Small Business Administration

Inadequate Oversight of Capital Management Services, Inc.--an SSBIC Gao ID: OSI-94-23 March 21, 1994

Failure of the Small Business Administration (SBA) to recognize signs that Capital Management Services, Inc., a specialized small business investment company in Little Rock, was operated improperly led to the loss to federal taxpayers of $3.4 million. David Hale, then a municipal court judge, ran Capital Management in an improper manner by entering into prohibited transactions, including loans to business associates and loans for real estate purchases. By taking advantage of flexible SBA guidelines for determining socially or economically disadvantaged persons, Hale was able to make loans to persons with questionable claims to program eligibility. GAO was unable to fully analyze transactions with Susan McDougal, Castle Sewer and Water, and Southloop Construction because key participants were unavailable for interview and records were incomplete. Nevertheless, the loan to Susan McDougal, who along with her husband had a reported net worth of $2.2 million, is an example of loans made to someone with questionable eligibility.

GAO found that: (1) SBA oversight of the licensee was inadequate and it failed to recognize serious indicators that the licensee was improperly managed, which resulted in a loss of $3.4 million to SBA; (2) SBA has placed the licensee in receivership and its president has been indicted; (3) the licensee made prohibited loans to business associates for real estate purchases, violated SBA regulations, and made questionable loan eligibility determinations; (4) SBA has not provided guidelines for determining socially or economically disadvantaged individuals because it wants to maintain flexibility in eligibility determinations, and it does require that licensees prepare and maintain eligibility profiles for each loan recipient; (5) the licensee only prepared and maintained a few recipient eligibility profiles; and (6) it was unable to fully analyze the loans to the disadvantaged small businesses because of the principals' unavailability and the licensee's incomplete transaction records.



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