad-this is a hypothetical case-if they all go bad, a national depression or something, the taxpayers will have lost the whole $400 million?

Mr. KELLEY. Yes.

Senator MUNDT. Now, if in turn you obligate yourself to pay private financial institutions for $100 million worth of paper without re

course

Mr. KELLEY. With recourse.

Senator MUNDT (continuing). With recourse, don't you have to come back then to Congress and say, "We are stuck with a hundred million dollars of bad paper"? Haven't you increased the obligation of the taxpayer to $500 million?

Mr. KELLEY. There are two ways. There are several ways of financing the agency. That is really what was involved here. One would be that the agency could ask the Congress for an appropriation, we will say for $100 million, for its general purposes including the SBIC program.

Another way would be that the agency could sell specific loans that it holds in its portfolio. They might be SBIC or they might be other types of loans which, in turn, would raise funds for the agency's operations.

Or, as was passed by the Congress 2 or 3 months ago, the participation pooling device whereby loans would be pooled and participating interest would be sold. It is my understanding that this did not have an effect on the ceiling applicable to SBIC loans.

Senator MUNDT. Let me set up some circumstances. You may be right, but I don't quite get the picture. Let us assume a hypothetical case where the SBIC has loaned out to smaller SBIC's its totality of $400 million. That is out.

Mr. KELLEY. Yes.

Senator MUNDT. Then you take paper that you have gotten back and borrow with recourse $100 million so that is an obligation, really, of the Federal Government.

Senator MUNDT. Then comes the deluge. None of the $400 million comes back. You are still owing some financial institutions $100 million. Where are you going to get the money?

Mr. KELLEY. Well, Senator, if the $400 million were lost in the first instance without any paper being sold, the taxpayer would be out $400 million.

Senator MUNDT. How about this extra $100 million?

Mr. KELLEY. Well, the taxpayer would still be out only $400 million it seems to me unless the other $100 million that came in as a result of that sale were invested in things in which the agency took a loss. Most of that money would not necessarily go back in the SBIC program.

Senator MUNDT. The man to whom you sold the $100 million worth of paper, not being able to collect on that paper, has or have recourse against the Government for $100 million.

Mr. KELLEY. That is true.

Senator MUNDT. Therefore, it is a loss.

Mr. KELLEY. But we could not, as a result of selling that $100 million, we could not loan SBIC's $500 million instead of $400 million. We could still loan, the maximum we could loan the SBIC's is $400 million.

Senator MUNDT. I am just pointing out the magnitude of the possible loss to the taxpayer would be $500 million.

Mr. KELLEY. That is true. That would be true if the agency had borrowed the money from the Treasury, too. If the Treasury had gone out and sold general securities of the Government for that $100 million and the $100 million was invested so that the Government took a loss or the taxpayer took a loss, he would still lose $100 million Senator MUNDT. It would be the same thing.

Mr. KELLEY. It would be the same thing. What I am saying is that that is an alternate means of financing the agency.

Senator MUNDT. Is that a good, prudent and proper governmental policy, do you think?

Mr. KELLEY. Speaking as a private citizen, which I can now do
Senator MUNDT. You are a banker now.

Mr. KELLEY (Continuing). I can say that I would have preferred that the Government go for an appropriation rather than sell these securities. But the Bureau of the Budget did not want us to go for an appropriation.

Senator MUNDT. The difference being, it seems to me, when you go for an appropriation you know exactly the limits of the contingency. You appropriate so much money and if you lose it all, that is what you lose. Are there any limits which should be placed on you by the act on what you can do in terms of placing money in selling debentures to financial institutions?

Mr. KELLEY. There were not at that time, Senator. There was no limitation.

Senator MUNDT. It may have been cranked into the Participation Sales Act, I don't know.

Mr. KELLEY. In my view the primary problem with participation financing or the sale of individual loans is that the Government is going to have to pay a higher rate of interest than through direct Treasury financing. That is the main issue.

Senator MUNDT. Plus the fact that it seems to me it makes it very difficult in terms of our determination of what is exactly the national debt, what our obligations are, if we have a number of Federal agencies selling debentures, obligating the Government to that extent, without having any control over it.

Mr. KELLEY. I agree, Senator.

x

Senator MUNDT. That is all.

Senator HARRIS. Thank you, Mr. Kelley. You may be excused. There is present in the subcommittee room Mr. Walter B. Stults, executive director of the National Association of Small Business Investment Companies, Washington, D.C. Mr. Stults has furnished the subcommittee a statement by Mr. Grogan Lord, president of Texas Capitol Corp. and president of the National Association of Small Business Investment Companies. Mr. Lord could not be here in person. Without objection, that statement will be received and made à part of the record. We will make it an exhibit, No. 58.

(Document referred to marked "Exhibit No. 58" for reference and will be found in the appendix on p. 292.).

Senator HARRIS. Mr. Stults, I appreciate your presence here today and the other days of the hearings. We have some questions concerning the statement. I wondered if we might submit those to you and have Mr. Lord make some additional comments in response to those questions.

Mr. STULTS. Yes, sir. We would be delighted to do that.

(Comments were received and made a part of exhibit No. 58, and will be found in the appendix on p. 292.)

Senator HARRIS. Without objection, that will be done.

We have now come to the conclusion of 3 days of testimony concerning small business investment companies and their regulation by the Small Business Administration. First of all, I want to thank all of the witnesses for their patience in sitting through some long sessions so that we could finish on schedule.

Also I want to thank the members of our staff, particularly General Counsel Jerome Adlerman and John J. Walsh, Ralph Dunavant, Gerald D. Skinner, and Harold Ranstad for their very commendable preparation of this study, and particularly also the minority counsel, Mr. Philip W. Morgan.

I want to commend particularly Mr. Bernard Boutin, Administrator, of the Small Business Administration, and the Deputy Administrator, Mr. Howard Greenberg, for their candid and forthright testimony. It was indeed reassuring and refreshing to listen to a straightforward admission on their part of the existence of severe problems in this program and a factual discussion by them of means being employed to solve them. The fact that these problems are out in the open is a major step forward in getting them under control.

Once again, I feel sure I am joined by the other members of the subcommittee in expressing our confidence that Mr. Boutin and his formidable administrative talents will get this program back on the track and doing the job Congress intended that it should do.

To maintain proper perspective, we have placed in the record testimony concerning the many fine people who are associated with SBIC's and the good records they have made in carrying out the intent of Congress.

We have asked for further comments from the president of the Organization of Small Business Investment Companies, particularly in regard to such recommendations as greater self-regulating power. But it has been a shocking thing to learn that a program with so many taxpayers' dollars involved could exist for so long in such a lax condition of Federal administration.