much taxpayer money has been handed to any of them. Deputy Administrator Parris quickly sent to each of these involved SBIC's a letter warning they might "receive inquiries" from the press and emphasizing that SBA, for its part, is keeping mum.

"It is not the present intention of SBA to release any information regarding the details of the specific transactions," he wrote. "We do not plan to provide information about the name or financial affairs" of those who got the selfdealing loans. "Nor do we plan to provide any explanation of how our general criteria in such matters were applied to specific cases. * * * Should you receive an inquiry on this subject the decision as to whether or not you release additional information rests entirely within your discretion."

Not surprisingly, many of the self-dealing SBIC's decided their "discretion" should take the form of telling reporters little or nothing.

"Ethical" considerations were cited by Benjamin Burdick, president of Midwest Small Business Investment Co., which shares quarters in Detroit with his law firm of Burdick, Burdick, Silverstein, & Burdick, and which has no fulltime employees. He declared Midwest has engaged in two self-dealing affairs, one of them very minor and both entirely legitimate, but said revealing details about borrowers could result in "crippling companies that ought not to be hurt."

"I'd rather not discuss it because I've read some of the Wall Street Journal articles about small business investment companies and they've been uncomplimentary," said A. B. Simms, president of both the First Atlanta Investment Corp. and the Southern Regional Association of Small Business Investment Companies. His own SBIC has the same address and phone number as an Atlanta real estate consulting firm, A. B. Simms & Associates.

"NO PHONEY-BALONEY"

G. Wayne Leslie, general manager of Judson-Murphy Capital Corp. in San Francisco, reported this SBIC made one self-dealing loan with "provisions so there was no phoney-baloney." He warmly defended "internally generated situations" as "the natural result of a small company; we haven't got the money to justify the cost of finders"--but said "we have a policy not to divulge information on any of our loans." Somewhat mystifyingly, the firm's president, Philip Murphy, insisted in a separate interview that this SBIC has made no self-dealing loans whatever, though it did seek an SBA opinion on what at first seemed a borderline case.

Greater Pittsburgh Capital Corp. has a distinguished board of directors including two vice presidents of Aluminum Co. of America. Its president, Wallace Kirkpatrick, an Allegheny Ludlum Steel Corp. executive, suggested there are "probably a lot of shady goings-on" among some other SBIC's, but said his own did better by engaging in two self-deals than it could have done lending to others. Nevertheless, no details were given out. Vice President Donald Collins explained details of deals are simply private and confidential matters, and besides, information about self-dealings by SBIC's can be "bad publicity" for the industry.

But spokesmen for a number of SBIC's appear glad to disclose such dealings, and laud their benefits.

Charles M. Fairchild, who deals in real estate and other ventures in Washington, D.C., is proud of his role in Citizens Small Business Corp. It was founded 3 years ago, and he joined some 40 other stockholders to provide a total of $150,000 in private funds, while the Small Business Administration provided an equal amount of Government money. Mr. Fairchild became one of the nine directors; his wholly owned investment counseling concern, Fairchild & Co., was granted a contract to manage this SBIC. By now, Citizens has put $106,000 of loans, more than a third of its capital, into two companies in which Mr. Fairchild has himself become an investor.

Recounting this, James Olah, an official of Fairchild & Co., gives further detail: Last year Citizens loaned $60,000 to Branch Mountain Timber Farms, Inc., near Moorefield, W. Va. Before long, Mr. Fairchild had personally bought onethird ownership of the lumber company. By December, Citizens had granted another loan, of $10,000.

LOANS TO ART FIRM

Two years ago Citizens had put $30,000 into American Society of Fine Arts, Inc., while Mr. Fairchild was investing $5,000 of his own in this firm set up to market art replicas. Last October Mr. Fairchild became president of the art company; in January it received another $6,000 loan from Citizens.

In all its investment program, Citizens has granted second-helping loans only to these two companies.

Comments Mr. Fairchild: "Branch Mountain would be bankrupt right now if I hadn't personally gone in; Citizens would have lost money." As for American Society, he says, "it original management tried a direct mail advertising approach that didn't work, so I was made president; but then the company ran into legal problems with its franchisers and has not been able to get any merchandise to sell. This is undergoing arbitration now; if we win, we'll make money."

The Small Business Administration has put another $150,000 of Federal funds into Capital Investors Corp. of Montana, an SBIC formed last fall in Missoula, Mont., by 15 businessmen, each of whom invested $10,000. Among these was Keith Wright, who serves as director. With approval of SBA headquarters in Washington, Capital Investors made a $26,000 10-year loan to Wright Lumber Co., in which Mr. Wright then held a minority share of ownership.

The money, along with a bank loan and additional personal investment by Mr. Wright, went to buy out two of his partners, to put Mr. Wright in full control of the lumber company, and to finance its expansion-so report high officials of the lending institutions concerned. Mr. Wright himself, despite a red and yellow "Welcome" sign outside his lumber company, says he's too busy to "waste time" talking to reporters.

MONTANA CARS, INC.

Another director of Capital Investors is Leonard Senechal, who holds a 40 percent stock interest in Montana Cars, Inc. This auto leasing firm has received a loan of about $15,000 from the SBIC. "With 15 guys in business, at one time or another they are going to need money. It's natural to go where they have an investment,' he remarks. Like Mr. Wright, he absented himself from the SBIC board meeting that approved his loan.

When Mr. Senechal helped found the SBIC, half his $10,000 share was actually money advanced by Mills Folsom, past president of the Missoula Chamber of Commerce. The SBIC subsequently granted a $20,000 loan for buying irrigating equipment to Folsom Co., Inc., a ranching enterprise owned by Mr. Folsom.

More recently, Mr. Folsom says, he found he needed to get back his original indirect investment in the SBIC. Since the SBIC could not immediately buy back these shares without impairing its required capital. the problem was resolved by a further SBIC loan to Mr. Folsom of $5,200 (his original investment plus interest); meanwhile his shares, nominally owned by Mr. Senechal, are in escrow. Says Mr. Folsom: "As far as I'm concerned, the stock is gone." Some SBIC's, after gaining formal approval from Washington for particular self-deals, have been overwhelmed by doubts.

"COLD FEET"

"We got cold feet," says Gerado Joffe, president of Science Investment Co. in San Francisco. This year the Small Business Administration had okayed the SBIC's plan to back a company formed to produce Tar Gard, a do-it-yourself cigarette filter which smokers could fit on the tips of regular brands. Mr. Joffe and Forrest Tancer, vice president of the SBIC, each personally owned 25 percent of Tar Gard Corp. After brooding, they decided to drop the SBIC deal and obtain their filter money elsewhere. Says Mr. Joffe: "If anything went wrong with the loan it would have been very unpleasant for us" with the other 21 SBIC stockholders.

Differing views about self-dealing are illustrated by Robert M. Nason, president of Arizona Capital Corp., in Tucson. One director of this SBIC insisted he did not want to borrow from it and obtained money elsewhere. But SBA approval has been sought and granted for a $60,000 loan to a company in which another director, F. C. Thum, holds an interest. Mr. Thum is president of this concern, John Porter Manufacturing Co., of Phoenix; the SBA letter of approval noted he owns less than 5 percent of its stock but holds an option which would give him 31-percent equity.

SBA officials say they apply three criteria to self-dealing applications. First, there must be noninterested persons in the SBIC with power to block the transaction if they wanted to. Second, terms of the deal must be "fair and reasonable." Third, the arrangement must "serve the purposes of the Small Business Investment Act of 1958." Though this may seem vague, and though officials refuse to elaborate, it has been used to reject a few proposals.

Neil Christopher, president of Southern Small Business Investment Co., in New Orleans, says Washington prohibited a $86,000 loan intended for Hammond Homes, a real estate development firm. SBA objected that Southern SBIC was controlled by a mortgage company in which Mr. Christopher and an associate together held 49.5-percent ownership; that the two of them owned all of Hammond Homes; that the projected deal "would constitute a use of the (SBIC) by its owners as a financing medium of their own undertaking."

Complains Mr. Christopher: "If the SBA was justified in turning down this loan, it should have turned down a lot of the others it has approved. I think a lot of SBIC's have gotten loans that were the same kind as mine. It might be that some of the others didn't furnish full information."

SBA OPERATIONS

How much information the SBA does demand remains obscure. Its officials say they do not normally attempt on scene investigations before approving selfdeals, though traveling examiners may later look into them during routine checks made every year or two. Washington operates mainly by correspondence. And its letters of approval seen by reporters merely recite back to the self-dealing SBIC the same information the SBIC has provided. Sometimes Washington takes months to make up its mind. But SBA took only two days to clear a deal for Chicago Capital Corp.; a director of this SBIC happened to be partner in a law firm serving as legal counsel for a company which obtained a loan, and he also served as a director and secretary of his borrowing company-but he had no financial interest in it.

In some cases the Small Business Administration may be getting slightly less than the full story.

Gerald Hardwick, president of First West Texas Capital Corp., in Odessa, Tex., pulled out of the files for a visiting reporter a letter from SBA authorizing a loan "in the amount of $62,500" to Rebel Pipe & Supply Co., Inc., partially owned by J. D. Ormand, a director of the SBIC. The loan actually granted was $85,000, however, he declared. He explained that after filing its applications this SBIC had increased its capital surplus, which raised its ceiling on the size of any one loan-so he didn't think further approval by SBA was necessary. "If it hadn't been a good loan, I would have voted 'no' myself," commented Mr. Ormand. He declined to disclose earnings of Rebel, a small oilfield equipment concern. According to the SBIC's annual report, however, Rebel showed a profit of $13,960 at the end of its last fiscal year, August 31, 1962, and a loss of $9,533 through February 28 of this year. The SBIC itself operated at a $7,520 loss in the year ended March 31. It has received $470,000 in taxpayer money from the SBA.

MANY REAL ESTATE VENTURES

Though SBIC's on the SBA's list of "self-dealers" enter diverse ventures, they appear to find a special magnetism in real estate. And with full approval of the Small Business Administration-although this agency, when operating under a separate direct-loan program to small businesses, proclaims that it will not back "speculation in any kind of real or personal property" because of its "unique responsibilities as a lender of taxpayers' money."

"Congress should have been more specific in the type of investments it allows the SBIC's to make. I don't think they should allow real estate loans; there is plenty of venture money available for real estate development." So says Ezra Mintz, portfolio manager for Georgia Capital Corp., of Atlanta. Nevertheless this SBIC, which has drawn $600,000 in Federal funds, made two $60,000 loans last year to a real estate holding company whose president at the time was a vice president of Georgia Capital, he reports. Details are withheld because they are of "a personal nature."

In the Boston area, all three of the SBIC's which SBA reports as having received approval for self-dealing share their offices with real estate firms, and their transactions have involved real estate in some form.

Alan Zuker, treasurer of Chestnut Hill Capital Corp., says that when this SBIC took a third mortgage on a Boston apartment house owned by Diwal Trust, it granted an interest rate of 10 percent, somewhat lower than for other borrowers. The reason, he reports, is that Chestnut Hill's president, Robert Waldman, is as a stockholder entitled to a special rate, and he is a trustee of Diwal Trust. Says Mr. Waldman: "There was sufficient equity in the property to merit the loan."

COLONY HOTEL CORP.

Julian Cohen, treasurer of Massapoag Investment Corp., in Brookline, Mass., and a partner in the real estate firm which shares office quarters, says that this SBIC's deal cleared by SBA did not really involve self-dealing. He states Massapoag granted a $54,000 mortagage for his brother, Bernard Cohen, on the Colony Hotel Corp., in Swampscott.

Bernard Berkman is a man of many interests who likewise denies any real self-dealing. He says he sells insurance and owns a liquor store and operates— within one office in Brookline a real estate firm, Berkman, Associates, Inc., and Pilgrim Capital Corp., an SBIC. He is president of both. Phillip Lemelman is clerk (secretary) and a director of the SBIC; his son, Herbert Lemelman, is clerk of Berkman Associates, according to Mr. Berkman; the Lemelmans have joint law offices.

Pilgrim loaned $17,500 to Wendell Realty Corp, last year on a Boston guest house, subject to a previous bank mortgage, according to Mr. Berkman. Treasurer of Wendell Realty is Phillip Lemelman; he declines to comment on the deal but his son Herbert says, "my father is a substantial owner of Wendell." Mr. Berkman declares SBA approval was also gained for $30,000 second mortgage granted last September to Bayside Manor Nursing Home, Inc., of which Herbert Lemelman was an incorporator. Pilgrim also has granted Bayside short-term loans from time to time, Mr. Berkman says, "Pilgrim agreeed to buy 50 shares of Bayside stock, but the price has not been determined as yet," adds Mr. Berkman. Bayside's president Richard Gens, states that Pilgrim has obtained the 50 shares, amounting to half ownership, paying nothing for his stock since it was granted in return for a "favorable" 3 percent interest rate on the loans. "They put in the venture capital and we put in the know-how," comments Mr. Gens.

Herbert Lemelman declines to confirm Mr. Berkman's statement that he or his father obtained SBA approval on behalf of Pilgrim for the Bayside and Wendell loans. "It is not a matter of public record," he comments. He insists neither he nor his father engaged in self-dealing. "We are lawyers and professional clerks and we do this all the time; we have no (investment) interest in Bayside or Pilgrim." Mr. Berkman states that he personally owns all of Pilgrim's stock, with $154,000 of his own capital and $150,000 borrowings from SBA. And he too insists none of Pilgrim's transactions constitute self-dealing. Richard Felts, manager of Small Business Investment Corp. of Georgia, says it lent $45,000 last summer to Pleasant Hill Acres, Inc., which wanted to develop a trailer park at the edge of Atlanta. Two of this SBIC's directors owned 20 percent shares in Pleasant Hill. Since the SBIC had previously invested in a trailer sales agency, explains Mr. Felts, "I looked upon the creation of this mobile home park as a potential to sell some of our trailers." He adds: "We're not deliberately going into self-dealing transactions; we'd rather avoid them. It's going to be hard, because each of our 27 directors has diverse business interests around town *** we don't want to turn down a good deal."

When SBA Deputy Administrator Parris officially approved a $60,000 loan to Crossroads Development, Inc., by Small Business Investment Co. of Hawaii, an SBIC in Honolulu, he wrote that "Crossroads is stated to be a real estate development company, with two projects currently underway and plans for continuing series of development projects." He noted, with his approval that, Crossroads was wholly owned by Robert D. Thomas, vice president of the SBIC. Mr. Thomas has invested $5,000 in this SBIC, according to its officials, while the SBA has put in $300,000.

Hon. JOHN HORNE,

Office of the Administrator,
Small Business Administration,

Washington, D.C.

JULY 2, 1963.

DEAR JOHN: I call your attention to the lead article in the Tuesday, July 2, Wall Street Journal entitled, "Usual Federal Frown on Conflicts of Interest Absent in SBIC Cases," with the subheadline, "SBA Approves Many Loans by Investment Groups to Officers' Own Companies."

The explanation in the article of the SBA's

This article deeply concerned me. position did not seem to be very convincing.

The article indicated that SBA officials said they applied three criteria in passing on self-dealing arrangements. These criteria were as follows:

1. There must be noninterested persons in SBIC's with power to block the transactions if they want to do so.

2. The terms of the deal must be fair and resonable.

3. The arrangement must serve the purposes of the Small Business Investment Act of 1958.

Obviously, these criteria are so vague as to be virtually meaningless. You know as I do that so-called noninterested persons closely associated with their colleagues in an SBIC are very likely to be subject to the pressures, influences, and associations which would persuade them to go along with self-dealing arrangements.

The examples given in the article of self-dealing by SBIC's in real estate ventures and speculations were particularly alarming.

But what gives me the deepest concern about this situation is the refusal of the SBA to disclose to the press the full and complete story on self-dealing. It is obvious that this kind of activity can be subject to grave abuse.

This abuse is particularly likely, however, if the whole business is conducted in secrecy with the public shut out.

In view of the fact that taxpayer money is involved in all of these cases, it is very difficult for me to understand how the SBA not only permits but, on the basis of this article, seems to encourage this highly questionable activity.

I would appreciate a prompt answer because I feel very strongly that this is something that should be considered by our subcommittee when we review the annual authorizations requested for SBIC's.

Sincerely,

WILLIAM PROXMIRE, U.S. Senator.

SMALL BUSINESS ADMINISTRATION,
Washington, D.C., July 9, 1963.

Hon. WILLIAM PROXMIRE,
U.S. Senate,

Washington, D.C.

DEAR SENATOR PROXMIRE: This is in reply to your letter of July 2, 1963, requesting our specific comments on the article of July 2, in the Wall Street Journal entitled, "Usual Federal Frown on Conflicts of Interest Absent in SBIC Cases."

We appreciate this opportunity to explain our position since the Wall Street Journal article contains a number of statements that are misleading, incomplete, or only partly true. This is not surprising since, from past experience, we know that the Wall Street Journal can hardly be regarded as an objective observer of small business problems of "Main Street."

The purpose of this letter, however, is not to answer all of the misleading points of the Journal article, but to answer the points raised by your letter. For convenience, we first will list the four basic points or implied questions set forth in your letter.

1. Does SBA "encourage this highly questionable activity" (i.e., transactions labeled for convenience as "self deals" but which would be better described as transactions involving affiliation of interest between an SBIC and a small business concern in which the SBIC invests)?

2. Are the three criteria used by SBA in reviewing such transactions "so vague as to be virtually meaningless"?

3. Should SBA have refused to "disclose to the press the full and complete story on self-dealing"?

4. Should the "examples given in the article of self-dealing by SBIC's in real estate ventures and speculations" be regarded as "particularly alarming"?

At the outset, it should be noted that "self-dealing" is regulated by SBA under section 107.716 of the regulations, which provides as follows:

"§ 107.716 self-dealing limitation.

"(a) Self-dealing to the prejudice of SBA or the Licensee's shareholders is prohibited.

"(b) Without the prior written approval of SBA, a Licensee shall not purchase Equity Securities of, or make a loan to, an officer or a director of the