WASHINGTON - The Justice Department announced today that it has filed a lawsuit accusing John Torkelsen, Richard Propper, Daniel Beharry, and Sovereign Bank of defrauding the Small Business Administration’s Small Business Investment Company (SBIC) program of $32 million. The suit was filed in the Eastern District of Pennsylvania under the False Claims Act, which allows the United States to recover up to three times the amount of its losses plus civil penalties.
The government’s complaint alleges that Torkelsen, Propper and Beharry violated the conflict of interest and management fee rules of the SBIC program by engaging in multiple secret transactions that funneled government money into companies controlled by Propper and Beharry or Torkelsen and his family. The SBIC program has rules designed to prevent the unauthorized investment of government funds in companies controlled by those who act as managers of the SBICs. The alleged fraud is believed to be the largest perpetrated upon the program to date.
The SBIC program, administered by the U.S. Small Business Administration, was created in 1958 to fill the gap between the availability of venture capital and the needs of small businesses in start-up and growth situations. The government, itself, does not make direct investments or target specific industries. Rather, the SBIC program is a “fund of funds” – meaning that portfolio management and investment decisions are left to qualified private fund managers. Small businesses which qualify for assistance from the program are able to receive equity capital, long-term loans and expert management assistance.
The investigation of the fraud allegations against the defendants was conducted by the U.S. Attorney's office in Philadelphia, Pa.; the U.S. Small Business Administration’s Office of Inspector General and Office of General Counsel; the Federal Bureau of Investigation; and the Justice Department's Civil Division. The United States has settled with, or reached settlement in principle with, a number of other individuals or entities involved in the alleged fraud.