Borrower Beware: Serial Whistleblowers Fuel Continued DOJ Investigations into Paycheck Protection Program Loans

As early as June 2020, our “Borrower Beware” alerts began warning borrowers about the risks associated with false certifications on Paycheck Protection Program (“PPP”) loan applications and potential after-the-fact government scrutiny of such loans under the False Claims Act, which is often spurred by whistleblowers.

• Borrower Beware: Prepare Now to Defend your Company’s Paycheck Protection Program (PPP) Loan from SBA Review or a Possible False Claims Act or Criminal Investigation
• Borrower Beware II: Whistleblower Workers Put PPP Borrowers in the Government's Crosshairs for False Claims Act and Criminal Investigations
• Borrower Beware: False Claims Act Liability in Connection With the PPP is a Trap for the Unwary and the Arrogant

These risks have manifested into reality and are not going away any time soon. The Trump Administration has made combatting fraud a cornerstone of its agenda, recently issuing an Executive Order creating the Task Force to Eliminate Fraud. This Task Force includes a representative from the Small Business Administration (“SBA”), suggesting that PPP fraud investigations are likely to continue for the foreseeable future. And, as evidence of the initiative at work, on April 24, the SBA referred 562,000 allegedly fraudulent PPP and EIDL loans, totaling $22 billion in funds, to Treasury for “aggressive collection.”

• Trump Administration’s Full-Scale War on Fraud
• X.com Post by Kelly Loeffler, 28th Administrator of the U.S. Small Business Administration

On top of Trump Administration scrutiny, the PPP has spurred the creation of a “cottage industry” of third-party serial whistleblowers, who collect and piece together publicly available PPP and company information to identify borrowers whom they hypothesize may not have met eligibility requirements. These whistleblowers then file “qui tam” False Claims Act lawsuits under seal on behalf of the government alleging violations of PPP eligibility rules, incentivized by the prospect of turning that speculation into a substantial windfall reward. This spurs an investigation and retroactive examination of previously forgiven loans by the U.S. Department of Justice (“DOJ”)—which is likely to be a costly undertaking for the company—even if the allegations are baseless. The borrower may be required to respond to a civil investigative demand, which is similar to a subpoena, that requires collection, review, and production of extensive amounts of information.

False Claims Act liability for an ineligible PPP borrower can also be quite significant, and is not limited to the face amount of the PPP loan. The statute permits the government to recover treble damages (loan amount, lender processing fees, and interest) upon a finding of liability, as well as civil penalties. The whistleblower is entitled to 15% to 30% of the damages recovered by the government, plus its own incurred legal fees and costs. And even in the more common scenario where the borrower settles alleged False Claims Act allegations with the government, the whistleblower receives significant financial remuneration for its role in the recovery. The financial impact to the borrower is typically well in excess of the loan, not including the expenditure of the borrower’s time and internal resources or the substantial attorneys’ fees that may be incurred by the borrower throughout the process.

While most borrowers likely believed they applied for and utilized PPP funds appropriately and during a time of great economic stress, financial need, and uncertainty, a borrower’s mere belief that it acted or intended to act in good faith is not by itself a defense to the False Claims Act. Relators and the DOJ develop cases and allegations today with the benefit of hindsight and comprehensive analyses of program rules, and with the luxury of time and resources that PPP borrowers did not have in the throes of the pandemic. And an investigation that delves into internal emails and documents may reveal evidence supporting the claims or a failure to vet eligibility in good faith. A “reckless” disregard of applicable PPP rules (scrutinized and adjudged in hindsight years after the fact) could prove sufficient for liability purposes.

So what does this mean for PPP borrowers? It means that if you received sizeable PPP loans, and have not been investigated by the DOJ, it may be prudent to review loan eligibility issues now with experienced counsel and ensure that documentation evidencing eligibility and forgiveness has been preserved and is readily available. This is particularly true for borrowers who may not have conducted a deep dive into the SBA regulations and guidance when they applied for the loan. A review may also be prudent for PPP borrowers who operate businesses that have been regularly targeted by whistleblowers, such as: businesses with multiple affiliates, Canadian affiliates, or other foreign affiliates; country clubs and other private clubs; nursing homes with multiple affiliates; businesses that lend, finance, or have access to capital; affiliated businesses or those with complex organizational structures that exceeded the $20 million aggregate cap for First Draw loans or $4 million cap for Second Draw loans; businesses engaged in lobbying or political activities; and government-owned entities. 

That all or a portion of a PPP loan was forgiven in due course by the SBA means little, and neither proves eligibility conclusively nor serves as a defense to False Claims Act liability. Borrowers who relied upon lenders or the SBA to “vet” applications and reject ineligible borrowers, or who assumed that they must have been eligible because the lender and SBA approved the loan or forgiveness, could be particularly vulnerable. The SBA squarely placed the responsibility on the borrower to determine and certify its eligibility, and the mere approval, funding, or forgiveness of a loan does not protect against potential False Claims Act liability where a borrower was not actually eligible under applicable PPP rules. And borrowers—particularly in light of the Trump Administration’s focus on fraud and the significant financial incentives and ease with which whistleblowers may assert eligibility violations under the False Claims Act—will likely continue to face retroactive scrutiny over their PPP loans years after the money was received and used and the loans were fully forgiven. 

If you have questions about PPP eligibility, forgiveness, repayment risks, False Claims Act exposure, or how to implement strategies to better prepare your business for SBA review or DOJ scrutiny, please contact Jason E. Markel (716.848.1395) or Reetuparna Dutta (716.848.1626).

Disclaimer:

This client alert is a form of attorney advertising. Hodgson Russ LLP provides this information as a service to its clients and other readers for educational purposes only. Nothing in this client alert should be construed as, or relied upon, as legal advice or as creating a lawyer-client relationship.