False Claims Act Lawsuit for PPP Loan: Civil vs. Criminal.

Yes, a single PPP misstatement can subject a borrower or other defendant to both civil FCA liability and criminal charges. The two statutes impose different knowledge standards, one permitting proof through reckless disregard under the FCA, while the criminal statute requires proof that the defendant knew the claim was false, fictitious, or fraudulent, and the criminal statute requires proof that the defendant knew the claim was false, fictitious, or fraudulent.

FCA Civil Liability

The FCA includes a broad definition of liability. Section 3729(a)(1)(A) of the FCA states, in relevant part, that any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,” will be liable for liability under the statute. The statute then defines “knowingly” in Section 3729(b)(1), explaining:

“In order to establish liability under this section, the Government need not prove ‘actual knowledge’, i.e., proof that the defendant had a specific intent to defraud the United States. The Government may establish ‘knowing’ status through evidence that the defendant acted (i) in reckless disregard of the truth or falsity of the information on the claim, or (ii) in deliberate ignorance of the truth or falsity of the information on the claim.”

As specified in Section 3729(b)(1), “negligence” does not satisfy the knowledge requirement. The fact that the FCA’s “knowing” standard is lower than what is required under the criminal statute discussed below means that the Government has an increased opportunity for victory in court. Of course, this also means that the civil False Claims Act presents a substantial risk for anyone who received a PPP loan.

Criminal Liability

Another section of the United States Code, Section 287, imposes criminal liability in certain situations. Section 287 provides:

“Whoever makes or presents to any person or officer in the civil, military, or naval service of the United States, or to any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years and shall be subject to a fine in the amount provided in this title.”

As discussed, the words “knowingly and willfully” introduce a “specific intent” requirement that is different from the “knowingly” requirement established under the FCA. In a criminal prosecution under 18 U.S.C. § 287, the Government will have to prove that the defendant knew the claim was false, fictitious, or fraudulent, and it will also be required to meet the government’s burden of proof in a criminal proceeding, or “proof beyond a reasonable doubt.”

Which PPP Application or Forgiveness Certifications Can Count as Separate FCA Claims?

The False Claims Act also includes language that prohibits defendants from knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim. Section 3729(a)(1)(B) provides the basis for liability, and it states: “A person who knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim, is liable to the United States Government for a civil penalty and damages as provided in this section.” Falsity is a requirement of liability under the FCA. In order to pursue liability, the Government must be able to show that the claim presented under the FCA is false or fraudulent. In many cases, this will entail a question of materiality, a question of whether the falsity had a natural tendency to influence, or was capable of influencing, the Government’s decision to make a payment or approve the claim.

Under the federal government’s Paycheck Protection Program (PPP), borrowers have to certify information in two different stages of the program. Initially, they must certify a series of details in order to apply for the loan; subsequently, they will have to certify additional details if they wish to seek loan forgiveness. These are two separate certifications, and they are made at different times.

• The certification for loan applications requires meeting various eligibility requirements. Borrowers must certify eligibility information when they apply for loan programs through the Small Business Administration (SBA), the U.S. Treasury, or private lenders like Wells Fargo, J.P. Morgan Chase, and banks. This information includes:
• Employee count,
• Annual revenue, and,
• Other eligibility requirements.

Later, if they wish to seek forgiveness, the borrower must separately certify that its expenses meet the qualifying criteria to count toward forgiveness and that the borrower continues to meet all other program requirements. The certification for PPP loan forgiveness depends on meeting the program’s requirements for eligible expenditures, and the forgiveness of a PPP loan requires meeting various other program requirements as well. When seeking PPP loan forgiveness, borrowers must certify:

• Necessary expenditure of funds, meaning the borrower must certify that it has used the funds for payroll and other eligible business expenses, and,
• Eligibility.

If a Borrower presents a materially false request for PPP forgiveness, the Government may be able to establish a separate FCA claim for the forgiveness request, as the request is for approval of payment under Section 3729(a)(1)(A) of the FCA. The claim for PPP loan forgiveness would be separate from the original application for the PPP loan if the PPP loan application was also based on a materially false statement.

Spodek Law Group is a second generation New York firm. Todd Spodek practices out of the firm his father opened in 1976.

Does Repayment of a PPP Loan Erase Liability, Damages, or the Filing Deadline?

If a borrower has repaid a PPP loan, it does not necessarily mean that the borrower is not liable for a violation of the FCA or another federal statute. While the Government can demand repayment in any case involving a request for assistance under the Paycheck Protection Program, it will generally only seek criminal charges or civil FCA penalties if it has evidence to support such penalties. Therefore, while the government’s decision to demand repayment can be an early indicator of the risk for PPP loan recipient, repayment itself neither proves nor disproves a violation of the FCA or federal criminal law.

Similarly, loan forgiveness does not necessarily protect a borrower from federal civil liability under the FCA or criminal prosecution under other federal statutes. If a borrower has sought PPP loan forgiveness, the government can pursue criminal charges or civil FCA penalties regardless of whether the PPP loan has already been repaid. Loan forgiveness is based on an analysis of the borrower’s eligibility, and an investigation into a borrower’s request for forgiveness could lead to liability regardless of the original loan’s status.

While criminal restitution and civil damages under the False Claims Act are related, they are not the same. Criminal restitution is meant to make victims whole, whereas civil damages are meant to compensate for the government’s loss as well as serve to deter future conduct. As a result, the amount of potential criminal liability under the federal criminal code may differ from the amount of civil liability under the FCA, and, conversely, the lack of criminal restitution can have no bearing on whether civil damages are owed.

The statute of limitations for PPP loans can be complex. Under the FCA’s limitations framework, the statutory time period is six years, but there are three statutory extensions that can result in a longer deadline. However, these statutory extensions apply to a limited number of specific types of fraud cases. Congress extended the statute of limitations for fraud involving covered PPP loans to ten years, and this extended deadline applies to both criminal charges and civil enforcement actions. In civil False Claims Act proceedings involving PPP loans, the filing deadline is determined by the FCA’s limitations analysis; this analysis applies to each alleged violation on an individual basis. Therefore, the filing deadline for an FCA case may vary from one PPP-related violation to another.

Who May Investigate a PPP Submission, and What Does a CID Mean Before Charges?

As outlined above, individuals known as “relators” have the right to bring lawsuits on behalf of the United States under the FCA. These are termed “qui tam” lawsuits, and they generally follow a specific procedure that allows the Government to determine whether it wants to join the action. The relator files a qui tam complaint under seal, and the government is then afforded the opportunity to investigate the allegations while the complaint remains under seal before deciding whether to intervene The Government can choose to either intervene in the case or allow the relator to pursue the case on its own (with or without the government’s ongoing oversight).

When facing a qui tam lawsuit under the False Claims Act, it can be critical to promptly investigate the allegations, conduct a comprehensive evaluation of all available information, and contact the investigating prosecutor.

What is a Civil Investigative Demand (CID) in an FCA Case?

A CID is a unique type of subpoena that gives the government the authority to compel an entity or individual to produce documents, supply written answers to interrogatories, or provide oral testimony. CIDs are authorized for investigations under the civil False Claims Act. Even if the CID comes from the Department of Justice (DOJ), receiving a CID does not mean that you are being criminally prosecuted for fraud, nor is a CID itself an indictment.

If you have received a CID, there are several steps you should take promptly:

• Preservation: You must preserve all relevant evidence and identify any evidence that may be relevant to your response.
• Privileged Information: You should work with counsel to identify any information that may be subject to attorney-client or other legal privilege.
• Scope Assessment: Your counsel should assess whether the CID is overly broad. With this information, your counsel may be able to negotiate with the prosecutor to narrow the scope of the CID.
• Obligation Assessment: You should work with counsel to determine what specific obligations are triggered by the CID, such as the obligation to produce certain documents or testify at a deposition.

What is the Next Step After Receiving a CID?

The next step after receiving a CID is to respond. Your response should address the government’s specific inquiry as efficiently and thoroughly as possible.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 888 348 8028.