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Truckers, Babysitters Targeted by Feds in Pandemic Loan Cases

July 11, 2022, 8:45 AM

The US Attorney’s Office for the Northern District of Mississippi is leading the way when it comes to the government’s use of the False Claims Act to target alleged Paycheck Protection Program fraud.

Oxford, Miss.-based federal prosecutor Clay Joyner has brought more than 80% of the government’s known civil suits seeking to recoup money to which his office asserts some borrowers weren’t entitled, suing an auto mechanic, a baby sitting service, and a landscaper, and obtaining consent judgments from a trucking company and a jeweler.

“While we cannot speak for what other US Attorney’s offices will be doing, our filings are in direct response to trends and issues we have observed during investigations within our district,” Assistant US Attorney Stuart Davis, one of Joyner’s deputies, told Bloomberg Law. Joyner has led the office in an acting capacity since March 2021.

Congress enacted the PPP in March 2020 to provide emergency financial support to those suffering the economic effects caused by the Covid-19 pandemic. The program, under which loans were backed by Small Business Administration, ended in May 2021 after providing small business applicants around $800 billion.

The US has since filed more than a dozen complaints alleging that some of those applicants violated the FCA by misrepresenting their business’ payroll and other needs in order to receive funds.

As of July 8, federal prosecutors have initiated at least 17 civil lawsuits alleging PPP fraud under the FCA, according to Bloomberg Law research. The government has also reached settlements in cases initiated by whistleblowers. Still more whistleblower suits raising similar claims may as yet be under seal, allowing the government to investigate claims and decide whether to intervene.

Fourteen of the prosecutor-filed civil suits have been brought by Joyner’s office. The Eastern District of Virginia just outside the nation’s capital, has filed three cases.

SBA press director Carol Wilkerson said the agency doesn’t comment on any pending investigations. But it “routinely assists DOJ in the prosecution of False Claims Act matters, including in PPP,” she said.

Mechanics and Landscapers

The Mississippi prosecutor has already found litigation success, securing on June 28 a nearly $47,000 consent judgment against a jewelry and clothing store operator; and a nearly $47,000 consent judgment against freight trucking business owner.

It also obtained a $21,000 consent judgment June 14 against a woman who claimed to be a daycare business operator. According to the complaint, the woman told an investigator that she received a loan for her self-employed business’ payroll needs even though she didn’t operate such a business.

Other pending cases in the Northern District of Mississippi have raised PPP fraud allegations against a babysitting service operator; a trucking business operator; an automotive mechanical and electrical repair and maintenance business operator; a baked goods business operator; and a landscaping business operator.

Most of the defendants in the Mississippi suits don’t have legal representation, according to the dockets. Counsel for defendants Xavier Bailey and Bailey’s Trucking LLC, didn’t immediately respond to a request for comment.

The increased FCA enforcement could “pull in PPP recipients, particularly small businesses, that may have submitted PPP paperwork containing errors that were simply made because of the intense confusion and uncertainty surrounding both the PPP rules, and the future of the economy at the initiation of the program during the height of the pandemic,” said former federal prosecutor Ronald G. DeWaard of Varnum LLP in Grand Rapids, Mich.

“Whether the government is fairly taking into account that confusion when reviewing applications in hindsight is unclear at this point,” he said.

It is likely that the US Attorney directed an assistant US attorney to “crunch the numbers” on PPP loan information and applications from that district, and then bring enforcement actions, said Alex P. Hontos, who represents FCA defendants with Dorsey & Whitney LLP, Minneapolis. “That model can be replicated in every other district, provided the district prioritizes PPP FCA investigations,” he said.

‘Low-hanging Fruit’

The DOJ seems to be focusing on straight-forward cases as larger or more complex FCA cases can take years to investigate and pursue, Hontos said.

“I think that DOJ is starting with the low-hanging fruit, and I suspect we’ll be hearing actions against larger entities soon,” he said.

The current trend has been “to pursue ‘double dippers'—those that unlawfully obtained two first draw loans. Those cases are fairly easy to identify,” said another Dorsey & Whitney lawyer, Kirk W. Schuler in Des Moines.

“In the near future, I suspect the cases will focus on more complex PPP fraud, such as those dealing with the alleged failure to disclose affiliates of the borrowers that would render borrowers ineligible for their loans,” he said.

“In addition, it is clear that the administration believes there is an enormous amount of PPP fraud left to be investigated, as Congress is introducing legislation to create a ten-year statute of limitations period for all criminal and civil enforcement of PPP fraud, and DOJ is setting up new strike forces to investigate the fraud,” Schuler said.

The Next Wave

The government has pursued “the more egregious” PPP cases under criminal statutes, which typically move faster than civil cases, said Adam R. Tarosky of Nixon Peabody LLP in Washington.

“Criminal matters typically move faster, but I think the next wave of Covid-19 fraud enforcement will be civil. There are likely many pending qui tam matters that are still under seal as FCA investigations often last several years before an intervention decision is taken,” he said.

Typically about 75% of False Claims Act investigations are initiated by whistleblowers, and that trend should hold for PPP cases, he added.

To contact the reporter on this story: Daniel Seiden in Washington at dseiden@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com; Carmen Castro-Pagán at ccastro-pagan@bloomberglaw.com