What California Businesses Need to Know About PPP Fraud Defense

Thanks for visiting Spodek Law Group. We’re a second-generation law firm managed by Todd Spodek, with over 40 years of combined experience defending federal fraud cases throughout California and nationwide. PPP fraud prosecutions in California present unique challenges that business owners must understand – because California’s multi-agency federal-state task forces operate differently than enforcement elsewhere.

In May 2025, fourteen defendants across San Fernando Valley and Glendale were arrested on federal complaints alleging they fraudulently obtained over $25 million in COVID-19 relief funds. August 2025 saw a California businessman plead guilty to a $15.9 million PPP and EIDL fraud scheme. These aren’t isolated cases. Congress extended the statute of limitations for PPP fraud to 10 years, meaning investigations continue through 2033.

Why California Is Different

California federal prosecutions involve coordination between SBA Office of Inspector General, IRS Criminal Investigation, and Homeland Security Investigations’ El Camino Real Financial Crimes Task Force – a multi-agency group focused specifically on Southern California financial crimes. This task force approach creates three problems for California businesses that companies in other states don’t face to the same degree.

First, multiple agencies investigating simultaneously means information sharing across federal and state jurisdictions. What starts as an SBA audit can quickly morph into IRS criminal investigation, HSI inquiry, and potentially California state charges for tax fraud or theft. You’re not defending against one agency’s theory – you’re defending against coordinated multi-agency prosecution where each agency contributes different pieces of evidence.

Second, California’s banking infrastructure and real estate markets create additional scrutiny. Large PPP loans in expensive California markets look different than loans elsewhere. A $150,000 payroll expense for five employees raises immediate questions in Mississippi; in San Francisco, it might be reasonable given salary costs. But auditors applying national standards to California loans often flag legitimate expenses as suspicious simply because California wage and rent figures seem inflated compared to other regions.

Third, California’s concentration of tech startups, gig economy companies, and contract-heavy businesses means complex ownership structures that prosecutors misunderstand – or deliberately misconstrue. When your business operates through multiple LLCs, has fluctuating contractor relationships, or maintains complicated cap tables, prosecutors claim you’re hiding payroll numbers or inflating employee counts. What’s standard Silicon Valley business structure becomes evidence of fraud.

The $2 Million Audit Threshold

SBA-OIG’s Auditing Division automatically audits PPP loan recipients who received $2 million or more. If your California business took a loan above this threshold, understand that federal audit is coming – not if, but when. These audits examine:

• Payroll records and tax filings for the calculation period
• Bank statements showing how funds were spent
• Employee verification through Social Security numbers and I-9 documentation
• Contractor vs. employee classification for gig workers
• Related-entity transactions that might constitute self-dealing

The audit itself isn’t criminal investigation – yet. But anything auditors find suspicious gets referred to SBA-OIG’s Investigations Division, which coordinates with DOJ prosecutors. I’ve spent five decades watching how administrative proceedings become criminal cases, and the pattern here is clear: auditors identify “discrepancies,” investigators reframe those discrepancies as intentional fraud, prosecutors charge based on the investigators’ characterization rather than the underlying facts.

What Triggers Referral from Audit to Investigation

Certain findings almost always result in criminal referral. Inflated employee counts, particularly when W-2s don’t match the loan application. Payroll expenses that can’t be verified through tax filings. Fund usage inconsistent with the certification – using PPP money for prohibited expenses like purchasing real estate, paying owners excessive compensation, or investing in securities. Multiple loans to related entities where ownership overlaps.

But here’s what disturbs me constitutionally: auditors often flag legitimate California business practices as fraud indicators. Paying contractors through 1099s instead of W-2s – common in California’s gig economy – gets characterized as misrepresenting employee counts. Seasonal businesses with fluctuating payrolls get accused of cherry-picking high-payroll months for loan calculations. Startups that pivoted business models during COVID get charged with obtaining loans under false pretenses, even when the loan application was accurate at the time of submission.

Federal Charges California Businesses Face

Notice the aggravated identity theft charge – prosecutors add this when business owners list employees on applications who didn’t authorize the use of their information, or when they use SSNs of people who weren’t actually employees. In California’s contractor-heavy economy, businesses often maintain information on past contractors or potential hires. Using that information on a PPP application – even if the person worked for you previously – can trigger mandatory minimum sentences.

Good Faith Actually Means Something Here

California businesses have stronger good-faith arguments than companies elsewhere, but only if you establish the factual record properly. SBA regulations changed constantly during 2020-2021. What counted as “payroll costs” shifted. Who qualified as an “employee” wasn’t always clear for gig economy companies. How to calculate loan amounts for seasonal businesses received contradictory guidance. The good-faith defense requires proving you relied on available SBA guidance when completing your application, that guidance was ambiguous or changed, and a reasonable business owner in your position could have interpreted it the way you did. This isn’t a “I didn’t know it was illegal” defense – it’s “I followed what I reasonably believed were the rules based on SBA’s own statements.” Todd Spodek’s representation of Anna Delvey in fraud charges that resulted in a Netflix series demonstrated how prosecutors mischaracterize defendants’ intent when financial transactions appear questionable in hindsight. The same principle applies to PPP cases: prosecutors view loan applications through the lens of 2025 clarity about what was fraudulent, ignoring the chaos and confusion of 2020 when businesses were desperately trying to survive and SBA rules changed weekly.

What Most California Lawyers Get Wrong

California defense attorneys unfamiliar with federal white-collar practice make catastrophic mistakes in PPP cases. They treat these like state fraud prosecutions, which operate under different rules and involve different stakes. Federal prosecutors have resources state prosecutors don’t – forensic accountants who can trace every dollar through banking systems, access to IRS records showing complete financial pictures, cooperation from witnesses coerced through their own plea agreements.

Many California attorneys also fail to recognize how early the defense must begin. By the time you’re charged, prosecutors have built their case over months or years. They’ve interviewed employees, obtained bank records, analyzed tax filings, and developed their theory of fraud. Starting your defense at indictment means playing catchup against prosecutors who already know your financial history better than you do.

The other critical error: cooperating with investigators without counsel. SBA-OIG and IRS-CI agents conduct “interviews” that feel informal – we’re just trying to understand what happened, help us reconcile these numbers, explain why your loan application says X but your tax return shows Y. Every answer you provide becomes evidence. Every explanation that doesn’t match documentary evidence becomes proof of obstruction or false statements. At Spodek Law Group, our team includes former federal prosecutors who know exactly how investigators turn cooperation into conviction. We’re available 24/7 because PPP investigations don’t announce themselves with warning.

If you received a PPP loan exceeding $2 million, assume audit is coming. Gather documentation now: payroll records, bank statements showing fund usage, contemporaneous communications about business decisions, evidence of how you interpreted SBA guidance. Don’t wait for the audit letter. If you’ve received an SBA audit letter, information document request from IRS, or contact from federal investigators: do not respond without counsel. The questions seem straightforward, the requests seem reasonable, but everything you produce and everything you say will be used to build a criminal case if investigators decide to proceed that direction.

If you made mistakes on your PPP application – inflated payroll, misclassified expenses, failed to return funds you couldn’t properly document – voluntary disclosure might mitigate criminal exposure, but only if handled correctly through experienced federal defense counsel. Walking into SBA-OIG and saying “I made mistakes” without legal strategy is confession, not cooperation. California businesses face prosecutorial scrutiny other states don’t experience to the same degree, coordinated multi-agency investigations that create compounding legal exposure, and federal prosecutors who view every California PPP loan through a lens of suspicion. You need defense counsel who understand federal white-collar prosecution, know how California’s business environment creates unique challenges, and can force the government to prove intentional fraud rather than accept narrative about suspicious circumstances. Call us immediately.