The Next Wave of COVID-Related Criminal and Civil Enforcement Actions is Starting
Given the rapid pace and volume of economic aid allocated by Congress to combat the COVID-19 pandemic and its economic impacts, it is no surprise that the federal government has focused heavily on identifying and prosecuting COVID-related fraudulent conduct. US law enforcement agencies now appear poised to launch a new wave of investigations to identify and pursue additional civil and criminal actions against alleged wrongdoers. The complex, rushed nature of many COVID-related aid programs, however, may make it difficult for prosecutors to pursue more complex cases where conduct is less-obviously fraudulent.
With the recent passage of the American Rescue Plan, Congress will have allocated more than $5 trillion dollars to combat the COVID-19 pandemic and related economic crisis. The influx of unprecedented amounts of government funds into the economy has already led to a large number of criminal and civil enforcement actions and investigations. To date, the Department of Justice (DOJ) has criminally charged 474 defendants in COVID-related fraud cases, with potential losses of over $569 million. However, most of those prosecutions have focused on the low-hanging fruit, i.e., blatant instances of fraud or abuse. Those prosecutions are likely just the tip of the enforcement iceberg.
On March 26, 2021, the DOJ emphasized its ongoing commitment to pursuing COVID-related criminal and civil enforcement actions. There are indications that this next wave of COVID-related government enforcement actions will increasingly focus on large-scale, complex fraud investigations and will involve the more frequent use of civil fraud statutes, such as the False Claims Act (FCA), the Anti-Kickback Statute (AKS), and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Indeed, it appears that such a shift has already begun.
In 2021, one can expect to see increased COVID-related criminal and civil enforcement actions in four areas: (1) the Paycheck Protection Program, (2) healthcare, (3) securities, and (4) government contracts and procurement. Many of these enforcement actions, however, may face significant challenges given the speed in which the relief programs were implemented and the lack of clear rules, regulations and guidance from federal agencies.
The Paycheck Protection Program
For the past year, the Department of Justice (DOJ) Fraud Section primarily focused on combatting fraud in connection with the Paycheck Protection Program (PPP). The PPP was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide to small businesses forgivable loans of up to $10 million. Between March and April 2020, Congress authorized approximately $670 billion in funding for PPP loans. In December 2020, Congress authorized an additional $284 billion for first- and second-time PPP borrowers.
The DOJ’s Fraud Section has already charged 109 defendants in 74 PPP loan fraud criminal cases, involving total attempted losses of more than $268 million. There have also been a large number of similar fraud prosecutions relating to Economic Injury Disaster Loans (EIDL) program. Many of these prosecutions arose from data analysis. And PPP or EIDL fraud prosecutions to date have typically involved three categories of easily identifiable fraudulent conduct: (1) obtaining PPP loans using fictitious companies and/or stolen identities, (2) relying upon inflated employment figures and/or submitting fake payroll documents or tax returns, and (3) using PPP loan funds for improper purchases such as luxury cars and homes.
Although similar PPP loan fraud prosecutions will continue in 2021 (particularly as new PPP loans are issued and businesses file loan forgiveness applications), the next wave of PPP loan fraud investigations will likely target more complex fraudulent conduct and focus on larger PPP loans or single corporate groups that received multiple PPP loans. The DOJ is also expected to increase its use of civil enforcement actions under the FCA and FIRREA to target PPP loan fraud. Indeed, in January 2021, the DOJ announced the first civil settlement of FCA and FIRREA claims in a case involving a fraudulent PPP loan.
Another issue that may lead to increased civil enforcement actions is the requirement that businesses certify in “good faith” that the PPP loan was necessary to maintain ongoing operations. The SBA will be auditing all PPP loans exceeding $2 million and is currently requiring all businesses that received such loans to submit a “necessity questionnaire.” Although false statements made in connection with an SBA audit or on the necessity questionnaire can lead to criminal exposure, the government is more likely to pursue civil remedies given the difficulty in proving the falsity of a borrower’s belief that a PPP loan was “necessary.” The DOJ may also be hesitant to pursue criminal charges when a business made inaccurate statements in connection with the necessity questionnaire or did not meet the technical PPP eligibility requirements, but nevertheless used the PPP loan funds for their intended purpose.
One area in which there has yet to be significant COVID-related enforcement actions is in the healthcare space. This, however, is certain to change in the near future as the DOJ and Department of Health & Human Services (HHS) analyze additional Medicare claims data and/or more whistleblower qui tam complaints are filed. As a result, there will likely be significant increases in both criminal and civil healthcare fraud enforcement actions in 2021.
So far, there have been only a small handful of healthcare fraud prosecutions relating to COVID-19. The first two COVID-related healthcare fraud prosecutions involved bundling COVID-19 tests with other medically unnecessary “add-on” tests, an area of concern HHS identified at outset of the pandemic. The DOJ also recently charged two pharmacy owners with using COVID-19 emergency override billing codes in order to bill Medicare $30 million for expensive cancer medication that was never purchased, prescribed or dispensed to patients.
But the DOJ’s focus appears to be expanding. Last month, the DOJ brought the first criminal prosecution in the country involving the Provider Relief Fund. The Provider Relief Fund was created as part of the CARES Act to provide direct payments to healthcare providers for expenses and lost revenue relating to COVID-19. The government has allocated $178 billion in financial assistance as part of the Provider Relief Fund, and has already distributed more than $100 billion. Given the large amounts of money distributed through the Provider Relief Fund, such prosecutions will likely increase in frequency in 2021, particularly as providers begin submitting to HHS required reports regarding their use of the funds. Also, the DOJ recently reiterated that its Civil Division will be using the FCA to aggressively pursue COVID-related healthcare fraud cases, including cases involving the Provider Relief Fund and telehealth services (the use of which expanded significantly during the COVID-19 pandemic).
Civil healthcare fraud enforcement actions under the FCA are also likely to increase in the near future because of the DOJ’s increasing use of data analytics to identify potential fraud. Indeed, data analytics is already proving to be a game changer. Although qui tam relators continue to be the primary source of FCA cases, last year the DOJ initiated 250 FCA cases on its own—100 more cases than the DOJ initiated in 2019, and the most non-qui-tam FCA cases filed in nearly 30 years. As a result, there were a record 922 federal FCA cases filed in 2020, more than 60% of which were healthcare related. The combination of a more proactive DOJ and increased federal funding for healthcare providers due to COVID-19 could create a perfect storm and lead to an unprecedented increase in FCA healthcare fraud cases.
At the outset of the COVID-19 pandemic, the Securities & Exchange Commission (SEC) primarily focused on preventing simpler COVID-related fraud schemes targeting “Main Street” investors. But as the economy continues to recover in 2021, the SEC may increasingly focus on whether public companies accurately disclosed to their investors the impact the COVID-19 pandemic had on their finances and operations.
Just as with fraudulent PPP loans, the SEC enforcement actions have focused on the low-hanging fruit. The vast majority of COVID-related securities enforcement actions to date have involved pump-and-dump schemes involving microcap or penny stocks and/or blatant false statements that artificially inflated a company’s stock price. For example, between March and May 2020, the SEC suspended trading in more than 30 different securities due to false or misleading claims regarding their ability to sell PPE or to develop COVID-19 tests or treatments. The SEC’s initial trading suspensions have led to a number of subsequent SEC civil complaints, and some parallel criminal prosecutions.
The SEC’s recent civil settlement with The Cheesecake Factory, however, is likely a preview of the different types of securities enforcement actions that are coming down the road. In December 2020, the SEC announced it reached a $125,000 settlement with The Cheesecake Factory for making misleading disclosures about the impact of the COVID-19 on its business operations and financial condition. This was the first time since the pandemic started that the SEC has brought such claims. As the long-term financial impact of COVID-19 on businesses becomes clearer, similar SEC actions based on false, misleading or inadequate financial disclosures are likely to increase in frequency.
Government Contracting and Procurement Fraud
During the past year there have been an extensive amount of government contracts and grants awarded to combat the COVID-19 pandemic. Federal agencies have already allocated more than $53 billion in contract spending relating to COVID-19, and that number will certainly increase in 2021 and with the passage of American Rescue Plan. However, there have also been persistent reports of fraud in connection with these COVID-related government contracts and grants. The DOJ has always focused heavily on government contracting and procurement fraud, and one can expect that criminal and civil enforcement activity in this area will intensify in 2021.
The DOJ brought the first significant procurement fraud prosecution relating to COVID-19 in January 2021. Robert Stewart, Jr., the CEO of a Virginia-based business, had agreed to sell more than $38 million of 19 types of personal protective equipment (PPE), including N95 masks, to the Federal Emergency Management Agency (FEMA) and the Department of Veterans Affairs (VA), even though his company did not possess any PPE to sell. Stewart pleaded guilty to false statements to government agencies, wire fraud and theft of government funds.
The Stewart case will likely be the first of many procurement fraud prosecutions to come in 2021. For example, as of November 2020, the DOJ’s Procurement Collusion Strike Force (PCSF) had already opened more than two dozen grand jury investigations, many of which likely involve COVID-related procurement fraud. The PCSF was formed in 2019 to investigate and prosecute government procurement antitrust and fraud crimes. And although the PCSF’s primary focus remains antitrust actions, the PCSF has been working closely with the Pandemic Response Accountability Committee (PRAC) to investigate other COVID-related procurement fraud offenses.
The reality is that any company that received federal funds relating to COVID-19, either directly from the federal government or indirectly through state and local governments, could find itself subject to a criminal or civil investigation if the funds were not used appropriately or false statements were made in the contracting or grant processes. On the criminal side, there are a plethora of statutes the government can use to prosecute procurement fraud offenses. On the civil side, companies will continue to see claims brought under the FCA and AKS.
For the past year, federal, state and local governments have understandably been focused on allocating and spending billions of dollars in relief funds meant to combat COVID-19 and the resulting economic downturn. But as this money is distributed, government contracts are fulfilled and contractors are audited, the government will increasingly turn its attention to identifying and prosecuting fraud or abuse. Those investigations are likely already in progress and will continue to increase in scope, frequency and intensity during 2021.
The Nature of the COVID-19 Relief Programs Will Pose Challenges for Prosecutors and Present Opportunities for Defense Counsel
Although the availability of more than $5 trillion in COVID-19 relief funds will lead to increased enforcement actions, the scope and complexity of the relief programs and the speed with which those programs were implemented will present numerous challenges for prosecutors or regulators pursuing those cases. Most criminal prosecutions will require the government to prove a defendant acted with intent to defraud, and civil enforcement actions, such as FCA claims, will at a minimum require proof a defendant acted knowingly. In many complex cases, this will be easier said than done.
For example, when implementing the PPP, the SBA appeared to focus more heavily on getting loans approved and funding to businesses than on making sure there was clear guidance to borrowers and lenders about the program requirements. Certain program requirements changed each time Congress authorized additional PPP funding and the SBA has frequently issued new interim final rules on a variety of topics. As a result of these frequent rule changes, the SBA has already published seven different versions of its Frequently Asked Questions. Thus, should the government pursue civil actions regarding technical violations of the PPP, the government may have difficulty proving that the company understood the applicable rules and program requirements when it submitted its applications.
Similarly, in the healthcare space, HHS has frequently changed or modified various requirements and statutory or regulatory standards in an effort to ease the regulatory burden during the pandemic. These regulatory changes will likewise make proving knowledge or intent increasingly difficult in certain cases.
In conclusion, although COVID-19 enforcement actions and investigations will increase in frequency, scope and complexity during 2021, the success of such actions is not assured. Once the government moves beyond prosecuting obviously fraudulent conduct and focuses on more complex cases or technical legal violations, any ambiguity in the applicable rules or regulations could be used as a powerful defense.