Their PPP loans were forgiven, but they were under investigation by the FBI. How did that happen?

CINCINNATI — Documents revealed that seven people who were under FBI investigation in Greater Cincinnati had their Paycheck Protection loans forgiven by the U.S. Small Business Administration.

The anomaly was found by comparing SBA forgiveness data to criminal complaints in 22 pandemic fraud cases in the Cincinnati region. One complaint, which outlines loan-fraud allegations against six defendants, said the FBI opened its investigation in March 2021 "based on a review of transactional data showing that deposits stemming from SBA programs … had been used for purchases and expenses seemingly unrelated to job retention and other permissible business expenses."

The investigation led to the September 2021 arrest of Joseph Lentine, a Sedamsville property manager who was accused of filing false statements to obtain pandemic relief loans and collecting fees for helping five others do the same.

By the time Lentine was arrested, the SBA had approved Paycheck Protection and Economic Injury Disaster Loan payments to the six defendants totaling $1.3 million. In addition, the SBA forgave PPP loans totaling $572,745 for five of the six defendants between April and August of 2021. In other words, the loans were forgiven after the FBI probe began but before the criminal complaint against Lentine was unsealed in U.S. District Court.

Four of the six defendants have reached plea agreements that call for restitution to the SBA totaling $392,908. No trial date has been set for Lentine, who could not be reached through his attorney.

The SBA, FBI and U.S. Attorney's office were contacted on whether SBA was aware of the criminal probe before loan forgiveness was granted. The FBI and U.S. Attorney's office declined to comment. SBA provided a statement:

"While the U.S. Small Business Administration (SBA) cannot comment on on-going investigations or specific cases, the SBA actively works with its Office of Inspector General to identify cases of suspected fraud and supports OIG, DOJ, FBI, USSS and other federal and state law enforcement agencies to prosecute fraudsters and seize unlawfully obtained funds."

Forgiveness Rules

In its most recent public report, the SBA said it has approved nearly $753 billion in PPP loan forgiveness through Sept. 11. That's 95% of all money borrowed. It has been criticized by government auditors for forgiving loans before they are reviewed for eligibility and fraud.

It has been criticized by small-business advocates for denying loans in which borrowers made "good faith" errors.

But on balance, the agency has accomplished what Congress intended: Keeping people employed by helping companies survive the pandemic, said Tenley Carp, a Washington, D.C. attorney who helps companies appeal SBA loan decisions.

"SBA is one of the smallest agencies, with only somewhere around 3,000 employees," said Carp, a partner at Arnall Golden Gregory LLP. "So, to ask a tiny agency to do this huge job on top of existing work that was just thrust upon them, and to audit and make sure that they've caught every single bad actor, I think is asking for a lot."

Carp said the banks that approve PPP loans also make the initial decision on whether borrowers qualify for forgiveness. Their decision is subject to SBA review. Borrowers must show how much they spent on payroll expenses in the eight to 24 weeks after they got the loan. If their payroll expenses are less than the loan, they can add to their forgiveness amount with qualified expenses like mortgage payments, rent and utilities. If forgiveness is denied, borrowers must start paying back the loan.

SBA can halt a forgiveness application if there is evidence of fraud. The agency flagged millions of loans as potentially fraudulent between August of 2020 and September of last year, according to data analysis published this month by the Project on Government Oversight. It said SBA cleared more than 60% of its fraud flags in the waning days of the Trump administration. The mass clearing happened partly because borrowers with fraud flags could not access second-round PPP loans, which began in January 2021.

Carp said a pending FBI investigation would be enough to halt a loan forgiveness application. But that could have alerted those under investigation that their loans were under scrutiny. And it wouldn't necessarily have triggered repayment of the loans.

"The agency should have been coordinating," Carp said. "If there was an investigation going on it should not have approved those loans. But the money was out the door and there was going to be a difficult way of getting the money back from bad actors no matter what."

Forgiveness Facts

In a 41-page affidavit, FBI agent Ferron M. Yi identified 11 Paycheck Protection loans totaling $925,000 that were approved for Lentine and his co-defendants before the FBI began its investigation in March 2021. Four additional loans totaling $186,295 were approved in March and April of 2021.

But court records indicate SBA might have known about the alleged fraud 10 months earlier than that.

"Klosterman has the fraud ID #s issued early in May 2020," wrote John Klosterman, a Sedamsville landlord who claimed to have reported Lentine "to the fraud division at the Inspector General of the SBA" in a hand-written court filing this year.

Klosterman owned dozens of Sedamsville buildings before he was jailed for not repairing building code violations and stalking a former tenant.

A court-appointed receiver took control of Klosterman's properties in February 2020 and put Lentine in charge of managing them. Last month, the Port of Greater Cincinnati Development Authority struck a deal to purchase the properties for $1.5 million. Proceeds of the sale will be used to pay Klosterman's fines and expenses of the receivership.

"Joe Lentine was laundering my money as well as funds from the PPP," Klosterman wrote in a 15-page motion that asked a federal magistrate to remove the receiver and fire Lentine. Prosecutors did not respond to the motion, which Magistrate Karen Litkovitz rejected in March.

The FBI found "significant indicia of money laundering and fraud" when it analyzed spending at two Lentine companies that secured PPP loans in June 2020. In a $99,290 loan to Tri State Corporation, the FBI's review of transactional data found proceeds were used to buy a 37-foot yacht and a 2012 Mercedes. In a $50,926 loan to N.Y. – O.H. Property Corporation, the FBI was suspicious of "various cash withdrawals and movement of funds from this account to other accounts."

When agents interviewed Lentine on April 29, 2021, he "acknowledged filing PPP applications on behalf of numerous individuals" and "collecting fees" from those borrowers of up to 30%, said the FBI affidavit. SBA had a 1% limit on fees for PPP loan consultants. But those issues did not prevent SBA from forgiving the larger loan on April 2, 2021 and the $50,926 loan on May 20, 2021.

In addition to Lentine's two loans, the SBA forgave three loans in May 2020 that Lentine helped others secure. Additional loans were forgiven in June and August. Here is a summary of the forgiven loans:

* Angel Strunk borrowed $14,165 as a self-employed office worker in April 2021. SBA approved a loan forgiveness of $14,204 – which is the loan amount plus accrued interest – on Aug. 12, 2021. In a May interview with the FBI, Strunk "admitted to preparing PPP applications for Lentine's associates, explaining that she 'started from scratch'" to provide "supporting documentation" for each loan. Strunk signed a plea agreement in August to one count of making a false statement on a loan application. She agreed to pay restitution of $43,985 and is scheduled for a plea hearing in December.

* Full Circle Pies LLC borrowed $49,696 on June 30, 2020. SBA approved a loan forgiveness amount of $50,106 (including accrued interest) on May 3, 2021. The company was owned by Charles Murray, who reached a plea agreement in January to one count of making a false statement on a loan application. He agreed to pay restitution of $212,981 and awaits sentencing.

* Events by Faith LLC borrowed $100,925 on July 28, 2020. SBA approved loan forgiveness totaling $101,680 on May 5, 2021. The FBI affidavit said Faith Hill submitted the application, listing a Reading Road address that had "no signage or storefront, or any evidence that this business ever existed at this location." Hill signed a plea agreement last December to one count of making a false statement on a loan application. She agreed to pay $135,942 in restitution and is scheduled for sentencing next March.

* Two companies owned by Keith Lee secured forgiveness authorizations totaling $240,587 on May 27 and June 15. SBA data shows OBJ Property Services LLC borrowed $105,520 on July 6, 2020, while OBJ Development Properties LLC borrowed $132,965 on July 16, 2020. Lee "went on a gambling spree" with the proceed of one of those loans, according to the FBI affidavit, with $17,500 in "point of sale withdrawals at Jack's Casino" downtown between July and October 2020. Lee waived his right to be indicted within 30 days of his September 2021 arrest. The case has yet to advance beyond that stage.

* A sixth defendant had no loans forgiven or approved after the FBI launched its investigation. Robert Debaun received two loans totaling $199,745 in July 2020 and January 2021. He reached a plea agreement in January 2022 and is scheduled for sentencing Dec. 6.

Carp said the lack of coordination between the SBA and investigators is a problem for taxpayers, even if the criminal case leads to restitution orders.

"For all involved, for the taxpayers especially, it would have been better had the SBA never approved the loan forgiveness and let that money go out the door," said Carp. "Because getting it back of course is much harder than allowing the bad actors to have access to it."

This article was written by Dan Monk for WCPO.