Borrower Beware: First False Claims Act PPP Loan Fraud Regulation Announces More To Come

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The Department of Justice (DOJ) has reached its first civil settlement for loan fraud involving the Paycheck Protection Program (PPP). January 12, the United States Attorney’s Office for the Eastern District of California has announced that Slidebelts, Inc. and its President and CEO, Brigham Taylor, agreed to pay $ 100,000 in damages to resolve claims of civil fraud for distorting their bankruptcy in order to obtain a PPP loan of 350,000 $.

In April 2020, California-based online fashion accessory retailer Slidebelts submitted three PPP loan applications, falsely stating on each that Slidebelts was not currently bankrupt. The PPP request indicates that a PPP loan will not be approved for a bankrupt applicant. The Small Business Association (SBA), responsible for administering the PPP, also issued an interim final rule in April, declaring PPP ineligible for any plaintiff who is the debtor in bankruptcy proceedings at the time they submit the claim. PPP or at any time before PPP Loan Disbursement.

After Slidebelts submitted its first two PPP loan applications, the potential first lender – also a creditor in the Slidebelts bankruptcy – explicitly rejected Slidebelts’ loan application because Slidebelts was bankrupt. Nonetheless, Slidebelts submitted a third loan application with the same false claim that it was not currently involved in any bankruptcy. The second lender, meanwhile, approved Slidebelts’ application and disbursed a loan of $ 350,000 guaranteed by the SBA to Slidebelts. Although Slidebelts alerted the lender to its incorrect answer to the bankruptcy question on the PPP application loan one day after the loan was disbursed, Slidebelts did not repay the loan until mid-July.

Settlement Agreement Says Slidebelts and Taylor are liable to the United States for nearly $ 4.2 million in damages for violating the Financial Institutions Reform, Recovery and Enforcement Act 1989. (FIRREA) and the False Claims Act. Due to the compromised financial position of Slidebelts and Taylor, the DOJ accepted a settlement amount of $ 100,000 in exchange for releasing Slidebelts and Taylor from any liability for these civil claims. The settlement agreement, however, did not release Slidebelts and Taylor from any liability under the Internal Revenue Code, criminal liability, or any other administrative liability or enforcement right not specifically set out in the agreement.

Key points to remember

  • The CARES Act created new authorities to investigate CARES Act funding fraud, and DOJ has prioritized the investigation and prosecution of pandemic-related fraud and abuse. The Slidebelts regulation reflects DOJ’s commitment to tackle PPP loan fraud for loan amounts of all Cut.
  • The DOJ can seek substantial financial penalties under FIRREA and FCA – maximums of approximately $ 2 million per violation under FIRREA and $ 23,000 per violation, plus three damages, under of the FCA. Both laws provide for and encourage whistleblower actions. With this in mind, borrowers should closely monitor PPP compliance and ensure that an internal reporting system is in place for any potential violation of PPP loan requirements.
  • Both current and potential borrowers should carefully review their loan applications for any misrepresentation and promptly report any inaccuracies to the SBA. The Slidebelts Agreement pointed out in its stipulated facts that Slidebelts waited two and a half months to repay the loan after Slidebelts informed the lender of its incorrect application, during which time the SBA made several requests to Slidebelts to return the loan. As such, promptly reporting and resolving inaccuracies on PPP loan applications and, if necessary, returning poorly obtained PPP loans can result in more favorable treatment from the SBA and DOJ.

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