Lender settles DOJ, Einhorn case for $26.3 mln

* Ciena Capital agrees to settle with Justice Department

* Greenlight Capital’s David Einhorn to share in recovery

* Ciena Capital filed for bankruptcy in September 2008

By Jonathan Stempel

NEW YORK, May 6 (BestGrowthStock) – Ciena Capital LLC, a New York
City business lender, has settled U.S. Justice Department fraud
claims over its small-business lending practices for $26.3
million, in an agreement that also resolves a whistleblower
lawsuit by a prominent hedge fund run by David Einhorn.

The settlement resolves allegations that Ciena and its
Business Loan Center unit falsely certified their compliance
with Small Business Administration regulations when they sought
payments on federally backed loans they made and serviced.

Some of these loans defaulted soon after they were made
because Ciena and Business Loan Center violated SBA rules and
underwriting requirements, the Justice Department said.

Thursday’s accord also resolves allegations that Ciena’s
former parent, Allied Capital Corp, should be held liable.

Ciena changed its name from Business Loan Express LLC,
which was the parent of Business Loan Center, in January 2008.

“The United States will not tolerate fraud in lending
programs designed to assist small businesses,” Assistant
Attorney General Tony West said in a statement.

Einhorn’s hedge fund, Greenlight Capital Inc, as well as
co-plaintiff James Brickman, will receive $4.3 million of the
recovery, the Justice Department said. The accord also includes
a $18.1 million credit previously paid to the SBA.

One former Business Loan Center executive vice president
has pleaded guilty to conspiring to defraud the United States
and was sentenced to 10 years in prison, the department said.

Allied was acquired on April 1 by Ares Capital Corp
(ARCC.O: ), a New York-based specialty finance company.

An Ares spokesman had no immediate comment. A Greenlight
spokesman declined to comment.


The settlement requires approval of a Manhattan bankruptcy
court, where Ciena filed for Chapter 11 protection from
creditors on Sept. 30, 2008.

A hearing is scheduled for June 9. In a Wednesday court
filing, Ciena said SBA disputes and False Claims Act litigation
were two of the main factors behind its bankruptcy, and that
the resolutions “pave the way for a largely if not completely
consensual (reorganization) plan confirmation process.”

Greenlight had sued Business Loan Center and its parent,
Business Loan Express, in Atlanta federal court under the
whistleblower provisions of the federal False Claims Act, which
let private citizens sue on behalf of the United States and
share in recoveries.

“Business Loan Express basically had the SBA’s pen,” Marc
Kleiman, a lawyer who represents Greenlight in the case, said
in an interview.

“It could approve loans, without the SBA’s ever seeing them
until the loans went bad, leaving the agency on the hook
sometimes for 75 or 80 cents on the dollar,” he added.

Einhorn drew headlines in 2002 when he said Allied shares
were overvalued and should be shorted because the company was
slow to mark down depressed assets and stretched accounting

“Allied was the tip of an iceberg,” Einhorn told Reuters in
a March 2009 interview. “This kind of questionable ethic,
philosophy and business practice was far more widespread than I
recognized at the time.”

The Ciena bankruptcy is In re: Ciena Capital LLC, U.S.
Bankruptcy Court, Southern District of New York, No. 08-13783.
The whistleblower lawsuit is U.S. ex rel. Brickman et al v.
Business Loan Express LLC et al, U.S. District Court, Northern
District of Georgia, No. 04-3789.

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(Reporting by Jonathan Stempel; Editing by Ted Kerr)

Lender settles DOJ, Einhorn case for $26.3 mln