The virus

Introduction

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Episode 5 of The Heist

In March, the telephones stopped ringing at HVAC Guys, a Southern California heating and air conditioning business.

The owners, Luis and Ana Rivera, worried that the quick spreading COVID-19 virus was the cause. They began to fear their business would fail. 

But just days later, their worry grew into hope. They heard about the Paycheck Protection Program, a $349 billion pot of money Congress had just allocated to help small businesses survive during the pandemic. (Congress subsequently set aside another $320 billion at the end of April.)

They asked the banks they had done business with, JPMorgan Chase and Wells Fargo Bank, for a small loan of $7,000 to cover payroll, rent and utilities for two and half months, as the program allowed. Luis is the only official employee at the company, which operates out of a storefront in La Habra, not far from Disneyland. Ana is the chief executive and doesn’t take a paycheck.

But like many other mom and pop businesses seeking a PPP loan this past spring, the Riveras heard nothing for weeks from their banks.

“I was like, well, I guess maybe PPP was just not for us,” Ana said. “Maybe we just don’t qualify. Maybe we’re too small.”

While the Riveras waited, bigger businesses stepped to the front of the line for much larger loans. About 45 miles east of the HVAC Guys, in a town called Colton, is another heating and ventilation business called Williams Furnace Inc.  

Williams Furnace’s parent company, Chicago-based Continental Materials Corp., was approved for a $5.4 million loan on April 8, just days after the PPP loan program launched. The company is majority owned and controlled by the prominent Chicago family of Ronald Gidwitz, the Trump administration’s U.S. ambassador to Belgium and acting representative to the European Union. James Gidwitz, the ambassador’s brother, is Continental’s chief executive.

Ambassador Gidwitz’s father, Gerald, and his two uncles started Continental as a uranium mining company in 1954. Gerald Gidwitz also built up the cosmetics and hair products company, Helene Curtis, which was controlled by the Gidwitz family until it was sold to Unilever in 1996. Ronald Gidwitz, the ambassador, was Helene Curtis’ CEO. The family has long been involved in Republican politics in Illinois and nationally, while giving money locally to Democrat Mayor Richard Daley. Gidwitz also ran unsuccessfully for governor of Illinois as a Republican.

The story of the Gidwitz family and Riveras shows how the PPP program favored larger, well-connected companies that didn’t necessarily need the money, while struggling smaller businesses — and minority owned — couldn’t get funding during the pandemic’s critical early days. As of Aug. 8, when the PPP stopped accepting applications, less than 2% of the companies that received loans pocketed nearly a third of all the money — $179 billion of the total $525 billion loaned.

The SBA and the Treasury stress the PPP program has helped 51 million workers hold on to their jobs. A September report by the Congressional Select Subcommittee on the Coronavirus found the program has been plagued by fraud. According to the committee, “a lack of oversight and accountability from the Treasury Department and Small Business Administration (SBA) may have led to billions of dollars being diverted to fraud, waste, and abuse, rather than reaching small businesses truly in need.”

The SBA did not respond to a request for comment on the program or for information to support the number of jobs retained. The Center for Public Integrity has requested documents and data from the SBA under the Freedom of Information Act; the requests are pending and before a federal judge.

“It’s pretty clear that the PPP process was run in a way that pushed needy small businesses to the back of the line while prioritizing the influential,” said Matthew Gardner, a senior fellow at the non-profit, left-leaning Institute on Taxation and Economic Policy. “That’s not at all the way it was built, certainly not at all the way Americans would want to see it work.”

‘You can’t beat that’

PPP provided loans up to $10 million to small businesses that the government deemed “adversely impacted” by the coronavirus. The law that created the program — the Coronavirus Aid, Relief, and Economic Security or CARES Act — defined small businesses as those with fewer than 500 employees and put no such limits on certain businesses such as restaurants and hospitality companies. The average loan issued by the Small Business Administration, which manages the program, was just over $100,000 and will be forgiven if a company can show it used 65% of the loan to retain employees. The rest could pay for a business’s utilities, rent or mortgage.

Continental, which manufactures doors and ventilation and heating equipment, was among the 1% of companies that received a PPP loan of more than $2 million. The SBA has stated it will audit any loans over $2 million.

SBA did not respond to requests for comments on the status of Continental’s loan and any potential audit.

At issue for Continental is whether the company needed a PPP loan. The SBA required businesses to make a “good faith” certification that the PPP loan was “necessary.” When it applied for the loan, Continental said in filings with the Securities and Exchange Commission that the pandemic had yet to seriously impact the company. The company lost money in 2018 and in 2019, according to its SEC filings.

The SBA also required companies to certify that they could not access other sources of capital without significantly harming the business. But Continental and the Gidwitz family had other sources of financing. Less than two weeks before Congress created the PPP program, Continental obtained a $20 million line of credit from its bank, CIBC, according to its SEC filings.

The Gidwitz family also received a separate loan on April 6, two days before the company was approved for its $5.4 million PPP loan. Bee Street Holdings LLC, which holds the Gidwitz family stock, received a credit line of $8.75 million to purchase up to $6.1 million in outstanding shares of Continental stock, SEC filings show.

The Gidwitz family took Continental private in May, and the company no longer trades publicly. It’s unclear how much — or whether —Continental and the Gidwitz family drew down on either of the credit lines after receiving the $5.4 million PPP loan.

The loan, nevertheless, was a lot cheaper than borrowing money from a bank, said Robert Willens, an independent tax adviser who teaches corporate tax policy at Columbia Business School. The PPP loan has an interest rate of 1% if a company does not qualify to have the loan forgiven. The interest rate on one of the credit lines was slightly more than 2% and the rate for the other credit line was 3.25%.

“You can’t beat that,” Willens said.

Tax policy expert Gardner said Continental failed to meet the criteria for the PPP loan. The loans were for companies “facing existential threats due to COVID” and that “lacked access to capital [and] didn’t have a means of borrowing to keep themselves afloat,” he said.

‘Typical example’

Guy Chipparoni, a Continental spokesman, said in an email that the company followed the PPP rules. During its 68 years of operation, Continental “has met, dealt with and survived considerable industry and economic turmoil, none of those as drastic as what the Covid-19 crisis continues to present today,” Chipparoni said.

The CARES Act prohibited businesses controlled by President Donald Trump, Vice President Mike Pence, members of Congress, and heads of executive departments from receiving PPP loans. The law, however, didn’t ban companies that have financial ties to presidential appointees, such as Ambassador Gidwitz, from receiving loans.

“This is just a typical example of Congress or any legislature trying to address an ethical concern and making a first cut at the problem,” said Kathleen Clark, an ethics expert at Washington University in St. Louis. “It’s not surprising that it’s incomplete in its coverage, because frankly, Congress’s main concern was getting this money out the door.”

A State Department official said Ambassador Gidwitz resigned from his management position at Continental on June 29, 2018, after Trump named him ambassador to Belgium. Gidwitz “agreed that during his government service he would not participate personally and substantially in any particular matter that to his knowledge has a direct and predictable effect on the financial interests of Continental Materials Corporation,” the official said in an email.

After much worry and work, and nearly six weeks, the Riveras eventually got their PPP loan through an institution called the Opportunity Fund. The company is a so-called community development financial institution, which provides microloans to businesses that usually don’t have banking relationships. Early on, institutions such as the Opportunity Fund that primarily serve minority-owned businesses were shut out of issuing PPP loans. They were later allowed to make loans.

“I know it sounds weird and funny, but I feel like they were just angels who came to me,” Ana Rivera said.