Development Group Will Vote Today on Controversial Contract

Directors of the government-subsidized Local Development Corp. will decide today whether to terminate a controversial contract to arrange Small Business Administration loans that it awarded to a close associate of board Chairman Clarence Pendleton.

LDC staff members have claimed that the lucrative 1984 contract with Sydney I. Novell has placed the 9-year-old organization--which the federal Small Business Administration uses exclusively to arrange its low-interest loans in San Diego County--in a situation that threatens its financial solvency.

There was no competitive bidding before the contract was awarded to Novell, a partner in the consulting firm of Pendleton & Associates and a confidential assistant to Pendleton since his appointment by President Reagan as chairman of the U.S. Civil Rights Commission.

The contract, approved by the LDC board in June, 1984, guarantees Novell a salary of $5,000 a month to prepare loan packages for small businesses in certain areas of the county.

Corporation controller Jeff Sturman said an audit showed that Novell had been paid salary and commissions of $113,411 since the contract was awarded, but that the corporation had received only $17,541 in income from the loans she has arranged. The corporation receives a 1.5% commission from the Small Business Administration for each loan it secures.

Since Novell was placed in charge of arranging loans, Sturman said, the corporation’s $26,283 reserve fund has been wiped out, and it is $19,506 in debt.

The city and county of San Diego provided the Local Development Corp. with almost $500,000 in federal Housing and Urban Development funds last year to arrange small-business loans. The loans are restricted to small businesses in minority and low-income areas designated by the city and county. Novell’s contract was to arrange loans in other areas.

Pendleton has wielded considerable control over the nonprofit development corporation since it was formed in 1977 to create new jobs and businesses for minorities and persons with low incomes. The San Diego Urban League played a key role in the corporation’s founding when Pendleton was president of that organization. He has been the corporation’s only board chairman, and a number of his business associates have risen to power on the board.

In November the board voted to give up HUD funding and turn over complete control of the organization to Novell (after Pendleton initially proposed but later withdrew a plan to award the contract to his own consulting firm), empowering her firm to arrange all SBA loans in the area. And the board informed LDC employees that they would be terminated as of Dec. 31.

But SBA intervened, and ordered the action frozen for 120 days, until it could complete an audit into the ramifications of the plan. The results of the SBA audit, which will focus on whether the arrangement constitutes a conflict of interest for Pendleton, are expected to be released next week. SBA officials refused to comment pending completion of the audit.

Pendleton and Novell have refused to return numerous phone calls placed to their offices by The Times.

Patricia Smith, a board member who works in the Pendleton & Associates’ offices, said she had “no idea what would happen” at the meeting today. She said she had no opinion about Novell’s effectiveness since she was awarded the contract to arrange the private-sector loans. But Novell has been harshly criticized by former board directors and members of the LDC staff, who say she has failed to generate enough loans to justify her salary. Other board members also refused to comment until after today’s meeting.

LDC staff members said Pendleton now supports the termination of Novell’s contract, but intends to proceed with the plan to turn the agency over to a private contractor, although there would be a competitive bidding process before one is chosen.

Executives representing five lending organizations have written to the SBA, saying they might not be willing to finance SBA loans if the plan to reorganize the LDC is carried out and its current staff is dissolved. They questioned whether the reorganization was in the best interests of the local business community.

“We never had a deficit before, and it’s directly attributable to the (Novell) contract,” said Sturman. “The city and county reimburse us directly for our costs, so there is no deficit in those areas. We saw a need for private packaging in areas where our governmental arrangements did not allow us to operate, but Sydney (Novell) just has not been able to generate enough loans to justify the expense of her contract.”

The current financial situation, coupled with Pendleton’s plan to dissolve the LDC’s paid staff, “indicate that the corporation may be unable to continue its existence,” an LDC audit concluded.

The LDC board, in addition to Pendleton and Smith, includes Wilmer Cooks, another partner in Pendleton & Associates; developer Gil Contreras, and banker Jill Cobb, who have had financial dealings with Pendleton since his days with the Urban League, according to Art Goodman, LDC executive vice president. Together, they form a majority of the nine-member board, which has one vacancy. “No one ever has questioned how this group came to power together,” Goodman said.

Goodman, who served as Pendleton’s vice president on the Urban League, has emerged as an outspoken critic of plans to reorganize LDC. He said Pendleton has made a “very concerted” effort to take over the corporation and control its board. He said he hoped the audit would analyze Novell’s performance since she received the contract.

Until the movement began to convert LDC to a private corporation, Goodman said, the board of directors exerted little influence over the organization. Under the LDC bylaws, patterned after those governing 40 similar nonprofit corporations nationwide, it was “very easy for anyone to get a seat on the board,” Goodman said. The board is elected by the LDC membership, a loosely organized group made up predominantly of small-business owners, who can join simply by completing an application form.