DOJ Announces First False Claims Act Settlement re: PPP Loan Fraud

On January 12, 2021, the United States Attorney’s Office for the Eastern District of California announced the first Paycheck Protection Program (“PPP”) civil settlement stemming from alleged violations of the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”).  According to the Department of Justice’s (“DOJ”) press release and the settlement agreement, SlideBelts Inc. made false statements on its PPP loan applications when it omitted the fact that it had filed for Chapter 11 bankruptcy.  In particular, while in bankruptcy, the company’s CFO, CEO, and President, Brigham Taylor, filed three separate PPP loan applications in three different states.  In each application, Taylor certified that the company stated that it was not “presently involved in any bankruptcy” allegedly to influence the federally insured institutions to grant, and for the Small Business Administration (“SBA”) to guarantee, a PPP loan.  As a result of these certifications, SlideBelts received a $350,000 PPP loan.  Despite repaying the $350,000 loan just two and a half months after receiving it, the DOJ contends in the settlement agreement that SlideBelts and Taylor are liable for damages and penalties totaling $4,196,992 for violations of the FCA and FIRREA.  SlideBelts and Taylor did not concede liability, but did accept responsibility for the facts set forth in the settlement agreement.  According to the settlement agreement, the DOJ agreed to resolve the matter with SlideBelts and Taylor for $100,000, of which $65,000 will be paid by SlideBelts and $35,000 will be paid by Taylor.

The Paycheck Protection Program and Criminal Prosecutions

Before unpacking the SlideBelts settlement for guideposts on how the DOJ may approach future civil settlements under the PPP, let’s outline the DOJ’s efforts thus far to deter fraud and abuse of the largest stimulus program in US history.  As part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act signed into law on March 27, 2020, the federal government initially allocated $659 billion to the PPP.¹  The first round of PPP allowed small businesses to seek forgivable loans of up to $10 million to be used to pay for up to eight weeks of a business’s payroll costs plus some other expenses, such as rent and utilities.  Loans were to be eligible for forgiveness if companies used the money to retain workers or hire back employees.  The SBA waived many of its usual requirements for SBA loans and did not require collateral or a personal guarantee for them, but businesses still had to apply for the loans through a bank or other lender and were required to certify compliance with the PPP’s eligibility requirements, thus setting up a classic “pay and chase” scenario for fraud enforcement.

Almost immediately after the CARES Act was signed into law, the SBA and the DOJ dedicated historic resources to ferreting out would-be fraudsters attempting either illegally to obtain PPP loans or divert PPP loan proceeds to extravagant purchases, such as sports cars, jewelry, or vacations.  By November 2020, the FBI had opened several hundred PPP-related criminal investigations involving nearly 500 suspects and hundreds of millions of dollars’ worth of loans, while the DOJ had charged at least 73 defendants for fraudulently obtaining approximately $227 million in PPP funding.   

Guideposts from the SlideBelts Settlement

As the early wave of criminal cases became public, the PPP borrower community took solace in the fact that the DOJ was prosecuting the most patently obvious fraud schemes.  Lurking behind that solace were nagging, unanswered questions about what the DOJ’s efforts would look like in the civil enforcement sphere.  The SlideBelts settlement provides some useful and ominous guideposts to PPP borrowers: 

• FCA & FIRREA

The DOJ alleged that SlideBelts and Taylor violated the FCA and FIRREA when they made false certifications on their PPP loan applications.  The use of the FCA to prosecute PPP fraud was expected.  The FCA, 31 U.S.C. §§ 3729-3733, was enacted during the Civil War to address extensive fraud encountered in the government procurement process and has been viewed as the logical statute to punish PPP fraud.  The FCA imposes both criminal and civil penalties for knowingly submitting—or causing to submit—false claims to the government for payment, as well as for knowingly making a false record or statement to get a false claim paid by the government.² A “claim” under the FCA includes any demand for money or property made directly to the federal government.  Small businesses and individuals applying for PPP loans—and PPP loan forgiveness—will therefore be making “claims” for stimulus funds and will be subject to the strictures of the FCA.  Potential damages under the FCA can be significant, including a civil penalty—currently between $11,463 and $23,331—for each false claim, up to three times the government’s actual damages, and attorney’s fees.

More surprising was the DOJ’s allegation of a FIRREA violation in the SlideBelts settlement.  The agreement states that “[t]he United States contends that it has certain civil claims against Taylor and SlideBelts for violating the . . . FIRREA, predicated 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. § 1344.³ Based on these claims, the United States contends that Taylor and SlideBelts are liable to the United States for damages and penalties totaling $4,196,992 under FIRREA and the FCA.”

Passed in 1989 in response to the savings and loan crisis of the late 1980s, FIRREA’s civil penalties provision, 12 U.S.C. § 1833a, created new civil money penalties for 14 federal criminal offenses involving or affecting federally-insured deposit institutions.  The penalties are significant: up to $2,048,915 per violation (after adjustment for inflation), or up to $10,244,577 for continuing violations.  FIRREA also permits courts to assess additional penalties up to the amount of any person’s pecuniary gain or loss due to the violation.  Beyond the potential for massive settlement amounts, FIRREA is an attractive tool in DOJ’s enforcement toolkit because the government only needs to prove the predicate offense by a preponderance of the evidence, and it extends the statute of limitations to 10 years.  Perhaps of equal if not greater concern, FIRREA includes a whistleblower provision that allows private persons who report FIRREA violations to earn a maximum award of up to $1.6 million.  Thus, like the FCA, the potential for instances of fraudulent activity brought to the attention of the DOJ are considerably enhanced.

Looking forward, the inclusion of FIRREA is notable for at least two reasons.  First, the FIRREA civil penalty amounts not only drove the $4,196,992 damages calculation against SlideBelts and Taylor, but it also dwarfed the potential damages had the DOJ alleged only a violation of the FCA—which would have been, at most, less than a $1,000,000 fine.  Second, it appears likely that FIRREA will be invoked in all civil PPP loan fraud cases going forward, as the statute appears to be the most readily provable offense for the enforcement of false statements made to lenders and the SBA in connection with the PPP loans.  DOJ has ramped up its use of the FIRREA civil penalties provision over the past decade, and that trend is poised to continue as it focuses its enforcement efforts on PPP fraud.  False statements, mail fraud, and wire fraud “affecting a federally insured financial institution” are predicate offenses under FIRREA, as are false statements in loan applications to the SBA.  FIRREA’s broad scope, and the availability of statutory penalties without regard to proof of losses, makes it very likely that the DOJ will seek FIRREA penalties in PPP fraud cases, alone or in addition to FCA damages.

• Inability to Pay or an Excessive Fine

Despite the DOJ’s assessment of a $4,196,992 penalty, the United States allowed SlideBelts and Taylor—because of their inability to pay—to resolve the matter by paying $100,000.  Why the DOJ did so is unknown, but two possibilities are worth discussing.  On the one hand, allowing entities to make arguments regarding their inability to pay has been a long-standing DOJ policy.  Most recently, on September 4, 2020, the DOJ issued a memorandum that provides guidance on how it will assess an entity’s assertion of an inability to pay.  Although this process requires extensive analysis of many factors, the SlideBelts settlement is a prime example of why such an endeavor is necessary on the part of defendants and also signals that “inability to pay” arguments are being taken seriously by the DOJ.  On the other hand, by using FIRREA penalties, the DOJ has shown an inclination to wield a deterrence weapon that is disproportionate to underlying damage caused by the PPP fraud.  SlideBelts paid back its $350,000 loan and the DOJ assessed damages and penalties of $4,196,992.  By agreeing to take pennies on the dollar, the DOJ is able to avoid a challenge that the practice of assessing FIRREA penalties for the same underlying conduct for which it also assessed FCA damages violates the “excessive fines” clause of the US Constitution.

• Individual Liability

The SlideBelts settlement also highlights the potential risks for directors and officers of a company applying for a PPP loan, particularly those who certify compliance with the loan’s requirements.  As with Mr. Taylor, if an individual is suspected to have certified the submission of a false claim on behalf a borrower, the certifying person may be subject to an investigation into whether their conduct violated the FCA.

Avoiding Civil Liability

While the SlideBelts settlement is the first civil settlement announced by the DOJ with respect to PPP loan fraud, it certainly will not be the last.  All applicants for funds under the PPP must answer each question on the PPP loan application truthfully, carefully review and understand the requirements for eligibility for a PPP loan and understand the restrictions on the use of PPP loan proceeds.  As the SlideBelts settlement demonstrates, ineligibility for a PPP loan can turn a $350,000 loan—that was repaid—into damages and penalties totaling more than $4,000,000. 

With a new round of PPP financing available until March 31, 2021, small businesses applying for a loan under the PPP must certify, among other things, that they are eligible to receive a loan under the SBA’s rules implementing the PPP in effect at the time that the application is made.  The SBA rules are extensive and prohibit certain types of businesses from obtaining PPP loans.  In addition, most businesses are subject to the SBA’s affiliation rules, which may make an otherwise eligible business ineligible due to its common ownership with other businesses.  Many of these restrictions are not apparent from a simple reading of the borrower application itself.  As a result, it is important that borrowers consult with advisors who not only have knowledge about SBA loans in general, but also about the specific requirements of PPP loans.

Companies should also be careful to document the rationale and bases supporting their submissions (including, for instance, communications with their lender or the SBA, advice of counsel, etc.) and, if applicable, should document any governmental modifications or waivers of requirements so that they are authorized in writing by a government official or agency with sufficient authority to act.  Borrowers should also ensure that they have effective reporting systems in place to receive notice of potential compliance issues and then investigate them appropriately.  In FCA investigations, government investigators have traditionally viewed a failure to maintain records as tantamount to an admission, and recordkeeping problems due to COVID-19 may not be enough to mollify federal investigators several years in the future.  To successfully navigate a future investigation by the SBA and the DOJ, we recommend that businesses keep all records related to the application and loan approval process, and all records showing how the proceeds of the loans were used, for at least 10 years after any loan forgiveness application has been submitted.

As the government continues to roll out stimulus payments and other relief, it is essential that recipients of government funding have a plan in place to ensure they comply with all applicable rules, regulations, and requirements to avoid potential criminal or civil liability down the road.   

 

¹ This amount was increased to $806 billion on December 27, 2020. 

² The statute permits the DOJ as well as qui tam relators—individuals claiming to have direct and independent knowledge of fraud—to bring civil suits against government contractors and other federal program participants to recover damages and penalties.

³ 18 U.S.C. § 1014 (false statement on a loan application), 15 U.S.C. § 645(a) (false statements to get an SBA loan), 18 U.S.C. § 1001 (false statement to U.S. government), 18 U.S.C. § 1343 (wire fraud), and 18 U.S.C. § 1344 (bank fraud).