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USDA OK’d $179M of Phony Loans, Firm Says

CHICAGO (CN) - The U.S. Department of Agriculture approved a lender that sold about $179.2 million of fabricated loans to an Illinois asset manager, the alleged victim claims in court.

Pennant Management Inc., a Lisle, Ill.-based acquirer of $850 million of USDA- and Small Business Administration-guaranteed loans on behalf of community banks, qualified retirement plans, and municipalities, sued the feds in Chicago Federal Court Friday.

"Pennant and its investor clients are the victims of a massive fraud perpetrated by [nonparty] First Farmers Financial LLC, an entity approved as a nontraditional (non-bank) lender by the USDA's Rural Business Cooperative Service," the plaintiff says (parentheses in original).

First Farmers' principals, Nikesh Patel and Timothy Fisher, secured USDA approval as a nontraditional lender on April 2, 2012, by falsely submitting that the firm had over $22 million on deposit, according to Pennant, a registered investment advisor.

"The fact that this purported liquidity was a complete fiction could have been ascertained by the USDA with even the most rudimentary investigation," the complaint states.

Thanks to a USDA employee of over 30 years with "substantial connections to personnel involved with the [Business and Industry] Program," First Farmers expanded its eligibility to Florida and Georgia on Nov. 14, 2012, and later to nine other states, according to the complaint.

Pennants says that from June 2013 through August 2014, it bought 26 loans from First Farmers, based on "packages" that complied with the USDA's "good delivery requirements."

But the loans were "manufactured out of whole cloth" by First Farmers, Pennant claims.

In September 2014, "during a routine review of the documentation regarding the [First Farmers] loans, inconsistencies came to light," the complaint states.

A more thorough review "ultimately revealed that none of the 26 borrowers reflected in the [First Farmers] loans exists and that any identifying information, including postal addresses, either did not exist at all or had nothing to do with the purported borrower," Pennant claims. "Nor were Pennant employees able to find any such business entities in Georgia or Florida, the two states in which all of the 'borrowers' were purportedly located."

Indeed, both states allegedly said they have no record of any of the purported borrowers.

First Farmers "forged the signatures of USDA officials in Florida and Georgia on purported guarantees," Pennant Claims.

Plus, "the CPA who allegedly performed the most recent audit of [First Farmers], and whose audited financial statement was provided to Pennant, does not exist," and his or her web address is associated with one Patel's numerous entities, the complaint states.

The loans' purportedly "guaranteed" balances allegedly totaled about $179.2 million.

Until Sept. 18, 2014, when the Athens, Ga. USDA office said it had no record of three of the loans, "Pennant did not know that those loans were anything other than bona fide obligations of legitimate borrowers with legitimate, enforceable USDA guarantees," the complaint states.

Though the USDA has also confirmed that it did not approve any of the First Farmers loans, and that none of the notes and guarantees are in its books and records, it has denied Pennant's claims for recovery, the asset manager says.

First Farmers' "ability to carry out this fraudulent scheme is the direct result of the USDA's approval of [First Farmers] as an authorized lender," the complaint states.

Pennant seeks damages for negligence under the Federal Tort Claims Act on behalf of itself and as assignee of the claims of certain investor clients.

The plaintiff is represented by Paul Fox with Greenberg Traurig in Chicago.

The defendant has yet to return a request for comment.Pennant filed similar claims against First Farmers, Patel, and others last year.

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