First Civil Settlement for Fraud on Cares Act Paycheck Protection Program

“The defendants made false statements to multiple banks in order to obtain a Paycheck Protection Program loan that should have been disbursed to an honest small business suffering financially from the economic effects of the COVID-19 pandemic,” said U.S. Attorney Scott. “The Department of Justice and our partners at the SBA will use all tools at our disposal, including civil fraud statutes, to aggressively pursue those who exploit federal programs intended to help those in need during this national emergency.”

Background

On January 12, 2021, the U.S. Attorney’s Office for the Eastern District of California announced the first civil settlement with a borrower for allegedly committing fraud in obtaining a Paycheck Protection Program (“PPP”) loan, in violation of the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). The FCA allows the government to recover damages and penalties for presenting false claims for payment to the United States. FIRREA allows the government to impose civil penalties for violations of enumerated federal criminal statutes, including those that affect federally-insured financial 

Private plaintiffs also may bring lawsuits on behalf of the government under the FCA.

The DOJ alleged that the borrower, SlideBelts Inc., and Brigham Taylor, president and CEO, falsely stated in their PPP applications that the company was not “presently involved in any bankruptcy,” which was a condition of PPP eligibility. SlideBelts Inc., an internet retail company and debtor in bankruptcy, and Taylor have agreed to pay the United States a combined $100,000 in damages and penalties to resolve allegations that they committed fraud. SlideBelts also repaid the $350,000 in Paycheck Protection Program funds it received. In the settlement, DOJ contends that the defendant’s damages and penalties were $4,196,992 under FIRREA and the FCA, but agreed to settle for $100,000, which $65,000 will be paid by SlideBelts, and $35,000 will be paid by Taylor. The defendants did not concede liability, but they did “admit, acknowledge, and accept responsibility” for the facts recited:

  • Circa August 2019, the company filed a Chapter 11 bankruptcy petition. While that bankruptcy proceeding was pending, the company applied to three different lenders for PPP loans.
  • On April 3, 2020, the company submitted a PPP application for $300,000 to a credit union in Sacramento, California.
  • On April 8, 2020, the company submitted another PPP application for $350,000 to a federally insured bank located in New Jersey. On both applications, in response to Question 1, the company answered falsely that it was not “presently involved in any bankruptcy.”
  • On April 10, 2020, a credit union manager told the company by email that Question 1 (see below) had been answered incorrectly because the manager knew the company was in bankruptcy. Taylor responded that this was an “oversight” but argued that SBA was “overreaching” by including a certification about pending bankruptcy in borrower applications.
  • On April 14, 2020, Taylor repeated this argument and asked the credit union to approve the loan. The credit union declined based on the bankruptcy, as to which Taylor responded, “that does make sense. All good!”
  • Approximately three (3) hours after this rejection, Taylor and SlideBelts submitted a third PPP application to a federally insured bank in Minnesota, making the same false statement regarding bankruptcy.
  • Then, the New Jersey-based bank approved the PPP application, and Taylor signed the note. However, he knew from his earlier communications with the credit union that this second bank would not provide the PPP loan had it known that the company was in bankruptcy. By obtaining a PPP loan from the bank, the defendants also caused the bank to submit a false claim to SBA for $17,500 in loan processing fees, which SBA paid.
  • On April 22, 2020, after the bank distributed the loan proceeds to SlideBelts, Taylor wrote an email to the bank explaining that the company had “just realized that we may not have answered [Question 1 see below] correctly since we filled out the application quickly and wanted to bring it to your attention.” Taylor disclosed that the company was in bankruptcy but did not return the funds at this time.
  • Instead, the company asked the bankruptcy court for retroactive approval of the PPP loan, and both the bank and SBA opposed the motion.
  • On July 8, 2020, after repeated requests from the SBA, the company returned the loan.

PPP Loan Fraud

PPP loan fraud is when an individual or business submits false information in an application or certification for a loan under the federal Paycheck Protection Program (PPP). An article by Thomson Reuters in October 2020 stated, “Recent reporting shows that $4 billion in PPP loans have already been red-flagged. 

Estimating a ten percent rate of fraud applied to total PPP loans, the real dollars of PPP loan fraud could eclipse $60 billion.

CARES Act

The CARES Act was enacted on March 29, 2020, to provide emergency financial assistance to the millions of Americans who are suffering the economic effects caused by the COVID-19 pandemic. One source of the relief supplied by the CARES Act was the authorization of up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the Paycheck Protection Program. In April 2020, Congress authorized approximately $349 billion, and in December 2020, Congress approved nearly $310 billion in additional Paycheck Protection Program funding. This brought the total funds available to the SBA and the PPP to $659 billion.

Oversight

The CARES Act establishes three separate bodies charged with oversight of stimulus funds:

  1. The Office of the Special Inspector General for Pandemic Recovery (SIGPR) within the Treasury Department;
  2. The Pandemic Response Accountability Committee (PRAC); and,
  3. The Congressional Oversight Commission (COC).

See Notes below for details.

Question 1

The SBA form states that if Question 1 is answered “Yes,” then the “loan will not be approved.” Additionally, the SBA’s Interim Rule of April 24, 2020, stated: “If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan.”

Investigations

If you have been contacted by a federal agent or regulatory body about a PPP loan, you need to stop, take a breath, and contact me or a reputable attorney-I know a few. Do not talk or respond to anyone.

A PPP loan fraud investigation can go a long way in avoiding criminal charges. Although there are several criminal prosecutions already underway, I understand that federal grand juries are limited right now due to wide-spread COVID-19 restrictions. That means an experienced lawyer might be successful in diverting the matter to a civil disposition instead of federal criminal charges.

Simultaneously, you should take these steps.

  • Gather all your business and personal financial records and make a digital copy of them. You will need these to document your loan request and to support your defense.
  • Do not throw away, shred or otherwise destroy any business records, especially any used to prepare your loan application or certifications. Not only may you need these documents later, destroying any vital document in anticipation of a PPP loan fraud investigation can lead to a separate criminal charge.
  • Advise your employees they can report their suspicions about PPP fraud to management without fear of retaliation. If they feel they can’t talk to you, they may decide to go directly to the government or a whistleblower attorney.

Prophylactic Measures

Investigations are expensive, so if you believe there is a heightened level of fraud risk, immediately consider the following.

Notify your board of directors.

Hire a forensic accountant to review your documentation and the logic used to apply for the loan(s). Also, have the forensic accountant conduct a compliance review and perform a gap analysis.

Depending on the situation and level of risk, it might be wise to have the above exercise done under attorney-client privilege and have the summary of findings and the gap analysis delivered orally.

Closing

The government is not playing games (emphasis added). The DOJ has already announced that it will focus resources on COVID-19-related fraud. Specifically, the DOJ will continue to utilize the FCA to ferret out fraud against government programs and hold businesses and individuals accountable for wrongdoing.

Why? For those that remember TARP, or the Troubled Asset Relief Program (TARP) enacted in 2008, the DOJ used the FCA to recover funds allegedly obtained from the government falsely or fraudulently—policing of TARP funding resulted in numerous criminal convictions and substantial financial settlements for the government.

The FCA imposes liability and the potential for treble damages and harsh penalties, not only when businesses and individuals have actual knowledge that their statements are false, as alleged here, but also where a company or individual has deliberately ignored or shown a “reckless disregard” for the truth or falsity of statements.

It is vital for those seeking PPP and other government-funded responses and relief programs to have a complete and accurate understanding of the eligibility criteria and restrictions. To minimize the risk, companies should implement safeguards to ensure the genuineness of all statements made in the PPP and related programs application process. Also, the board of directors should monitor compliance with all program eligibility requirements and limitations.

I welcome your thoughts and comments. Remember, I am here to help.

Best,

Jonathan T. Marks, CPA, CFF, CFE

Notes

The DOJ press release is available here.

The settlement agreement is available here.

The FIRREA allegations are based on violations of 18 U.S.C. § 1014, 15 U.S.C. § 645(a), 18 U.S.C. § 1001, 18 U.S.C. § 1343, and 18 U.S.C. § 1344. FIRREA permits the DOJ to sue for civil penalties for certain criminal offenses (including federal mail and wire fraud) affecting federally insured financial institutions.

Oversight

SIGPR will supervise and coordinate “audits and investigations of the making, purchase, management and sale of loans, loan guarantees, and other investments” by the Treasury Secretary under any program established by the CARES Act. SIGPR is authorized to conduct investigations, issue reports, and refer matters to the DOJ for criminal or civil investigation.

PRAC will support inspectors general in the oversight of stimulus funds to “detect and prevent fraud, waste, abuse, and mismanagement; and mitigate major risks that cut across programs and agency boundaries.” PRAC also can conduct investigations and refer matters to the DOJ for criminal or civil investigation.

COC will oversee the implementation of the CARES Act stimulus package by the Treasury Department and Federal Reserve Board and with assessing its effectiveness. The COC is authorized to hold hearings, to take testimony, to receive evidence, and to issue reports.

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