Crackdown on PPP Fraud Is Precursor to More Charges and Investigations

Defense lawyers say they are getting calls from PPP loan recipients who have been contacted by investigators or fear they may face charges.

Investigations of possible fraud in the federal Paycheck Protection Program (PPP) are prompting some loan recipients to seek legal counsel, lawyers say.

Some of those cases involve clear-cut allegations of fraud, along the lines of the New Jersey lawyer charged earlier this month with fraudulently obtaining $9 million in PPP loans. But many investigations appear to focus on the more nebulous issue of whether the businesses really needed the money.

Defense lawyers say they are getting calls from PPP loan recipients who have been contacted by investigators, or who fear they may face charges in connection with the aid program.

Christopher Porrino, chairman of the litigation department at Lowenstein Sandler who had stints as the state attorney general and governor’s counsel under Chris Christie, likened the PPP fraud situation to the state’s distribution of aid after Hurricane Sandy. There, a state aid package was followed by numerous fraud charges against recipients.

“What people don’t understand is that there is tremendous political pressure to get the money out the door,” said Porrino. “The people who are responsible for getting the money out the door are in a different section of government than the people in charge of auditing, and have different motivations. The investigators are not part of the political machine, and as the money goes out, they are sharpening the knives and ready to investigate.”

In addition, if Joe Biden is elected president, PPP fraud investigators can be expected to become even more aggressive, said Porrino.

“The new administration will feel much less attached to the grants and the process around the grants. Unfortunately, the grantees are the ones that will lose,” Porrino said.

Knowing whether a PPP recipient will face trouble for taking aid it didn’t need is difficult, Porrino said. Applicants were required to certify that they needed the money to make payroll, “a pretty mushy standard,” he said.

He cites the hypothetical example of a company that leases a Ferrari for its CEO and renews the lease after receiving PPP funds. In that case, “I don’t know if the government is going to take the position that the company really needs the money,” Porrino said.

Other companies are fearing investigation because they predicted they would need the money for payroll when applying for funds, Porrino said. In the early days of the shutdown, many companies braced for dire economic predictions, but the most severe scenarios did not always materialize.

“You just hope that people were careful and papered their files and can demonstrate that they applied for the money in good faith, as opposed to an auditor or investigator revealing to the contrary, that the application was not made in good faith. I think this look back is going to create an enormous amount of activity for applicants and for defense lawyers,” Porrino said.

The Justice Department says it anticipates a high volume of PPP prosecutions are coming.

On Thursday, the Justice Department announced that it had charged 57 people with fraudulently seeking to steal more than a combined $175 million in loans through the PPP. The department has used data analytics to bring a flurry of fraud cases within months of the relief program’s launch, said Brian Rabbitt, the acting head of the Justice Department’s criminal division.

“The amount of fraud that we’ve uncovered to date and that we’ve prosecuted to date is significant. The amount of fraud that we’re currently investigating and anticipate charging in the future is also significant,” said Rabbitt. He predicted “plenty of work” in the months ahead.

And earlier this month, Jae Choi, 48, of Cliffside Park, New Jersey, a former Dechert associate who ran a group of education service companies, was charged with submitting three fraudulent PPP loan applications. Authorities said he used the PPP money to buy a house for nearly $1 million, to make home improvements, and to invest millions in the stock market.

Christopher Adams, a criminal defense lawyer at Greenbaum, Rowe, Smith & Davis, said his firm has been retained by companies that are subject of PPP fraud investigations or that fear they may become a target.

Adams said the PPP application process was fairly simple, although the specific requirements changed repeatedly while applications were being taken. The Small Business Administration (SBA), which runs the PPP program, apparently did not conduct a lengthy review of each application due to a desire to distribute the funds promptly.

“If you sacrificed the speed at which this relief went out to the public for greater due diligence and verification, you may exacerbate an economic collapse. The speed at which this went out helped these businesses,” Adams said.

Timothy Anderson, a criminal defense lawyer in Red Bank, New Jersey, said Congress made the application process “as easy as possible,” and when applicants made representations about their finances, “took their word for it.” In making the process so easy, though, the government “assumed a certain amount of fraud,” said Anderson.

But the government’s frequent reworking of the rules could make prosecutions challenging, he said. Businesses receiving PPP funds are supposed to use most of the money to pay salaries, but that rule was changed from 75 percent to 60 percent, and then 40 percent, Anderson said.

Congress intended for banks accepting PPP loans to help weed out fraud, Anderson said. But potential borrowers could apply through any bank, not just the one where they have accounts, he said.

“It didn’t play out where the banks were in a position to have lots of information about the people that did apply,” he said.

The PPP’s infusion of cash “was a blessing for a lot of businesses, but as we’re seeing, it was an incredibly easy opportunity for anybody that wanted to play fast and loose to take advantage of the program. It’s mind-boggling—that is, if it’s absolutely true—how they thought they could get away with it,” Robinson said.

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From: New Jersey Law Journal

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