Trio of DOJ Civil Resolutions under the Paycheck Protection Program are Tip of the Iceberg

On June 2, 2021, the United States Attorney’s Office (“USAO”) for the Eastern District of Virginia (“EDVA”) became the second USAO in the country to reach a civil resolution stemming from alleged Paycheck Protection Program (“PPP”) fraud. The EDVA USAO’s announcement resolved allegations that KC Investments Group, LLC (“KC, LLC”) and KC Investment Groups, Inc. (“KC, Inc.”), through their owner, Sunu P. K.C. (“Sunu”), respectively obtained loans under the PPP, but that KC, LLC was not operating at the time of its PPP loan. In addition, the EDVA USAO alleged that KC, LLC’s loan funds were deposited into KC, Inc.’s bank account, which rendered false KC, Inc.’s representation that it would not receive multiple PPP loans. 

The government alleged that the forgoing conduct violated the False Claims Act, 31 U.S.C. § 3729, et seq. (“FCA”), and the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), 12 U.S.C. § 1833a. The FCA and FIRREA are the government’s one-two punch in its fight against loan fraud. The FCA provides for treble damages and penalties if a defendant knowingly makes materially false or fraudulent claims to the government. FIRREA provides for civil penalties if the government can establish, by the civil standard of a preponderance of the evidence, a violation of one of fourteen enumerated criminal statutes. FIRREA’s predicate criminal statutes include mail fraud, wire fraud, bank fraud, false loan applications, false statements to the Small Business Administration (“SBA”), and others. The FCA is the superior statute to pursue damages, as it allows for treble damages, whereas FIRREA contains the superior penalty provision with a per violation penalty currently up to $2,048,915, versus the FCA’s per violation penalty range of $11,803 to $23,607. The FCA contains the superior whistleblower provisions, with recoveries by whistleblowers (known as “relators”) of up to 30% of the total resolution, whereas a FIRREA whistleblower (known as a “declarant”) is capped at $1.6 million. The FCA also permits relators to pursue cases on behalf of the government even when the Department of Justice (“DOJ”) declines to intervene in the case, however FIRREA may only be pursued by the DOJ. 

The FCA/FIRREA one-two punch was used by the DOJ over the past decade to pursue cases against lenders that allegedly submitted loans with misrepresentations to the Federal Housing Administration (“FHA”) for insurance. Such cases resulted in significant settlements with, or judgments against, lenders including settlements of $1.2 billion with Wells Fargo and $418 million with SunTrust, and an affirmed judgment against Allied Home Mortgage of $298 million, along with many more. 

Unsurprisingly, the DOJ has now applied this same playbook to pursue alleged loan fraud against borrowers under the PPP. The first two resolutions were announced by the USAO for the Eastern District of California. The first came on January 12, 2021 with a settlement of $100,000 and the second on April 21, 2021 with a settlement of $70,000. Both resolutions also required full repayment of the loans. The settlement amounts were small for at least two reasons. First, the loan amounts themselves were small ($350,000 and $430,000, respectively), and second, neither borrower received loan forgiveness from the SBA on its loan. Receiving loan forgiveness is the point at which the SBA would have transmitted funds to the lender, and arguably the point at which the government would have suffered losses (other than the processing fees that the SBA paid to the lenders at loan origination). 

The third PPP civil settlement, reached last week by the USAO for the Eastern District of Virginia, also resulted in a relatively small payment ($230,414), although slightly larger than the first two by the Eastern District of California. As with the California resolutions, the Virginia borrower had not yet received loan forgiveness from the SBA.

What this trio of settlements reflect is not the anticipated size of recoveries under PPP civil fraud resolutions, but rather the DOJ’s strategy of utilizing the combination of the FCA and FIRREA to pursue such cases. PPP borrowers would be ill-advised to take solace in the relatively low settlement amounts of the first three PPP civil resolutions. 

My prediction is that we will see dozens, if not hundreds, of multi-million-dollar civil resolutions resulting from alleged PPP fraud over the coming years. The driving factors that will guide these resolutions will be: (1) the perceived egregiousness of the conduct; (2) the size of the PPP loan; and (3) whether loan forgiveness has been approved and funded by the SBA. Borrowers are well-advised to consider and evaluate any concerns prior to submitting their requests for loan forgiveness, for the reasons described above. 

At Potomac Law Group, we have been helping PPP borrowers navigate the complexities of the program since its inception, and will continue to monitor trends and developments as they arise.