ATLANTIC CITY, N.J. (AP) — A 2-year-old loan program that was supposed to lend as much as $40 million to struggling homeowners and businesses in this cash-strapped resort city has given out nothing and has instead led to a federal lawsuit.
Atlantic City is suing to get back $3 million it gave to the company that has failed to run the Community Loan Program, launched in 2013 by Lorenzo Langford, the mayor at the time.
The company is partially owned by relatives of a former Langford aide, The Associated Press found. The company used most of the city money to buy a finance firm in Tennessee that has since had management of more than $6.6 million in government-backed loans taken away by the Small Business Administration.
As Atlantic City fights to overcome an economic downfall driven by its decimated casino industry, including cutting $40 million from its budget and slicing nearly 200 jobs, the suit raises questions about why money was fronted to provide loans that banks readily make.
The city says in its lawsuit that W. Wesley Drummon and his ZeMurray Street Capital misrepresented themselves, failed to deliver promised services and didn't honor requests to return the money.
Felix Gonzalez, the lawyer for the company and Drummon, of New York, denies the city's claims. He said in a filing this week that Atlantic City had lawyers review the loan program agreement and that the city is not a victim.
Attorneys for the city and Drummon are due in federal court Friday for a hearing after ZeMurray did not meet deadlines for handing over documents.
Gonzalez said in the filing that he has advised Drummon to exercise his Fifth Amendment right against self-incrimination after he was told by an attorney for the city that the U.S. attorney's office has launched a criminal investigation. City attorneys did not return calls seeking comment, and a spokesman for the U.S. attorney's office said it does not confirm or deny the existence of investigations.
While it's not clear when Drummon first connected with Atlantic City, Langford pitched the idea of the loan program in 2012, and again in 2013. Four months later, Atlantic City's council approved giving Drummon's company $3 million to start the program.
The city's agreement signed in May 2013 with ZeMurray Street Capital said that ZeMurray had the "experience and expertise necessary to establish and administer" the program, and ZeMurray said it would lend money through the Tennessee Business and Industrial Development Corp.
But ZeMurray's purchase of TN Bidco with the help of two brothers of one of Langford's aides didn't receive preliminary approval from Tennessee regulators until two months later, according to business filings and documents from the Tennessee Department of Financial Institutions reviewed by the AP.
And as late as May 2014, regulators still had not given the takeover their final blessing and the company did not have permission to make loans outside of Tennessee, documents show.
Michael Lax, of Spring Hill, Tennessee, was listed in documents as the registered agent for TN Bidco after the purchase and was later paid $4,000 a month as a consultant, while Gary Lax, a finance attorney in Washington, D.C., became chairman of the board of TN Bidco. He was also the trustee of a family trust with an ownership stake in ZeMurray. Their brother Eddie served as an aide and spokesman for Langford.
Michael Lax said that he was asked by Drummon to be the registered agent for the company, but that he couldn't remember when that happened. He said that Eddie Lax was not involved in the transaction.
"I never had any discussion with anyone in Atlantic City about this," Michael Lax said. "I know Ed works for the mayor, and that's about it. I think he's a clerk."
Gary Lax, who previously served as a board member for the Miss America Organization, did not respond to emails, phone calls and a hand-delivered letter seeking comment.
Eddie Lax is paid $53,600 a year as a clerk in the office of Atlantic City Mayor Don Guardian, according to payroll records. Guardian upset Langford in a November 2013 election, becoming the first Republican to run the city in more than two decades.
Eddie Lax said that he knew about the loan program because "it was something that (Langford) did," but that he didn't know his brothers were involved.
"I have no ownership or involvement in that company," he said from his desk just outside Guardian's office.
Langford declined to comment on the loan program and the lawsuit.
"If I was still in office I'd be happy to talk to you," he told a reporter outside of his home. "Because I am a year removed from office, I will reserve comment."
After the lawsuit was filed in August 2014, the Small Business Administration took over servicing of TN Bidco's loans, according to a letter sent to the company in January from the agency's office of credit risk management.
Willard "Chuck" Lewis, a consultant who was involved with the company and said he was speaking on its behalf, said that TN Bidco met with more than 80 loan applicants from Atlantic City starting in October 2013. He said that loan applications were in "various stages of processing" before the lawsuit.
He said Drummon has been "working diligently" at building a financial services company that helps underserved communities.
"I think Wes has always been a guy from the time that I've met him has always been concerned that there's equal access to capital (and) to provide loan opportunities to the areas that were distressed in some instances or underserved," Lewis said.
Arch Liston, who came in as Atlantic City's business administrator along with Guardian last year, said that the new administration became aware of an issue when it realized it hadn't received reports ZeMurray was supposed to send them about the loan program.
"You can go into almost any bank and get a small business loan. It was just unusual that there was city money that was fronted for this," Liston said. "It's just highly unusual he had this kind of money fronted."
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