Meridian Bancorp last month agreed to a $1.56 million settlement with the federal government to resolve fraud allegations surrounding a 1991 Small Business Administration loan guarantee.

The April 2 prefiling settlement closed a three-year federal investigation in which the government accused Meridian of granting an SBA guarantee to a company the bank knew was ineligible. The company subsequently failed.

Meridian, which merged last month with Philadelphia-based CoreStates Financial Corp., issued the $750,000 guarantee as an SBA "preferred lender" - that is, through its preferred lender status, meaning it didn't have to go to the government agency for approval.

"Taxpayer money was obligated that never should have been to lower Meridian's exposure on a big loan," said John N. Joseph, assistant U.S. attorney for the Eastern District of Pennsylvania.

"Without admitting any wrongdoing, Meridian has decided to settle the claim, given its excellent relationship with the SBA," the bank said in a release. Meridian, based in Reading, Pa., also said it wanted to avoid further expense and interference in its business operations.

Meridian issued a $750,000 SBA loan as part of a financing package to Birdsboro (Pa.) Foundry. But the company wasn't eligible to receive guaranteed funds because Elmer Gates, one of the foundry's principals, had personal assets exceeding federal limits, the government charged.

Meridian hid Birdsboro's ineligibility by understating Mr. Gates' equity interest and management position in the foundry, the government said.

Birdsboro subsequently defaulted on the loan, and a $750,000 claim was paid by the SBA, the settlement said.

The $1.56 million settlement represents double damages; by law the government could have asked a court for treble damages, Mr. Joseph said. Also under the settlement, the government agreed not to pursue claims against officials of the bank or Birdsboro.

An investigator for the SBA's Office of Inspector General said the matter was uncovered by a routine agency audit in 1994. The U.S. Attorney's Office in Philadelphia became involved in the fall of 1995.

"This is an example of what can happen if you don't have oversight by the agency," the SBA investigator said.

The investigator said other banks are being probed for abusing government guarantees.

Meridian "certainly isn't the only bank under investigation, but abuse certainly isn't rampant," the investigator said.

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