In the October 13, 2022 edition of The Legal Intelligencer, Edward T. Kang wrote “The Great Pandemic Heist: Attorneys’ Role in Fighting PPP Loan Fraud”
In the COVID-19 era, there has been a heist of great value, but it has not gone undetected. Prosecutors have called the heist the largest fraud in U.S. history, with the thieves stealing hundreds of billions of dollars in taxpayer money through fraudulently obtained Paycheck Protection Program (PPP) loans.
The “good” thieves are able to abscond with tremendously valuable items while remaining undetected. They take care to cover their tracks, to make sure any witnesses are silenced, and to financially clean the ill-gotten goods as quickly as possible. In the COVID-19 era, there has been a heist of great value, but it has not gone undetected. Prosecutors have called the heist the largest fraud in U.S. history, with the thieves stealing hundreds of billions of dollars in taxpayer money through fraudulently obtained Paycheck Protection Program (PPP) loans. The thieves’ plan to line their pockets was fairly simple: steal the money that the government was doling out to help buoy the economy during the throes of the pandemic. They took advantage of the government’s urgent loan dispersal to those who required immediate help. But the thieves could not resist showing off their looted wealth. They began purchasing flashy and expensive Lamborghinis, beautiful beachfront houses, and spending large amounts in cash. The careless and reckless nature of the heist has proven to be its undoing, and now the U.S. government is coming to take back what was stolen—although they are not acting alone.
In many cases, individuals are serving as whistleblowers to identify the manner in which the thieves fraudulently obtained COVID-19 relief funding. These individuals have become an integral part of the government’s effort to crack down on the fraud. They also require legal counsel to help them advance the claims on behalf of the government. Practitioners who position themselves as counsel to these individual whistleblowers stand to not only help the government in its efforts to recover stolen taxpayer funds, but also to receive awards as the government provides significant financial incentive to those who fight fraud. On that note, my firm opened The Whistleblower Advocates earlier this year, to tackle these types of whistleblower claims.
Per the U.S. Department of the Treasury, the PPP was implemented with the support of the Small Business Administration to provide small businesses with funds to pay up to eight weeks of payroll expenses. According to the National Conference of State Legislators, at least 75% of the loans were supposed to be used for payroll expenses, and the loan would be forgiven by the SBA for the amount used for payroll costs, rents, utilities or group health insurance costs.
Despite the nature of the program being quite explicit (then-Treasury Secretary Steven Mnuchin stated that the “overarching focus” of the PPP was to keep workers “paid and employed”), companies did not always retain the majority of the staff on their payrolls. Analysis of the efficacy of the PPP plan have revealed significant flaws. A study by a team at Harvard found that the PPP had “little material impact on employment at small business,” implying that the loans doled out may not have gone toward achieving the goal of the program. For example, the Omni Hotels & Resorts took in between $30 million and $71 million and yet kept nearly half of their hotels closed and their workers on unpaid furloughs according to union representatives for the hotels’ employees. The extent of PPP fraud goes far beyond a debatable decision as to how to use the loan, however. There were far more brazen ways that fraudsters took advantage of the PPP. There are two main types of the more brazen PPP fraud: a legitimate business claiming it has far more employees than it did or a person acquiring a loan for a nonexistent or fraudulent business. A particularly egregious example of the first type of fraud occurred in Jefferson City, Missouri where a business owner has been charged with conducting a massive fraud scheme in which he obtained over $12.4 million in PPP loans based on fraudulent statements about his construction business. The Department of Justice (DOJ) report about the incident stated that the business owner made “materially false and fraudulent claims in the loan applications and claimed payrolls for employees who did not exist or no longer worked” at any of the construction companies he owned. Other fraudsters, such as the owner of Faithful Transport Services LLC in South Carolina, used coconspirators and forged tax documents to inflate the number of people their businesses employed to receive more in PPP loans. An offshoot of this business-oriented fraud is the “PPP broker” schemes that were run by various individuals across the country, such as the one run by a Louisiana woman through her fictitious company. A U.S. Attorney’s Office investigation charged that the woman advertised on Facebook that her company could help facilitate loans for other individuals. She allegedly filed over 110 PPP loans on behalf of other individuals, pocketing portions of the loans and charging fees for the service.
These are two examples among thousands, but they all stem from a similar premise—a person who owns a legitimate business who has used the business to fraudulently obtain PPP loans. The other common way fraudsters stole PPP funds was by creating fake businesses with fake employees who needed COVID-19 relief. There have been large-scale PPP fraud cases throughout the country, but the conduct of California resident Robert Benlevi stands out for its audacity. Benlevi, who was convicted in March 2022, operated several fake businesses and acquired $27 million in fraudulently obtained loans through ludicrously fraudulent loan applications. According to the Department of Justice, Benlevi submitted 27 loan applications to four banks, representing that each of his three fake companies—1 Stellar Health LLC, Bestways 2 Health LLC, and Joyous Health 4 U LLC—had 100 employees each despite that there was not a single employee at any of the companies. Benlevi fabricated payroll statements and Internal Revenue Service documents to perpetuate the fraud and used the stolen funds to pay for his personal credit cards and bought an oceanfront rental property in the affluent Santa Monica neighborhood.
The headline stories do not tell the entire picture of the PPP heist. A white paper released in 2021 by members of the University of Texas’ department of finance faculty found that around 1.8 million of the 11.8 million loans approved by the program were obtained by potentially fraudulent means. This figure, a whopping 15% of the total loans dispersed, amounts to nearly $76 billion worth of potentially stolen funds and according to Hannibal Ware, the inspector general of the SBA, the fraud uncovered thus far is only, “the smallest, tiniest piece of the tip of the iceberg.”
The government is not without means to combat the fraud that has occurred. The chief legal avenue the government has to clean up the PPP loan issues—the False Claims Act—was also borne out of a nationwide emergency. During the Civil War, defense contractors who had contracted with the Union to supply weapons and military infrastructure were fraudulently obtaining funds for nonexistent expenses. In response, Congress passed the False Claims Act (FCA), also known as the “Informer’s Act.” The FCA subjects fraudsters to both civil and criminal penalties by authorizing private individuals, known as “relators,” to seek relief from the alleged fraudsters in a qui tam action. In a qui tam action, the relator initiates a suit alleging fraud by a party against the U.S. government, and the United States can either intervene to proceed with the action or decline to intervene, in which case the relator may continue as the sole party to the action. See Eisenstein v. City of New York, 540 F.3d 94 (2d Cir. 2008), aff’d sub nom. Eisenstein v. City of New York, 556 U.S. 928 (2009). Importantly, relators in qui tam actions are entitled to a percentage of the money recovered by the government, either 15% to 20% if the government intervenes or 25% to 30% if the government chooses not to intervene. Currently, violators of the FCA are liable for treble damages of the amount stolen and a penalty fine between $5,000 and $10,000.
Practitioners have an important role to play in the FCA process. Individuals bringing qui tam actions cannot represent themselves because, as relators, they are representing the government. That means relators must hire a litigator to bring their claim. Further, while relators may have extensive experience in their specific field of work it is unlikely they know how to bring that knowledge to bear in a legal setting. Practitioners can also help relators navigate the potential legal hurdles that exist in these FCA actions by confirming that the information is not considered too public (i.e., public disclosure bar) to be used and by operating with the speed necessary to make sure the claim is not precluded by another claim related to the same information (i.e., first to file rule).
Practitioners who are ready to take on relators as clients could see a huge uptick in work over the coming years as the fraud perpetrated by those taking advantage of the PPP is astounding.
The Department of Justice has, since the start of the pandemic, initiated over 240 civil investigations into more than 1,800 individuals and entities for alleged PPP loan fraud totaling more than $6 billion in stolen funds. Both civil and criminal penalties are being sought, and the government is not just going after the direct perpetrators of fraud. In September 2022, the Department of Justice announced its first civil settlement in a PPP fraud whistleblower case in which the U.S. government intervened with a lender who had processed a PPP loan on behalf of someone committing fraud. The “PPP and Bank Fraud Enforcement Harmonization Act of 2022” (H.R. 7352), signed into law in August, extends the statute of limitations for PPP fraud cases to 10 years, meaning that PPP fraud claims will likely be litigated into 2030 at minimum, despite that the PPP ended in 2021.
Considering the breadth and scope of PPP fraud, it is likely that there will have been fraud committed by actors in a variety of sectors, including health care, technology and financial services. Practitioners can use their expertise to help relators better present their cases to the U.S. government. Setting aside that the work may be lucrative for practitioners, it is also an important societal good that will help the government recover fraudulently gained funds. Working to help whistleblowers bring FCA actions against PPP fraudsters is a great benefit to every U.S. taxpayer and may prove to be a financial windfall for the attorneys willing to take on the fraudsters. Those who practice in the tri-state area could also benefit from the U.S. Attorney’s Office of the Eastern District of Pennsylvania, which has one of the most robust FCA programs in the nation.
Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at firstname.lastname@example.org.
Reprinted with permission from the October 13, 2022 edition of “The Legal Intelligencer” © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or email@example.com.