The U.S. Department of Justice (DOJ) recently announced that it had reached the first civil settlement resulting from allegations of fraud under the Federal Paycheck Protection Program (PPP). The case concerned SlideBelts Inc. and its CEO Brigham Taylor. SlideBelts Inc. had received a loan of $ 350,000 under the PPP.
The DOJ’s decision to reach a civil settlement is a solid and reasoned approach to resolving many PPP credit fraud investigations. While some PPP fraud cases undoubtedly warrant prosecution, it is equally clear that many do not. In many cases, companies and their executives have unknowingly violated the hastily drafted and difficult-to-interpret provisions of the PPP. Additionally, many companies, including SlideBelts Inc., have partnered with the DOJ and returned their PPP loan funds on investigation. Resolving these types of cases through civil resolution enables an efficient resolution with reasonable outcomes for the company, the federal government, and the PPP lender.
The civil settlement results in the repayment of a PPP loan of $ 350,000 and the payment of damages and penalties of $ 100,000
SlideBelts Inc. is an internet retail company that sells belts, wallets, watches, and other personal accessories. Following bankruptcy, SlideBelts Inc. applied for a PPP loan from several banks during the COVID-19 pandemic. In the company’s PPP loan applications, SlideBelts Inc. and Taylor misrepresented that the company was not bankrupt “in order to influence banks to approve and guarantee the Small Business Administration (SBA),” a PPP loan. SlideBelts Inc. eventually received a $ 350,000 PPP loan.
According to the DOJ, SlideBelts Inc. returned the loan “in response to US claims”. During the course of the DOJ’s investigation, SlideBelts Inc. and Taylor admitted to providing false information about the company’s PPP loan applications in violation of the False Claims Act and the Financial Institution Reform, Recovery and Enforcement Act (FIRREA). Rather than pursuing criminal charges under the False Claims Act, the DOJ opted for a civil settlement that completely resolved allegations against SlideBelts Inc. and Taylor. In addition to repaying the $ 350,000 PPP loan, SlideBelts Inc. and Taylor agreed to pay a total of $ 100,000 in damages and penalties as part of the settlement.
Civil resolution is the correct approach to many PPP loan fraud investigations
A civil settlement is the right outcome in such cases. While SlideBelts Inc. and Taylor admitted they misrepresented several banks in order to obtain a PPP loan, they admitted wrongdoing and returned the loan when approached by the DOJ. The DOJ’s press release announcing the settlement makes no intent, but it is clear that criminal charges were not warranted in the circumstances.
“While PPP criminal fraud is indeed a very real problem, many cases of PPP fraud do not warrant prosecution. Small businesses in particular that have made mistakes and can correct those mistakes by repaying their PPP loans or otherwise deserve to be spared the extreme costs and risks of federal criminal charges. “- Dr. Nick Oberheiden, founding attorney for Oberheiden PC
The DOJ’s civil ruling not only allows the PPP lender to get their loan back and the federal government to cover the costs of their investigation, but it also gives SlideBelts Inc. – a small company that is clearly having trouble during the COVID-19 pandemic had – another chance for success. By using civil law settlements to efficiently resolve PPP credit fraud cases that require attention but do not warrant the provision of the resources necessary to prosecute, the DOJ can fulfill its mandate while adequately representing the interests of all parties involved.
Understand PPP fraud allegations
When it was first announced, the PPP represented a vital lifeline for small businesses struggling due to the downtime and other economic impact of the COVID-19 pandemic. The PPP was founded under the Coronavirus Aid, Relief and Economic Security (CARES) Act and offered forgivable, low-interest loans to struggling companies from banks that had received guarantees from the US Small Business Administration (SBA). In an effort to get PPP loan funds into companies’ bank accounts as quickly as possible, the SBA outlined the parameters of the program, but its guidelines left many questions unanswered.
When the PPP opened and applications flooded, many of those applications contained errors and omissions. These errors and omissions are considered fraud under federal laws such as the False Claims Act and FIRREA. For example, some of the most common mistakes (both intentional and unintentional) made with PPP loan applications included:
-
Misrepresentation that the company has qualified as a “small business”.
-
Misrepresentation: “The uncertainty of the current economic conditions makes the loan application necessary to support the day-to-day operations of the entitled recipient.”
-
Misrepresentation of the number of employees or the company’s payroll.
-
Misrepresentation of this loan proceeds would only be used for payroll and other qualified expenses under the PPP.
-
Trying to obtain (or actually obtain) PPP loans from multiple lenders – a practice known as “stacking”.
As questions about PPP eligibility and funding requirements continued to emerge, the SBA updated its guidance (mainly its Frequently Asked Questions) to provide additional guidance to PPP loan applicants and recipients. However, uncertainty persisted and invalid applications continued to be received by banks during the second round of PPP funding.
In addition to errors and omissions in PPP loan applications, many PPP loan recipients have also made mistakes in the use of their loan proceeds. Loan certification fraud has been a key issue for both the DOJ and the US Treasury Department.
The purposes for which qualified companies could use PPP loan proceeds were limited. In particular, the CARES Act allowed loan proceeds to be used only for (i) labor costs, (ii) interest and rent payments from pre-existing obligations, (iii) insurance premiums and (iv) utility companies. In order to be able to grant their loans, the loan recipients had to certify under the CARES Act that they had met the requirements of the program.
However, many PPP loan recipients were unaware or did not fully understand the restrictions placed on the use of PPP funds. Also, many beneficiaries were unaware of the steps required (i.e., setting up a separate account and carefully documenting all PPP loan expenditures) to demonstrate compliance. Many small businesses relied on media coverage of the PPP’s “interest-free loans” and assumed that certification was just another formality in the PPP lending process. As a result, by the time it is time to get certification, many small businesses either didn’t understand what was required, didn’t take the implications seriously, or got to a point where they needed forgiveness to survive.
Of course, not all false statements by loan applicants resulted from confusion or ambiguity about the eligibility criteria and loan use requirements of the PPP. Many PPP loan applicants undoubtedly knew (or at least suspected) that their applications were not compliant. Even so, in many cases, the rewards of law enforcement are still outweighed by the efficiency and practicality of a civil law settlement, allowing the DOJ to focus its law enforcement efforts on other areas.
When (if at all) is prosecution warranted in a PPP loan fraud investigation?
To be clear, some PPP credit fraud cases warrant prosecution. In addition to the civil settlement with SlideBelts Inc., the DOJ has announced several criminal cases related to PPP credit fraud. These cases included allegations ranging from manufacturing entire businesses to claiming sole proprietorships employing dozens of people, and filing amended tax returns to confirming PPP compliance after using loan proceeds to pay for luxury cars, swimming pools, and other personal expenses were.
When individuals knowingly and intentionally defraud banks for their own benefit, it is a completely different scenario than a small business making a mistake that can be corrected. Crimes deserve to be prosecuted as such – especially if they want to use programs designed to help those in need in times of crisis. The pursuit of substantial fines and jail terms in such cases is well worth the DOJ’s resources as it not only punishes the culprit but also discourages other potential scammers.
However, if a civil settlement adequately serves the law enforcement objectives of the DOJ, a civil settlement is sufficient. It’s not worth using federal funds to track down small businesses that have made mistakes and don’t make the same mistakes again. Not only that, but the inefficiency of pursuing unnecessary criminal charges ultimately defeats the DOJ’s purpose in enforcing the rules of the PPP and helping banks and the government recover as much of their fraudulent losses as possible.
The DOJ’s efforts to enforce the PPP are not going to end anytime soon. As federal prosecutors continue to assess and pursue allegations in PPP credit fraud cases, the prospect of negotiating civil settlements in appropriate cases should remain on the table. This is the right approach in many cases and provides the DOJ with the greatest opportunity to cheaply resolve as many PPP credit fraud cases as possible.
Oberheiden PC © 2021 National Law Review, Volume XI, Number 98