DOJ announces first civil settlement for PPP fraud

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After laying dozens of criminal charges against Paycheck Protection Program loan recipients in recent months, on January 12, the U.S. Department of Justice announced its first civil settlement resolving allegations of PPP loan fraud. In accordance with the settlement agreement, SlideBelts, an internet retail company and bankrupt debtor, and its President and CEO, Brigham Taylor, have agreed to pay a total of $ 100,000 to resolve allegations that they have violated the law on False Claims and the Financial Institutions Reform, Restoration and Enforcement Act 1989. SlideBelts also repaid the $ 350,000 PPP loan it received.

This first civil settlement confirms that the government will actively and aggressively prosecute borrowers and individuals involved in allegations of PPP loan fraud.

The government’s allegations

The settlement agreement sets out a long recitation of the facts, for which SlideBelts and Taylor “admit, acknowledge[d], and accept[ed] accountability. ”Specifically, the settlement agreement states that on April 3, 8 and 14, SlideBelts submitted three applications for PPP loans to three different federally insured banks ranging from $ 300,000 to $ 350,000, and falsely stated, in response to question 1 on each loan application, that SlideBelts was “not presently involved in any bankruptcy”, although at the time SlideBelts was in fact a debtor in bankruptcy proceedings.

The settlement agreement states that on April 10, the first lender denied SlideBelts’ claim and informed Taylor that it had answered question 1 incorrectly because the lender knew that SlideBelts was currently bankrupt. According to the settlement agreement, ‘Taylor replied that his response was a'[o]versight, ”but nevertheless argued that the bankruptcy question in the claim was“ overbreadth ”by the US Small Business Administration. On April 14, Taylor contacted the first lender again and said the term bankruptcy should not be included in question 1 of the PPP loan application and asked the lender to approve the loan. But the lender again rejected the request, repeating that SlideBelts was definitely not eligible for a PPP loan because it was bankrupt. Three hours later, SlideBelts submitted a third claim to another lender, making the same false statement.

The second lender finally approved SlideBelts’ application before the third lender and granted a PPP loan of $ 350,000. According to the settlement agreement, “Taylor signed the loan note with [the second lender] and wrongly stated that SlideBelts was not bankrupt to influence [the second lender] to execute the note and pay the loan proceeds to SlideBelts. The settlement agreement also states that “the misrepresentation of Taylor and SlideBelts caused [the second lender] submit a bogus claim to the SBA for $ 17,500 in loan processing fees, which the SBA paid to the “second lender”.

On April 22, the day after the loan disbursed from the second lender to SlideBelts, Taylor emailed the second lender “explaining that SlideBelts had just realized that we may not have responded. [Question 1] correctly since we completed the request promptly and wanted to bring it to your attention[.]“” SlideBelts did not repay the loan; instead, eight days later, SlideBelts filed a petition in bankruptcy court seeking retroactive approval of the PPP loan. According to the settlement agreement, SlideBelts’ motion “did not disclose to the [bankruptcy] [c]bear that he had obtained the loan by making a false statement to [the second lender] regarding its bankruptcy status.

On June 16, the SBA opposed SlideBelts’ petition and asked the court to order SlideBelts to repay the loan. The second lender joined the SBA’s opposition. However, SlideBelts did not repay the loan and instead asked the bankruptcy court to dismiss the case so that he could file for bankruptcy later and “ask. [PPP] funds while the case is closed. The bankruptcy court allowed SlideBelts’ motion to dismiss its bankruptcy case, and on July 8, SlideBelts returned the $ 350,000 loan to the second lender.

Notably, the government does not appear to be alleging that SlideBelts would not have qualified for a PPP loan had it not been for bankruptcy or that SlideBelts had mis-spent the loan funds before returning them.

The government maintains that SlideBelts and Taylor (i) violated FIRREA for making false statements on its loan applications and for committing bank and electronic fraud, and (ii) violated FCA for making false statements and having caused the lender to submit a false claim for processing costs and, therefore, that they “are liable to the United States for damages totaling $ 4,196,992”.

Lessons learned

The government’s civil settlement with SlideBelts and Taylor sends several notable messages to the PPP borrower community:

  • Individuals will be held responsible: The settlement with Taylor is in line with the DOJ’s continued pursuit of individuals in CAF affairs. Indeed, the settlement agreement specifically names Taylor as having answered questions about the PPP loan application and for making alleged false statements to lenders. The settlement, which was effected on an “inability to pay” basis, also took into account Taylor’s financial disclosures and provided that $ 17,500 of the $ 100,000 settlement amount (likely attributable to the $ 17,500 loan processing fee) “constitutes a return from Taylor”
  • The DOJ and the SBA will not shy away from small civil regulations: SlideBelts received a PPP loan of $ 350,000, which is far less than the loan amounts involved, even in some of the recent DOJ prosecutions. That the DOJ would announce a relatively small loan because its first civil settlement indicates that the DOJ will not hesitate to prosecute borrowers of small PPP loans that it suspects of having committed wrongdoing
  • Expect to learn more about FIRREA: FIRREA imposes heavy civil penalties for violations of 14 specified criminal laws, such as bank and mail / electronic fraud laws “affecting a federally insured financial institution”. Little was said about FIRREA after its promulgation in 1989, but it was given new life following the financial crisis of 2008. FIRREA’s importance in the settlement with SlideBelts and Taylor indicates that the government did not ‘will not hesitate to use this powerful tool in future civil regulations. Likewise, although the government has chosen to settle these claims within the framework of FIRREA, with its less demanding burden of proof, the regulation recalls that borrowers, and in particular individuals, may be liable to criminal prosecution for fraud. PPP loans.
  • Failure to pay settlements can be a big blow: The DOJ has long been willing to consider an entity’s claim that it is unable to pay the amount demanded by the DOJ because it does not have enough assets to pay the government and meet its expenses. ordinary and necessary. In political orientation recently released in September, the DOJ clarified this policy around a defendant’s “inability to pay”, possibly in anticipation of PPP settlements. Given the economics behind the PPP loan applications, the DOJ’s settlement with SlideBelts and Taylor – which was effected on the basis of an inability to pay with an initial partial payment and payments over time, with interest – may indicate that the DOJ will be willing to settle other civil PPP cases under similar conditions
  • The DOJ and the SBA stay true to their word: The SBA has constantly reminded borrowers that it retains the ability to review any PPP loan at any time for any reason and has included clear language in application documents regarding the applicability of civil and criminal laws and laws. penalties for intentional misstatements. This regulation confirms that the SBA is serious

Conclusion

With over $ 525 billion in PPP funds disbursed on over five million loans until the original program ended last August, and more as first-draw PPP loans were re-authorized and applications for Second-draw PPP loans are now accepted, this long-awaited first civil settlement under the PPP is probably the first of many to come. Indeed, over the next few months, it is likely that qui tam cases are likely to come to light, making this case the tip of the iceberg.


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