Arnold Kilberg likes to refer to himself as a one-man bank. He lends millions of dollars to retirees and racketeers alike.
Squat as a bull mastiff and well-heeled with a shiny black Rolls-Royce, the 69-year-old accountant has lent government money to everything from a troubled Virgin Islands beach resort to a financially ailing amusement park that left its creditors up in the air.
When the ventures he invests in falter, though, the American taxpayer ultimately is on the hook.
For his part, Kilberg has made money off the loans, fees and deals he has cut and wins praise from many of his customers.
“I regard Arnold as something of a J.P. Morgan. He stepped up to finance businesses when other people wouldn’t,” said Clinton Pearson, whose boat repair firm got $1 million in government-backed loans from companies with ties to Kilberg before he defaulted.
Kilberg is just one of many loan brokers licensed by the U.S. Small Business Administration (SBA) to lend some $1 billion in taxpayer’s money to small businesses, a major source of new jobs in America.
Ostensibly, the brokers are supposed to use the government money to make a profit while lending it to the disadvantaged, Americans who lack the financial wherewithal to get loans from traditional banks.
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Instead, federal audits suggest, the program has been riddled with waste, fraud and abuse thanks to the government’s poor oversight of brokers like Kilberg.
“If the SBA guarantees these loans and oversees them, it should be more involved,” said Gerald Lynch, who lost his home after a loan he got from a Kilberg venture went bad. “There is absolutely no supervision. To allow anyone to give out loans at (high) interest rates to corporations that can’t get traditional financing and then to have nothing to do with it doesn’t make any sense. If (SBA officials) guarantee the loan or provide the money, where are they?”
Although Kilberg declined to comment for this article, federal records, interviews with customers and court filings provide a vivid portrait of his operation, which is a microcosm of the best and the worst of the SBA’s program.
Raised in a Woonsocket, R.I., tenement, Arnold Kilberg grew up as the son of a Russian immigrant who peddled linens from a horse-drawn wagon. Over the years, he developed a keen eye for a deal and a sharp mind for numbers.
He does math in his head, scribbles complex payment plans on a napkin and years later can recall every nickel. After earning a degree in accounting, he became a CPA and started working as a loan broker in a variety of real estate businesses in the 1960s.
“He is sometimes his own public relations worst enemy,” said John A. Holmes, a Rhode Island Republican party chief who has steered loans to Kilberg. “He is a yeller and a screamer. But I saw people at a closing table get up and hug him and cry. I saw him do a lot of good for a lot of people.”
Kilberg became immersed in the current SBA loan program in 1984 when he was an owner, manager or investment adviser to four Rhode Island loan companies that were granted $16.2 million from the SBA.
Under the SBA program, Kilberg was supposed to borrow the money from the SBA at, say, 8 percent and relend it to disadvantaged Americans at a higher interest rate, say 15 percent. The program allows Kilberg’s firms to pocket the difference between what he pays to the government and what he charges the borrower once his costs are deducted. He also charges borrowers fees on the loans.
Kilberg has had no trouble finding borrowers, although many of his loans should have raised questions with SBA officials charged with oversight of the federal program.
In 1990, for example, one of his companies arranged for a $1.7 million loan to a Virgin Islands hotel company whose president, Kilberg’s former neighbor Benedetto A. Cerilli Jr., currently faces criminal racketeering charges for alleged misuse of an investment bank.
In 1991, one of Kilberg’s companies also lent $3.1 million to a Rhode Island shipyard whose president, Kreso Bezmalinovic, had three years earlier pleaded guilty to paying an illegal gratuity to a federal Environmental Protection Agency inspector, in a case involving a New York asbestos removal company he ran.
The same year his companies lent $5 million to the Rocky Point Amusement Park, a 155-year-old facility in Warwick, R.I., treasured by New Englanders for its corkscrew roller coaster ride and clam-cake dining hall. One of its owners, Boston real estate and nightclub magnate Henry D. Vara Jr., had some troubles, too.
In 1989, the Nevada Gaming Commission granted a Massachusetts-based company the right to buy the Sands Hotel for $127 million on the condition that its investors cut their business ties to Vara. An official said drugs were sold out of Vara’s nightclubs, and profits were being skimmed.
At the time, Massachusetts Gov. Michael Dukakis told several state lawmakers that his administration would not “do business with Mr. Vara,” according to a suit Vara filed in a Massachusetts county court.
Vara, whose investment portfolio included Florida television stations and a Colorado youth prison, filed court papers saying he was not associated with organized crime and was being treated unfairly because of his Italian heritage.
Vara was not Kilberg’s only questionable client. In 1987, Kilberg put together a $750,000 loan for a real estate firm ostensibly headed by the wife of reputed New England crime syndicate boss Raymond Patriarca Jr. The loan was paid off, but an SBA auditor cited Kilberg’s firm for minor infractions. In 1991, Patriarca pleaded guilty to extortion, drug trafficking and gambling and is now serving a 10-year federal prison term.
The other loans had bigger troubles. The Virgin Islands resort defaulted on its $1.7 million loan, and Kilberg’s brokerage took an ownership stake in the hotel. The shipyard filed for bankruptcy last August, and the loan to the amusement park went unpaid. Rocky Point filed for bankruptcy in 1994.
Despite the fiascos, Kilberg lives well. According to some 1994 court records, he drew personal income of more than $450,000 a year from the brokerages, his accounting firm and about $6 million worth of Rhode Island properties.
One of the reasons he seems to prosper despite the bad loans is his ability to make money servicing the borrowers through his network of interrelated companies. Kilberg’s accounting firm has helped prepare financial records for companies that have borrowed from his SBA-backed brokerage, court records show.
Kilberg comes along after a deal encounters trouble and picks up the pieces. Once the Rocky Point amusement park went under, for instance, an attorney for the park’s unsecured creditors filed court papers accusing the owners of having skimmed profits–a charge they denied. Under a reorganization plan, a new corporation controlled by Kilberg was created to manage the carnival, court records show.
Local citizens groups fought in court to save the historic park, but Kilberg’s company was given court permission to auction off the rides to pay delinquent taxes and now plans to subdivide the property and sell it to real estate developers.
To preserve access to the historic shoreline, state and local officials are currently negotiating to pay Kilberg’s company as much as $3 million to buy a strip of it.
All of this, of course, hasn’t gone unnoticed by the government. The SBA approved the payments to his accounting firm.
In 1993, an SBA official notified one of Kilberg’s partners that because of “significant regulatory violations,” the SBA was willing to permit two of the loan companies to continue operating “only on the condition that Mr. Arnold Kilberg is removed from positions of management.”
A report this April report by the General Accounting Office cited Kilberg’s dealings as an example of how the SBA’s lax oversight had allowed the program to be marked by waste and fraud.
Nevertheless, Kilberg is still operating. He is not a man without influence.
State Republican Party chief Holmes, who is an investment adviser, has rented office space from Kilberg, and steered cash-strapped small businesses to him, records and interviews show.
In February 1992, Holmes Financial Services even took out a full-page ad in the Providence Business News. Captioned, “Where to go when the bank says no,” the ad listed a dozen businesses that had been financed through Holmes by Kilberg’s government-backed loan companies.
Today, only three of those loans are performing smoothly. Six of the companies, with a total of more than $12 million in loans, filed for bankruptcy. Three others, with loans totalling $2.6 million, are seriously delinquent, court records and interviews show.
If the problems in the SBA program were limited to Kilberg, it would be troubled enough. But they aren’t.
The program has its success stories. A subsidiary of Chicago’s South Shore Bank has a long record of successful loans to minority businesses, for example. And since 1994, the guidelines for brokers have been tightened. Only 37 new firms have been licensed since then, and they are more experienced, much better capitalized and more closely monitored than the ones that came before.
“The program was ill-conceived at that point in time, and we fixed it since,” said SBA Associate Administrator Don Christiansen.
Still, a dismal picture emerges in the government’s statistics that chronicle the millions of dollars that taxpayers pay for problems.
At the end of last year, 186 of the SBA-approved loan brokers, or four out of every ten, had been closed, and the government was selling off or managing their assets. Most of the trouble stemmed from defaults on loan repayments to the SBA or regulatory violations.
Indeed as of September 1995, the 186 brokers owed the SBA $481 million, and government accountants projected that $302 million of the total would never be recovered.
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An analysis by the Federal Reserve Bank of Chicago showed that the brokers defaulted at rates that were twice as high as borrowers from savings and loans and 10 times the rates at commercial banks.
No figures were available for default rates on their private counterparts, venture capital firms, but the Fed report described the SBA broker performance as “dismal.”
Taxpayers and creditors are not the only ones suffering. Small-time entrepreneurs who bet their life savings on new businesses are being hurt, too.
One of the smallest companies listed in Holmes’ ad was a flower shop in Pawtucket, R.I.
Gerald Lynch and his wife were social workers in 1978 when they bought the tiny store with an attached greenhouse, hoping the modest business would provide for their retirement.
Despite putting in long hours at the shop and having relatives man the cash registers and make deliveries, their company by 1991 was veering toward default on two bank loans that totaled $195,568, and owed $2,800 in federal taxes and $4,389 in utility bills, company records show.
In 1990, the business had retained earnings of just $15,399. It cost the Lynches more to grow a single rose than to buy one at a supermarket.
“We should have walked away, but it was our love and our life,” Gerald Lynch said. “It was like family, and I guess you just don’t give up on that.”
In December 1991, the Lynches borrowed $240,000 from Kilberg’s Fairway Capital Corp., securing the loan with a mortgage on the home they’d lived in for 17 years, as well as the shop.
Holmes brought the Lynches to Kilberg, and took a $7,600 commission for helping prepare their application, loan papers show.
What happened next is typical of the program’s breakdowns, a fiasco for which the borrowers, broker and government lender all seem to bear some responsibility.
Kilberg made the loan at 15.25 percent, not far from the rate charged by credit cards. In an unrelated case he spelled out why: the SBA was charging more than 8 percent interest on the money it lent him, then adding auditing, legal and examination fees which he said in court papers drove his interest rate to nearly 11 percent. To make a profit himself, he had to raise his interest rate and heavily collateralize loans.
The tiny flower business soon staggered under its $3,400-a-month payments to Fairway. In 1994, with mounting interest fees and penalties, the Lynches owed Kilberg’s firm $300,000.
They declared personal and business bankruptcy. In June 1996, at a court-appointed auction, Fairway seized their home and shop.
Gerald Lynch doesn’t blame the debacle on Kilberg, who he says was caustic and profane in policing the loan, but nonetheless waited a year before foreclosing on their home. Lynch says the SBA should have policed the program better.
Ironically, the Kilberg company that seized the Lynches’ home now is in the SBA’s financial burn ward, too, where troubled companies awaiting SBA liquidation linger, some for as long as 20 years.
In 1994, two of the Kilberg-affiliated investment companies sued a third for allegedly failing to share the proceeds of a delinquent $1.2 million loan. And in a separate suit, Kilberg and his partner in Fairway accused each other of fraud and breaches of SBA regulation in their running of the company.
Fleet National Bank then sued Kilberg and his partner, accusing them of fraud and seeking to put a claim on the loan company’s stock to recoup some $4.5 million in outstanding loans.
Kilberg denied wrongdoing and accused the bank of fraud.
“As Fleet well knows, Arnold Kilberg is more than a typical borrower or businessman,” his lawyers wrote in 1994 court papers. “Actually, he is as much a banker as Fleet.”
Despite the government’s ongoing effort to close Fairway, Kilberg continues to play a role in its operations.
In June, one of his companies filed a lawsuit against one of his distant relatives, Mildred Miller, to collect the $14,465 she still owed on the $40,000 the firm extended to her late husband’s jewelry business.
Miller filed court papers saying the lawsuit would destroy the struggling business, and she accused Kilberg of exploiting the family’s trust in making and overseeing the loan.
He also served as the Millers’ accountant and financial adviser, as well as her husband’s life insurance trustee, she said. The case is pending.