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Troutman Pepper | Borrower Beware: First False Claims Act PPP Loan Fraud Settlement Signals More to Come

The Department of Justice (DOJ) entered into its first civil settlement for loan fraud involving the Paycheck Protection Program (PPP). On January 12, the U.S. Attorney’s Office for the Eastern District of California announced that Slidebelts, Inc. and its president and CEO, Brigham Taylor, agreed to pay $100,000 in damages and penalties to resolve civil fraud allegations for misrepresenting their bankruptcy to obtain a $350,000 PPP loan.

In April 2020, California-based fashion accessories internet retailer Slidebelts submitted three PPP loan applications, falsely stating on each that Slidebelts was not presently in bankruptcy. The PPP application advises that a PPP loan will not be approved for an applicant in bankruptcy. The Small Business Association (SBA), charged with administering the PPP, also issued an interim final rule in April, declaring PPP ineligibility for any applicant that is the debtor in a bankruptcy proceeding at the time it submits the PPP application or any time before the PPP loan disbursement.

After Slidebelts submitted its first two PPP loan applications, the first potential lender — also a creditor in Slidebelts’ bankruptcy — explicitly rejected Slidebelts’ loan application because Slidebelts was in bankruptcy. Nevertheless, Slidebelts proceeded to submit a third loan application with the same false assertion that it was not presently involved in any bankruptcy. The second lender, meanwhile, approved Slidebelts’ application and disbursed a $350,000 SBA-guaranteed loan to Slidebelts. Although Slidebelts alerted the lender to its incorrect answer to the bankruptcy question on the PPP application one day after the loan disbursement, Slidebelts did not return the loan until mid-July.

The settlement agreement states that Slidebelts and Taylor are liable to the United States for nearly $4.2 million in damages and penalties for violating the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the False Claims Act. Because of the compromised financial condition of Slidebelts and Taylor, DOJ agreed to accept a settlement amount of $100,000 in exchange for releasing Slidebelts and Taylor from liability for these civil claims. The settlement agreement did not, however, release Slidebelts and Taylor from any liability under the Internal Revenue Code, criminal liability, or any other administrative liability or enforcement right not specifically released in the agreement.

Key Takeaways

  • The CARES Act created new authorities to investigate CARES Act funding fraud, and DOJ has prioritized the investigation and prosecution of pandemic-related fraud and abuse. The Slidebelts settlement reflects DOJ’s commitment to combating PPP loan fraud for loan amounts of every size.
  • The DOJ can seek substantial monetary penalties under both FIRREA and the FCA — maximums of approximately $2 million per violation under FIRREA and $23,000 per violation, plus triple damages, under the FCA. Both statutes provide for and incentivize whistleblower actions. With this in mind, borrowers should monitor PPP compliance closely and ensure that an internal reporting system is in place for any potential violations of PPP loan requirements.
  • Both current and prospective borrowers should scrupulously review their loan applications for any misrepresentations and promptly report any inaccuracies to the SBA. The Slidebelts agreement emphasized in its stipulated facts that Slidebelts waited two and a half months to return the loan after Slidebelts notified the lender about its incorrect application, during which time the SBA made multiple requests to Slidebelts to return the loan. As such, prompt reporting and resolving inaccuracies on PPP loan applications and, if necessary, returning improperly obtained PPP loans may result in more favorable treatment from both the SBA and DOJ.

Authors:

  • Allison DeLaurentis, Partner, TROUTMAN PEPPER
  • Miranda Hooker, Partner, TROUTMAN PEPPER
  • Angela Monaco, Associate, TROUTMAN PEPPER

Compliments of Troutman Pepper – a member of the EACCNY.