Will PPP fraud turn into the next wave of ‘liar’s loans’?

In April, Andrew Marnell of California applied for millions of dollars of loans in federal assistance through the Paycheck Protection Program. Based on his applications, Marnell received approximately $9 million in federally awarded funds from banks authorized to make the loans. It was only after funding the loans that the lenders discovered the funds were going directly to Marnell rather than the small businesses listed in the applications, causing them to notify federal investigators.

The Department of Justice soon brought a criminal complaint against Marnell, alleging that he received approximately $9 million in PPP loans by submitting applications for multiple, nonexistent businesses that employed hundreds of fabricated workers and had millions of dollars in fanciful payroll expenses. He’s alleged to have then used the money to make stock trades and gamble hundreds of thousands of dollars in Las Vegas. On July 16, Marnell was arrested on federal charges of bank fraud.

By now, most or all Americans know about the PPP, which is part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the federal law enacted on March 29 in response to the COVID-19 pandemic, and its economic impact on employers and the workforce overall. In summary, the PPP component of the CARES Act, which amends Section 7(a) of the Small Business Act, is designed to provide emergency financial assistance to Americans suffering as a result of COVID-19 and its impact on businesses throughout the country.

It specifically provides for forgivable loans to small businesses and others, including nonprofit organizations, veterans groups and tribal businesses that meet certain criteria set out in the statute. These loans are meant to be used to cover payroll and other specified business expenses, provided that certain conditions are met both at the time of application and for a specified period following receipt of any PPP funds.

To date, approximately $517 billion in PPP loan funds have been approved under the CARES Act to approximately 4.9 million small business recipients. Moreover, Congress is currently considering awarding more financial relief as the COVID-19 crisis continues, presumably in a manner that would be an extension of the existing PPP loans. This amounts to one of the largest, most ambitious, and rapidly funded federal emergency relief programs in our nation’s history. Although accurate numbers will not be available for some time, it is certain that a significant portion of these funds were put to use precisely for their intended purpose, namely, to keep small businesses afloat and allow many companies to avoid employee layoffs that would have deepened the financial impact of the COVID-19 crisis.

However, any time Congress acts swiftly and sweepingly, even with the best of intentions, negative consequences can follow. That is precisely what appears to have happened in Marnell’s case and, increasingly, in many other cases across the country, including in Texas. In fact, the first PPP-related fraud charges were brought in early May 2020, when two New England businessmen were charged with illegally attempting to procure over $500,000 in PPP loans through allegedly fraudulent funding applications. Unsurprisingly, federal and state authorities across the country have charged numerous similar cases since and will surely continue to do so.

In the case of the PPP loan program, the consequences that followed, and will continue to follow, were highly predictable from the start. The government sought to get funds in the hands of qualifying participants at an unparalleled speed and in unprecedented amounts — allowing individuals to apply online, disclose minimal information, and provide little supporting documentation. The four-page loan application completed by potential PPP borrowers and submitted to eligible lenders can be found here. The first page of the application asks general questions regarding the small business, such as the name and address of the business, the number of employees, and the ownership breakdown, including percentage of ownership. The second page then asks the authorized representative of the small business to make certain representations, authorizations and certifications by signature and initial. Importantly, third-party verification and the submission of documentation in support of the loan application are simply not a part of this process. The last two pages of the application give very basic and limited guidance on how to complete the application and set out certain relevant federal laws.

On a certain level, it makes sense that Congress made the process of applying for and obtaining a PPP loan so simple. This allowed banks to review and approve applications rapidly and to get loan funds into the hands of small businesses suffering as a result of the pandemic. In many cases, that is precisely what happened.

However, requiring so little from applicants and giving so little guidance to them is virtually begging for fraudulent loan applications to be submitted or for good faith errors to be made. In this sense, the PPP loan program resembles the “liar’s loans” of the 2008-09 mortgage crisis, in which “no document” loans were awarded to borrowers by financial institutions across America. In many cases, these borrowers knowingly submitted fraudulent applications for mortgages that they had no possibility or intention of repaying. Based on investigations and indictments to date, the Justice Department and many of its state corollaries believe that something similar is occurring with PPP loan applications, and they have brought the indictments to support that belief. Many more will surely follow in the ensuing months and years.

Additionally, the vague requirements and guidelines relating to the PPP loans create risks for loan applicants who, unlike those described above, have good faith intentions in applying for funds but misinterpret the limited guidelines and requirements imposed on them as borrowers. In doing so, these borrowers may have put themselves at hazard of investigation and prosecution. For example, an applicant may misunderstand what makes the small business eligible to receive a loan, innocently provide false information on the application, or misappropriate the received funds due to misunderstanding the parameters of how the funds can be used.

PPP loan fraud will be investigated and prosecuted by the federal government presently and for years to come, similar to the prosecutions of the “no document” loans that fueled the mortgage crisis but likely on a larger scale. There are various factors that should be analyzed, and legal arguments that should be made, by experienced white-collar attorneys for anyone investigated for, or alleged to have engaged in, PPP loan fraud. This is especially true because it is likely that, similar to the pandemic itself, information surrounding PPP loan fraud allegations will change and morph in the coming months and years as the government learns more about the statute itself and develops theories about what allegedly constitutes violations of it and how to prosecute them.