The U.S. Department of Justice should utilize qui tam actions more in its Paycheck Projection Program enforcement efforts, both to maintain credibility with whistleblowers and to leverage the False Claims Act's lower burden of proof on the civil side, which makes settlements easier to reach than criminal convictions.
This expert analysis by TELG managing principal R. Scott Oswald and TELG associate Lydia A. Pappas was published by Law360 on September 28, 2021.
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By R. Scott Oswald and Lydia A. Pappas
Eighteen months after the Paycheck Protection Program (PPP) was launched near the start of the COVID-19 pandemic, whistleblowers continue to identify cases of PPP fraud – a scourge that may have diverted as much as $76 billion in taxpayer money, according to a recent study.
Because we represent whistleblowers, we get lots of these calls, some quite eye-opening. We hear about employers and individuals who have lied about their eligibility for the now-closed government program, which dispensed about $800 billion in loans; who have plundered the resulting funds, which are supposed to be used for payroll and valid business expenses; and who have wrongfully claimed forgiveness of the loans at taxpayer expense.
We send many callers directly to the U.S. Small Business Administration and the U.S. Department of Justice. For egregious and well-documented cases, however, we help people to file civil complaints under the federal False Claims Act (FCA), which includes a qui tam provision that can reward whistleblowers who help to recover money for the government.
The DOJ admits it can’t catch every wrongdoer, but it has pledged to use “every available federal tool” to fight pandemic-related fraud. Its declared strategy is to target the worst offenders, an approach that has led to dozens of high-profile criminal prosecutions of PPP recipients, including bad guys who — in what’s becoming a cliché — are alleged to have bought Lamborghinis. (There are at least four cases involving the Italian supercar: Two in Houston and one each in Miami and Irvine, Calif.)
Criminal outcomes can be severe, as reality TV star Arkansas Mo discovered this month when he was sentenced in the U.S. District Court for the Northern District of Georgia to more than 17 years in prison for PPP fraud and other crimes.
The civil side of PPP enforcement, however, has been much quieter.
In December, Deputy Assistant Attorney General Michael Granston predicted “significant [civil] cases and recoveries” for COVID fraud under the FCA. We’re aware of only four civil PPP settlements since then, however, totaling less than $1 million — and just one of those, a relatively low-key matter in the U.S. District Court for the Southern District of Florida, was brought by a whistleblower.[1] She will receive an award of more than $57,000; our firm was not involved in the case.
Civil complaints take longer to resolve than criminal charges, so it’s still early days. But so far it seems that the DOJ and SBA haven’t focused on qui tam cases as a major platform for PPP enforcement. That’s a shame for two big reasons.
First, pursuing PPP allegations to a civil settlement can be easier than proving a crime — especially when a whistleblower offers insider evidence, as is often the case. And second, pandemic fraud enforcement depends heavily on tipsters, who will keep providing information only if they see that complaints are taken seriously.
It’s time for the DOJ to raise its PPP game, and its credibility with qui tam whistleblowers, by notching some high-profile wins on the civil side.
This article provides a quick guide on how to make that happen.
The Case for Civil Enforcement
To start, let’s stipulate that criminal fraud cases are sexy. They grab headlines, and prosecutors don’t need a ton of signoffs from the affected federal agency — in this case, an SBA that’s surely been overwhelmed by its huge PPP responsibilities.
It’s true, too, that the threat of a felony conviction can bring a fraudster to the table, although plea deals are tough to close.
Civil liability under the FCA is also very intimidating, however. Besides penalties, the statute calls for treble damages — so that even a negotiated settlement can yield more for U.S. coffers than a criminal case.
The burden of proof is considerably lower on the civil side, which strengthens the government’s hand. A wrongdoer will hesitate to gamble on a jury trial when prosecutors need to muster only a preponderance of the evidence. Plus, since there’s no need to admit criminality, a quick civil settlement may be easier to swallow.
Finally, most qui tam cases arrive at the DOJ’s doorstep with lawyer-vetted documentation, an insider’s roadmap to further evidence, and a preliminary witness list — which, in PPP matters, can lead to settlement without a lot of extra legwork.
These aren’t complex Medicare fraud cases, with thousands of small payments, arcane regulations, and dueling medical experts. Most PPP fraud schemes are simple scams, evident on their face.
If you’re looking to make public examples, especially on the corporate side, whistleblower cases provide great fodder.
Theories of FCA Liability
The typical forms of COVID fraud fit easily into an FCA framework.
Based on our own experience, most PPP fraudsters violate U.S.C. §3729(a)(1)(A), which forbids knowingly false claims for government payment, and often also U.S.C. §3729(a)(1)(B), which forbids the knowing creation or use of false records or statements in connection with such a claim.
PPP loans aren’t classic payments by the government for goods or services, of course, but the separate applications for a loan and for forgiveness each qualify as “a claim for payment or approval” under the statute.
A frequent misrepresentation that triggers (a)(1)(A) liability on the loan application form is the applicant’s certification of eligibility for the program, the falsity and materiality of which is usually plain. The SBA’s criteria for loans have fluctuated over time, but some frauds we’ve seen are way outside the gray zone. Bankrupt companies are a good example: They’re categorically ineligible, but many have taken loans anyway.
At a bare minimum this defrauds the government of the loan processing fee, which it pays to lenders, though we believe there’s a strong argument for (a)(1)(A) liability on the entire loan.
Other schemes we’ve seen include lying about payroll size, including by misclassifying workers; padding payroll with make-work positions designed to funnel taxpayer money to family and friends; applying for multiple loans for the same workforce; and lying about the intended use of funds.
On the forgiveness application, an (a)(1)(A) claim arises from false certifications about the actual use of funds. Any non-allowed expense should be declared and deducted from the forgiven amount, but most fraudsters are loath to admit that taxpayers paid for a new swimming pool.
Meanwhile, an (a)(1)(B) claim will attach wherever the wrongdoer supports an application with fraudulent documents such as false or backdated payroll records, rent receipts, corporate records, and so on — documents that may be in a whistleblower’s possession.
Challenges in PPP Cases
Because PPP loans are aimed at small businesses, the amounts in dispute may be on the low end of FCA practice at many U.S. Attorney Offices — especially in busy jurisdictions. In our opinion, pre-multiplier damages will be based on the total loan amount, typically six to eight figures, with penalties of up to $23,331 per violation.
Collectability may be an issue, but the government has options that include asset freezes, the creation of constructive trusts, and use of the DOJ’s Asset Forfeiture Program. Moreover, as in criminal PPP cases, the priority is to make an example of bad actors regardless of the eventual recovery — including for loans below $2 million, the SBA’s usual threshold for close attention, since that’s where much of the fraud lies.
The sole qui tam settlement so far illustrates everything we have discussed: Seth Bernstein, who was accused of misusing a $1.2 million loan to JetReady, a jet charter company now in bankruptcy, agreed to pay the United States less than $300,000 to resolve the case. The deal was cut by the U.S. Attorney’s Office for the Southern District of Florida, which is also a hotbed of action on the criminal side of PPP fraud.
As shown in the unsealed JetReady complaint, which was brought by former assistant controller Victoria Hablitzel and showcases a number of damning e-mails, civil prosecutions are accelerated by a strong qui tam relator. A well-placed tipster offers a shortcut to proving scienter, a crucial element in PPP cases, via internal communications and financial documents. Relators also can testify to verbal statements of intent and help to fashion productive civil investigative demands.
Every week the DOJ is being served more whistleblower complaints. PPP loan forgiveness is in full swing, with more bad actors completing their schemes each day. Now is the time to act on solid qui tam cases — and to send a strong signal, to wrongdoers and whistleblowers alike that well-documented PPP fraud won’t go unpunished.
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[1] The Florida case is United States ex rel. Hablitzel v. All in Jets, LLC, No. 20-cv-61410 (S.D. Fla.). The other three settlements appear to have been reached without a court filing but were announced by DOJ. See Eastern District of California Obtains Nation’s First Civil Settlement for Fraud on Cares Act Paycheck Protection Program, U.S. Dept. of Justice (Jan. 12, 2021); Bakersfield Medical Practice Agrees to Resolve False Claims Act Allegations Involving Cares Act Paycheck Protection Program, U.S. Dept. of Justice (Apr. 21, 2021); Virginia Company Agrees to Settle Civil Fraud Allegations for Paycheck Protection Program Loans, U.S. Dept. of Justice (June 2, 2021).
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R. Scott Oswald is managing principal of The Employment Law Group, P.C. Lydia A. Pappas is an associate attorney at The Employment Law Group, P.C.
(Note: This version has been edited slightly from, and carries a different headline than, the version published by Law360.)
