Paycheck Protection Program (PPP) Fraud and the FCA

For anyone old enough to care about the False Claims Act, there is a haunting shared experience about the year 2020. It was a year marked by fear and confusion. Although everyone experienced the pandemic in different ways, everyone remembers how chaotic everything seemed at times.

One of the measures the US government used to help people through the economic chao was the Paycheck Protection Program (PPP). Congress created the PPP in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Through the PPP and the related Economic Injury Disaster Loan (EIDL) initiative, the Small Business Administration disbursed approximately $1.2 trillion.

The loans were designed to be easy to acquire and quickly dispersed. Small businesses eligible for PPP loans were required to make certain certifications regarding the nature of their business, how the money was to be used, and that they would not seek additional PPP loans if approved. The interest and principal on PPP loans could be forgiven if the funds were used for approved business expenses within a designated time.

Because the program was designed to distribute money rapidly to aid businesses which were affected by shutdowns, quarantines, and more, there were obvious opportunities for unscrupulous actors to receive PPP funds they were ineligible for. It is estimated that approximately 17%—over $200 billion—of PPP and EIDL loans were disbursed to potentially fraudulent actors.

The government, for its part, was not unaware that fraudsters would attempt to take advantage of a program that handed out large sums of money with low accountability. In May 2021, the Attorney General established the COVID-19 Fraud Enforcement Task Force to address pandemic-related fraud. The Task Force coordinated the actions of numerous agencies to prosecute bad actors and recover ill-gotten money.

Prosecuting PPP Fraud Cases

Since then, the DOJ has prosecuted hundreds of PPP fraud cases under various legal theories. There is a wide variety of prosecutorial tools that have led to convictions, settlements, and penalties. The DOJ has brought cases for mail fraud, wire fraud, bank fraud, money laundering, identity theft, making false statements, and more.

However, the DOJ has also prosecuted a number of PPP fraud cases by utilizing the False Claims Act (FCA). The FCA is particularly useful for two reasons. First, the FCA allows for treble damages that the government sustains because of the fraudulent act(s). THE FCA also has qui tam whistleblower provisions which allow a private party to file an action on behalf of the United States and receive a portion of the recovery.

The PPP fraud cases successfully pursued by the DOJ are varied in important ways. The fraudulent actions that form the basis of the lawsuits are wide-ranging; the whistleblowers range from former employees to opportunistic attorneys; and cases have been successfully pursued against both borrowers and lenders.

Below are some of the cases in which the FCA was used to combat PPP fraud.

Company Lied on PPP Application About Being in Bankruptcy

In early 2021, the DOJ secured its first civil settlement to resolve allegations of fraud related to a PPP loan. Slidebelts received a $350,000 PPP loan, but lied on the application by stating that the company was not in bankruptcy, knowing that the loan would be denied if they answered honestly. Slidebelts, Inc. and its owner, Brigham Taylor, agreed to pay $100,000 in damages and penalties to settle fraud charges brought under the FCA and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). They also returned the $350,000 loan.

Company Owner Used PPP Funds for Personal Expenses

In April 2020, Seth Bernstein, the owner of All in Jets LLC, a jet charter company, secured a PPP loan for approximately $1.17 million. Within a day, Bernstein transferred nearly $100,000 to pay for personal expenses. A former employee blew the whistle and brought a qui tam suit under the FCA. U.S. ex rel. Hablitzel v. All in Jets, LLC and Seth A. Bernstein, No. 20-cv-61410 (S.D. Fla.). Bernstein settled in August 2021 for $287,055 in penalties. The relator received $57,411 for her contribution to alerting the government to the false claims.

Owner of Four Agricultural Companies Improperly Inflated Headcount

In January 2023, the DOJ settled with four agricultural companies run by one owner, John Seasholtz, for $400,000 in damages and penalties under the FCA as well as $200,000 in penalties under FIRREA. By including non-employee contract workers who were employed by other entities as employees, Seasholtz was able to secure $1.8 million in PPP funding he was not truly eligible for. It is unclear how much the relator, Bell Hill LLC, received as part of the settlement.

Company Improperly Used PPP Funds to Pay Employees of Other Business

In March 2023, the DOJ secured a settlement against two Florida resorts for $271,720 in damages and penalties under the FCA and $53,280 in civil penalties under FIRREA. Kingwood Crystal River Resort Corp. sought forgiveness of its PPP loan, claiming that it used the loan to pay its employees. However, it had used some of that money to pay employees of its other resort, Kingwood Orlando Reunion Resort LLC. The former Director of Human Resources for Kingwood Resorts noticed the false claim, filed a qui tam suit, and received $46,000 as part of the settlement.

Company Owner Lied on PPP Application About Being under Indictment

In a case that implicated both traditional FCA claims in the medical field and PPP fraud claims under the FCA, Dr. Emad Bishai, an anesthesiologist and pain management physician operating the Woodlands Pain Institute, settled with the DOJ for $523,331. Dr. Bishai was accused of falsely billing for surgeries never performed. He was also accused of making false statements on his PPP application by stating that he was not under indictment even though he was facing criminal charges for his practice of prescribing opioids. This case led to the first successful settlement against a PPP lender as well.

Lender Processed Ineligible Loan

In September 2022, Prosperity Bank agreed to pay $18,673.50 to settle allegations that it improperly processed the $213,400 PPP loan to the Woodlands Pain Institute. Prosperity Bank employees knew Dr Bishai, the sole owner, was facing criminal charges and was ineligible for the PPP loan. However, the bank processed the application anyway, receiving a 5% processing fee of $10,670 to which it was not entitled.

Not-for-profit Overstated its Payroll to Receive PPP Loan it Was Not Eligible For

In October 2022, The Rensselaerville Institute (TRI), a not-for-profit company in New York, agreed to settle FCA claims for $86,676 related to a $500,000 PPP loan they received in April 2020. When applying for the loan, TRI knew that it was ineligible for a loan of that size given its payroll expenses. Nevertheless, TRI applied for and received the loan. TRI was aware it had received more money than it was eligible for but applied for forgiveness of the entire loan anyway. A whistleblower brought this to the attention of the government and received $17,000 for their contribution.

Relator Receives $77,000 for Blowing the Whistle on Two Ineligible Nonprofits

Not all small businesses or nonprofit organizations were eligible for PPP loans. Two Michigan nonprofits, the Michigan Education Association (MEA), a 501(c)5 nonprofit labor organization, and the Michigan Education Special Services Association (MESSA) a 501(c)9 voluntary employees’ beneficiary association. both secured PPP loans they were ineligible for as nonprofits. In April 2020, MEA received a $6.4 million PPP loan and MESSA received a $6.1 million loan. Although both organizations returned the funds in December 2020, their false claims tied up over $12 million in critical funding which they were never entitled to. Both settled with the DOJ in March 2023. MEA agreed to pay $115,265, while MESSA agreed to pay $110,622. The relator, the Mackinac Center for Public Policy, received $77,000 for initiating the FCA qui tam suit.

PPP Fraud Hunter Files Dozens of Qui Tam Suits as Relator under FCA

Bryan Quesenberry is an attorney based in Utah who has been able to file dozens of lawsuits against companies who violated PPP rules. Quesenberry has uncovered numerous examples of companies who lied on their PPP applications in order to receive additional loans those companies were ineligible for. Several of the cases have settled, netting Quesenberry a portion of the recovery as the relator. Some of the relator fees are small; Quesenberry received only $4,500 for exposing Sextant Marine Consulting, LLC. However, earlier this year Quesenberry received $80,000 as relator in a settlement that resulted in three California companies paying $530,000 in fines for receiving duplicate loans.

PPP Loan Determined Fraudulent Because Company Engaged in Fraudulent Billing

In a case that brings the False Claims Act full circle, the DOJ settled a case involving both the FCA and PPP fraud for $24.5 million in April 2022. Physicians Partners of America LLC (PPOA) received a $5.9 million loan through the PPP. In order to obtain the loan, PPOA stated that it was not engaged in any unlawful activity. However, an investigation into PPOA regarding fraudulent billing in violation of the FCA led to the determination that PPOA lied on the PPP application. In this case, the underlying FCA violations caused the entire loan to be fraudulently obtained. This settlement is higher than most PPP fraud cases because it includes damages for the false medical claims as well. However, four different employees or former employees shared in the recovery as relators.

If you have information regarding a business or individual who received a PPP loan that they should not have, used the loan in an improper manner, or engaged in any of the other fraudulent activity described above, contact our office to discuss if you may be able to receive a share of recoverable funds.