Government Gives and Justice Department Wins: First Civil Settlement for Paycheck Protection Program Fraud | Vinson & Elkins LLP
It was only a matter of time. On January 12, 2021, the Department of Justice (“DOJ”) announced that it had reached its first civil settlement regarding allegations of fraud related to the Paycheck Protection Program (“PPP”).1 The DOJ settled a $ 4.2 million claim against a bankrupt Internet retailer and its chairman for $ 100,000. While unique to the specific allegations of the case, the settlement discloses activities that may be alleged as PPP fraud, the laws available to DOJ to pursue civil enforcement, and the conditions under which DOJ will resolve the allegations. PPP fraud. The DOJ has been pursuing criminal cases against PPP fraudsters for months, but this regulation introduces the powerful tools to fight civil fraud that the DOJ also has in its toolbox to tackle suspected fraud and misrepresentation related to these. popular loans. This first civil settlement involving the PPP includes the False Claims Act, 31 USC § 3729-3733 (“FCA”), and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 USC § 1833a (“FIRREA”). These laws allow the government to seek civil monetary penalties and damages from borrowers that are exponentially greater than the principal amounts of the PPP loans involved.
The target of the DOJ’s civil action was SlideBelts Inc., an Internet fashion accessories manufacturer and retailer with offices in California. SlideBelts filed for bankruptcy in August 2019. Although bankrupt debtors are not eligible for PPP loans, SlideBelts submitted three PPP loan applications, the first to a credit union, and the second and third to various insured financial institutions. by the federal government. In response to a question about PPP loan applications as to whether the loan applicant was involved in bankruptcy, SlideBelts said it was not.
The credit union turned down SlideBelts’ first PPP loan application because, as a creditor in the bankruptcy proceedings, it knew SlideBelts was bankrupt. Hours after the credit union rejected SlideBelts’ request, the company submitted a PPP request to the third lender. Meanwhile, the lender who received SlideBelts’ second PPP loan application approved the $ 350,000 loan. The president of SlideBelts signed a loan agreement with the second lender, again declaring that SlideBelts was not bankrupt. The lender executed the loan note and disbursed the funds to SlideBelts, the Small Business Administration (“SBA”) guaranteeing the loan under the PPP. The day after receiving the loan distribution, the president of SlideBelts emailed the lender indicating that the company may have answered the bankruptcy question incorrectly.
A week later, SlideBelts filed a petition in its bankruptcy proceedings seeking court approval for the PPP loan. The SBA opposed SlideBelts’ petition and asked the bankruptcy court to return the loan proceeds to the lender. In response, SlideBelts asked the bankruptcy court to dismiss his case so he could apply for a PPP loan while the case was dismissed, and then file for new bankruptcy later. The bankruptcy court dismissed the case and SlideBelts returned the proceeds from the PPP loan two and a half months after receiving the funds.
After an investigation was conducted in cooperation with the Office of the Inspector General of the SBA, the DOJ argued that the United States had a $ 4.2 million civil action against SlideBelts and its president under FIRREA and FCA, even though the loan amount was only $ 350,000. (and had been returned in its entirety). Both laws are powerful enforcement tools, authorizing the government to impose massive civil penalties for fraudulent conduct and to recover damages suffered by the government as a result. The CAF provides for a civil pecuniary penalty of $ 23,331 per false declaration, as well as three times the damages suffered by the government as a result of the false declaration. Both laws have long statutes of limitations, giving the government years to investigate PPP borrowers. The regulations under the FCA do not necessarily cover criminal conduct, so parties like SlideBelts and its chairman remain exposed to criminal charges. Whistleblowers can receive significant rewards for providing new credible information related to status violations. Finally, because the laws provide for civil recoveries, the government’s burden of proof is the “preponderance of the evidence”, which is considerably lower than the “reasonable doubt” standard required to successfully prosecute a criminal charge.
To resolve its civil claims, the DOJ entered into a settlement agreement with SlideBelts and its chairman (available here), which deals with allegedly fraudulent behavior in pursuing and obtaining a PPP loan. The settlement agreement contains several notable features:
- Payment. Although SlideBelts returned the proceeds from the PPP loan, the settlement agreement required SlideBelts to pay $ 100,000 in damages over a five-year period in accordance with a detailed payment schedule. The settlement agreement states that $ 17,500 of the payment is a restitution from the president of the company. This amount is the loan processing fee that the SBA paid to the lender under the SlideBelts PPP loan. The settlement agreement notes that the government was prepared to accept $ 100,000 in settlement of its civil claim of $ 4.2 million solely because of the poor financial situation of the company and its chairman.
- Admissions. Without admitting responsibility, SlideBelts and its chairman admitted facts related to their knowledge of the bankruptcy and the impact of their statements on the lender and the SBA. Specifically, SlideBelts and its chairman admitted to falsely answering the question about SlideBelts’ involvement in bankruptcy in order to influence the credit union and financial institutions to grant SlideBelts a PPP loan. SlideBelts and its chairman also admitted that their misrepresentation actually prompted the lender to approve the loan application and the SBA to secure the loan, as well as causing the lender to submit a false claim to the SBA for the costs of the loan. loan processing.
- Versions. The United States has released SlideBelts and its President from any civil or administrative pecuniary claims relating to conduct described in the Settlement Agreement under FIRREA and FCA, as well as under the Program Fraud Civil Remedies Act, 31 USC §§ 3801–3812, and some common law theories. However, the United States has explicitly reserved and has not released SlideBelts from any criminal liability, any liability under the Internal Revenue Code, and any other administrative liability or enforcement right not expressly set forth in the Agreement. settlement. The settlement agreement also makes it clear that the releases only cover certain behaviors of SlideBelts and its chairman related to seeking PPP loans, and the releases do not apply to other behaviors or to other entities or people.
What it means to you
Over five million entities have applied for and received PPP loans, and the vast majority are requesting loan cancellation. Based on its enforcement actions, the DOJ reviews the certifications made in PPP loan applications, which must be made “in good faith”. The SlideBelts rule shows that any recipient of a PPP loan should be aware that they may attract the attention of DOJ investigators and what the possible outcomes of a civil enforcement investigation might be when the DOJ has tools. also powerful to request recovery.
Not only are PPP loan applications reviewed by the government, FCA and FIRREA encourage whistleblowers to report suspected fraud to the government, which can lead to investigations. Once initiated, investigations can take years due to long statutes of limitations under FCA and FIRREA, giving the DOJ ample time to litigate. The laws also allow the DOJ to seek massive recoveries against the PPP amounts borrowed, and as seen in SlideBelts, simply returning the loan proceeds is unlikely to be enough to solve the problem. In addition, in order to reach a settlement, the DOJ may request a confession related to knowledge of the falsity of certain statements made, the intent behind the false statements and the subsequent events that those false statements caused. Such confessions are important to navigate, especially because these civil regulations tend not to cover criminal liability, and confessions could be used to constitute a criminal case. PPP borrowers should be wary of the execution capacities of the Department of Justice and be prepared to respond if they find themselves the target of civilian enforcement efforts.
1 Press Release, Dep’t of Justice, Eastern District of California Obtains Nation’s First Civil Settlement for Fraud on Cares Act Paycheck Protection Program (January 12, 2021), https://www.justice.gov/usao-edca/pr/eastern-district-california-obtains-nation-s-first-civil-settlement-fraud-cares-act.