Nov. 13 (Bloomberg) -- A former executive of Allied Capital Corp.'s Business Loan Express holding was sentenced to 10 years in federal prison over a scheme to issue fraudulent loans guaranteed by the U.S. Small Business Administration.

Patrick Harrington, a former executive vice president at the Business Loan Express office in Troy, Michigan, also must pay $33.9 million for his role in a six-year conspiracy to fraudulently issue or acquire $76.9 million in loans backed by the SBA. Harrington pleaded guilty last year to one count each of conspiracy and making a false statement to a grand jury.

``No loan could have gone through without Mr. Harrington signing off on it. His activities seriously tarnished the reputation of the SBA'' and ``inflicted mammoth injury'' on Business Loan Express, U.S. District Judge Avern Cohn said at today's sentencing hearing in Detroit. ``People who lie to a grand jury inflict injury to all of us.''

Cohn ordered Harrington to pay $30 million in restitution to Business Loan Express, $2.9 million to Community South Bank and $800,000 to the SBA, plus a $200,000 ``special assessment'' to the U.S. government. Harrington admitted participating in 86 fraudulent SBA-based loans, primarily for gas stations and party stores, prosecutors said. Business Loan Express, or BLX, agreed in 2007 to cover the SBA's losses on the loans.

80 Percent Default

``As of June 2008, a staggering 80 percent of the loans defaulted,'' the government said in court papers. The cost to BLX has been $18.9 million so far, with the company projecting total losses of as much as $32.2 million, prosecutors said.

Harrington and his attorney, David DuMouchel, declined to comment after today's hearing.

BLX changed its name to Ciena Capital LLC in January. Ciena, 95 percent-owned by Washington-based Allied Capital, filed for bankruptcy on Sept. 30 along with 10 affiliates. Ciena identified the SBA as its largest unsecured creditor, with a disputed claim of $1.8 million.

The fraud ``effectively destroyed the company and its ability to supply much-needed capital to small businesses across the country,'' Ciena spokesman Tom Becker said in an interview.

The Harrington prosecution was part of a federal probe into BLX's lending practices in Michigan that resulted in 20 guilty pleas and nine additional indictments. The scheme was ``the largest single fraud in the history of the Small Business Administration,'' prosecutors said in court papers.

SBA fraud flourished in the Detroit area between 2000 and 2006 as the federal program doubled the number of loans nationally while cutting back oversight, prosecutors said in court papers on Sept. 16. Harrington, through BLX, was involved in making or aiding fraudulent SBA loans in eight other states, including Illinois, Indiana, and Tennessee, prosecutors said.

Authority Delegated

The SBA delegated loan approval, closing, servicing and liquidation authority to preferred lenders such as BLX, the government said.

``Harrington was involved in a conspiracy of several people who over-appraised property; flipped property; recruited straw buyers; made false statements on loan applications; prepared false documents; submitted false equity injection documents; and conducted illegal disbursement of funds at closings,'' the government said in its sentencing memorandum.

The SBA program required borrowers to invest their own assets into the business, typically 20 percent of the purchase price, the government said. ``All of the BLX loans investigated revealed false equity injections,'' prosecutors said.

Harrington told prosecutors in 2006 that other BLX employees, including two who worked for him at the Troy office, knowingly participated in the fraudulent loans. No other BLX workers have been indicted.

Allied rose 14 cents, or 4.5 percent, to $3.27 at 3:38 p.m. in New York Stock Exchange composite trading. The shares had fallen 85 percent this year before today.

The case is U.S. v. Harrington, 06-cr-20662, U.S. District Court, Eastern District of Michigan (Detroit).

To contact the reporters on this story: Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net; Christine Richard in New York at crichard5@bloomberg.net.

Last Updated: November 13, 2008 15:47 EST