December 6, 2022

Volume XII, Number 340

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December 05, 2022

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First PPP Loan False Claims Act Settlement: What it Could Mean for Future Cases

On September 13, 2022, the Department of Justice announced a significant landmark settlement. This case is the first-ever False Claims Act decision to be settled with a lender involved in the Paycheck Protection Program. The intersection of these two government programs signifies the federal government's crackdown on fraud involving small businesses and loans given during the initial stages of the COVID-19 pandemic. This is likely the first of many settlements to be seen relating to PPP loan fraud moving forward.

Understanding PPP Loan Fraud and the CARES Act

The Paycheck Protection Program (PPP) was a significant portion of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in the early stages of the COVID-19 crisis. This federal program was created to help stabilize the economy and keep money coming in for businesses that were shuttered during the first wave of lockdowns.

Unfortunately, the program may have been well-intentioned, but it was also notoriously easy to take advantage of. While the full extent of the looting is still being understood, experts estimate that anywhere from $76 billion to $100 billion may have been given out in fraudulent loans. If these numbers are correct (and some say they may be conservative), then around 10 percent of the total funds earmarked for the program were simply stolen during the initial rollout of the PPP. The PPP program was particularly targeted as loans were eligible for extensive loan forgiveness, making them more similar in many cases to grants for eligible recipients.

This mass robbery has been termed "the biggest fraud in a generation." Much of the money, which was meant to provide masks, groceries, and some stopgap security for middle and working-class families, was spent instead on luxury hotel bills, sports cars, and other nonessential goods by scam artists and swindlers.

Unfortunately, PPP funds were severely curtailed by the amount of fraud that took place. If qualified businesses were at the back of the line to receive funds, they were no longer able to receive assistance once the money ran out. In this way, PPP fraud hurt both taxpayers whose money created the pool of available aid, as well as actual employees and businesses who needed relief during the health emergency.

Many of the stolen PPP funds may never be recovered. Even if the scam artists are brought to justice, they may be unable to repay the money they stole. However, some cases, like the September 2022 settlement, are actionable under the federal False Claims Act.

What is the False Claims Act?

The False Claims Act prevents any business or individual who contracts with or receives money from the federal government from making false claims in order to receive undue funds. It is commonly used to target healthcare providers and pharmaceutical companies that falsely claim Medicare or Medicaid funds. This law can also be used to hold accountable contractors with the Department of Defense, banks that commit financial fraud, and others. The False Claims Act protects taxpayer money by holding violators liable for up to treble damages, plus individual penalties assessed at a rate concurrent with inflation.

Many PPP funds were defrauded by individuals making false claims about their businesses. For instance, the Pandemic Response Accountability Committee, tasked with bringing to justice those who defrauded PPP funds, unemployment aid, and other CARES programs, found that much of the fraud was committed by people entering false information on the online system, which did not have follow up security protocols to ensure that the information given was accurate. For instance, in one evaluation, the Pandemic Response Accountability Committee discovered that the same phone number was used for 150 loan applications in the Houston area. The phone number turned out to be for a local gas station.

The Facts of the Case: First PPP Loan False Claims Act Settlement

PPP fraud spread like wildfire throughout the country during the COVID-19 pandemic, and this initial False Claims Act settlement is a notable step toward extinguishing the flames. The September 2022 case involves Prosperity Bank, a regional financial institution with branches in Texas and Oklahoma. According to the Justice Department announcement, Prosperity Bank processed and approved a PPP loan in the amount of $213,400 for a company called Woodlands Pain Institute PLLC, owned by Dr. Emad Bishai.

Importantly, the PPP loan application asks whether the applicant (or anyone who owns more than 20 percent equity in the company in question) is currently subject to an indictment, arraignment, or criminal charges. If the answer is yes, the business was supposed to be ineligible for a loan. Dr. Bishai was facing criminal charges related to his prescribing opioid pain medicine, which the bank knew about even though the doctor checked "no" on his application. However, Prosperity Bank green-lit his application under the Paycheck Protection Program anyway.

By doing so, Prosperity Bank was able to receive a processing fee from the Small Business Administration in the amount of $10,670. Banks that processed PPP loans were able to receive fixed payments from the Small Business Administration that ranged from one to five percent of the total amount approved. They were therefore incentivized to approve as many loans as possible, even for applicants who should have been disqualified under the program's parameters.

Moving Forward in the New Landscape

The September 2022 decision is especially noteworthy because the False Claims Act was successfully applied to a bank that enabled the drawing down of PPP-earmarked funds. It is the first settlement made with a PPP lending institution, which may open the door to further prosecution and hopefully more recovered taxpayer funds. Unlike individuals, financial institutions that helped perpetrate fraud may have the funds available to pay back some of the stolen money. However, in this case, the takeaway is especially positive, as Dr. Bishai also repaid his stolen PPP loan in full in 2022.

If you have information about fraudulent claims made with the Paycheck Protection Program, or if you work in an institution that should have known better than to approve certain loans during the COVID-19 pandemic, you may be able to become a whistleblower. Becoming a whistleblower can allow you to receive up to 30 percent of the overall amount reclaimed by the government. Federal and some state laws also protect whistleblowers from being fired, demoted, harassed, or otherwise discriminated against by their employers.

For more information, or to discuss the specifics of your knowledge, consider contacting a qualified PPP loan fraud attorney about your situation.

© 2022 by Tycko & Zavareei LLPNational Law Review, Volume XII, Number 294
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About this Author

Jonathan K. Tycko leads the Whistleblower Practice Group of Tycko & Zavareei LLP

In recent years, the laws of the United States have undergone a whistleblower revolution. Federal and state governments now offer substantial monetary awards to individuals who come forward with information about fraud on government programs, tax fraud, securities fraud, and fraud involving the banking industry. Whistleblowers also now have important legal protections, designed to prevent retaliation and blacklisting.

The law firm of Tycko & Zavareei LLP works on the cutting edge of this whistleblower revolution, taking on even the most complex and confidential whistleblower...

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