Recently, the U.S. Attorney’s Office for the Eastern District of California settled a Paycheck Protection Program (“PPP”) fraud investigation with Slidebelts, Inc. and its owner Brigham Taylor not by arresting Mr. Taylor, but by requiring him to pay a $100,000 civil penalty payment pursuant to the FIRREA civil penalty provision, 12 U.S.C. Section 1833a, and the False Claims Act, 31 U.S.C. Section 3729 et. seq. The FIRREA civil penalty statute, 12 U.S.C. Section 1833a, permits DOJ to civilly prosecute bank and loan fraud cases with a lower burden of proof and no resulting criminal conviction. To date, DOJ publicly has disclosed approximately 100 PPP criminal loan fraud prosecutions. Until now, DOJ has either declined to prosecute or criminally charged all other borrowers it has investigated – this is the first case publicly disclosed in which DOJ has concluded a PPP investigation by a civil settlement.
So why is this case different? The key difference appears to be that Mr. Taylor corrected the record with the lender before the lender or the government found the problem. Mr. Taylor’s error was that he falsely represented that the borrower, his company Slidebelts, Inc., was not in bankruptcy at the time of the loan application when in fact it was in bankruptcy. But what Mr. Taylor did differently than most borrowers faced with having submitted an erroneous loan application was that he “wrote an email to [the second lender] explaining that SlideBelts ‘just realized that we may not have answered [Question 1] correctly since we filled out the application quickly and wanted to bring it to your attention[.]’” Mr. Taylor did not disclose that SlideBelts was in bankruptcy until after the lender had disbursed a $350,000 loan to SlideBelts. SlideBelts did not return the loan to the lender at that time.
On its face, the facts look similar to other cases that the Department of Justice has criminally charged. The borrower certified that its business was not in bankruptcy, when, in fact, the business was before the Bankruptcy Court. The first lender that the borrower approached knew about the bankruptcy because it was a creditor, and that lender told the borrower that it was not eligible for a PPP loan because of the bankruptcy. The borrower applied to a second lender at the same time as it applied to the first lender. Moreover, after the first lender denied the borrower’s PPP loan application, the borrower applied to a third lender. The second lender approved the PPP loan prior to the third lender. Eventually, Mr. Taylor returned the loan after multiple demands from the SBA and the PPP lender, and unsuccessful litigation in the Bankruptcy Court.
This case teaches at least two important lessons. First, a borrower that has erred in its PPP loan application can improve its chances of a better outcome with the Department of Justice by coming forward to the lender and disclosing the problem before the SBA or the lender discovers the problem. This is especially important in quickly changing situations such as occurred with the PPP loan program. It could be the case that what seemed permissible under earlier guidance now seems wrong. In those cases, being direct by raising the issue in a forceful way could be the right approach, sometimes known as a “noisy” disclosure, depending on the facts and circumstances. In other cases, where the issues may be more gray, one may consider simply writing a letter to inform the lender of the situation to hopefully simply be placed in the file; this is sometimes referred to as a “quiet disclosure.” Of course, both options should be analyzed under the facts and circumstances of the individual case, including the status of any government investigation. As the saying goes, timing is everything. Second, if the facts favor leniency, there now is precedent for the Department of Justice settling its PPP investigation for a civil penalty.
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