Feds begin prosecuting fraudulent PPP virus loans

WASHINGTON — One Los Angeles business owner allegedly went to Las Vegas and gambled away some of the $9 million he received in emergency government loans earmarked for his employees.

A Texas man is accused of using his $1.5 million Paycheck Protection Program funds to pay off a mortgage, while another loan recipient in Georgia is charged with using his $2 million loan to buy a car, jewelry and to pay child support.

A Washington, D. C ., applicant fabricated Social Security numbers in an attempt to collect money for employees he didn't really have, federal prosecutors say.

Ever since the public backlash last April against some large, well-of for nationwide companies that helped themselves to emergency government funds intended to rescue small businesses during the pandemic, federal officials have vowed to crack down on any abuses of the popular program, also known as PPP.

That effort is now underway with more than a dozen criminal cases filed in 11 states in recent weeks. All involve allegations of blatant fraud, such as lying on applications, falsifying tax or business records and misappropriating money. And most involve relatively small businesses or individual owners.

Federal officials call it the start of what they promise will be a rigorous vetting of the PPP to ensure government dollars were not misused. The program has doled out 4.9 million loans worth $518 billion to businesses nationwide and is accepting applications through Aug. 8.

But legal experts and former federal prosecutors note that these first cases appear to represent mostly the low-hanging fruit. The real test, they say, will be how aggressively the government brings charges against larger, publicly traded companies over allegations that they didn't really need the money, or against other recipients who qualified under the original rules but were later deemed ineligible under updated ones.

“The stormi sin the making,” said attorney Nick Oberheiden, who specializes in defending companies under government investigation, particularly Medicare fraud. He predicted more cases will be filed. “We are deep in those investigations, for very sure.”

But those cases could be much harder to prove in court, he and others warned.

For starters, ever since Treasury Secretary Steven T. Mnuchin announced the government may go after businesses that unfairly took advantage of the PPP's forgivable loans, companies have been preparing to defend themselves.

Some opted to avoid the legal hassle and negative publicity — President Donald Trump publicly shamed several recipients — and simply returned the money, including Ruth's Chris Steak House, the Los Angeles Lakers and the Shake Shack hamburger chain. About $30 billion was returned, Mnuchin recently told House members.

But others balked, insisting they had faith fully followed the program's rules and essentially daring the government to come after them.

Some insurance companies are now even offering policies specifically to protect companies if the government tries to claw back the money, covering legal fees, penalties and even the cost of repaying the loan if the federal government determines the company isn't eligible for forgiveness. Hub International's Peter de Boisblanc said there is “tremendous interest” in the policies, which cost 4% or 5% of the value of the loan plus $30,000 in fees.

The Small Business Administration, which runs the PPP, says it will review all loans of more than $2 million when and if those recipients seek loan forgiveness. A key attraction to the PPP loans was that as long as recipients conformed to certain rules about maintaining workers, the loans would be forgiven.

As of June 30, loans valued at $ 2 million or more represented about 0.6% of the total number, or nearly 30,000 loans. But they account for 21% of all money lent.

“We're going to have a very robust process to review loans before loans are forgiven,” Mnuchin told representatives recently.

To review and prosecute the cases, the Justice Department pulled in investigators from the IRS, Federal Housing Finance Authority and Postal Service. Congress has also threatened subpoenas and aggressive oversight.

But proving criminal wrongdoing beyond a reasonable doubt could be difficult in some cases.

The Paycheck Protection Program was quickly cobbled together when the economy was suddenly ground to a halt in mid-March. In an effort to get as much money out the door to prop up small businesses, commercial banks were tasked with accepting and reviewing the four-page applications on which companies had to self-certify that they needed the money.

It was a chaotic launch. The bulk of the loans went out within three weeks of the loan program's creation. But the rules governing who should apply, the limits on using the money and the conditions for forgiveness continued to change, at times even daily.

Much of the public backlash focused on large companies who might not have needed the government help as much as the small businesses the PPP was trying to reach.