waitingAt the onset of the COVID-19 pandemic—and thus nearly a year and a half ago—the federal government implemented a massive stimulus program to prop up the economy.  A key component of that stimulus was the Paycheck Protection Program (PPP).  The PPP allowed businesses to obtain forgivable loans to be used for payroll and related expenses; the loans were approved, disbursed and administered by banks and fintech companies, but were issued and backed by the Small Business Administration.  (For additional background on the PPP, see here, here, and here.)

The rapid rollout of the PPP coupled with shifting federal guidelines and reduced underwriting requirements made PPP loans ripe for fraud.  One expected avenue that the government and private whistleblowers will use to combat that fraud is the False Claims Act (FCA) (see here).  But to date, there have been few publicly announced FCA cases brought for PPP fraud.  It was not until January 2021 when the government announced its first settlement in a FCA case for PPP fraud.  There, the defendant failed to disclose that it was in bankruptcy proceedings at the time of the loan application.  There were no criminal charges.  While that settlement was notable for being the first, the alleged fraud involved only $350,000 of PPP funds—PPP loans, however, were made in sums as large as $10 million.

Since the January 2021 settlement, there have only been a handful more in 2021, all of which also involve relatively small loan amounts.

  • On April 21, the US Attorney’s Office for the Eastern District of California announced a settlement to resolve FCA claims against a professional medical corporation and its owner related to a $430,000 PPP loan. According to the government, the corporation and its owner falsely certified in an application for a PPP loan that they had not previously received any PPP funds.  (Notably, the government alleged this false statement violated the FCA even though the corporation did not seek forgiveness of the second loan.)  The settlement required the corporation to repay the entire $430,000 loan and to pay, along with its owner, a combined $70,000 in damages and penalties.  There were no criminal charges.
  • On June 2, the US Attorney’s Office for the Eastern District of Virginia announced a settlement with a company and its owner to resolve FCA claims based on the company improperly obtaining multiple PPP loans by using a company that was not currently doing business to obtain a second loan only to have those loan proceeds deposited in the other, operating company’s account. The total settlement, inclusive of penalties, was $230,414.65.  There were no criminal charges.
  • On August 27, the US Attorney’s Office for the Southern District of Florida announced a settlement with the owner of a jet charter company to resolve FCA claims based on the owner misappropriating for his own personal expenses PPP funds obtained by the company. The government alleged that the company received $1,173,382 in PPP money and the owner, within a day, transferred $98,929 to pay for personal expenses unrelated to the company’s operations.  The owner agreed to settle for $287,055.  Unlike the others, this FCA case was commenced by a whistleblower relator, who will receive $57,411 of the settlement.  There were no criminal charges.

These settlements provide two insights into trends of stand alone FCA cases involving PPP fraud.  First, there was no one common fraud scheme: The FCA claim in each is premised on different types of underlying deception.  In the January settlement, the false statement was the borrower’s certification that it was not in bankruptcy when it applied for the PPP loan.  In the April and June settlements, the false statement was the certification the borrower had not previously obtained a PPP loan.  In the August settlement, the false statement was the owner’s certification that the loan funds would be used for permissible purposes under the PPP, i.e., for company payroll and operating expenses.  Each of these FCA violations involve clear cut fraud.  Which leads to the second insight: So far, stand-alone FCA claims based on PPP fraud involve only obvious fraud and involve only relatively small loan amounts (all have been settlements of $500,000 or less).

The question raised by the settlements is whether they are indicative of a less aggressive reliance on stand-alone FCA law suits to recover PPP funds because DOJ intends to prosecute criminally the more egregious PPP frauds, or whether we are just seeing the beginnings of stand-alone FCA cases and these settlements are nothing more than low-hanging fruit.  To be sure, the government has been investigating and prosecuting PPP fraud based on other theories of liability, as my colleague has written about here.  That does not answer whether there will be an uptick in stand-alone FCA cases premised on PPP fraud—an important question for participants in the PPP, because FCA cases are civil, and thus easier to prove than a criminal case, and because the government is aided by private whistleblowers and other relators in investigating and developing FCA cases.

There are several reasons to believe that the wave of FCA PPP cases has not crested and, in fact, is still far offshore.  First, as a practical matter, financial fraud cases can be complex and document heavy, requiring lengthy investigation.  That is true as a general matter but likely even more so for PPP fraud, given the speed of the program’s rollout and the approval and distribution of the loans.  Second, as a legal matter, FCA investigations and claims, by their very nature, are shielded from public view for many months or even years.  When a private relator, i.e., whistleblower, files a FCA case against a defendant, by statute the case is sealed for 60 days to permit the government time to investigate—and that time is frequently extended if the government needs additional time to investigate.  And of course, the government’s own investigations are rarely made public before charges or claims are brought.  So there could be hundreds or thousands of FCA PPP investigations ongoing right now that simply are not public.

Indeed, recent reporting suggests that the focus of investigations into FCA violations for the PPP is expanding beyond the recipients of PPP loans to the financial institutions, i.e., banks and fintech companies, that processed the borrowers’ PPP applications and disbursed the loans.  Whether there can be a viable FCA claim made out against these financial institutions is unclear—there are several strong defenses to FCA liability based on materiality and intent these entities likely could assert.  But this reporting indicates that FCA cases based on PPP fraud are likely to increase substantially in the coming months and years.

So, it is not a question of if the other shoe will drop for PPP FCA cases, but when.