Will PPP fraud turn into the next wave of “lying loans”?
In April, Andrew Marnell of California requested millions of dollars in federal aid loans under the Paycheck Protection Program. Based on his requests, Marnell received approximately $ 9 million in federal funding from banks authorized to make the loans. It was only after funding the loans that the lenders discovered that the funds were going directly to Marnell rather than to the small businesses listed in the requests, forcing them to notify federal investigators.
The Justice Department quickly filed a criminal complaint against Marnell, alleging he received around $ 9 million in PPP loans by submitting applications for several non-existent companies that employed hundreds of manufactured workers and had millions of dollars in whimsical payroll. expenses. He then allegedly used the money to trade stock markets and gamble for hundreds of thousands of dollars in Las Vegas. On July 16, Marnell was arrested on federal bank fraud charges.
By now, most or all Americans are familiar with PPP, which is part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the federal law enacted on March 29 in response to the COVID-19 pandemic, and its economic impact. on employers and the workforce in general. In summary, the PPP section of the CARES law, which amends Section 7 (a) of the Small Business Act, is designed to provide emergency financial assistance to Americans suffering from COVID-19 and its impact on businesses across the country.
It specifically provides forgivable loans to small businesses and others, including nonprofits, veterans groups, and tribal businesses that meet certain criteria set out in the law. These loans are intended to cover payroll and other specified business expenses, provided certain conditions are met both at the time of application and for a specified period following receipt of any PPP funds.
To date, approximately $ 517 billion in PPP loan funds approved under the CARES Act for approximately 4.9 million small business recipients. Additionally, Congress is currently considering providing more financial aid as the COVID-19 crisis continues, presumably in a way that would be an extension of existing PPP loans. It is one of the largest, most ambitious and fastest-funded federal emergency relief programs in our country’s history. While precise figures will not be available for some time, it is certain that a significant portion of these funds has been used precisely for the purposes intended, namely to keep small businesses afloat and to allow many businesses to avoid. layoffs that would have worsened the financial impact of the COVID-19 crisis.
However, any time Congress acts swiftly and drastically, even with the best of intentions, negative consequences can ensue. This is precisely what seems to have happened in the case of Marnell and, increasingly, in many other cases across the country, including in the Texas. In fact, the first PPP fraud charges were laid in early May 2020, when two New England businessmen were accused of illegally attempting to obtain more than $ 500,000 in PPP loans by the through allegedly fraudulent funding requests. Unsurprisingly, federal and state authorities across the country have indicted many similar cases since and surely will continue to do so.
In the case of the PPP loan program, the consequences that followed, and will continue to follow, were very predictable from the start. The government has sought to get funds into the hands of eligible participants at unprecedented speed and in unprecedented amounts – allowing individuals to apply online, disclose minimal information, and provide few supporting documents. The four-page loan application completed by potential PPP borrowers and submitted to eligible lenders can be found here. The first page of the application asks general questions about the small business, such as the name and address of the business, the number of employees, and the distribution of ownership, including percentage of ownership. The second page then asks the authorized representative of the small business to make certain representations, authorizations and attestations by signature and initial. It is important to note that third party verification and submission of documents to support the loan application is simply not part of this process. The last two pages of the application give very basic and limited advice on how to complete the application and set out some relevant federal laws.
On one level, it makes sense that Congress made the process of applying for and getting a P3 loan so simple. This allowed banks to quickly review and approve applications and put loan funds into the hands of small businesses suffering from the pandemic. In many cases, this is precisely what has happened.
However, demanding so little of applicants and giving them so little advice is practically implying that fraudulent loan applications be submitted or that good faith mistakes be made. In this sense, the PPP loan program resembles the “liar loans” of the 2008-09 mortgage crisis, in which “undocumented” loans were made to borrowers by financial institutions across America. In many cases, these borrowers knowingly submitted fraudulent mortgage applications that they had neither the ability nor the intention to repay. Based on investigations and indictments to date, the Justice Department and many of its state corollaries believe something similar is happening with PPP loan applications, and they have filed indictments to support this belief. Many more will surely follow in the months and years to come.
In addition, the vague requirements and guidelines for PPP loans create risks for loan seekers who, unlike those described above, have good faith intentions in requesting funds but misinterpret the limited guidelines and requirements imposed on them. are taxed as borrowers. In doing so, these borrowers may have been exposed to investigation and prosecution. For example, an applicant may misunderstand what makes the small business eligible for a loan, innocently providing false information on the application, or misappropriating the funds received due to a misunderstanding of the parameters of the use of funds.
P3 loan fraud will be the subject of federal investigation and prosecution now and for years to come, as will the prosecutions for the “undocumented” loans that fueled the mortgage crisis, but probably on a larger scale. There are various factors that need to be analyzed and legal arguments that need to be made by experienced white collar lawyers for anyone under investigation or suspected of having engaged in P3 loan fraud. This is especially true because it is likely that, like the pandemic itself, information regarding allegations of PPP loan fraud will change and transform in the months and years to come as the government learn more about the law itself and develop theories about what would constitute violations of the law. and how to pursue them.