Texas leads pandemic relief loan fraud
State has the largest share of cases handled by the DOJ, with over 20% at end of August
The director of a Houston funeral home tried to embezzle millions of dollars from loans designed to help small businesses during the pandemic, pretending to own businesses that happen to belong to the largest Italian oil and gas corporation, federal investigators said.
Jase DePaul Gautreaux, the director of Wingate Funeral Home in the Almeda area, filed multiple fraudulent applications with bogus businesses and inflated payrolls to qualify for more funds, in a scheme to steal over $13 million from taxpayers’ money, federal prosecutors said.
Gautreaux is among a handful of Texans accused of trying to defraud the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act, or CARES, according to the Department of Justice. His is among four Houston cases and eight statewide currently under indictment, but at $13 million, may be one of the largest sums attempted by an individual. With the federal government beginning to take cases such as Gautreaux’s to court, Texas leads the country in PPP fraud indictment cases, which include over 50 individuals charged nationwide by the DOJ’s Criminal Division.
The PPP program provides forgivable loans backed by the Small Business Administration intended to cover, principally, payroll expenses to keep people employed and businesses running during the pandemic.
With a $659 billion budget, the PPP loan received one of the highest fund allocations among all the programs included in the $2.2 trillion CARES Act, passed by Congress in March.
“We estimate that over $1 billion in verifiable criminal fraud exists in the Payroll Protection Program,” said Tom Miller, CEO of the risk management firm ClearForce, a company that has worked in fraud discovery with an SBA qualified lender of PPP
loans. “What’s concerning is that verifiable criminal fraud is just a subset of the total fraud that likely exists in the program.”
More in Texas
Data from the SBA shows that almost 417,300 applications for PPP loans have been approved in Texas as of Aug. 8, when the program ended, comprising $41 billion. The number of PPP loans issued in the state represents 8 percent of all loans approved in the country, a share exceeded only by California, with 12 percent, and Florida with 8 percent.
But even though Texas received fewer loans among the top three states, it has the largest share of all fraud cases prosecuted by the DOJ, with over 20 percent as of the end of August.
Texas may have the most because the state “just happens to have the investigative and prospective resources to be ‘first to market,’” said Victor Hartman, an attorney and former FBI agent in Houston who worked in cases such as the fraud that collapsed the Enron Corporation.
Another reason could be either because small businesses here were quicker to apply or because the SBA and authorized lenders worked faster to meet the region’s demand for assistance, said Andrew Goldstein, an attorney at Cooley LLP.
“In the early days of the PPP program, Texans received more loans than in any other state,” said Goldstein, who was a top deputy to special counsel Robert Mueller.
Goldstein explained that by April 16, about two weeks after the PPP program began, almost 135,000 loans were already approved in Texas. By comparison, California had roughly 113,000 at the time and Florida, 89,000. He said that the number of prosecutions would even out among states in the coming months as investigators continue to prioritize COVID-19 fraud.
Car extravaganza
The criminal complaint against Gautreaux reflects several characteristics that PPP fraud has in common, said Juan Vasquez, an attorney at Chamberlain Hrdlicka in Houston who specializes in tax controversy and auditing. He noted that typical examples are “filing applications for businesses that do not exist or where the applicant does not truly have the authority to apply, or providing false information about the businesses such as the number of employees or amount of true payroll costs.”
When the loan is secured, Vasquez said another fraudulent behavior is using funds for nonqualifying expenditures, typically on expensive products for personal gain.
Cars are at the top of the shopping list of many people charged by the DOJ. Gautreaux allegedly sent a check for almost $300,000 to a dealer in New York to buy two limousines and two hearses. Federal authorites have recuperated part of the money he is accused of pocketing. Gautreaux’s lawyer, Joshua Lake, declined to comment for this story.
But it was the flashiness of a luxurious Lamborghini Urus allegedly bought with a PPP loan by another Houston resident, Lee Price III, that lent his case more notoriety. The criminal complaint against him says he also bought a Ford pickup and spent money in strip clubs with a $1.6 million loan.
“The government has presented me with nothing to suggest that my client is guilty,” said Price’s attorney Kent Schaffer. “They are focusing on how my client spent the money instead of the way the money was obtained; they are presuming all the money he spent came from the loan and not from his business.” The criminal complainant said, for example, that he lied about payrolls and criminal records.
The criminal complaint accuses Price of applying to several loans for businesses that do not have records of employees and revenues required to be reported to Texas authorities. It says that Price claimed to have 50 workers in one of the companies and that he lied about his criminal record, particularly unrelated current felony charges of tampering with a government record.
According to the DOJ, another defendant, Michael George McQuarn from Austin, opted to spend part of a $2 million loan on a Rolls Royce and a 26-foot Pavati Wake boat. In another case, the agency said that Fahad Shah, a wedding planner from Murphy, Texas, bought a Tesla vehicle with part of the $1.5 million he received.
Investments in real estate and even cryptocurrency are also popular items. The latter was the main expenditure mentioned in the indictment of Joshua Thomas Argires, from Houston. He allegedly filed fraudulent applications seeking more than $1.1 million on behalf of supposed small businesses called Texas Barbecue and Houston Landscaping. His lawyer, Assistant Federal Public Defender Aisha Dennis, declined to comment citing her office’s policy.
A woman from Houston, Lola Shalewa Barbara Kasali, 22, is also accused of loan fraud for almost $2 million in connection with two businesses named Lola’s Level and Charm Hair Extensions, prosecutors announced Tuesday. They said the funds were confiscated before being spent.
The government's challenge to crack down on a program as large as the PPP, as well as other CARES Act packages, has unprecedented characteristics.
“The past 10 years or so have created a favorable environment for fraudsters, and the COVID epidemic has thrown a target-rich opportunity into that environment” for them, said Jon Coss, executive officer and founder of Thomson Reuters Corporation’s Pondera Solutions, which specializes in data analytics to combat fraud.
Coss explained that easy access to stolen identities from massive security breaches, and technical advances to create fake ones offer fraudsters opportunities to scale their operations significantly. They are now more capable of hiding among legitimate applicants as government entities are still technologically behind and under increased pressure to offer more online and readily available services.
The CARES Act, however, created a host of oversight measures that include multiple agencies. At the minimum, the government said all loans of $2 million or over would be audited. PPP fraud cases currently prosecuted show that investigators are cracking down on lesser amounts as well, even with the limitations that COVID-19 has imposed on investigators and courts.