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DOJ Cracks Down on COVID-Relief Fraud

On July 15, 2020, the Department of Justice (“DOJ”) charged Andrew Marnell with bank fraud in connection with $8.5 million worth of Paycheck Protection Program (“PPP”) loans he obtained for fake business expenses, that were then spent on gambling and stock market bets, incurring millions of dollars in losses.  See United States v. Marnell, No. 2:20-mj-03313-DUTY (C.D. Cal. Jul. 15, 2020).

The PPP is a form of emergency relief to support job retention for small businesses suffering from the economic effects of the COVID-19 pandemic.  Catalyzed by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, enacted on March 29, 2020, the PPP provides qualifying small businesses 1% interest loans with a two-year maturity for payroll costs, interest on mortgages, rent, and utilities, with the interest and principal amount forgiven if the proceeds are spent on these expenses within a certain period of time.

According to the complaint, Marnell submitted fraudulent PPP loan applications on behalf of at least four different LLCs, under a variety of aliases, to several financial institutions for over $10 million.  The loan applications contained false and misleading statements about the companies’ business operations and payroll expenses, as well as fake and altered back-up documentation, including federal tax filings that were never submitted to the IRS and employee payroll records.  In support of the complaint, an affidavit by a Senior Special Agent with the Federal Housing Finance Agency-Office of Inspector General states that although an investigation is ongoing, none of the LLCs appear to be functional businesses with any employees.

The complaint further alleges that, upon receiving the loan proceeds, Marnell transferred them from various bank accounts to his personal brokerage account, spending them on risky stock transactions and at a Las Vegas casino.  The stock transactions—which included “naked options” trades in a futures account—resulted in net losses of $525,693 in May, and $2,733,455.40 in June.  Marnell wired $150,000 of the proceeds to himself in Las Vegas on June 5th, and, based on reports from a number of casinos, used those monies to engage in gambling activity throughout the month.

The charges coincide with several other federal indictments for similar COVID relief-related fraud schemes filed in recent weeks throughout the country.  See, e.g.United States v. Belone, No. 0:20-mj-06264 (S.D. Fla. Jul. 10, 2020); United States v. Buoi, No. 20-mj-4143-DHH (D. Mass. June 19, 2020).  In a July 8, 2020 press release, the U.S. Attorney’s Office asserted DOJ’s commitment to prosecuting these cases in order to prevent “deplet[ion] [of] the program and diver[sion] [of] funds from those who need it most.”  In light of this commitment, businesses looking for relief through the PPP should expect their applications to receive close scrutiny by regulators, banks, and other financial institutions looking to flag potential misconduct while keeping companies and their employees afloat.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 212

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About this Author

Kate Ross, Corporate Attorney, Sheppard Mullin Law Firm
Associate

Kate Ross is an associate in the Government Contracts, Investigations & International Trade practice Group in the firm's New York office.

212.653.8190
Sarah Aberg Government Contracts Attorney Sheppard Mullin Law Firm New York
Special Counsel

Sarah Aberg is special counsel in the White Collar Defense and Corporate Investigations Group in the firm's New York office.

Areas of Practice

Sarah's practice encompasses litigation, internal investigations and white collar defense, with a focus on financial services and securities. She has conducted multiple criminal trials and numerous internal investigations into a wide variety of allegations, including mail and wire fraud, mortgage fraud, insider trading, market manipulation, money laundering, terrorist financing, cybercrimes, and data privacy violations.  Sarah’s regulatory practice encompasses market regulation, foreign registration and disclosure requirements, supervisory procedures, and sales practices.  Sarah represents corporations, financial services companies, and associated individuals in connection with investigations and regulatory matters before the U.S. Department of Justice, the Securities and Exchange Commission, the Commodity Futures Trading Commission, FINRA, the New York Stock Exchange, the New York State Department of Financial Services, and the New York Attorney General’s Office.

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