Federal Prosecutors Put Pressure on PPP Fraudsters

When the Paycheck Protection Program (PPP) was first passed into law along with the Coronavirus Aid, Relief and Economic Security (CARES) Act in March, it was intended to help businesses through the economic difficulties caused by the coronavirus pandemic. Businesses who struggled with paying for employees and other essential expenses could apply for PPP loans to help them endure when their business operations were negatively impacted by the virus or by quarantine measures. However, some people have been abusing the program for their own personal gain, and the United States Department of Justice (DOJ) has begun cracking down on people making false filings for PPP loans.

The coronavirus, also known as COVID-19, is the single greatest health crisis the United States has faced in a century, with millions of confirmed infections and more than 150,000 dead because of the disease. To try to control the spread of the disease, almost every state in the country (including New York) instituted some form of quarantine measures, which included restricting or stopping the operation of many businesses. Without the ability to operate normally, many businesses faced the prospect of laying off employees or shuttering entirely.

The Paycheck Protection Program was created to help these businesses, particularly smaller businesses, survive the coronavirus pandemic. The basic principle behind the PPP was to provide small businesses with short-term loans that would allow businesses to keep employees on their payroll and cover certain essential business expenses. So long as businesses adhered to these terms and used the money from the PPP loans on payroll or other covered expenses, the loans would be forgiven, and they would not need to pay the money back.

However, some people looked at the PPP loans not to sustain their struggling businesses, but instead as an opportunity to get free cash from the government. The fact that the PPP would forgive loans made to cover payroll and other expenses led some people to believe they could simply apply for the money and keep it by recording the money as being used for essential expenses, allowing them to pocket the difference. However, the government has not been asleep at the wheel, and they are prosecuting individuals based on misrepresentations made in loan applications, as well as misuse of PPP funds for inappropriate or fraudulent purposes.

A prime example of this kind of fraud came in the case U.S. v. Marnell, No. 2:20-mj-03313-DUTY (C.D. Cal. Jul. 15, 2020), in which the defendant submitted multiple false PPP filings for various LLCs, for more than $10 million in PPP loans. These applications contained false and misleading information about the companies, including falsified or altered records relating to payroll, taxes, and other expenses. According to the Office of the Inspector General for the Federal Housing Finance Agency, none of the LLCs the defendant filed for appear to be functional businesses with employees on their payroll.

Once the defendant obtained the money from the PPP loans, he transferred the money from the business accounts to his own personal account. He then used the money to gamble, both figuratively and literally, in the form of “naked options” trades on the stock market, and in a Las Vegas casino. Over the course of two months, these inappropriate and illegal uses of PPP funds resulted in net losses of more than $3 million from the PPP loans he had acquired.

Unfortunately, this case is far from the only one of its kind. A shocking number of individuals have attempted to defraud the PPP program for their own personal benefit, resulting in funds intended to help struggling businesses instead going into the pockets of fraudsters. The DOJ has promised that it is cracking down on these cases, however, to reclaim PPP funds so they can be used for their original intended purposes.

The business law attorneys at Blodnick, Fazio & Clark are skilled and knowledgeable in the areas of business law and commercial transactions.  With offices conveniently located in Garden City, Nassau County, and Babylon, Suffolk County, the firm provides high-quality legal care at reasonable prices. If you require legal assistance concerning business startups, formation, corporate acquisitions and mergers, corporate restructuring, or another business matter, call (516) 280-7105 or fill out our contact form for a free consultation.

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