Investigations Newsletter: Foreign National Charged With Fraudulently Applying for $20 Million in COVID-19 Loans

Arent Fox

COVID-19 Enforcement Updates

Foreign National Charged With Fraudulently Applying for $20 Million in COVID-19 Loans

On May 21, 2020, the US Attorney’s Office for the Southern District of New York announced the arrest of a foreign national for allegedly making misrepresentations to the Small Business Administration (SBA) and five banks in an attempt to fraudulently obtain more than $20 million in government-guaranteed loans meant for businesses affected by COVID-19, under the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) Program.

According to the criminal complaint, the defendant falsely stated that his two companies had hundreds of employees who were paid millions of dollars in wages on a monthly basis, when, in fact, the defendant appeared to be the only employee. One of the defendant’s companies, New York International Capital LLC, also allegedly falsely indicated to a COVID-19 test kit manufacturer and a medical equipment supplier that it represented New York State in procuring COVID-19 test kits and personal protective equipment to respond to the COVID-19 pandemic. The defendant also allegedly misrepresented on loan applications that he was a United States citizen when, in fact, he was a Chinese national with lawful permanent residence in the United States. The defendant was charged with bank fraud, wire fraud, major fraud, making false statements to a bank, and making false statements to a government agency.

The USAO press release is here.

Prosecutors Charge Hollywood Film Producer with $1.7 Million COVID-19 Relief Fraud

On May 22, 2020, the DOJ announced fraud charges against a Hollywood film producer in connection with his allegedly seeking more than $1.7 million in government-guaranteed loans under the PPP. The DOJ alleged that the film producer falsely represented that the funds would be used to support payroll expenses for three film production and distribution companies. According to the DOJ’s criminal complaint, the funds were used to pay off the film producer’s personal credit card debts and expenses rather than for legitimate business needs. The defendant was charged in a federal criminal complaint in US District Court for the Central District of California with wire fraud, bank fraud, making false statements to a financial institution, and making false statements to the SBA.

The DOJ press release is here.

FTC Sends Warning Letters Related to Marketing of Purported COVID-19 Products and Therapies

The Federal Trade Commission (FTC) announced that it sent warning letters to more than 50 marketers directing them to stop making unsubstantiated claims that their products and therapies can treat or prevent COVID-19. This is the fifth set of warning letters the FTC has issued in its effort to protect consumers from health-related COVID-19 scams. According to the FTC, the purported treatments included herbal medications, music therapy, ozone therapy, and shields claimed to boost the immune system by protecting the wearer from electromagnetic fields, despite that there is currently no scientific evidence that any products or services can treat or cure COVID-19. The letters requested notification within 48 hours of specific actions taken by the companies to address the FTC’s concerns, and threaten that the FTC may seek a federal court injunction and return of money to consumers if the companies do not stop marketing the products.

The FTC’s press release is here.

False Claims Act Developments

Fourth Circuit Holds that Insurer Must Indemnify False Claims Act Defendant

On May 26, 2020, the US Court of Appeals for the Fourth Circuit held that an insurer had a duty under a professional liability policy to indemnify the operator of an adult care facility for its costs in defending against a suit filed under the qui tam provisions of the False Claims Act (FCA).

In Affinity Living Group, LLC v. StarStone Specialty Insurance Co., 2020 WL 2630845, --- F.3d --- (4th Cir. May 26, 2020), the court considered whether, under North Carolina law, an insurance policy covering “damages resulting from a claim arising out of a medical incident” covered an FCA action that alleged false billing for services never rendered. A divided panel of the court answered the question affirmatively, reasoning that “[t]he ‘failure to render’ services is a covered ‘medical incident’ under the policy,” and that the failure “made the Medicaid claims false, giving rise to potential damages in the false-claims-act suit.”

The StarStone case provides an important reminder that FCA defendants and their counsel should carefully review relevant insurance policies when confronted with an FCA investigation or action to see if they may be covered. FCA cases can be expensive to defend, even if the allegations lack merit, but a broad insurance policy can defray those costs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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