COVID-19 Investigations Put Small And Midsize Businesses in Government’s Enforcement Crosshairs

May 22, 2020

With the uncertainty created by the global COVID-19 pandemic, it is hard to find anything like a sure bet. States are grappling with when to reopen, parents with school-aged children are awaiting news of when and if their kids will be allowed back into the classroom, businesses are struggling to reinvent themselves to adapt to new social distancing norms and a weary workforce wonders nervously whether the worst of the economic impact is over.

However, there is one thing all but the most cautious prognosticators among us can guarantee ― when the federal government injects trillions of dollars of stimulus money into the economy, it will follow up with an active effort to ferret out fraud and abuse. Similarly, whenever there is a crisis, especially one of this magnitude, it creates opportunities for even the slightest deviation from ordinary practices to be viewed as unlawful by authorities watching from afar.

A Different Type of Government Stimulus

We have been down this road before, but aspects of this stimulus program look different. It seems like yesterday that we were dealing with the last big “economic crisis.” In 2008, Congress and the administration of then President George W. Bush created the $700 billion Troubled Asset Relief Program (TARP) to provide liquidity to struggling banks. TARP spawned a large number of reported investigations, and resulted in the creation of the office of the Special Inspector General for the Trouble Asset Relief Program (SIGTARP), which was formed within the Treasury Department to oversee investigations of alleged TARP abuses.

By 2011, SIGTARP reported “more than 150 ongoing criminal and civil investigations” in a report to Congress. In its latest semiannual report to Congress, spanning the period from Oct. 1, 2019 through March 31, 2020, SIGTARP touted the following statistics:

  • 384 individuals criminally convicted (including 94 bankers and 79 of their alleged co-conspirators);
  • A 97% Department of Justice (DOJ) conviction rate in prosecutions brought by the office;
  • Prison sentences for 302 defendants (including 77 bankers);
  • 81 bankers banned from the industry;
  • DOJ, Securities and Exchange Commission (SEC), and other agency enforcement actions against 24 banks/entities;
  • Recovery of more than $11 million allegedly wasted by state agencies on unauthorized expenses; and
  • Recovery of more than $11 billion in TARP funds ― a reported 3100% return on investment for the office.

While TARP was among the most recent government stimulus programs predating the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it was certainly not the nation’s first. From 1918 to 1939, the federal War Finance Corporation (WFC) supplemented private lending markets that had dried up due to the war effort, providing much needed credit facilities and liquidity to early 20th century industrialists. From 1932 to 1957, the Reconstruction Finance Corporation (RFC) helped the nation rebound from the Great Depression and later from World War II. In 1984, the federal government took over a failed private bank, and in the late 1980s and early 1990s, the so-called “savings and loan crisis” resulted in a wide-reaching need for federal assistance. 

Despite a more than 100-year history of federal efforts to stimulate the economy during times of crisis in order to prevent economic calamity, aspects of the government stimulus brought about to curb the economic impact of the COVID-19 pandemic through the CARES Act differ significantly from the ghosts of stimuli past.

Much ink was spilled in the aftermath of TARP suggesting that the government’s supposed “bailout” of “Wall Street” left “Main Street” to fend for itself, or sacrificed people who were suffering to preserve larger cogs in the economic engine ― the big banks. This time, federal assistance is flowing more directly to smaller individual players in the U.S. economy that collectively wield massive influence.

According to a Jan. 30, 2019 U.S. Small Business Administration (SBA) press release, small businesses generate 44% of the country’s total economic activity and two-thirds of net new jobs. It is, therefore, not a coincidence that the SBA has been tasked with administering a significant portion of the targeted stimulus programs included in the CARES Act.

The Paycheck Protection Program (PPP), one of the cornerstone stimulus programs under the CARES Act, has already been subject to a flurry of investigations. The PPP is a forgivable, government-backed lending program designed to provide a direct incentive for small and midsize businesses to keep workers on their payrolls and mitigate job losses that have contributed to staggering unemployment rates resulting from the COVID-19 crisis. This early investigative activity portends a particularly active effort on the part of the government to curb CARES Act fraud and abuse. For one of the first times in American history, small and midsize business owners are in federal authorities’ sights related to a government stimulus program.

Just weeks after PPP loans began to fund, the Department of Justice has already announced a series of charges against individuals on COVID-19 relief-related fraud charges. The defendants are not stockbrokers or investment bankers, corporate executives or public officials, but instead individuals operating or holding themselves out to be operating small businesses such as an architectural firm, a restaurant, a wireless business and a trucking concern. The federal government is rolling down “Main Street U.S.A.” and taking names in a very tangible way.

Setting aside instances of outright fraud, such as situations in which a small or midsize business inflates the size of its workforce in its request for PPP funds, the perils associated with the PPP in particular are largely a byproduct of the emergency nature of its authorizing legislation. Congress did not have sufficient time to think through the rollout, placing the cart before the horse. Consequently, aspects of the program like the much-criticized good faith certification ― requiring borrowers to certify under oath that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant[]” ― leaves too much open to interpretation. While recent guidance from the SBA has attempted to provide some level of assurances to PPP borrowers for loans under $2 million, too much remains unclear about the precise, intended meaning of the good faith certification, and how the government will follow through on threats to audit loans over the $2 million threshold.

In short, the future is uncertain for small and midsize businesses that have applied to receive PPP loans and other forms of CARES Act stimulus funds. The need for thoughtful, creative and innovative advocacy in this area abounds.

Multiple Risks to Small and Midsize Businesses

Unfortunately, the risk to small and midsize businesses does not stop at stimulus funds. In March, Attorney General William Barr joined President Trump at the White House’s Daily Coronavirus Task Force press briefing to announce a Department of Justice task force impaneled to address supply chain issues associated with Personal Protective Equipment (PPE) such as disposable gloves, N-95 masks and other equipment and supplies such as ventilators, essential to the COVID-19 relief effort. These items were scarce at that time, and continue to be to some extent, due to worldwide demand.

This was the first statement from the federal government on supply chain issues, and came on the heels of the president’s invocation of the Defense Production Act of 1950 (DPA) to address the national supply of health and medical resources necessary to respond to the spread of COVID-19. The DPA, among other sweeping powers, authorizes enforcement actions against those that stockpile scarce goods for purposes of manipulating the market for such goods during an emergency.

By virtue of the president’s invocation of the DPA, and the broad rule-making authority of the Federal Trade Commission (FTC), the federal government holds vast authority to regulate so-called “price gouging” and other anti-competitive practices capitalizing on this emergency. For example, Section 5 of the Federal Trade Commission Act (FTC Act) broadly forbids “unfair methods of competition.” Yet, to date, states have been responsible for the most significant enforcement efforts aimed at combatting alleged price manipulation of in-demand commodities. It remains to be seen the extent to which, if at all, the federal government enters this arena.

The state-by-state patchwork of price gouging laws in our country is as diverse and varied as the nation’s inhabitants. What constitutes price gouging in one state might not meet the legal definition for price gouging in another. While some states utilize a bright-line test, or formulaic approaches to determining an illegal price hike to capitalize upon an emergency; other states rely upon more subjective observations for the same determination.

In the internet age, commerce is faster and easier. Most importantly, technology allows a small or midsize business to achieve a broader geographic reach than once was the case. At the same time, unlike large, nationwide retailers, the operational nerve centers of small and midsize businesses tend to remain concentrated in a particular locale. This tends to give them a form of legal tunnel vision as to the requirements of foreign jurisdictions. These businesses tend to focus on one regulatory framework arising from the nexus of their operations, without consideration of their ability to engage in commerce virtually anywhere because of the internet. Any analysis of whether a small or midsize business is engaged in pandemic-fueled practices that violate consumer protection laws becomes a layered, complex issue, warranting a national perspective and national resources.

Federal and state governments have numerous criminal, civil and regulatory tools at their disposal to pursue COVID-19 investigations targeting small and midsize businesses, too many to mention in a single article. Nonetheless, while the issues presented in the stream of anticipated investigative activity flowing from the COVID-19 emergency may address certain factual issues as novel as the virus itself, the strategies that must be deployed to blunt the impact of the government’s inquiries do not differ markedly from other white-collar criminal defense and regulatory compliance engagements.

Job one for companies receiving COVID-19 related assistance or selling products or services related to fighting the disease is to reassess and update their regulatory compliance programs to make sure they are current and being thoroughly implemented. Businesses that may have already attracted the attention of government investigators should consult with counsel in order to protect their rights and plan the appropriate response.


For questions on government investigations related to COVID-19 relief funds or other regulatory compliance issues, contact national White-Collar Criminal Defense & Regulatory Compliance Practice Group co-chairs Matthew S. Adams at [email protected] or Matthew D. Lee at [email protected].