Lack of Criminal Intent: Key Defense in PPP Cases.

In federal criminal court, the government carries the burden of proving all charges beyond a reasonable doubt. With respect to the various forms of pandemic relief fraud alleged, this means the government must prove not just that a business or individual’s application contained an error, but also that the applicant made a knowing, intentional choice to deceive the government. This makes an inaccurate application a starting point, not a conclusion, in many federal criminal investigations targeting the pandemic era.

Contemporaneous electronic records can show lack of knowledge and intent in a number of different ways as well. However, these records can also support the government’s efforts to establish criminal liability. Depending on the specific circumstances involved, contemporaneous emails, text messages, and other electronic communications can be a “double-edged sword,” and it is important for defendants to understand how these records can be used by the government to seek to establish criminal liability.

Financial records serve another important role. A PPP fraud case often relies on a government interpretation of payroll records, employee counts, and other data. In these cases, defendant-side financial records can be used to reconstruct the calculation process for those figures, as well as the calculation for eligibility and use of proceeds. This is often a key component of a successful PPP defense.

Forensic accounting is another critical component of many successful PPP defenses. Many PPP-related charges depend on government calculations of payroll, eligible expenses, loss, and intended loss. In these cases, forensic accounting is an essential tool for testing the government’s calculations, showing that these key elements do not exist, and uncovering other potential defenses.

Finally, admissible contemporaneous records can show what information was actually possessed by the defendant(s) at the time an application was filed. This can be key to showing that any inaccuracies in a PPP application were the result of innocent mistakes and reliance on inaccurate information from an employee or an outside accountant.

How Do Wire Fraud, Bank Fraud, False Statements, and FCA Theories Change the Intent Question?

Federal prosecutors have a variety of ways to allege pandemic-related fraud, and they often include multiple charges in their indictments. Each of the charges that could be raised in a PPP case, however, contains a different set of elements. This means that in many cases, a defendant’s PPP defense strategy will have to be highly specific to the individual charges. Some possible federal charges, and their relevant elements, include:

• Wire fraud, codified at 18 U.S.C. § 1343: In these cases, prosecutors claim that a defendant devised or intended to devise a scheme or artifice to defraud and transmitted, or caused to be transmitted, writings, signs, signals, pictures, or sounds by wire communication for the purpose of executing that scheme or artifice. In PPP cases, this usually refers to an electronic application or certification. The key element in a successful defense in these cases is often the “intent to defraud.”
• Bank fraud, codified at 18 U.S.C. § 1344: Similar to wire fraud, this statute targets anyone who “executes, or attempts to execute, a scheme or artifice” to “defraud a financial institution” or “to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;”
• The False Claims Act (FCA), codified at 31 U.S.C. § 3729: The FCA imposes civil liability for knowingly presenting a false or fraudulent claim for payment, knowingly misrepresenting a material fact or omitting a material fact to get a false claim paid, and other forms of conduct. Often, the “entire program” approach is taken, where prosecutors claim that anyone who sought and received PPP funds must have complied with the program guidelines. This approach does not hold up in court; any materiality analysis must identify a particular application, certification, or other transaction.
• False statements under 18 U.S.C. § 1001: Prosecutors may charge defendants with knowingly and willfully falsifying, concealing, or covering up a material fact; making a materially false, fictitious, or fraudulent statement or representation; or making or using a false writing or document knowing that it contains a materially false, fictitious, or fraudulent statement or entry. This is often the case in PPP prosecutions since the loan program’s application was based on an honor system.

Because these four (and other) theories of federal liability involve different elements, any defense strategy must be focused on disproving the government’s case at a granular level.

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When Does Accountant Reliance Support Good Faith, and When Does It Expose the Signer?

One key misconception when it comes to reliance is whether involvement by accountants or other professionals automatically transfers responsibility to that professional for information the defendant signed or submitted. It does not. But, to a degree, the more a professional is responsible for the calculation of a defendant’s eligibility or use of proceeds, the more weight is given to professional reliance.

For example, if a defendant-side accountant did a calculation of payroll, and a defendant-side forensic accountant later verifies that this calculation was based on complete and accurate disclosure of all records in the defendant’s possession, this will likely be strong evidence in support of a professional reliance defense.

However, professional reliance will have far less weight, and could, in some cases, be more evidence against the defendant, if contemporaneous records showing communication with the accountant suggest fabrication, concealment of records, or an awareness that the defendant was not eligible for the loan.

Similar logic applies to reliance on PPP guidance issued during the pandemic. Because the rules for eligibility and allowable expenses changed from day to day, the guidance that applied on the day of an application will not be the same guidance that applied several months later. To be probative, PPP guidance must be matched specifically to the application, certification, or date of spending involved.

As with all other elements of a federal criminal defense, professional reliance is not conclusive; and, in addition to showing any relevant documents, we must be able to convincingly present arguments showing:

• the substance of the advice a defendant allegedly relied on;
• the completeness of the defendant’s disclosures (or lack thereof);
• the reasonableness of the defendant’s reliance (or lack thereof); and,
• as discussed above, the offense elements, with a focus on knowledge and intent.

While accountants may be able to help establish good faith in these cases, they cannot offer an affirmative “get out of jail free card” for defendants who knowingly submitted fraudulent PPP applications.

Why Do Legitimate PPP Proceeds and Calculation Errors Not End the Case?

For an individual or business that has received a PPP loan, spending it on legitimate expenses (including but not limited to payroll, rent, mortgage interest, utilities, and other business expenses) will not automatically end their federal investigation. While using PPP proceeds for personal purchases or luxury goods has commony been enough to trigger prosecutorial scrutiny on its own, legitimately using them does not prove the defendant had a lack of knowledge and intent.

If a defendant’s forgiveness application contained a material misrepresentation, then it, too, can lead to criminal prosecution. Forgiveness applications often required certification regarding a business’s need for the loan, certification regarding the types of expenditures a loan recipient made, certification that any loan payments made did not exceed PPP loan requirements, and certification that all documents were truthful. The logic behind denying a loan forgiveness application can be based on the logic behind denying a full refund. Once a business had received the loan and used the proceeds for eligible purposes, it could apply for forgiveness, subject to the program’s eligibility, documentation, and certification requirements.

A successful PPP defense strategy will, in many cases, focus on several different aspects of a defendant’s case. For example, in a case where the defendant used his PPP funds legitimately, showing legitimate spending will be key to a successful defense, but it will need to be used in conjunction with evidence of good faith in order to provide an effective PPP defense.

Legitimate spending does not necessarily prove that a defendant made their loan application or certification in good faith. If there were no certification involved, for example, if a defendant relied on the loan for his own calculations, legitimate spending might not be a proper issue for a defense.

Similar to the issue with criminal intent, a defendant’s spending also will not necessarily affect the materiality of their certification. If the certification said that they needed a certain amount for payroll, but they were only entitled to about half that amount, but they used the loan for payroll-eligible expenses, this doesn’t change the fact that their certification was material.

Finally, regardless of legitimacy, repayment is always the focus of a restitution argument from the government. Even in a successful defense that shows the defendant’s spending does not matter, repayment can still determine the sentencing consequences.

Speak With Counsel Before You Answer Anything

If agents have contacted you, the order matters: counsel first, answers second. Spodek Law Group has been practicing since 1976 and defends federal matters nationwide, coast to coast, from offices in New York, Brooklyn, Queens and Los Angeles. Call 888 348 8028.