DOJ Announces First PPP Fraud Settlement - Should Borrowers Be Worried?

The Department of Justice (DOJ) recently announced its first settlement involving fraud allegations related to the Paycheck Protection Program (PPP)...

The Department of Justice (DOJ) recently announced its first settlement involving fraud allegations related to the Paycheck Protection Program (PPP).  SlideBelts Inc., along with the company’s president and CEO, have agreed to pay a combined $100,000 in damages and penalties to resolve allegations that they committed fraud in connection with a $350,000 PPP loan. SlideBelts also repaid the PPP funds it received.

“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,” U.S. Attorney McGregor W. Scott said in a press statement. “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.”

Allegations of PPP Fraud

As part of the settlement, Taylor and SlideBelts admitted that they made false statements to federally insured banks that SlideBelts was not in bankruptcy in order to influence those banks to approve, and the Small Business Administration (SBA) to guarantee, a PPP loan to SlideBelts. As a result of their false statements, SlideBelts received a PPP loan for $350,000. Months later, in response to demands by the federal government, SlideBelts returned the funds to the lender. Taylor and SlideBelts also admitted that their statements caused false claims to be made to the SBA in connection with the PPP loan.

The resulting DOJ civil enforcement action alleged that Taylor’s and SlideBelts’ misconduct violated 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 the presentation of false claims for payment to the United States. Meanwhile, FIRREA allows the government to impose civil penalties for violations of enumerated federal criminal statutes, including those that affect federally-insured financial institutions.

Lessons for PPP Borrowers

The DOJ, SBA, and other federal agencies are aggressively policing COVID-19 relief programs for potential fraud, and the recent settlement is likely just one of many to come, particularly given that the PPP has reopened to disperse another round of loans. In January, the DOJ stated that in the nine months since the PPP began, its Fraud Section attorneys have prosecuted more than 100 defendants in more than 70 criminal cases. It has also seized more than $60 million in cash proceeds derived from fraudulently obtained PPP funds, as well as numerous real estate properties and luxury items purchased with such proceeds.

If your business is participating in PPP or other COVID-19 relief program, be prepared for your application and your expenditures to be closely scrutinized for compliance with the program’s requirements, particularly with regard to loan eligibility and loan forgiveness. As highlighted by the recent DOJ settlement, misrepresentations on applications, certifications, or other program documents may give rise to a criminal fraud investigation or FCA violations. Since even inadvertent misstatements can lead to a costly and embarrassing investigation, it is essential to verify the accuracy of all information submitted, memorialize decision making in connection with the application process in writing, and keep detailed records of how the funds are expended. In addition, knowingly making false statements to federal law enforcement agents constitutes a crime punishable by a term of imprisonment. The DOJ has stated that it will not pursue businesses that have acted in good faith. However, should the DOJ uncover misconduct, the consequences can be significant. As demonstrated by the SlideBelts settlement, it may not be enough to simply repay the PPP loan. Borrowers may also have to pay damages and/or penalties, and executive officers could face personal liability. If you suspect that you or your business may be the subject of a criminal investigation, it imperative to contact an experienced white-collar criminal defense lawyer as soon as possible and certainly before meeting with state or federal law enforcement agents. 

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Bob Levy, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.