The federal government's flagship program to foster minority business is in many cases doing precisely the opposite of what was intended. It is helping rich white contractors get richer and turning away hundreds of the poor and disadvantaged it was designed to assist.
Formed in 1968 in what seemed to be a practical marriage of Lyndon Johnson's Great Society and Richard Nixon's Black Capitalism, the program was intended to provide "economically disadvantaged," minority-owned firms with noncompetitive government contracts and special grants through the Small Business Administration.
Over the last 12 years, as nearly $4 billion has been poured into the program, more and more examples have arisen of the money going to the rich rather than the poor. Last year alone, an SBA study found that more than one-third of the 1,505 firms that received money under the program may not have been qualified. Their ranks include:
Harold Greenspan, the white owner of four New Jersey companies, who controlled a Virginia janitorial firm that has received more than $1 million in minority set-aside contracts. The "president" of the firm, Ernest McNeal, a 57-year-old black, was paid $125 a week.
Allen Rand, the white owner of two New York City companies, who manages a Brooklyn packaging firm that has received $690,000 in federal minority set-aside contracts. The firm's 60-year-old black "president," Jesse Glover, is paid $225 a week. He spends much of his time driving a truck for Rand.
Keith Grundmann, a 37-year-old white steel company executive, who collects $52,000-a-year for managing the business of the impoverished Goshute Indians on a part-time basis -- more than twice the salary of any Indian employe of the firm. Nearly $300,000 in federal minority assistance funds received by the tribe's firm have gone to Grundmann's steel company in purchases of steel.
Also enrolled in the government's minority business program are several millionaires, Rolls Royce-driving manufacturers and wealthy owners of sailboats and elegant cruisers.
There are literally hundreds of such cases, all of them profiling a well-intentioned government program that has seen abuses go uncurbed under three presidential administrations. But the issue is one of extreme political senstivity. No president wants to be responsible for raising questions about a program that has such strong support among the black leadership, even if the program doesn't work as it should. The Carter administration, for example, is seeking to increase significantly the federal assistance next year above the present $1.6 billion level even though it has been in possession of the SBA study that outlines the failings of the system.
The program's success rate is uncertain. Of the 4,350 firms that have used the program, 174 -- or just under 5 percent -- have "graduated" and now operate without special federal help. However, there are hundreds of minority firms in business today, many of which, though dependent on government set-asides, might not otherwise exist.
One essential problem with the program -- known in bureaucratic jargon as the 8 (a) program -- is that the government has never been able to decide who should qualify for it. The official government language says that the program is intended for the "socially and economically disadvantaged." In 12 years, however, the SBA has never developed a dollar-figure definition of "economically disadvantaged."
In the end, officials concede, the decision on who qualifies for the money is subjective -- taking into account an individual's net worth and access to capital. "It boils down to a judgment call, like so many other things in this program," said A. Vernon Weaver, administrator of SBA. "I must have spent a hundred hours with my general counsel, sitting in this office discussing: What the hell is 'economic disadvantage.'"
An SBA audit last year found 44 firms in the program whose owners had personal net worths of more than $100,000. Nineteen had net worths of more than $250,000, and several were millionaires. But to many of the program's staunchest supporters, such as U.S. Rep. Parren Mitchell (D-Baltimore,) wealthy blacks deserve and need the federal assistance.
Said Mitchell: "In many businesses a million dollars is very little, I would raise the question: does he have the same access to capital . . . to loans . . . to bonding . . . as his white counterpart?"
While there is debate over what constitutes "economic disadvantage," there is general agreement that "fronts," or firms not controlled by minorities, do not belong in the program. In its audit last year, the SBA found that for 323 firms -- 21 percent of those in the program -- it was not certain that the owner or controlling interests properly qualified. There was a pervasiveness of fronts controlled by whites through a variety of stock manipulations, lease arrangements, profit-sharing agreements, subcontracts, salary structures and other methods of controlling assets.
In some cases, the whites have been exploiting the minorities simply for profit. In other cases, the minority firms have shared profits with the whites in exchange for financing, bonding, administrative help and other services. And for some, the experience is humiliating. Said Ernest McNeal, "president" of a Virginia janitorial service: "I didn't do anything. All I did was go to the SBA office in Richmond to show them I was black. That wat it."
Despite the findings of the SBA audit one year ago, the government has not removed any of the questionable firms from the program. SBA administrator Weaver said he believes matters are now under control. Some members of Congress disagree.
This Thursday, a Senate subcommittee headed by Sen. Max Baucus (D-Mont.) will begin looking into problems with the minority-assistance program. "A program to help the disadvantaged has been taken advantage of." Baucus said recently. "SBA continues to ignore its own findings, compounding the evil."
What follows are case studies of well-intentioned program that has gone awry. Luther Benjamin
When Luther Benjamin, a black Virgin Islander, entered the SBA's minority assistance program in 1973, he estimated his own net worth to be $979,700 -- including some $794,200 in real estate investments on St. Thomas in the Virgin Islands.
At the time, he was also chairman of the Racing Commission, president of the General Contractor's Association of Virgin Islands, a member of the Governor's Board and president of the St. Thomas Branch of the Republican Party.
A few months after Benjamin was admitted into the program, a perplexed General Services Administration official, Nathan L. Adler, wrote the SBA: "It strikes us as rather unusual that an individual with a net worth of almost a million dollars can qualify as an 8 (a) subcontractor." Adler requested SBA to explain to him why Benjamin was considered "economically disadvantaged."
The SBA declined to explain.
But GSA's curiosity was more than a passing interest. Benjamin's construction firm, had just been given a $7,368,479 contract to build the federal courthouse and office building on St. Thomas for the GSA.
Benjamin offered his own explanation in an earlier letter to the SBA in support of his application: "I have never had the opportunity of amassing big money or even modest means to acquire the expertise needed for today's competition."
Benjamin wrote that "for reasons beyond my control" he had "been deprived of an opportunity to develop and maintain a position in the competitive economy."
"If you want to call me a millionaire because I have a couple pieces of land in St. Thomas, you can call me a millionaire," said Benjamin in a recent interview. But Benjamin, whose most recent financial statement on file with the SBA puts his net worth at $1,381,100, says he is still "economically disadvantaged."
Now the SBA itself is trying to answer the question raised by the GSA official six years ago. Writes an SBA reviewer following a March 1, 1979, field audit of the firm:
"There is no documentation to support, or evidence to indicate, that Luther Benjamin is socially or economically deprived. The only eligibility criteria which is supported is that he is black," the reviewer wrote.
Benjamin expressed defiance at the possibility of being terminated from the program. "I don't have a thing to hide. If they throw me out of the program, they throw me out of the damn program. . . . Mr. Benjamin is a self-made man that has worked all his life. I have always found a way of making my living on my own." 'You Will Be President'
Ernest McNeal had been working as a janitor at military bases in Virgina for 15 years when he received a long-distance telephone call from his boss in April 1972.
"How would you like to be in the SBA's minority business program?" asked Harold Greenspan, his employer, according to McNeal.
"You can make a whole lot of money," McNeal recalls being told. "You will be president."
McNeal, 50 years old at the time, felt that this was the biggest opportunity of his life. He went to the bank to make arrangements to borrow $5,000 to start his new company, Multi-Mac. The loan was approved.
But McNeal never borrowed the money. "Mr. Greenspan, he wouldn't let me put up any money," McNeal said.
Instead, according to corporate records, McNeal was issued 153 shares of stock -- totaling 51 percent ownership of the firm. Greenspan was issued 40 percent of the stock and the remaining 9 percent went to Harry Hardin, another white working for Greenspan.
The stock was valued at $3.33 a share when it was issued, but McNeal did not pay for it.
"I didn't do anything," McNeal recalls. "Mr. Greenspan handled everything . . . All I did was go to the SBA office in Richmond to show them I was black -- and that was it."
Greenspan was the owner of Kleen-Rite Janitorial Services, as well as three other firms in New Jersey. In 1972, he listed his personal net worth as $243,450.
In an interview, Greenspan acknowledged that he did virtually all the work in financing and setting up Multi-Mac and dealing with SBA to enter the 8 (a) program. He said he went into the business in order to receive the set-aside contracts and share the profits with McNeal. He said he felt the firm would help McNeal's career.
"He [McNeal] was a loyal employe and a good worker," Greenspan said. "This was an opportunity for him to get involved."
Before the firm was formed in Hampton, Va., Greenspan was paying McNeal $125 a week. After the firm received its first contract, with McNeal as "president," his pay remained the same -- $125 a week.
"I was president and I had 51 percent of the stock, but it was on paper only," McNeal said. "I was still working for Mr. Greenspan."
By the summer of 1976, Multi-Mac had received $1,076,889 in 8 (a) contracts. McNeal's salary had been boosted to $150 a week. McNeal and his wife began to grow uneasy not only with his "front" status, but also because he said he was signing vouchers for payments of thousands of dollars for products and services unrelated to the business.
McNeal told SBA investigators that Greenspan was transferring funds from Multi-Mac to his other corporations and to himself. He said that Multi-Mac funds were used to pay employes of other corporations, and he was asked to sign vouchers for expensive automobiles and airfare unrelated to Multi-Mac.
SBA auditors, using documents provided by McNeal, are still investigating the charges.
In an interview, Greenspan said he couldn't remember much about Multi-Mac since 1978. He said he couldn't recall if he was still a stockholder in Multi-Mac.
"I don't remember what happened to the stock," he said. "I guess I turned it over to him (McNeal). I'm not sure. I don't have anything to do with that anymore."
Regarding all of McNeal's charges, Greenspan simply said: "I doubt that." He refused to be more specific.
Multi-Mac is still in existence today and is still listed as an active member of the 8 (a) program. However, it is not doing any business.
McNeal left the firm and started another janitorial service on his own. He asked SBA for assistance in developing his new solely-owned company, Bobbie-Mac. The SBA refused to admit Bobbie-Mac into 8 (a) program. 'No Questions Were Asked'
Albert Maddox, a black, self-made millionaire, joined the SBA program in 1971 at the age of 67. His net worth at the time was $1,571,859.
"I just gave them my financial statement and no questions were asked," said Maddox. "I wasn't trying to hide anything."
His partner, Joseph Stabler, a white Beverly Hills millionaire, holds 49 percent of the stock in Maddox & Stabler Construction Co. The firm is in the same building that houses three other Maddox-controlled corporations.
Today, Maddox sets his net worth at $3,087,721, with an annual income of $286,295. Stabler is worth $1,210,800.
The SBA, although it accepted the firm with no hesitation, has since repeatedly questioned why the company is in a program intended for the "disadvantaged."
The minutes of a May 28, 1976, SBA evaluation committee meeting show that the seven members unanimously recommended that the firm be cut from the program because of the financial status of the owners.
Three weeks after that meeting, SBA's regional director, Stewart L Rollins, recommended the firm receive no now 8 (a) contracts.
One year later, on May 25, 1977, the evaluation committee recommended that the firm be approved for $1 million in contracts for that year. At the same time, the committee said that Maddox and Stabler should be cut from the program in six months.
Today, more than three years after that decision, Maddox and Stabler is still in the program. It has received $3,790,136 in SBA contracts to date. s
SBA offers no explanation on why it has not acted on its own evaluation committee's decision to remove Maddox and Stabler from the 8 (a) program.
Stabler, who says that his firm has awarded subcontracts to minority firms, says of his involvement in the 8 (a) program: "We could give this thing up today and it wouldn't even cause a ripple. Neither Maddox nor myself need this business. We don't make a hell of a lot of money from it." 'More or Less as Friends'
For 30 years, Jesse Glover drove a truck for Allen Rand, the president of Eur-Pak, a large Brookly, N.Y., packing firm. Glover, a father of six, earned $150 a week. Today he is the president of his own company, Pak-Well Inc. a firm that has received $690,284 in minority set-aside contracts.
But little really has changed for Jesse Glover.
He says he still spends much of his time driving a truck for Rand at Eur-Pak. His salary is $225 a week. His office and much of his equipment are leased from Rand at the Eur-Pak plant. His books are kept by Rand's bookkeeper. Even the telephone number for Glover's firm is the same as Rand's.
"I had wanted to go out on my own," recalls Glover, who says he and Rand (the firm's "secretary") formed Pak-well in 1972 to take advantage of minority assistance contracts.
While Glover was give 51 percent of the Pak-Well stock, Rand has essentially run the company. In an interview, Glover acknowledged that he knows little about the management of the firm. For example, he could not say how much rent his firm pays to Rand.
"I wouldn't know off-hand. It varies from time to time," Glover said.
Rand said the rent does not vary. He said Pak-Well pays $700 a month rent to Rand Realty, another firm owned by Rand.
Glover also said he does not know how much federal money Pak-Well has received in its eight years. "I have no idea how much," he said. "Maybe a total of $12,000 to $18,000."
In fact, the firm has received $690,284 acording to SBA records.
"He [Rand] knows more about the business than I do, but I'm learning," said Glover. He insists that he does take some part in business decisions of the firm. "Anything comes up, me and Mr. Rand get together more or less as friends" he said. Glover said his major role in the firm is to do the hiring. fPak-Well employes five people. All of them -- including Glover -- work for Eur-Pak "when things are slow," Glover said.
The situation at Pak-Well has been well-known to the SBA. As early as October 1976, an SBA official wrote a letter to the firm questioning who controlled the business, and temporarily suspending 8 (a) funding. Two years later, after funding was restored, SBA field auditors again found Rand handling administrative matters.
But the firm is still an active 8 (a) businesss today. Grundmann and the Goshutes
In 1971, the 320 members of the Goshute Indian tribe who live on the desolate Ibapah, Utah, reservation formed Goshute Enterprises and were accepted into the SBA's minority set-aside program.Their product was cattle guards -- steel plates embedded in a road to prevent cattle from crossing.
Today, after nine years and some $3 million in federal contracts, the Goshute Indians themselves have little to do with the management of the firm. gThe man who runs the business is not a member of the tribe. "I am a management advisor for the tribal business," says Keith Grundmann, a 37-year-old steel company executive.
Grundmann's salary and share of the profits will bring him $52,000 this year -- more than twice the salary of the highest paid Indian employed by the firm and $6,000 more than the tribe's total profit from the business.
For Grundmann, the job is only part-time. The rest of the time he is 200 miles away in Salt Lake City, running his $5 million-a-year K.D.J. Custom Steel Company and collecting another $50,000-a-year salary.
Before Grundmann was hired by the Goshute firm, the tribe owed him money for steel he had supplied. As part of the settlement of the debt, the tribe agreed to hire him as a manager.
The salary is not the only benefit Grundmann gets from managing the Goshute business. He estimates that about $300,000 in federal funds to the Goshute firm has gone to his own steel company for the purchase of steel used in the manufacture of the cattle guards.
Throughout 1978 and part of 1979, Grundmann leased the building, the ground, and the equipment the Goshutes used on their own reservation. It was only after the SBA objected to the leased that Grundmann abandoned it and sold the property to the Goshutes.
Today Goshute Enterprises' Salt Lake City office is located in the same building as K.D.J. Custom Steel.
The only tribal member with any management responsibility is Bob Steel, 60, who is paid about $21,000 a year to supervise tribe members who do the welding for the firm. Most of them, says Grundmann, earn about $12,000 a year.
Goshute Enterprises employs 10 of the tribe's 320 members. But Steele says his tribe is not resentful of Grundmann's management -- it is simply a necessity. "Our people are not skilled in management. We don't have the education. That is the problem we are facing. That's why we hired Mr. Grundmann," said Steele.
Grundmann says he remains under the authority of the tribal council and the board of directors who gave him the contract. He says no one in the tribe is capable of taking over his job. He said he and the SBA have recently agreed on a training program to eventually bring Goshutes into management.
But Grundmann also is highly critical of the SBA program, which, he says fails to overcome the most basic needs of a new business -- overcoming the lack of capital and acquiring basic managerial skills.
"I'm not sure the 8 (a) program is worth a damn," says Grundmann. CAPTION: Picture 1, Keith Crundmann, shown outside his Salt Lake City office, received $52,000 for managing Indian firm. By Tom Smart for The Washington Post; Picture 2, Ernest McNeal was elevated to 'president' of a company in SBA program. By AP for The Washington Post