The Investigations are Coming
We’ve seen this movie before. The government provides industries severely impacted by an economic downturn direct access to capital. Thereafter, the Department of Justice (DOJ or Department) zealously pursues criminal and civil cases against alleged violators – on solid facts and on not-so-solid facts. We all learned lessons from the Great Recession. One such lesson is the government will engage in aggressive fraud enforcement related to the unprecedented loan programs established in response to the Covid-19 Pandemic. And the other lesson learned is to engage competent counsel early to respond to any government investigation and, possibly, to do so before any investigation begins.
Following the drastic steps implemented by governments nationwide following Covid-19 reaching our shores, the United States’ economy suffered a substantial loss. To bolster the economy, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a massive 335-page piece of legislation that allocated $2 trillion dollars for economic relief. Following the economic downturn in 2008 from the collapse of the United States’ real estate market, Congress took similar steps through the Troubled Asset Relief Program (TARP). If TARP provides any roadmap, we can be certain the DOJ will inevitably pursue criminal and civil fraud prosecutions, and in particular False Claims Act cases, related to loan applications and other activities under the CARES Act.
Each year, the DOJ touts recovery totals from False Claims Act cases, which in recent years has exceeded $3 billion. With Congress now allocating over $2 trillion dollars – far more than at play under TARP – one can expect recoveries in years going forward to exceed prior benchmarks. To do so, the DOJ will have to ramp up investigations. And the DOJ has not wasted any time: on May 5, 2020, the DOJ announced the first criminal charges for CARES Act fraud.
The May 5th charges out of Rhode Island pertain to the Small Business Administration (SBA) Paycheck Protection Program (PPP). As the SBA explains: “The Paycheck Protection Plan is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.” Under the PPP, small businesses could obtain funding that, if certain conditions are met such as using at least 75% of the funds for payroll, would be forgiven. To obtain the loans, businesses must file certain paperwork with the government in which they make certain material representations. If proper care is not taken in the loan applications, or loan forgiveness applications, the DOJ, which has already shown its intent, will pursue an aggressive enforcement policy in regards to PPP, as the Department did with TARP. Indeed, on April 30, 2020, the DOJ announced it had already contacted 15 to 20 of the largest PPP lenders to investigate instances of potential fraud.
Business owners should, therefore, take care when filling out any paperwork associated with PPP loans or other CARES Act funding. Indeed, the PPP application specifically requires one to certify that, among other things, the applicant “understand[s] that knowingly making a false statement to obtain a guaranteed loan from the SBA is punishable under law, including under 18 USC 1001 and 3571 …; under 15 USC 645 …; and, if submitted to a federally insured institution, under 18 USC 1014 ….”
The Rhode Island charges are an example of what an egregious violation could look like. There, two gentlemen allegedly conspired to obtain PPP loans by claiming to have dozens of employees working at four different locations when the businesses had no employees. As we saw with TARP and other fraud prosecutions during the Great Recession, however, not all cases pursued by the DOJ, state Districts Attorney or Attorneys General have anywhere near such egregious conduct. For example, following the Great Recession, government authorities pursued numerous fraud cases against real estate professionals for conduct that by all metrics fell within industry norms prior to the Great Recession. And the investigations and subsequent cases ensnared numerous people including, in some instances, notaries who simply witnessed the signing of loan applications. We all believe it could not happen to us, until it does.
If one receives a call or inquiry from any governmental authority concerning a PPP loan, it is wise to engage counsel early in the process. While one can believe the situation is simply a misunderstanding, statements made to the government early in the process can doom any potential for a strong, viable defense later on.
Moreover, companies can be proactive in assessing their risk under the False Claims Act or potential fraud-based claims on receiving PPP funds. The Covid-19 Pandemic and subsequent actions by the states to enact and enforce social distancing came upon us fast over the past several months. Businesses had immediate needs to obtain crucial liquidity to keep people employed and businesses operating, and the government had opened the spigot. Therefore, one may have not had the necessary and appropriate time to engage professional advisors to review the loan applications and other paperwork prior to submission. Moreover, PPP funds must be used in certain ways in order to obtain forgiveness. So while the initial application may be okay, companies need to take care when submitting applications for loan forgiveness as well.
As with any government-initiated inquiry, if you have any concerns about your applications, hiring counsel to conduct an internal investigation and review to provide comfort or otherwise advise on potential exposure can be wise. Likewise, it can be wise to have an independent review of internal policies and procedures to ensure compliance with the CARES Act, PPP, and other regulations relating to obtaining and using funds from the government. As the old adage says, an ounce of prevention is worth a pound of cure.
Attorneys at Snow Christensen & Martineau are experienced in conducting internal investigations for companies prior to the filing of claims or charges, negotiating with opposing parties to avoid such suits, and defending such claims by federal and state enforcement agencies in both civil and criminal cases.
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