As another coronavirus relief package stalls in Congress, the federal government is cracking down on borrowers who obtained fraudulent loan proceeds from the SBA's Paycheck Protection Program (“PPP”), established as part of the original Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”).
The CARES Act is a federal law enacted on March 29, 2020, designed to provide emergency financial assistance to the millions of Americans who are suffering the economic effects caused by the COVID-19 pandemic. One source of relief provided by the CARES Act was the authorization of up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses, through the PPP. In April 2020, Congress authorized over $300 billion in additional PPP funding.
9 Individuals Charged with $24 Million Loan Fraud Scheme
Yesterday, the Department of Justice announced that 9 individuals have been charged in the Southern District of Florida and the Northern District of Ohio with a $24 million coronavirus relief loan fraud scheme.
In the press release, the Acting Assistant Attorney General of the Justice Department's Criminal Division is quoted as stating:
“The defendants allegedly participated in an extensive nationwide scheme to file at least 90 fraudulent applications for millions of dollars in PPP loans in exchange for illegal kickbacks of portions of the loan proceeds. These allegations reflect an organized effort by defendants to defraud the SBA's PPP program on a large scale by stealing funds intended for legitimate small businesses suffering from economic hardships caused by the COVID-19 pandemic. The department and our law enforcement partners will continue to aggressively pursue those who would seek to illegally exploit the ongoing national emergency for their own benefit.”
Individual Charged with PPP Loan Fraud After Buying a Lamborghini
This comes nearly a week after the arrest of another South Florida man who was charged with a loan fraud scheme for obtaining $3.9 million in PPP loans and using those funds, in part, to purchase a 2020 Lamborghini Huracan sports cars. According to the feds, he also spent the money on personal expenses, including dating websites, luxury jewelry, clothing retailers (including Saks Fifth Avenue), and Miami Beach resorts like the Fontainebleau.
Individual Charged with Bank Fraud After Gambling with Loan Proceeds
PPP loan fraud schemes are not unique to South Florida. Last month, an LA man was charged with one count of bank fraud for allegedly obtaining more than million in PPP loans through applications to insured financial institutions, and others, on behalf of different companies. According to court documents, the man submitted fraudulent loan applications that made numerous false and misleading statements about the companies' business operations and payroll expenses. Court documents also allege that he submitted fake and altered documents, including federal tax filings and employee payroll records.
The complaint further alleged that he then transferred millions of dollars from the fraudulently obtained loan proceeds to his brokerage accounts to make risky stock market bets and spent hundreds of thousands of dollars at the Bellagio Hotel & Casino and other gambling establishments.
Individuals Charged with PPP Loan Fraud as Early as May
And in May, the DOJ announced federal charges in four separate cases against defendants accused of committing loan fraud related to PPP loans:
On May 4, 2020, the government filed charges in the District of Rhode Island against two businessmen in separate cases for allegedly filing fraudulent loan applications seeking more than a half-million dollars in forgivable PPP funds.
On May 12, the DOJ filed criminal charges in the Eastern District of Texas against an Engineer who allegedly applied for PPP loans in excess of $10 million from two separate banks for businesses that did not have any employees.
And on May 13, the DOJ announced bank fraud charges filed in the Northern District of Georgia against a reality TV personality in connection with a PPP loan that he obtained for his trucking company to pay employees or make other payments specifically allowed under the PPP Rule, but instead used more than .5 million of the loan proceeds to purchase expensive jewelry, other personal items, and to pay child support.
Protect Yourself by Consulting with a Lawyer
These aggressive approaches by the federal government serve as an important reminder to businesses and individuals that, when seeking forgivable loan funds under the CARES Act, it is important that borrowers document the basis for their good faith belief in their eligibility for the funds and document well their use of the funds to show compliance with the program. Businesses and individuals that receive formal or informal requests from the DOJ or the SEC should consult with legal counsel regarding any questions they have about how to respond to such requests before responding or speaking with federal authorities.