What SlideBelts Teaches Us About False Claims Act Enforcement Against PPP Loan Fraud

March 15, 2021

By Dulce J. Foster

When Brigham “Brig” Taylor filed for Chapter 11 bankruptcy relief on behalf of his business in August 2019, he did not  know the world was about to be turned upside down by a raging global pandemic. SlideBelts, Inc., the online retailer he founded in 2007 to make and sell a style of belt that buckles without holes, was struggling to meet its debts. Reorganization was the only way out. Seven months later the pandemic hit, and suddenly SlideBelts was not alone. Small businesses across the country were facing insurmountable economic hardships, and the U.S. government stepped in to throw them a lifeline.

The government established the Paycheck Protection Program (PPP) under the CARES Act on March 27, 2020, to help small businesses stay afloat so they could avoid closure and keep people employed. The program supported loans of up to $10 million to small businesses for the payment of payroll, mortgages, rent and utilities. Although private lenders approved and funded the loans, they are guaranteed by the Small Business Administration (SBA) and forgivable with government funding if employers retain their workforce at salary levels comparable to those before the pandemic. It was exactly what Taylor needed to put the creditors behind him and get SlideBelts back on its feet.

But there was a catch: The PPP loan application required applicants to certify that they were not in bankruptcy proceedings to qualify for the loans. Undeterred, in April 2020 Taylor submitted PPP loan applications on behalf of SlideBelts to two separate lenders, stating both times that the company was not involved in any bankruptcy proceedings. The first of these went to a lender that was also a bankruptcy creditor, however, and the lender informed Taylor that he had answered the bankruptcy question incorrectly. Taylor said it was an oversight, but he argued that the SBA was overreaching its authority and asked the lender to approve the loan anyway. Not surprisingly, the lender rejected his plea.

Rather than correcting or withdrawing the second loan application, which remained outstanding, SlideBelts submitted yet another PPP loan application to a third financial institution—again stating that the company was not in bankruptcy proceedings. While the third application was still pending, the lender in receipt of the second application approved and funded a PPP loan to SlideBelts in the amount of $350,000. The very next day, Taylor informed the lender that SlideBelts “just realized that we may not have answered [the bankruptcy question] correctly since we filled out the application quickly and wanted to bring it to your attention[.]” SlideBelts did not return the funds, however. Instead, it sought retroactive approval of the loan through the bankruptcy court, and when that did not work, sought to dismiss the bankruptcy proceedings for the express purpose of submitting another PPP application. The SBA appeared in the bankruptcy proceedings to object and asked the court to order SlideBelts to return the funds. It took the company another three weeks to finally give the money back, after the SBA reiterated on the record a second time that the funds must be returned.

Brig Taylor’s approach undoubtedly displayed a great deal of hubris, but he probably regrets it now. Although SlideBelts eventually repaid the loan and any losses to the SBA and the lender were negligible, the Department of Justice (DOJ) asserted claims against the company and Taylor under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), claiming over $4 million in potential damages and penalties. SlideBelts ultimately agreed to pay $100,000 in restitution and penalties, resulting in the nation’s first FCA settlement arising from the PPP.

The fact that this FCA settlement was the first one involving the PPP has attracted a great deal of attention, but it is not the only reason the case is significant. The white collar defense bar has been watching the PPP closely to understand how the DOJ will enforce it under both civil and criminal statutes, and the SlideBelts case was revealing in a number of ways:

  • First, it underscores what we already knew: Taylor’s “shoot first and ask questions later” strategy for objecting to the SBA’s requirements was a bad idea. Falsifying the loan applications to get funding and only disclosing the “errors” after the funds were in hand did not help Taylor advance his position that the SBA’s bankruptcy exclusion was an overreach. If he wanted to challenge the SBA’s interpretation of the CARES Act, he should have filed a civil suit against the SBA.
  • Second, a voluntary disclosure can help you, but it will only get you so far when there is evidence of reckless or intentional wrongdoing. The impact of Taylor’s disclosure should not be understated. Likely, had he not come forward he would now be facing incarceration. A bankruptcy involves public court filings, so it is not something that can be hidden. The DOJ, the SBA, and the many other federal agencies tasked with rooting out CARES Act fraud routinely use court records and other publicly available data to identify falsified PPP applications. Eventually, SlideBelts would have been caught in an obvious lie. Taylor’s disclosure appears to be the only reason he was not  indicted, but it did not absolve him either. The DOJ pursued penalties under the FCA and FIRREA even though Taylor eventually came forward and repaid the loan. And while the $100,000 SlideBelts ended up paying is comparatively minor, that is more likely a concession to the interests of the company’s bankruptcy creditors than a reflection of the government’s views on the defendants’ culpability. The notion that you can walk away unharmed if you disclose false statements before the government discovers them is simply misguided.
  • Third, the government can and will bring FCA actions for PPP fraud even before a borrower seeks forgiveness. Until the SlideBelts settlement was announced, the government’s appetite for bringing FCA cases on pre-forgiveness PPP loans was unclear. To bring suit under the FCA, the DOJ must allege the defendant either made or caused to be made false claims for payment from the federal government. Since lenders provide the funding for PPP loans before they are forgiven, the government’s false claims damages in these circumstances are minimal. But this did not deter the DOJ from asserting FCA allegations against SlideBelts based on $17,500 in loan processing fees the SBA had paid to the lender.
  • Fourth, and relatedly, the DOJ will bring claims under FIRREA in addition to FCA claims when doing so adds leverage. FIRREA establishes civil penalties for a violation of any of 14 criminal statutes based on a civil “preponderance of the evidence” burden of proof. Predicate criminal acts under FIRREA include bank fraud, wire fraud, and other offenses implicated in PPP cases. Importantly, the penalties applicable under FIRREA currently exceed $2 million per violation.**  In contrast, treble damages based on actual or intended losses to the government present the more significant threat to defendants under the FCA, which currently imposes penalties of less than $24,000 per false claim. FIRREA accounted for the vast majority of the government’s $4 million claim against SlideBelts.
  • Fifth, this case is consistent with current trends in criminal prosecutions for PPP fraud. Business leaders and others expressed concern when the program began that government enforcement would focus on the “certification of need” requirement—a provision in the PPP loan application requiring borrowers to certify that, “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” But establishing a lack of necessity under this standard could prove challenging for prosecutors—even among businesses that have reported strong profits throughout the pandemic—since nearly anyone could truthfully assert fears of economic uncertainty when the pandemic began. Instead, government enforcement to date primarily has focused on false statements in applications and other documents, on the misuse of loan proceeds, or both. The SlideBelts case comports with this trend. The FCA establishes a lower intent bar than any applicable criminal statute (recklessness vs. willful intent to defraud), which could bring FCA claims based on lack of necessity more within the DOJ’s reach. However, the vagueness of the certification makes it unlikely these claims will become the primary drivers of FCA enforcement anytime soon.

The future of FCA litigation involving PPP fraud is yet to be written, but an increase in FCA enforcement seems certain. Acting Assistant Attorney General Brian Boynton recently emphasized this point in comments delivered at the Federal Bar Association’s Qui Tam Conference, during which he highlighted pandemic-related fraud as the Civil Division’s first priority. His comments underscore the massive infrastructure the government has created to support CARES Act fraud enforcement. In addition to Main Justice, local U.S. Attorney’s Offices have appointed COVID fraud coordinators and are becoming increasingly involved in investigating and charging PPP fraud claims. The DOJ is also closely coordinating its investigations with the IRS, the SBA, the FDIC and other agencies and inspectors general—each of which has allocated its own set of resources to the effort. When the government devotes so many resources to a particular issue of concern, the odds are good it will be a significant part of the enforcement picture for years to come.

The government’s enforcement efforts are just beginning to pay off. The DOJ has prosecuted more than 100 individuals to date, but these cases have arisen primarily from straightforward and obvious fraudulent conduct: fake payroll records, identity theft, nonexistent businesses and the use of funds to buy luxury homes and cars. SlideBelts is a legitimate business, so what it did was relatively less egregious, but the case was a layup for the DOJ since Taylor had submitted a false application when he clearly knew it was false.  In other words, the DOJ so far has been focused on the low-hanging fruit.

But borrowers should not be lulled into thinking only the most obvious misconduct creates risk. These easy targets simply take less time to investigate. The DOJ will almost certainly turn its attention to more complex cases in the future. As time goes on, we can expect to see more cases against corporations arising from sophisticated accounting and legal theories. A few possibilities include miscalculation of the number of full-time equivalent employees; inappropriate exclusion of business affiliates; or accounting irregularities resulting in the misallocation of loan funds to payroll expenses for legitimate employees. As loan forgiveness applications begin rolling in, more cases will arise from forgiveness requests and the audit processes associated with them. And as the government gains more expertise in asserting these claims, its allegations will become more nuanced and farther reaching. Buoyed by political winds, the enforcement net eventually may become wide enough to ensnare some of the large corporations for whom government officials are now claiming the program was never intended. The FCA undoubtedly will play a significant role in these cases. SlideBelts may have ushered in the era of FCA enforcement under the PPP, but it is just the tip of the iceberg.

 

*In December 2020, Congress passed another stimulus package supporting a second round of PPP loans with a $2 million cap and different qualification requirements.

**The DOJ increases penalties under both the FCA and FIRREA annually pursuant to Civil Monetary Penalties Inflation Adjustment rules.