SBA discrimination case could finally be headed for trial

By V. Dion Haynes

He and his partners sought licensing under a Small Business Administration program that uses private investment companies to distribute federal dollars to businesses in impoverished urban areas that traditionally don’t get capital.

But the SBA rejected Diamond Ventures, saying that the principals in the Washington- and Atlanta-based firm were not qualified. In response, Peek filed a racial discrimination lawsuit that he hopes could change the agency’s criteria for licensing firms for its Small Business Investment Company program and open the door for many minority-owned venture capital funds to participate.

After a seven-year battle, the case could come to a head this week. In March, the judge, citing some of the evidence presented by Diamond Ventures, denied the agency’s request to decide the case without a trial. Instead, she ordered the parties into mediation. When they failed to reach an agreement by June 15, the judge extended the negotiations by a month. If an agreement is not reached by the Thursday deadline, the case likely would go to trial.

“The SBA has treated minority applicants with an air of intimidation, antagonism and disrespect,” said Peek, who is African American. The agency’s criteria “exclude a broad group of people who would never quality.”

A spokeswoman at the SBA said the agency does not comment on pending litigation.

Peek said that in 2001, he sought licensing under the SBA program. The venture capital funds, through public and private dollars, finance the businesses mainly through equity investments.

But the lawsuit contends that the SBA rejected the application based on discriminatory criteria. The SBA, according to the suit, requires principals of firms receiving licensing to have five years’ experience in the venture capital market. Peek is a certified public accountant and a former entrepreneur. Like the other principals, he has extensive experience in commercial lending and economic development. Peek’s lawyers argue that very few African Americans have venture capital experience because they are locked out of jobs in that market.

“We believe the evidence shows that there are barriers to entry against African Americans in the private equity world,” said Bill Heyman, a lawyer with the Baltimore firm Tidings & Rosenberg. “Those barriers were adopted by the SBA in the criteria it chose to determine whether [a Small Business Investment Company program] applicant should receive a license.”

The lawsuit also alleges that the SBA granted licenses for numerous non-minority applicants with the same level of experience as Peek and with proposals similar to his.

The suit prompted an investigation by the SBA’s inspector general, who in 2003 concluded that the agency failed to comply with five of its own guidelines in licensing participants in the program. For instance, the report asserts that the agency used revised criteria regarding the experience level of Diamond Ventures’ senior managers, rather than the criteria in place at the time the application was filed. Moreover, the report asserts that the agency rejected the part-time, out-of-town work arrangements of one of the partners, yet had approved other applicants operating under similar circumstances.

In its response to a draft of the inspector general’s report, the SBA disagreed with its conclusions. The SBA cited other laws not mentioned in the inspector general’s report that it is obligated to follow in determining the eligibility of applicants.

The SBA also said its consideration of the work arrangements of the senior manager at Diamond Ventures was relevant in evaluating the amount of time he would commit to the fund.