Summary: Failure of the Small Business Administration (SBA) to recognize signs that Capital Management Services, Inc., a specialized small business investment company in Little Rock, was operated improperly led to the loss to federal taxpayers of $3.4 million. David Hale, then a municipal court judge, ran Capital Management in an improper manner by entering into prohibited transactions, including loans to business associates and loans for real estate purchases. By taking advantage of flexible SBA guidelines for determining socially or economically disadvantaged persons, Hale was able to make loans to persons with questionable claims to program eligibility. GAO was unable to fully analyze transactions with Susan McDougal, Castle Sewer and Water, and Southloop Construction because key participants were unavailable for interview and records were incomplete. Nevertheless, the loan to Susan McDougal, who along with her husband had a reported net worth of $2.2 million, is an example of loans made to someone with questionable eligibility.
