On Tuesday, January 12, 2021, the U.S. Attorney's Office for the Eastern District of California announced the first, and long-anticipated, civil settlement resolving allegations of fraud involving the Paycheck Protection Program (PPP). Up until last week, PPP enforcement primarily involved egregious criminal matters resulting from brazen, “low-hanging fruit” violations, but Brigham Taylor and SlideBelts, Inc. (SlideBelts) win the dubious distinction of becoming the first civil defendants to settle a PPP fraud-related enforcement action. SlideBelts, a California-based internet retailer and manufacturer of fashion accessories, and Taylor, its Chief Executive and Chief Financial Officer, agreed to pay the U.S. a combined $100,000 in damages and penalties to resolve allegations that they violated the False Claims Act (FCA), codified at 31 U.S.C. §§ 3729–33, and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), codified at 12 U.S.C. § 1833a. In addition, SlideBelts repaid a $350,000 PPP loan it had fraudulently obtained.
According to the Settlement Agreement, SlideBelts, while being a debtor in bankruptcy proceedings, submitted an application for a PPP loan for approximately $300,000 on April 3, 2020. Less than a week later on April 8, 2020, SlideBelts submitted a second PPP loan application for $350,000 to a different bank. On both loan applications, SlideBelts falsely answered that it was not “presently involved in any bankruptcy.” On April 10, 2020, a manager from the first PPP loan bank advised Taylor that he had incorrectly answered the question regarding bankruptcy because the manager knew that SlideBelts was presently in bankruptcy. Taylor responded that his answer was an "[o]versight," but nonetheless argued that the question regarding bankruptcy in the application was "an overreach" by the SBA. Id. Taylor followed up with the bank manager by email four days later and reiterated that “bankruptcy” should not be included in the loan application and that the loan should be approved regardless. The manager disagreed and declined the first PPP loan application due to the bankruptcy. Approximately three hours after the first PPP loan bank manager rejected SlideBelts application, and clearly undaunted by the rejection, Taylor submitted a third PPP loan application to yet another bank. Taylor made the same false representation regarding SlideBelts' lack of being in bankruptcy proceedings.
SlideBelts' second false PPP loan application was ultimately approved and on April 22, 2020, approximately one day after the $350,000 in loan proceeds from the approved loan had been distributed, Taylor emailed the second bank and wrote that SlideBelts "just realized that we may not have answered [the question regarding bankruptcy] correctly since we filled out the application quickly and wanted to bring it to your attention[.]" Id. Taylor did not return the loan proceeds at that time, however. On April 30, 2020, SlideBelts filed a motion in its bankruptcy proceedings seeking retroactive court approval of the PPP loan, but SlideBelts did not disclose to the Bankruptcy Court that it had obtained the loan by making a false statement regarding its bankruptcy. On July 8, 2020, only after exchanging motions seeking and opposing the Court's approval of SlideBelts' second PPP loan and a hearing regarding the same, SlideBelts finally returned the $350,000 to the second bank. As part of the settlement agreement with the U.S., 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 PPP loans to SlideBelts. SlideBelts and Taylor agreed to pay the U.S. $100,000, of which $17,500 constitutes restitution from Taylor. The FCA allows the government to recover damages and penalties for the presentation of false claims for purposes of seeking or obtaining government contract, grant, or loan payments, or other forms of government action or inaction. FIRREA allows the government to impose civil penalties for violations of enumerated federal criminal statutes, including those that affect federally-insured financial institutions.
The PPP was created through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, to provide low-interest private loans to help businesses keep their workforce employed during the COVID-19 crisis. The loan proceeds may be used to cover payroll costs, rent, interest, and utilities, but the program lays out specific requirements for PPP eligibility and relief. The Small Business Administration (SBA), with support from the Department of Treasury, oversees the PPP. These entities have issued incremental and inconsistent guidance over the course of the program, which has made it confusing for many borrowers and lenders.
The CARES Act created new authorities to investigate the administration of CARES Act related funding: (1) a Pandemic Response Accountability Committee (PRAC), consisting of 21 Inspectors General from various federal agencies and (2) a Special Inspector General for Pandemic Recovery (SIGPR) have been established to provide oversight of CARES Act matters, including activities involving hotline reporting, investigation, whistleblower protection, and prosecution referrals for fraud, waste and abuse, and criminal or administrative misconduct, including suspected PPP loan fraud; and (3) a COVID-19 Congressional Oversight Commission to study the impact and effectiveness of the PPP. While the U.S. Department of Justice (DOJ), the Securities and Exchange Commission (SEC), the SIGPR, and congressional commission, can all issue subpoenas for documents and testimony, only the DOJ and SEC can levy civil penalties, and only the DOJ (either the main Justice department or appropriate U.S. Attorney's office for the relevant jurisdiction) can prosecute the violators criminally.
Additionally, in the wake of passage of the CARES Act, the DOJ issued directives to senior DOJ personnel, law enforcement agency heads, and all U.S. attorneys, directing DOJ prosecutors to prioritize the detection, investigation and prosecution of illegal conduct related to the pandemic. The fallout from the COVID-19 pandemic has been fluid and ongoing, and the government's response, at the federal, state and even local levels has been swift and unrelenting. The DOJ did not waste any time in making examples of PPP-related bad actors. By May 13, 2020, the DOJ had already announced at least three separate criminal actions stemming from PPP fraud, and by the time of this alert in January 2021, the number of criminal defendants has grown to 50, resulting in more than $70 million of actual loss to the government. While the SlideBelts fraudulent scheme and false statements were enforced using only civil remedies, DOJ easily could have prosecuted SlideBelts and Taylor criminally under a variety of criminal statutes, such as in prior PPP loan fraud enforcement actions.
Regardless of the size of the PPP loan, the size of the borrower, or which enforcement body is doing the investigating, borrowers that applied for and those that received loans should take steps to protect themselves from future liability. It is critical that borrowers be able to support their eligibility for the PPP loan, as well as the accuracy of the underlying data they used to support the representations made in the application. Borrowers should ensure that all supporting documentation, such as financial forecasts and any board and/or management minutes reflecting the deliberations made and information relied upon, is secured and readily available. Finally, publicly traded companies should verify that the information provided to the SBA in the PPP loan application is consistent with any statements made to investors or filings made to the SEC or other federal, state or local government authorities. The SlideBelts settlement rings the bell and puts borrowers and defense counsel on notice that the civil enforcement we've all been hearing about is finally here.
Originally Published by Stinson, January 2021
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