Ex-Banker to Plead Guilty in SBA Loan Scam

A former top Small Business Administration official who left to head up SBA lending at a Paramount bank has agreed to plead guilty to taking kickbacks from loan brokers whose deals he helped approve. The plea agreement caps a decade-long investigation that has led to nearly two dozen convictions.

The U.S. attorney’s office Wednesday charged Gerold Y. Morita, 61, of Hacienda Heights with accepting a $24,000 Toyota as a gift from the loan brokers and skimming more than $65,000 off a million-dollar loan he approved to one of the broker’s companies, in which the banker held a secret 50% interest.

The allegations date back to 1990 and 1992, when Morita headed the SBA lending division of Mechanics National Bank, generating millions of dollars in SBA guaranteed loans. Morita served as general counsel and then district director of the SBA’s Los Angeles district office from 1970 to 1984 before leaving to join Mechanics Bank.

In his role there, he ramped up the small bank’s SBA lending division to make it the fourth-largest in the state. During those years, at least 17 borrowers submitted fraudulent documents to the bank seeking the government-backed loan guarantees, which Morita easily shepherded through the SBA system.

Under the plea agreement, Morita accepted no responsibility for that scheme, which cost the SBA and the bank about $8 million in losses and contributed to the demise of Mechanics in 1994.

“Borrowers submitted false information to qualify for these loans,” said Assistant U.S. Atty. Kimberly Dunne, chief of the agency’s public corruption and government fraud section in Los Angeles. “In almost every instance, there was a default.”

The scheme has led to charges against 17 borrowers, two tax-return preparers and three loan brokers, but Morita is the most prominent figure to be charged to date. Eighteen of them have already been sentenced and required to pay more than $2 million in restitution.

As part of his plea agreement filed by the U.S. attorney’s office, Morita has agreed to serve from 15 to 21 months in prison, five years’ supervised release and to pay $934,656 restitution to the SBA and Federal Deposit Insurance Corp. He will be arraigned in federal court later this month, at which time a judge will consider the plea.

Many of the fraudulent documents were submitted to Mechanics through loan brokers Saei & Associates. It was that firm, headed by Michael Saei and Paul Dadgar, that purchased the Toyota for Morita.

Morita also pushed through a $1-million loan to a gas station owned by Saei without revealing to other bank officials that Morita had a 50% stake in the company. Proceeds from that loan went into Morita’s personal bank account, as well as to pay down a personal line of credit for Morita and pay off some of his debts, according to the plea agreement.

Saei has also been held responsible for restitution payments. Both Saei and Dadgar are awaiting sentencing.

The investigation was conducted by the FBI and the SBA’s Office of the Inspector General. While Morita was no longer an SBA official when the alleged fraud occurred, one federal official said “the bottom line is he knew how the system worked.”

Dunne said Morita profited from the increase in SBA loan activity, including the fraudulent loans.

Morita earned a base salary of as much as $250,000, plus a percentage of the profit earned by the bank when the bank sold guaranteed portions of SBA loans in secondary markets. From 1989 through 1992, Morita received about $2 million in incentive bonuses and commissions from the sale of SBA guaranteed loans, according to prosecutors.

“The more loans that were approved, the more he benefited,” Dunne said.

The case highlights potential vulnerabilities in the SBA’s Preferred Lender Program. Under the system, select lenders approve SBA-guaranteed loans with virtually no upfront oversight by the agency. Mechanics was one of those.

SBA spokesman Michael Stamler said the Preferred Lender program has been overhauled since the scandal to include a more stringent review of loans and lenders as well as new curbs on loan packagers such as Saei & Associates.

Morita referred all calls to his attorney, John Potter.

Potter concedes that Morita took kickbacks from Saei but says his client was unaware of any fraudulent loan scheme.

“He was never the mastermind of any criminal scheme,” Potter said. “He should not have accepted a car from a loan broker. He is contrite for that action and prepared to accept responsibility.”

According to prosecutors, tax preparers doctored documents for borrowers, whose packages were then submitted to Morita through Saei, Dadgar and loan broker Fereidoun Roknian of Upland.

Nearly all those loans later defaulted, resulting in millions of dollars in unrecoverable losses to the SBA and Mechanics, and ultimately the FDIC.

Mechanics had assets of about $165.8 million when it was closed by the Office of the Comptroller of the Currency in 1994 as “unsafe and unsound.” The bank had incurred more than $21 million in losses in two years.

The FDIC sued Morita and Saei in federal court in 1994, and the case was settled a year later. The Comptroller of the Currency also sued Morita in federal court charging him with breaching his fiduciary duties while serving as an executive at Mechanics.

The regulator sought restitution of $5.7 million. In November of 1996, Morita agreed to repay $250,000.