On January 9, 2023, the United States Department of Justice (DOJ) announced a settlement with four California agricultural companies and their owner (the Seasholtz Defendants), who agreed to pay $600,000 in damages and penalties to settle allegations that they violated the FCA and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Although we do not know the exact details of the settlement or the precise covered conduct, DOJ's press release states that the Seasholtz Defendants improperly inflated the employee headcount on their Paycheck Protection Program (PPP) applications by impermissibly including non-employee contract workers who were actually employed by other, unrelated entities. As a result, DOJ claims that the Seasholtz Defendants improperly obtained nearly $1.8 million in excess PPP funds (out of $3.5 million in total), that were intended to provide critical relief to small businesses suffering during the COVID-19 pandemic. Even though the Seasholtz Defendants had repaid the $1.8 million, that did not allow them to avoid the settlement.
Notably absent from the settlement is Bank of the West, which originated the PPP loans in question and was named as a defendant in the Relator's complaint that was filed two years before the settlement. The Relator was Bell Hill LLC, whose manager previously worked as consultant for the Seasholtz Defendants. The complaint alleges a broader improper scheme than the one that appeared in DOJ's press release, which is unsurprising since DOJ intervened in part for purposes of settlement and declined to intervene in part. According to the Relator's complaint, the Seasholtz Defendants operated on a "zero-balance" account through an agreement with the bank and thus had immediate access to cash which made them ineligible for PPP loans in the first place. The complaint goes on to allege that the Seasholtz Defendants have a long-standing relationship with the bank that allowed them to borrow operating capital, and that the owner and his wife had a personal line of credit of $21 million with the Bank for their 2020 operating expenses. As a result, Relator alleges that the bank conspired with the Seasholtz Defendants to violate the FCA since the bank knew that the Seasholtzs did not qualify for the PPP loans, yet agreed to work with them to obtain the loans, and then funded them after the loans were wrongfully approved.
As noted above, DOJ only intervened in part for purposes of settlement. We, of course, do not know what happened behind the scenes during the course of the investigation or whether Relator will attempt to pursue any of the declined claims, but it is worth noting that the bank is not a party to the settlement. As we previously blogged here, last year DOJ settled its first FCA case with a lender for processing a PPP loan on behalf of an ineligible borrower. While the facts of that case were somewhat unique because the bank allegedly knew that the borrower was under indictment and thus not eligible for the loan, we cautioned that that settlement should be concerning to any lenders that were making PPP loans in the early, chaotic days of the program. At a minimum, the Seasholtz case is another indication that, given the volume of investigations arising out of the CARES Act relief programs, lenders are likely to continue to be dragged into FCA cases and should be prepared to mount a vigorous defense if that occurs.
We will continue to monitor the developments in this and other PPP cases. For a complete list of government enforcement actions related to CARES Act fraud and FCA, please see the Arnold & Porter CARES Act Fraud Tracker and Arnold & Porter FCA Recoveries List.
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