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How Can I Defend Myself Against Criminal Charges Arising from a COVID-19 Paycheck Protection Program (PPP) Loan?

Paycheck-Protection-Program-PPP-LoanYou could be charged with a crime if the federal government believes you made a false statement on your application for a PPP loan. The most commonly used defenses in these types of prosecutions include (i) the allegedly false statement was actually true; (ii) the false statement was the result of an innocent mistake; and (iii) the misrepresentation was immaterial.

COVID-19 has rampaged through the US economy like a bull in a china shop. In response, Congress passed an economic stimulus package of unprecedented magnitude. Among the relief measures passed by Congress is the Paycheck Protection Program, or PPP loan program. Federal law enforcement authorities are hyper-vigilant to stamp out any abuse of this program – sometimes at the expense of innocent parties, unfortunately.

The Paycheck Protection Program (PPP)

The PPP loan program closed on August 8, 2020, was one of the primary components of the $2 trillion CARES Act, the federal government’s first major COVID-19 economic relief program. The goals of the PPP program were to:

  • Avoid small business bankruptcy by helping these businesses pay their near-term operating expenses; and
  • Avoid mass unemployment by encouraging small businesses to retain as many of their employees as possible.

The PPP loan program, which was allotted a stunning $350 billion, allows small businesses all the way down to the sole proprietor level to obtain forgivable loans of up to $10 million per business in order to achieve the foregoing purposes. Obviously, this measure sets up a dynamic in which fraud is likely, and false allegations of fraud are perhaps even more likely.

Federal Prosecutions for PPP Fraud

The federal government has initiated and pursued several dozen cases of criminal fraud arising out of the abuse of the PPP loan program. Between May 1 and September 10 alone, the US Department of Justice criminally charged dozens of individuals with defrauding or attempting to defraud the PPP loan program out of more than $175 million in federal funds. The department continues to pursue other potential fraud cases involving the PPP loan program.

The Department of Justice identifies many potential criminal prosecutions by examining PPP loan applications filed through the Small Business Administration (SBA), which administers the PPP loan program. As of September 10, 2020, the federal government had either recovered or frozen over $30 million of the $70 million in PPP funds that it claims were fraudulently obtained (over $100 million more in PPP loan funds were subject to unsuccessful fraud attempts).

Common Forms of PPP Fraud Allegations

When it comes to the PPP loan program, the most likely types of alleged fraud fall into three categories: falsifying basic eligibility requirements, increasing the size of the loan through misrepresentation, and misrepresenting the necessity of the loan. Other types of fraud allegations are possible as well.

Eligibility

To be eligible to be considered for a PPP loan, the applicant must (i) have commenced business before February 15, 2020; (ii) fit the legal definition of “small business”; (iii) not be owned by an undocumented alien; and (iv) not be owned (20 percent or more) by anyone who is in prison, on parole, on probation, charged or chargeable with a crime, or convicted of a felony within the last 5 years.

Loan Amount

Since one of the primary purposes of the PPP loan program is to discourage employers from laying off their employees, the amount of the loan that an employer is eligible for is based on average monthly payroll costs.

To be exact, the maximum amount of the loan should be 2.5 times the employer’s average monthly payroll – if payroll is $100,000, for example, eligibility will top out at $250,000. This amount will give the employer enough money to pay its payroll for two and a half months, hopefully long enough to account for both the COVID-19 shutdown and its aftereffects on the business.

Exaggeration of Payroll Expenses

Exaggerating payroll expenses is the most common form of PPP nor its total payroll expenses to qualify for more than it is entitled to, or to create a shell company with no employees and claim payroll expenses.

This strategy will require representatives of the company to make false statements under oath, which will trigger criminal liability. The company officials who knowingly make false statements under oath will face personal criminal liability, meaning that they could go to prison. The Department of Justice has already initiated criminal prosecutions for exactly this type of fraud (see below for two examples):

  • On June 22, 2020, for example, Elijah Majak Buoi was charged with federal wire fraud in Winchester, Massachusetts over PPP loans worth $13 million. Buai misrepresented both the number of employees his company employed and his company’s total payroll expenses.
  • In May 2020, Manhattan resident Muge Ma (also known as Hummer Mars) was charged with fraud for seeking over $20 million in PPP and other government-backed loans that are designed to help small businesses affected by the Covid-19 crisis. More specifically, he claimed payroll expenses for hundreds of employees in two companies, when he was the only employee of either company.

Necessity

To qualify for a PPP loan, a company must assert that the loan is necessary – in other words, that the loan is necessary to ensure that it continues to operate during the period of economic uncertainty caused by the COVID-19 crisis.

The SBA maintains that public companies or other companies with access to funding are not likely to qualify for a PPP loan under the “necessity” test. Company representatives who make false statements under oath to assert necessity are subject to criminal prosecution. Nevertheless, a claim of necessity by itself is a judgment call that will not necessarily result in criminal prosecution — it is false statements about objective facts that trigger criminal liability.

Types of Criminal Charges

Bank fraud is not the only charge that might be asserted against you if you are accused of abusing the PPP loan program. Depending on the circumstances, you might also be charged with:

  • Making misrepresentations to the SBA;
  • Making false statements to a federal agency;
  • Mail fraud;
  • Wire fraud; and
  • Many other possible charges.

Although it is not always the case, federal charges have a reputation of carrying longer prison sentences than state charges for equivalent conduct.

Possible Defenses

Fraud cases, especially at the federal level, are highly fact-dependent. In other words, they tend to be decided on a case-by-case basis where the court weighs one factor against another. Nevertheless, some of the most common federal fraud defenses are listed below.

  • The “false statement” you were charged with making was actually true – at least at the time, it was uttered. In some cases, the dividing line between a true or false statement is clear. In other cases, it’s a judgment call whether a statement is true or false. Did your business have a real “necessity” for a PPP loan? Our job would be to introduce evidence and arguments that created at least a reasonable doubt as to whether the loan was necessary.
  • You acted in good faith. Remember, criminal charges require criminal intent, and when it comes to PPP fraud, you will prevail if you can show that any mistake you made (as to whether the loan was “necessary”, for example) was innocent and was not intended to deceive. Perhaps you relied on the statement of an incompetent or corrupt accountant, for example.
  • The subject matter of the false statement was not “material.” Keep in mind that ”material” is one of those words that means something very different in a legal context than it means in everyday conversation.
    In this context, “material” means something like “significant” or “important” with respect to the issue of whether you should have been granted the loan. If the misrepresentation wouldn’t have changed the decision, you may have a “materiality” defense.

Civil Liability

Even if you are not convicted of a crime, you or your company might still face significant civil liability – perhaps even enough to bankrupt the company. It is much easier to prove a civil claim than it is to prove a criminal charge.

Move Quickly

If you have been arrested or indicted for a PPP-related offense, or if you even suspect that an investigation is underway, it is critical that you get started preparing your defense as soon as possible. Defenses to these types of charges can involve many complex issues that need to be investigated and prepared for well before trial or even plea bargaining.

The stakes could be high because the risk involved is not only the company’s – individual executives could face prison time. How fast you move can make the difference between an effective defense or either a conviction or a bad plea bargain. If you need help, please do not hesitate to contact our highly-experienced defense team:

Stewart Jones, Jr.(518) 730-4723
James C. Knox  – (518) 730-4723
Julie A. Nociolo – (518) 380-2597

Contact the trusted attorneys at E. Stewart Jones Hacker Murphy for a free initial consultation by filling out our online contact page or by calling one of our offices in Albany, Colonie, Schenectady, Saratoga, or Troy. We’re ready to fight for you!

How Can I Defend Myself Against Criminal Charges Arising from a COVID-19 Paycheck Protection Program (PPP) Loan? was last modified: November 11th, 2020 by E. Stewart Jones Hacker Murphy