Pennant Management, a Wisconsin investment manager for community banks and retirement plans, sued a Florida lender for allegedly selling it more than $22.8 million in sham loans that the lender said were guaranteed by the government.
The loans are among 26 totaling $179 million bought from First Farmers Financial LLC that may be fraudulent, Pennant said in a Sept. 29 complaint and statement. First Farmers Chief Executive Officer Nikesh Patel was arrested in Florida this week on a wire-fraud charge connected to loans involving a company that wasn't identified in court filings.
Pennant, the leading purchaser of U.S. Department of Agriculture-guaranteed rural development loans, acquired the loans from First Farmers last year and discovered two weeks ago that borrowers for three of them didn't appear to exist, according to the complaint filed in federal court in Chicago.
"The scope of the fraud may be broader, but at least three loans with purportedly 'guaranteed' balances totaling $22,820,000 purchased by Pennant from FFF have now been revealed to be shams," according to the complaint, which alleges that First Farmers' executives made up the borrowers and forged USDA officials' signatures on guarantees.
Pennant confirmed First Farmers' status as a USDA-approved "non-traditional" lender before buying the debt and understood that First Farmers had "undergone a supposedly rigorous vetting process by both state and national USDA offices," according to the complaint. The USDA has told Pennant the loans aren't reflected in its records and may not be legitimately guaranteed, according to the complaint.
First Farmers operates a USDA-guaranteed program for business and industry lending and provides bridge loans and capital for entrepreneurs and startup companies, according to its website.
The lawsuit names Patel, his wife and companies he ran. The money Pennant paid First Farmers was diverted to those entities and used to buy real estate including a lavish personal residence in Windermere, Florida, according to the complaint.
Patel was arrested in Orlando in connection with the allegations in the Pennant complaint and released on a $100,000 bond, his attorney, Mark NeJame, said in a phone interview. He said First Farmers has ceased doing business.
Representatives of First Farmers didn't respond yesterday or today to e-mails sent through the company's website asking about the allegations or whether Patel remains CEO.
Patel sold loans "under the false pretense that those loans were guaranteed by the U.S.," according to a Federal Bureau of Investigation affidavit filed in federal court in Orlando with a warrant for Patel's arrest.
Federal prosecutors in Chicago brought the case against Patel. NeJame said his client denies wrongdoing.
"There is a lot of ambiguity in the documents, and we are sorting through them and hopefully getting them clarified and presenting them at the appropriate time," NeJame said.
The civil case is Pennant Management v. First Farmers Financial, 14-cv-07581, and the criminal case is U.S. v. Patel, 14-cr-546, both in U.S. District Court, Northern District of Illinois (Chicago). The arrest warrant is filed under U.S. v. Patel, 14-mj-1485, U.S. District Court, Middle District of Florida (Orlando).
Elsewhere, Harvard Illinois Bancorp disclosed Wednesday that an $18 million investment it made could be in jeopardy due to the alleged fraud. Harvard Illinois, which said it is unclear how much of its investment is at risk, said it had understood that the loans used to back its investment were guaranteed by the USDA.