[co-author: Kayley Sullivan]
On May 5, 2020, the Department of Justice (the “DOJ”) brought its first charges for defrauding the CARES Act Paycheck Protection Program (the “PPP”). Federal prosecutors in the District of Rhode Island charged two businessmen, David A. Staveley and David Butziger, with allegedly filing bank loan applications fraudulently seeking more than a half-million dollars in PPP loans, claiming to have dozens of employees earning wages at four different business entities, when, in fact, there were no employees working for any of the businesses.
It was only a matter of time. In our prior alerts, we discussed that the CARES Act loan programs would be followed by strict government oversight and increased investigations and enforcement actions against companies and individuals for fraud. Assistant Attorney General Brian Benczkowski, in an April 30th interview with Bloomberg News, reminded us of this reality, when he indicated that the DOJ had already begun an inquiry into money loaned to businesses through the PPP. Benczkowski told Bloomberg: “Whenever there’s a trillion dollars out on the street that quickly, the fraudsters are going to come out of the woodwork in an attempt to get access to that money.”
These criminal actions are almost certainly the tip of the iceberg and they reinforce the need for companies to ensure that they have the proper procedures in place to ensure PPP compliance.
United States v. Stavely and United States v. Butziger
According to the DOJ, Staveley filed loan applications requesting more than $438,500, claiming that he employed dozens of people at three restaurants he owned. However, two of the businesses allegedly were not open prior to the start of the COVID-19 pandemic, at the time the loan applications were submitted, or at any time thereafter. Staveley allegedly had no role at the third restaurant. Staveley also allegedly misrepresented that his brother owned one of the restaurants for which he was claiming funds. The DOJ charged Staveley with conspiracy to make a false statement to influence the Small Business Administration (the “SBA”), conspiracy to commit bank fraud, and aggravated identity theft.
The DOJ alleges that Butziger filed an application seeking $105,381 in PPP loans as an owner of another entity, claiming that he had seven full time employees, including himself. The claims were made in documentation filed with the bank and in a telephone call with an undercover FBI agent. The DOJ alleges that Butziger falsely represented to the agent that he brought the employees on full-time on January 1, 2020 and laid them off at the end of March. Butziger also allegedly falsely claimed that the employees continued to work without being paid through April, and that he would use PPP funds to pay them. The DOJ charged Butziger with bank fraud, conspiracy to commit bank fraud, and conspiracy to make a false statement to influence the SBA.
While the DOJ’s allegations against Staveley and Butziger appear to be egregious, their criminal actions still provide lessons to all companies who applied for and obtained PPP loans.
First, the Stavely and Butziger criminal actions give insight into the extensive law enforcement resources that will be deployed in CARES Act fraud investigations. In addition to the DOJ and FBI, the investigation involved the Internal Revenue Service and the Inspector General Offices for the SBA and Federal Deposit Insurance Corporation. Local law enforcement resources were involved as the investigation began with a complaint to the Chief of Police of Berlin, Massachusetts, that Stavely was engaged in COVID-19 relief fraud. The Rhode Island Department of Revenue also provided tax information to the government. This collaborative effort comes before the confirmation of the Special Inspector General for Pandemic Recovery, Brian Miller. Miller was the Inspector General (“IG”) of the U.S. General Services Administration. If Miller’s past role and the role that special IGs have played in past crises are any indication, we can expect that he will be very active in investigating fraud and coordinating with the DOJ and other IGs.
The Stavely and Butziger criminal actions also provide insight into the aggressive techniques law enforcement will use to investigate CARES Act fraud. Bloomberg reported that the DOJ’s efforts to investigate fraudulent use of COVID-19 relief funds is drawing on the model used by its healthcare fraud strike force, which utilizes data analytics to identify criminal activities related to Medicare and other government programs. The FBI will also use the undercover tools in its arsenal to pursue alleged wrongdoing.
Finally, these criminal actions serve as a reminder that the DOJ will be scrutinizing the accuracy of the employee counts, dates of employment, and payroll disclosed in PPP loan applications and any attempts to game these numbers in order to qualify for loans or larger loans.
The PPP has very specific rules on business eligibility and loan amount qualification that are based on employee counts and payroll information. Business must have 500 or fewer employees or otherwise meet SBA standards. Employee counts are subject to business affiliation rules, which take into account facts such as stock ownership, overlapping ownership, and identity of interest. An applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of the affiliation rules. Moreover, the loan amount a company is eligible to receive is based on average payroll costs, which are subject to requirements on which employees may be counted (e.g., independent contractors do not count) and what wages qualify (e.g., employee compensation in excess of an annual salary of $100,000 is excluded). While some of the eligibility requirements are relatively straightforward, many provisions are not. The government continues to issue regulatory guidance that PPP applicants must be aware of even if they have already applied for and received their loans.
Business applicants should maintain a robust paper trail of their application for and compliance with the terms of the PPP loans they receive. This should not only include headcount and payroll documentation but also the implementation of controls to ensure that PPP funds are spent in accordance with the program’s rules. Adapting existing controls and taking a proactive approach from the outset will allow applicants to avoid criminal and civil liability and the reputational damage that is sure to follow. Companies will be well-advised to consult attorneys with expertise for advice regarding compliance with the PPP.
 Press Release, U.S. Dep’t of Just., Two Charged in Rhode Island with Stimulus Fraud (May 5, 2020), available at https://www.justice.gov/opa/pr/two-charged-rhode-island-stimulus-fraud.
 Kristen L. Jackson, C. Shawn Cleveland, Steven M. Dettelbach, and Joshua D. Rovenger, Borrower Beware: Future Government Investigations and Whistleblower Liability Based on the CARES Act Paycheck Protection Program, BakerHostetler (Apr. 23, 2020), available at https://www.bakerlaw.com/alerts/borrower-beware-future-government-investigations-and-whistleblower-liability-based-on-the-cares-act-paycheck-protection-program; Patrick T. Campbell, Lauren P. Lyster, Jimmy Fokas, and George A. Stamboulidis, On the Heels of the CARES Act, Companies Should Prepare for Increased Prosecutions and Enforcement Activity, BakerHostetler (Apr. 7, 2020), available at https://www.bakerlaw.com/alerts/on-the-heels-of-the-cares-act-companies-should-prepare.
 Tom Shoenberg and Christina Berthelsen, Justice Department Sees Early Fraud Signs in SBA Loan Fury, Bloomberg (Apr. 30, 2020), available at https://www.bloomberg.com/news/articles/2020-04-30/justice-department-sees-early-fraud-signs-in-sba-loan-flurry.
 Paycheck Protection Program Loans, Frequently Asked Questions as of May 5, 2020, Small Business Administration, available at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.
 13 CFR § 121, available at https://www.sba.gov/sites/default/files/2020-04/SBA%20IFR%202_1.pdf.
 Paycheck Protection Program Loans, Frequently Asked Questions, supra note 5.