Department of Justice Announces First False Claims Act Settlement Related to PPP Fraud

Perhaps the most popular and successful program that the United States has launched to combat the economic impact of the COVID-19 pandemic is the Paycheck Protection Program (“PPP”). Administered by the Small Business Administration (“SBA”), the PPP provides forgivable loans and emergency financial assistance to businesses suffering economic hardships related to the pandemic. The most recent data from the SBA show that the United States has approved more than 6 million loans totaling almost $600 billion.

The availability of such vast amounts of money has, of course, attracted the attention of fraudsters. And it is certain that countless loans have been made to ineligible businesses or to those that have made false representations in their applications to illegally secure forgivable loan funds. While criminal prosecutions related to PPP fraud have been ongoing, on January 12, 2021, the United States announced what is likely to be the first of many civil False Claims Act settlements resulting from PPP fraud.

Slidebelts, Inc. – The First False Claims Act PPP Settlement

Shortly after the PPP program was announced, Slidebelts, Inc., an online retailer of fashion accessories, applied for a $350,000 forgivable PPP loan from three lenders. On its applications for those loan funds, Slidebelts repeatedly stated that it was not in bankruptcy, when in fact it was. PPP guidelines prohibit loans to companies in bankruptcy. So two of the loan applications were rejected when the lenders learned that—despite its statements otherwise—Slidebelts had pending bankruptcy claims. A third lender, however, approved Slidebelt’s $350,000 loan application, relying on its misrepresentation about its bankruptcy status.

When the United States learned that Slidebelts had fraudulently obtained a $350,000 PPP loan, it brought civil charges against the company and its CEO under both the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”). Although the loan was only for $350,000, the United States initially sought over $4 million from Slidebelts in assorted penalties based on the PPP fraud.

To resolve the False Claims Act charges, Slidebelts admitted to including false statements in its PPP loan applications. And in addition to paying back the $350,000 loan, Slidebelts agreed to pay the United States an additional $100,000. Although this was less than originally sought, the United States emphasized that the settlement amount was based in large part on its determination that Slidebelts could afford to pay no more.

What to Expect in the Future for PPP fraud

In public statements, the Department of Justice has repeatedly stated that it will aggressively use the False Claims Act to prosecute fraud related to the PPP and other COVID-19 relief efforts. So Slidebelts is likely the first of many PPP fraud cases that the United States will pursue. The Slidebelts settlement highlights three key points to consider going forward:

• The United States will pursue claims even if the ability to pay is an issue. As noted above, Slidebelts was ineligible for PPP loan funds because it was in bankruptcy. Despite its obvious financial difficulties, the United States brought civil claims against Slidebelts anyway. So whistleblowers should not remain quiet or assume the United States will be uninterested simply because the borrower may be unable to repay the fraudulently obtained loan.

• The United States will pursue individuals. Notably, the United States brought False Claims Act claims against, not just Slidebelts, but also its CEO. Although the CEO did not personally obtain the fraudulently loaned funds, he made false statements in the application. And the decision to pursue him individually shows that the United States will pursue all those responsible for fraudulently securing PPP loans.

• The United States will use every tool at its disposal. In addition to claims under the False Claims Act, which prohibits the submission of false claims for payment to the United States, the United States brought FIRREA charges against Slidebelts. FIRREA, a federal statute that allows the United States to seek civil remedies for criminal acts in the financial industry, will likely be used in many PPP civil actions. And like the False Claims Act, FIRREA provides recoveries for whistleblowers that come forward with knowledge of the fraud.

If you know of a company that has improperly obtained or used PPP funds, and you share that information with the United States, you may be entitled to a share of any money that the United States recovers from that company. But missteps could eliminate your chance to recover, so before doing anything you should consult the whistleblower attorneys at Florin Gray to determine how best to proceed. For a free and confidential consultation, please call us at (727) 220-4000 or email [email protected].