Payroll Protection Program (“PPP”) Fraud
On March 27, 2020, President Trump signed into law the Coronavirus Aid Relief and Economic Security Act (“CARES ACT”). It is a $2.3 trillion relief package designed to relieve the economic harm caused by the COVID-19 pandemic. The largest portion of these funds is allocated to assist small businesses affected by the pandemic in meeting payroll and other expenses. This is commonly known as The Payroll Protection Program. Congress initially allocated $345 billion for this program. However, it was quickly exhausted and Congress allocated an additional $310 billion.
The law was enacted in haste so that the funds would be available as soon as possible to struggling businesses. As initially enacted, in order for the loan to be forgiven, borrowers were given 8 weeks to spend the funds on certain qualified business expenses, with at least 75% of the funds being spent on payroll. However, it quickly became apparent that more flexibility was required. For example, restaurants were shut down during the pandemic and needed the funds when they were allowed to re-open. Many businesses had expensive rent, making the 75% to be expended in payroll difficult to meet. As a result of these concerns, Congress extended the period from 8 weeks to 24 weeks, and reduced the percentage to be spent on payroll from 75% to 60%.
Anytime the government enacts a program that provides as much as $655 billion in potentially “free” money, there are going to be allegations of fraud in connection with that program.
The application for the PPP loan requires the Applicant to certify under penalty of perjury that the current economic uncertainty makes their loan request necessary to support ongoing operations. What does that vague phrase mean? Nobody knows. As a result, it would be next to impossible for the government to claim fraud based on that particular certification.
To illustrate the absurd lengths to which this certification has been stretched, the Los Angeles Lakers, with a value of $4.4 billion, received a PPP loan, as did Ruth’s Chris Steak House, Shake Shack and numerous other publicly traded companies. When Treasury Secretary Steve Mnuchin said the program was only intended to help small businesses and large publicly traded companies may suffer “severe consequences”, most of them returned the money. This did not dissuade Boies Schiller, one of the most successful law firms in the United States. They had $400 million in 2019 revenue and average partner compensation of $3.3 million, yet obtained millions in a PPP loan which they did not return.
Moreover, the Treasury Department subsequently enacted a “safe harbor” provision that “any borrower that … received PPP loans with an original amount of less than $2 million will be deemed to have made the required certification concerning the loan request in good faith.” This safe harbor provision will allow the government to utilize their limited audit resources for larger loans where the compliance efforts may yield higher returns.
However, one should not assume that this means that one is immune from prosecution if the loan is less that $2 million. Although the chances of getting caught may be decreased, the government will still vigorously prosecute borrowers who falsify the existence of a company, intentionally falsify payroll expenses, and expend the funds for purely personal purposes, such as buying a Rolls Royce or a Lamborghini.
Although the list will likely expand daily, some of the early prosecutions are set forth below:
A Texas man who did not actually employ anybody, used an online name generator to create names for hundreds of “employees”. He sought a $5 million loan, claiming 400 employees with an average monthly payroll of $2 million.
A Texas engineer was accused of using a false company to file for $13 million in forgivable loans. His application raised suspicions when the Texas Workforce Commission alerted investigators that there were no records of him or his business paying employee wages.
A 29 year old Houston man obtained over $1.1 million in PPP funds on behalf of a barbecue company and a landscaping company. However, instead of utilizing the funds for payroll or rent, he invested in cryptocurrency and withdrew cash from an ATM.
A Los Angeles man obtained over $8.5 million in PPP funds by allegedly submitting a number of false applications supported by false tax returns and payroll records. He then transferred the funds into his brokerage account and a casino in Las Vegas.
A 29 year old Florida man requested more than $13.5 million in PPP loans for several moving companies he claimed to own. He claimed he had 70 employees. The bank approved 3 of these loans for $3.5 million. Within just 5 days of receiving an initial deposit of $750,000, he bought a $320,000 Lamborghini. He also went on a shopping spree. The government became suspicious when they observed his companies had no website.
A 29 year old Houston man obtained a 1.6 million dollar PPP loan through a construction company in which the person he listed as a CEO had died the month before. He then used the funds to buy a Lamborghini, a Rolex watch, and trips to strip clubs.
A New England businessman sought $500,000 in loans to pay employees of a fictitious business, a closed business and a business owned by someone else.
A reality TV personality immediately spent $1.5 million of a $2 million PPP loan on a Rolls Royce, jewelry and child support.
Any time there is a disaster, be it a hurricane, flood or other natural disaster, the Federal government initiates hundreds if not thousands of criminal prosecutions against those that the government alleges unfairly seek take advantage of the situation. The coronavirus will be no exception.
There are several different types of schemes that have already been alleged. These have resulted in civil suits to enjoin such activities, as well as criminal prosecutions.
Although this list will be expanding on a daily basis, some of the criminal cases that have already been brought are set forth below:
An Arizona man was charged with advertizing free COVID-19 tests on social media, and once he had the patients in the door, billing for a plethora of medically unnecessary tests for which he was seeking reimbursement.
A New York man was charged with advertizing and selling COVID-19 tests, and falsely claiming he was connected to a lab that would provide results to the customers. The customers swabbed themselves, sent in their swabs to the “lab”, yet never received results.
A British man smuggled misbranded drugs into the United States, claiming they would successfully treat those suffering from COVID-19.
A California man was arrested on Federal fraud charges for soliciting investments in a company that he claimed would prevent coronavirus infections and an injectable cure for those already suffering from COVID-19.
A Washington state man advertized for sale on Facebook a “dynamic duo” of substances that could not just boost the immune system, but could kill the coronavirus.
An Oregon man was charged with importing and offering for sale hydroxychloroquine, a malaria drug touted by President Trump as successful in curing coronavirus. The drug shipments originated in China and were not approved by the FDA. The FDA has issued warnings of the dangers of using hydroxychloroquine to prevent or cure COVID-19, although a growing body of doctors continues to tought it’s efficacy.
A Georgia man was charged with running a marketing company that defrauded Medicare by soliciting and receiving kickbacks from companies involved in testing for COVID-19 and steering Medicare beneficiaries to them for testing.
A California doctor was charged with selling a “100% cure” for COVID-19.
A Georgia woman was charged with selling an unregistered pesticide as a cure for coronavirus. She claimed on Ebay that it would help protect individuals for viruses and would reduce the risk of transmission by 90%.
A Georgia man was charged with wire fraud for allegedly lying about testing positive for COVID-19, resulting in a Fortune 500 company expending $100,000 to temporarily shut down and sanitize the business.
A Georgia man was charged with wire fraud in a scheme to sell $750 million worth of nonexistent PPE to the VA, including 125 million face masks and other personal protection equipment.
A Chinese manufacturer was accused of selling 140,000 defective masks to a U.S. distributor. The Chinese manufacturer allegedly represented these masks filtered out at least 95% of very small particles, including droplets containing viruses. According to tests performed by the government, the masks only had a filtration efficiency of 22%.
Two individuals were charged with price gouging under the Defense Production Act (50 U.S.C. §§ 4512-13). They were accused of attempting to sell one million KN95 masks at a 50% markup, representing that the markup was only 10%.
A retail store owner in Long Island was charged under the Defense Production Act of price gouging by allegedly selling scarce personal protection equipment at a price 1,328% above the prevailing market rate.
A St. Petersburg man was charged with claiming he was infected with COVID-19 and intentionally coughing and spitting on law enforcement officers.
In conclusion, PPP Fraud and COVID-19 fraud are going to inundate the Federal court system in the near future. Many of these cases have built-in defenses. For example, what exactly is “price gouging” versus capitalism. The Defense Production Act states “no person shall accumulate (1) in excess of the reasonable demands of business, personal or home consumption, or (2) for the purpose of resale at prices in excess of prevailing market prices” certain health care items. What is “reasonable” and “excess”? Moreover, there have been no criminal prosecutions under the statute in its 70 year history, and thus, no precedent on how it will be interpreted.
With regard to PPP fraud, the certification that the current economic uncertainty makes the loan request necessary to support ongoing operations is so vague that it’s difficult to envision how allegedly making a false certification under this section could be successfully criminally prosecuted. Moreover, the rules and regulations for PPP loans change on almost a daily basis. One cannot possibly he held liable for false statements that were true at the time they were made. In short, the government may rush in with numerous such prosecutions, but there will often times be built-in barriers to their successful prosecution.