By Matthew D. Lee and Marissa Koblitz Kingman of Fox Rothschild LLP
Published on June 29, 2020
Shortly after the Small Business Administration began accepting applications for Paycheck Protection Program (PPP) loans, two Rhode Island businessmen quickly applied for a combined $543,881 from the program. A few days later, the Justice Department announced that both were criminally charged with conspiracy to make false statements to influence the SBA and conspiracy to commit bank fraud, becoming the first individuals to face criminal charges related to the program, which was created by the federal Coronavirus Aid, Relief and Economic Security (CARES) Act. In the press release announcing the charges, the Justice Department said the arrests should serve as a stern warning to other PPP loan applicants, and promised that the FBI and other federal law enforcement agencies would aggressively pursue anyone taking advantage of the pandemic to commit fraud. The Justice Department has kept that promise, and to date has criminally charged 15 individuals alleged to have defrauded the PPP loan program of millions of dollars. On June 24 alone, three criminal cases were announced in Virginia, Texas, and Ohio.
The CARES Act Paycheck Protection Program
The CARES Act is designed to provide emergency financial assistance to Americans who have suffered economic losses related to the COVID-19 pandemic. It provides forgivable loans to small businesses to cover payroll and other specified expenses through the PPP loan program. Most PPP loans were funded in April and May. Since then, 15 individuals have been criminally charged across the country in connection with allegedly fraudulent PPP loan applications. These criminal cases are notable for several reasons.
Are These White Collar Investigations Happening Unusually Quickly?
The rapidity with which these initial PPP cases were investigated and charged is highly unusual. In typical white-collar cases, federal agents first try to determine if a crime was committed. Investigations can take months or even years to determine what potential crimes occurred and who was responsible. As the investigators review materials, talk to witnesses and subpoena records, investigations evolve, generating new leads and revealing more materials to review. White collar investigations often involve voluminous financial records which can take years to obtain and analyze. In stark contrast, the first 15 PPP cases were investigated and charged within a few short weeks after passage of the CARES Act.
Why Are These Crimes Being Charged?
One of the explanations for the atypical pace of these investigations is no doubt to deter others from engaging in similar misconduct. Each of the initial cases was announced by a strongly-worded press release from the Justice Department. With billions of dollars in public money at stake in the PPP, the federal government wants to ensure that borrowers who are tempted to misuse the money are fully aware of the very real criminal penalties they will face if they are caught. By aggressively prosecuting these cases, the DOJ is sending a clear message to the public that this behavior will not be tolerated.
How is the Government Able to Investigate and Charge These Cases so Quickly?
Federal prosecutors rarely reveal their sources, so at this point we do not know how these 15 cases came to light so soon. There are a variety of ways such information could make its way to investigators. Banks could be a source of information via their customary filing of Suspicious Activity Reports with the Financial Crimes Enforcement Network, a division of the U.S. Treasury. As the DOJ acknowledged in one recent press release, it was thankful for the “due diligence” of the “SBA’s lending partners to maintain the integrity of the lending programs.” Whistleblowers are another possibility. Many federal agencies encourage whistleblowers and offer rewards for information. For example, the FBI makes whistleblowing fairly easy by maintaining a 24/7 Cyber Complaint Center.
Which Agencies Are Investigating and Prosecuting These Crimes?
The sheer number of federal agencies involved in investigating PPP loan fraud is notable. Not surprisingly, the inspectors general of several federal agencies are leading the charge, including the Small Business Administration, the Federal Deposit Insurance Corporation, Federal Housing Finance Administration and the Federal Reserve. Other traditional federal law enforcement agencies, including the FBI, the Internal Revenue Service–Criminal Investigation Division, and the U.S. Postal Inspection Service are well represented in these cases. Finally, state and local law enforcement agencies are supporting this effort, too.
What Kind of White Collar Crimes Are Being Charged?
Most of the charges in these cases involve bank fraud, wire fraud, false statements to a financial institution and/or false statements to the Small Business Administration. For example, on May 22, 2020, William Sadleir, a film producer, was charged in the Central District of California with wire fraud, bank fraud, false statements to a financial institution and false statements to the SBA. Sadleir was the owner and founder of Aviron Group, LLC, which was the parent of several film distribution companies. Sadleir allegedly made misrepresentations to a bank to secure a PPP loan in excess of $1.7 million. He then allegedly used the funds to retire personal credit card debt and pay other personal expenses, rather than legitimate business needs.
The initial cases that have been charged appear to represent the most egregious cases, with allegations spanning phantom companies and non-existent employees to the use of PPP loan proceeds to pay personal expenses and fund lavish lifestyles. This does not mean that others will not be criminally charged, however. Other PPP borrowers will certainly be investigated in the months and years to come. Indeed, some of the potential charges that can be brought in a PPP loan fraud case carry a ten-year statute of limitations, providing federal law enforcement agencies plenty of time to build cases.
The Future of PPP Loan Fraud Enforcement
Scrutiny of PPP loans from all quarters is expected to intensify in the coming months. The Trump administration has vowed to audit all loans in excess of $2 million. The Justice Department shows no signs of slowing down its initial efforts to combat PPP loan fraud. Congressional oversight will be intense as well, with the CARES-Act created Pandemic Response Accountability Committee charged with detecting mismanagement of COVID-19 relief funds. The Special Inspector General for Pandemic Recovery, also created by the CARES Act, is charged with conducting audits and investigations related to CARES Act relief programs, including the PPP.
Any business owner concerned about PPP loan compliance should immediately consult counsel and not wait to be contacted by law enforcement. Any business owner who has already received a subpoena or inquiry from any law enforcement agency regarding a PPP application or loan should immediately consult with counsel who can assess the full potential for civil and criminal exposure before responding to any such subpoena or inquiry.
Matthew D. Lee is a Partner with Fox Rothschild LLP. He focuses his practice in the areas of white collar criminal defense and investigations, federal tax controversies, financial institution regulatory compliance and complex civil litigation. He can be reached at firstname.lastname@example.org or 215.299.2765.
Marissa Koblitz Kingman is an Associate with Fox Rothschild LLP. She focuses her practice on white-collar criminal defense and complex commercial litigation. She can be reached at email@example.com or 973.548.3316.