The case is against a subsidiary of Allied Capital, Business Loan Express (BLX), which alleged submitted fraudulent loan documents to the Small Business Administration (SBA).
The law suit claims that BLX "devised and executed a massive scheme" to defraud the US government by "repeatedly and systematically submitting false claims to the SBA" to guarantee payment of loans made to unqualified borrowers whom the defendants knew or should have known would default on the loans.
It is claimed that more than $76 million in loans had been fraudulently originated from the BLX Detroit office.
By taking the case in the name of the US government the hedge fund would be entitled to 25 per cent to 30 per cent of any award under the Federal Civil False Claims Act.
Greenlight Capital has also called in Allied to remove its management team because of the case.
Executive vice president of BLX Patrick Harrington was charged with fraud by the Attorney's Office on January 9th along with 19 other people.