Civil Settlement in PPP Loan Fraud Case Opens New Battle Lines

January 20, 2021Alerts

The U.S. Justice Department announced its first civil settlement with a Paycheck Protection Program borrower alleged to have committed fraud in connection with this highly popular COVID-19 relief program. A bankruptcy online retailer and its chief executive officer agreed to pay $100,000 in damages and penalties to resolve claims that they committed fraud in connection with multiple PPP loan applications. The company, SlideBelts Inc., also agreed to repay its PPP loan in full.

The Paycheck Protection Program is one of the signature provisions of the CARES Act, enacted in March 2020, to provide emergency financial assistance to individuals and businesses suffering economic hardships due to the pandemic. The CARES Act initially authorized up to $349 billion in forgivable PPP loans to small businesses. In April 2020, Congress increased PPP funding by $300 billion, and just last month, Congress approved an additional $285 billion for PPP loans. To date, more than 5.2 million PPP loans have been approved in an aggregate amount of more than $525 billion.

In the early days of the COVID-19 pandemic, the Justice Department mobilized quickly to fight COVID-19 fraud nationwide. In May 2020, only a few weeks after enactment of the CARES Act, the Justice Department announced its first criminal fraud charges against two PPP borrowers. Federal prosecutors and investigators have since moved at an unheard-of pace to file criminal charges against nearly 200 PPP borrowers.

Potent Civil Fraud Tools

With its announcement of the first civil settlement, the Justice Department has demonstrated that it will use additional tools in its fraud-fighting arsenal: the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Both of these statutes authorize the government to impose massive civil penalties for fraudulent conduct and to recover damages sustained by the government as a result of such conduct.

The FCA, enacted during the Civil War, allows the government to recover damages and penalties for the presentation of false claims for payment to the United States. The statute provides for a civil monetary penalty of $23,331 (as adjusted for inflation) per false claim, as well as three times the damages suffered by the government as a result of the false claim.

FIRREA, which Congress passed in 1989 in response to the savings and loan crisis, authorizes the Justice Department to impose civil monetary penalties for violations of certain federal criminal statutes, including those that affect federally-insured financial institutions. The statute provides that the civil penalty amount for each violation shall be $2,048,915 (as adjusted for inflation).

Enormity of Civil Penalty Exposure

The SlideBelts case illustrates in stark terms the enormity of the civil penalty exposure a company may face under these statutes. While SlideBelts applied for and received only $350,000 in PPP funding, the government asserted that the company was liable for a whopping $4.2 million in damages and penalties under the FCA and FIRREA. The damages portion of this amount is only $17,500, which consists of loan processing fees. The remaining portion consists of civil penalties under the two statutes.

In the SlideBelts settlement agreement, the company did not admit liability, but acknowledged that it had submitted three PPP loan applications to different financial institutions and on each application failed to disclose that it was a debtor in bankruptcy. The first financial institution – a creditor in the company’s bankruptcy proceeding – denied the application on the basis of the bankruptcy. Pursuant to SBA regulations, companies in bankruptcy were deemed ineligible to apply for PPP funding. The second financial institution was unaware of the bankruptcy and approved the loan in the amount of $350,000.

In the settlement, the company agreed to repay its PPP loan in full and to pay the government $100,000 in damages and penalties under the FCA and FIRREA. The agreement makes clear that the government was willing to accept $100,000 in compromise of its $4.2 million civil claims only because of the poor financial condition of SlideBelts and its CEO.

The SlideBelts settlement demonstrates that the FCA and FIRREA are potent tools that the federal government can use against companies alleged to have committed fraud in connection with PPP loans. With the ability to assert multimillion-dollar penalties, and to recover damages, the government can use these statutes to obtain civil recoveries from borrowers that are exponentially higher than the principal amount of their PPP loans. And because both statutes provide for civil recoveries, the government’s burden of proof is preponderance of the evidence, a substantially easier burden to satisfy than the much higher reasonable doubt standard required in criminal cases.

Both the FCA and FIRREA provide for lengthy statutes of limitations, meaning that the government has years to investigate PPP borrowers. Finally, in most FCA settlement agreements, the government’s release will not cover criminal conduct, so that settling parties like SlideBelts and its CEO remain exposed to potential criminal charges.