How The Super-Rich And Ex-Cons Squeezed Through Loopholes In A COVID-19 ‘Small Business’ Program

Donald Trump pointing in the East Room of the White House
President Donald Trump points to an employee of Bitty & Beau's Coffee at the end of an event about the Paycheck Protection Program used to support small businesses during the coronavirus outbreak, in the East Room of the White House, April 28, 2020, in Washington. Evan Vucci / Associated Press
Donald Trump pointing in the East Room of the White House
President Donald Trump points to an employee of Bitty & Beau's Coffee at the end of an event about the Paycheck Protection Program used to support small businesses during the coronavirus outbreak, in the East Room of the White House, April 28, 2020, in Washington. Evan Vucci / Associated Press

How The Super-Rich And Ex-Cons Squeezed Through Loopholes In A COVID-19 ‘Small Business’ Program

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Loopholes in a federal pandemic relief program allowed the approval of millions of dollars in “small business” assistance for Chicago-area companies tied to notoriously corrupt suburban contractors, the richest member of President Donald Trump’s cabinet and a wealthy Republican congressional candidate in next month’s election, a WBEZ investigation has found.

In late March, soon after the coronavirus pandemic led to shutdown orders in much of the country, Congress and Trump began the Paycheck Protection Program. Intended to save jobs, the forgivable PPP loans quickly channeled more than half a trillion federal taxpayer dollars to more than 5 million companies across the country at a time of spiking unemployment.

Trump and other proponents touted PPP as an effort to help struggling small businesses make payroll. The eligible companies were defined primarily as businesses with fewer than 500 employees.

The loan-application process also included safeguards to keep the money out of the hands of business owners with criminal pasts.

But the U.S. Small Business Administration, which administered the giant program, faced widespread complaints that corporate interests and politically-connected players got PPP loans, even as minority-owned businesses and truly small companies had to wait longer for the money — or never got any.

And WBEZ’s investigation found the companies in Illinois that were approved for PPP loans included:

  • The Palumbos, a family that was banned from bidding for federally-funded contracts due to corruption convictions in 1999. Now, a Palumbo family business has come up again in an ongoing government corruption investigation.

  • A Chicago tech firm listed for years on the personal economic disclosure statements filed by Trump’s education secretary, Betsy DeVos. She has invested in a private-equity fund with an interest in the company.

  • The ice cream shop chain of Republican congressional candidate Jim Oberweis — even though he has boasted during the campaign that he employed more than 1,400 people. The free-market conservative has previously spoken out against sending Americans more COVID-19 stimulus checks, even though his family’s business took roughly $6 million from a PPP loan.

The PPP rules are riddled with language that cleared the way for the approval of those loans and others that might appear to contradict the spirit of the initiative, which was a key part of the $2 trillion federal coronavirus aid package known as the CARES Act.

For example, the program’s application form required companies to disclose only felony convictions in recent years or ongoing criminal cases involving their owners.

Nothing stopped companies that have received money from wealthy private-equity funds from being approved for PPP loans.

And there was a long list of exceptions to the cap on the number of people that PPP recipients could employ, including a loophole that opened the way for even big restaurant chains to get millions of dollars each.

“The program had a number of loopholes,” says Aracely Panameño, co-leader of the small business lending team and director of Latino affairs for the Center for Responsible Lending, a national organization based in North Carolina.

She noted that many of the smallest businesses encountered great difficulty accessing PPP loans because they lacked preferential status with the banks processing applications for the funding. That was especially true during the crucial first few weeks after the shutdowns began and the program went into effect.

The rules permitting relatively big companies to participate in the program also were harmful to many businesses that have no employees besides the owner and other “microbusinesses” with less than 20 workers, she said.

“There’s an unfair advantage to those who are well-connected and a disadvantage to those who don’t have the connections,” Panameño said. “It is particularly pernicious to business owners of color.”

The SBA has refused to release the exact amounts of each PPP loan in the taxpayer-funded program. But a WBEZ analysis of SBA data found none of the 250 companies in Illinois approved for the largest loans — between $5 million and $10 million each — identified their owners as people of color.

Out of more than 1,100 companies in the state that got PPP loans of between $2 million and $5 million, only six said they were owned by African Americans, six by Hispanics and six by Asians, according to the data.

Those findings echoed similar reports on the racial inequities in the PPP initiative nationwide.

But the SBA’s regional administrator for the Great Lakes states, including Illinois, told WBEZ much of the data is incomplete and does not reflect all of the loans that went to minority-owned businesses.

“Could we have done a better job? Yeah,” Robert Scott said Monday. “But the goal of the program was to get the money out as fast as possible — save as many businesses and jobs as fast as possible.”

Scott noted that the program began taking applications within a week of getting bipartisan approval from Congress and from Trump.

“We were flying the plane and building it at the same time,” Scott said.

Many rules were added, he said, as the program developed, and that meant some loan money went to businesses that should not have been eligible for PPP assistance.

One of Illinois’ most notorious corruption schemes

The Palumbo family built many of the expressways in the Chicago area but found itself at the center of a notorious corruption case in the late 1990s. Three members of the family — Peter Palumbo and sons Joseph and Sebastian — were sentenced to prison terms for fraud after two of the family’s companies admitted overbilling for construction materials on road projects.

A state employee also got a prison term for taking bribes in the scandal, and the Palumbos promised to pay a total of $15 million in restitution and fines.

When the judge in their case said even those penalties were too little for what they had done, the top federal prosecutor at the time, Scott Lassar, replied that the plea bargain was actually good for the government.

That was partly because it avoided a lengthy trial, Lassar said. And according to news reports at the time, Lassar said the Palumbos agreed to a permanent ban from bidding on road projects funded with federal money.

But more than 20 years after the Palumbos were convicted and did their time, that ban has not kept the family’s current companies from raking in as much as $5.35 million in PPP money from Washington, according to federal and state documents.

Orange Crush LLC has 73 employees and was approved for between $2 million and $5 million on April 8. The managers of the company, which is based in west suburban Hillside, include Sebastian Palumbo, state records show.

A second PPP loan of between $150,000 and $350,000 was approved two days later for Palumbo Management LLC, which has 16 employees and is in northwest suburban East Dundee. Joseph Palumbo is a manager of that company.

The Palumbos did not respond to messages left at their companies.

Another entity involving Joseph Palumbo, PAL Land LLC of East Dundee, also has found itself at the center of a burgeoning corruption scandal this year.

William Helm, a longtime Chicago political operative and city Aviation Department official, has been charged with paying a bribe to a state senator to help win approval for an East Dundee project involving Helm’s consulting client, PAL Land LLC, according to court records and a source close to the investigation. But the Palumbos have not faced any allegations of wrongdoing in the case.

And neither their old criminal records nor the ongoing federal investigation prohibited the Palumbos from getting federal PPP aid.

The blank application forms for prospective PPP borrowers state that applications will not be approved if an owner of the company is “presently incarcerated” for a felony or is currently facing “formal criminal charges.”

The only other ethical problems that could disqualify an applicant are committing a felony such as fraud in a federal loan program during the last five years or getting in trouble for any other felony in the previous year.

The SBA has rejected WBEZ’s requests for copies of completed, successful applications for PPP loans from Orange Crush and other Chicago-area companies, saying privacy exemptions in the open-records law prevent greater transparency.

Scott, the SBA administrator, said the rules limiting the eligibility of ex-offenders were loosened recently to allow for PPP loans to business owners who reformed themselves after criminal convictions.

“Our country, we’re all about second chances,” Scott said. “I understand there’s a lot of public corruption cases in Chicago and Illinois and elsewhere in the country. But there’s also a lot of people who had felonies … that reformed themselves, and started a business, and they’re successful now and turned their lives around.”

DeVos’ profits from Chicago company

DeVos, the federal education secretary, hardly fits the description of a struggling small business owner.

Her net worth was estimated at $2 billion, which meant she had twice as much money as the rest of Trump’s cabinet secretaries combined, according to a 2019 report in Forbes magazine.

The daughter of a successful business owner from Holland, Mich., DeVos married into the family that runs Amway, the multilevel-marketing company headquartered near Grand Rapids, Mich. Her father-in-law was a founder of Amway and her husband was its chief executive.

After Trump was elected in 2016, he appointed DeVos to lead the U.S. Department of Education, and that required her to file an annual public financial disclosure report.

Betsy DeVos observes a classroom in Phoenix wearing a mask
U.S. Secretary of Education Betsy DeVos observes a classroom setting Thursday, Oct. 15, 2020, at the Phoenix International Academy in Phoenix. Matt York / Associated Press

Each year since she joined the Trump administration, she has listed her investment in a private-equity firm in Grand Rapids called Bridge Street Capital Fund I LP. DeVos also has disclosed each year that the fund “owns interests in” several companies, including Callpod Inc., which is based in Chicago’s Greektown. According to DeVos’ statements to government ethics officials, Callpod is a company that “sells universal cellular phone adapters, accessories, software and power modules.”

DeVos reported investing at least $351,000 and as much as $765,000 in the fund. She said the investment yielded no income “or less than $201” in 2016, 2017 and 2018. But in her latest disclosure form, filed on May 14, she said the fund that invested in Callpod had earned her more than $44,000 last year.

Callpod was among the wave of companies that got help from the first round of PPP funding. Federal data show Callpod got approved for a loan of at least $2 million and as much as $5 million to help it meet payroll for 138 employees on April 6.

The SBA disclosed that loan among more than 27,000 in Illinois when it first provided some data on the PPP program in July. But in subsequent data released in August, Callpod was no longer listed among the recipients of active loans.

Nobody at the company would answer questions about its loan application and approval, and federal officials refuse to comment on individual cases.

But the SBA’s Scott said many businesses that had other access to funding, including the Los Angeles Lakers basketball team and the Ruth’s Chris Steak House chain, gave back PPP money.

“You can’t fault the businesses for trying to navigate and trying to grab anything that was available to try to keep their employees paid,” Scott said when asked about Callpod. “But as we issued those rules, folks began to give the money back. … The situation you provided me, I’m sure that’s what happened. I don’t know that for a fact but certainly we have several cases where that occurred.”

Darren Guccione is co-founder and CEO of Callpod, and he also leads another company at the same address and office suite where Callpod is based. His other company, called Keeper Security, created “one of the most successful password-security apps out there” and had “earned millions of dollars in profit,” according to a Crain’s Chicago Business story in 2015.

Through a spokeswoman, Guccione declined to comment on the PPP application from Callpod or on the investors in that company.

The founder and managing director at the Michigan investment management firm in which DeVos has a stake did not return WBEZ’s calls. The fund began in 2004 with nearly $30 million, records show.

Private equity firms inherently have big advantages over small businesses and the companies they profit from should not have been able to tap PPP funding, said Don Wiener, a researcher with the left-leaning Center for Media and Democracy in Madison, Wis.

Private-equity investors “can go into capital markets and raise money with the enormous amount of cash they hold as collateral,” Wiener said. “Small businesses have no such ability.”

On her disclosure form, DeVos also reported income last year from a firm called Renaissance Acquisition Company LLC. That business is in Indianapolis and also got a PPP loan for between $2 million and $5 million, according to the SBA data. DeVos’ disclosure statement described the company as “the largest independent philanthropic solutions provider in North America.”

The Department of Education’s media office declined to comment “since this relates to the Secretary’s personal finances,” and DeVos did not reply to WBEZ.

“The franchise loophole”

In addition to his many runs for office as a conservative, free-market candidate, state Sen. Jim Oberweis, R-Sugar Grove, is best known as chairman of his family business, Oberweis Dairy.

Now, Oberweis is challenging first-term Democratic U.S. Rep. Lauren Underwood in the November general election. He again made reference to his success as a milk and ice cream magnate after winning the seven-way GOP primary in the 14th Illinois Congressional District in March.

In an interview on a conservative radio program on WIND-AM on March 31, Oberweis talked about how he built up an investment firm that had “$1 billion under management” and later bought the family dairy, now based in North Aurora.

“Since then, we’ve grown it from 50 employees to about 1,400 employees,” Oberweis told the show’s host, Steve Cortes, who later quit his Chicago talk-radio gig to work for Trump’s re-election campaign.

Eight days after that interview, Oberweis’ dairy business got approved for a PPP loan, according to federal records. A spokesman for Oberweis has said the loan was worth between $5.6 and $6 million.

In getting the loan, Oberweis Dairy took advantage of what experts say is perhaps the largest loophole in the PPP rules. Businesses that are in the “accommodations and food services” industries can work around the employee limit if they have “more than one physical location” and have fewer than 500 employees per location.

According to the Oberweis Dairy website, the chain includes dozens of locations in the Chicago area and additional outlets in the suburbs of Detroit and St. Louis.

A hiring sign outside of a Oberweis ice cream and dairy store
A hiring sign is seen outside of a Oberweis ice cream and dairy store in Rolling Meadows, Ill., Wednesday, July 29, 2020. Nam Y. Huh / Associated Press

Panameño, the advocate for small business lending, said many fast-food chains capitalized on what she called “the franchise loophole” in the SBA rules for PPP loans.

“They have access to capital that microbusinesses did not have,” she said. “A Black barbershop, an Asian nail salon, a Latina bodega owner who employs their own relatives and a couple other people from their community — they are not associated or affiliated with a large franchise company that provides access to capital. Those are the people that were left out.”

Like Oberweis Dairy, another chain company in Illinois that got a major PPP loan was Potbelly Sandwich Works LLC of Chicago. The chain of sandwich shops initially won funding, then gave it back after a public backlash — only to accept $10 million, after all, on Aug. 7, records show.

The only other companies in Illinois that took advantage of that same loophole in the rules were three Burger King, Marco’s Pizza and McDonald’s franchisees. On its website, the McDonald’s franchisees say they own and operate 24 restaurants with more than 1,200 workers.

Scott, the SBA official, defended the loophole, arguing that it helped low-wage workers in the restaurant industry who could have lost their jobs.

“The PPP program, when it was provided to these franchises, was not only a lifeline to the businesses but also to those employees,” he said.

Oberweis’ congressional campaign aides say he no longer takes a salary from Oberweis Dairy and his son runs it. But the candidate is the company’s chairman, did receive income from Oberweis Dairy last year and owns the “Oberweis Truck Barn” in North Aurora, according to his economic-disclosure filings as an Illinois lawmaker.

Aides to Oberweis did not respond to WBEZ’s questions about how he would vote on future pandemic-relief proposals, if elected next Tuesday.

But in his radio interview in March, Oberweis said he strongly opposed another key component of the CARES Act — the program that sent $1,200 checks from the federal government to many Americans. He told Cortes he opposed any aid of that sort because he thought federal help should have gone just to those who are jobless.

“People who have kept their jobs and are continuing to work are going to be OK,” Oberweis said. “Just issuing people checks — I don’t think that works so well.”

Disclosure note: Chicago Public Media, the nonprofit that operates WBEZ, received $2.8 million in PPP funding that a spokesperson said enabled the company to avoid layoffs or furloughs for the first few months of the pandemic. Chicago Public Media ultimately laid off 12 employees.

Dan Mihalopoulos is an investigative reporter on WBEZ’s Government & Politics Team. Follow him @dmihalopoulos.