The Government Giveth and DOJ Taketh Away: The First Civil Settlement for Fraud in the Paycheck Protection Program
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 DOJ settled a $4.2 million claim against a bankrupt internet retailer and its president for $100,000. Although unique to the case’s specific allegations, the settlement reveals activities that may be alleged as PPP fraud, statutes at DOJ’s disposal to pursue civil enforcement, and terms by which DOJ will resolve PPP fraud allegations. DOJ has been prosecuting criminal cases against PPP fraudsters for months, but this settlement showcases the powerful civil fraud enforcement tools that DOJ also has in its toolbox to fight alleged fraud and false statements related to these popular loans. This first civil settlement involving the PPP features the False Claims Act, 31 U.S.C. § 3729–3733 (“FCA”), and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. § 1833a (“FIRREA”). These statutes allow the government to seek civil monetary penalties and damages from borrowers that are exponentially higher than the principal amounts of the PPP loans at issue.
The target of DOJ’s civil enforcement action was SlideBelts Inc., a manufacturer and internet retailer of fashion accessories with offices in California. SlideBelts had filed for bankruptcy in August 2019. Though bankruptcy debtors were ineligible for PPP loans, SlideBelts submitted three PPP loan applications, the first to a credit union, and the second and third to different federally insured financial institutions. In response to a question on the PPP loan applications about whether the loan applicant was involved in any bankruptcy, SlideBelts stated that it was not.
The credit union declined SlideBelts’ first PPP loan application because, as a creditor in the bankruptcy proceedings, it was aware that SlideBelts was in bankruptcy. Within a few hours after the credit union rejected SlideBelts’ application, the company submitted a PPP application to the third lender. Meanwhile, the lender that received SlideBelts’ second PPP loan application approved the loan for $350,000. SlideBelts’ president signed a loan agreement with the second lender, again stating that SlideBelts was not in bankruptcy. The lender executed the loan note and disbursed the funds to SlideBelts, with the Small Business Administration (“SBA”) guaranteeing the loan under the PPP. The day after receiving the loan distribution, SlideBelts’ president emailed the lender stating that the company may have incorrectly answered the question about being in bankruptcy.
A week later, SlideBelts filed a motion in its bankruptcy proceedings seeking court approval of the PPP loan. The SBA opposed SlideBelts’ motion and asked the bankruptcy court to return the loan proceeds to the lender. In response, SlideBelts asked the bankruptcy court to dismiss its case so it could apply for a PPP loan while the case was dismissed, then refile for bankruptcy later. The bankruptcy court dismissed the case, and SlideBelts returned the PPP loan proceeds two and a half months after receiving the funds.
After an investigation was conducted in cooperation with the SBA’s Office of the Inspector General, DOJ contended that the United States had a civil claim of a whopping $4.2 million against SlideBelts and its president under FIRREA and the FCA, even though the loan amount was only $350,000 (and had been returned in full). Both statutes are powerful enforcement tools, authorizing the government to impose massive civil penalties for fraudulent conduct and to recover damages sustained by the government as a result. The FCA provides for a civil monetary penalty of $23,331 per false claim, as well as three times the damages suffered by the government as a result of the false claim. Both statutes have lengthy statutes of limitations, giving the government years to investigate PPP borrowers. Settlements under the FCA do not necessarily cover criminal conduct, so parties like SlideBelts and its president remain exposed to criminal charges. Whistleblowers can receive significant awards if they provide credible, new information related to violations of the statutes. Finally, as the statutes provide for civil recoveries, the government’s burden of proof is “preponderance of the evidence,” which is substantially lower than the “reasonable doubt” standard required to prosecute a criminal charge successfully.
To resolve its civil claims, DOJ entered into a settlement agreement with SlideBelts and its president (available here), which addresses the allegedly fraudulent conduct in pursuing and receiving a PPP loan. The settlement agreement contains several notable features:
- Payment. Although SlideBelts had returned the PPP loan proceeds, the settlement agreement required SlideBelts to pay $100,000 in damages and penalties over the course of five years pursuant to a detailed payment schedule. The settlement agreement notes that $17,500 of the payment is restitution from the company president. That amount matches the loan processing fees that the SBA paid the lender in connection with SlideBelts’ PPP loan. The settlement agreement notes that the government was willing to accept $100,000 in settlement of its $4.2 million civil claim only because of the poor financial condition of the company and its president.
- Admissions. While not admitting liability, SlideBelts and its president admitted facts related to their knowledge of the bankruptcy and the impact their statements had on the lender and SBA. Specifically, SlideBelts and its president admitted that they falsely answered the question about SlideBelts being involved in a bankruptcy in order to influence the credit union and financial institutions to grant SlideBelts a PPP loan. SlideBelts and its president also admitted that their false statements did in fact influence the lender to approve the loan application and the SBA to guarantee the loan, as well as causing the lender to submit a false claim to the SBA for loan processing fees.
- Releases. The United States released SlideBelts and its president from any civil or administrative monetary claims related to conduct described in the settlement agreement under FIRREA and the FCA, as well as under the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801–3812, and certain common law theories. However, the United States explicitly reserved and did not release SlideBelts from any criminal liability, any liability under the Internal Revenue Code, and any other administrative liability or enforcement right not explicitly released in the settlement agreement. The settlement agreement is also clear that the releases only cover certain conduct by SlideBelts and its president related to seeking the PPP loans, and the releases do not apply to other conduct or other entities or individuals.
What This Means For You
Over five million entities have applied for and received PPP loans, and the vast majority are seeking forgiveness of the loans. Based on its enforcement actions, DOJ is scrutinizing the certifications made in PPP loan applications, which are required to be made “in good faith.” The SlideBelts settlement illustrates that any recipient of a PPP loan should be aware that it may receive the attention of DOJ investigators, and what the possible outcomes of a civil enforcement investigation could be when DOJ has such powerful tools at its disposal to seek recovery.
Not only are PPP loan applications being scrutinized by the government, but the FCA and FIRREA incentivize whistleblowers to report suspected fraud to the government, which can lead to investigations. Once initiated, investigations can last for years due to lengthy statutes of limitations under the FCA and FIRREA, giving DOJ plenty of time to make a case. The statutes also allow DOJ to seek recoveries that are massive compared to any PPP amounts borrowed, and as seen in SlideBelts, merely returning loan proceeds will likely not be enough to resolve the matter. Further, in reaching settlement, DOJ may seek admissions related to knowledge of falsity regarding certain statements made, the intent behind the false statements, and what subsequent events those false statements caused. Such admissions are important to navigate, especially because these civil settlements tend to not cover criminal liability, and the admissions could be used to build a criminal case. PPP borrowers should be wary of DOJ’s enforcement capabilities and be prepared to respond should they find themselves the target of civil 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 (Jan. 12, 2021), https://www.justice.gov/usao-edca/pr/eastern-district-california-obtains-nation-s-first-civil-settlement-fraud-cares-act.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.