Understanding and Responding to Payroll Protection Program-Related Investigations

By admin, David Tayman and Katie Chaverri

Tayman Lane Chaverri LLP welcomes our colleague and co-counsel Ross Nabatoff’s input and expertise in criminal investigations.  We are pleased to share Mr. Nabatoff’s insights with the Firm’s clients and friends: 

Congress enacted the Federal Payroll Protection Program (“PPP”) attempting to alleviate the economic disaster inflicted upon small businesses by the coronavirus pandemic.  Pursuant to the PPP, the United States Small Business Administration (“SBA”) authorized banks and other lenders to loan funds to small businesses (companies with less than five hundred employees), and these loans would be forgiven if 75% of the proceeds were utilized for payroll and 25% percent used for other business expenses.  In addition, the recipient would have to spend the PPP loan proceeds within eight weeks.  Because the pandemic has caused such economic havoc upon small businesses, over $500 billion was loaned to businesses in an extremely short period of time.

The rush to distribute PPP funds to the business resulted in many financial institutions making loans to their favored clients.  These clients, however, were not true small businesses such as the neighborhood beauty salon, barber shop, or restaurant.  Instead, numerous large companies with healthy balance sheets received multi-million-dollar PPP loans.  These companies included Ruth Chris’ Steak House, Shake Shack, and the Los Angeles Lakers.  While several of these companies returned their PPP money after their receipt of the funds was widely publicized, numerous local small businesses, who were the intended recipients of the PPP loans, were deprived of any PPP money and left to survive on their own.

Once the media disclosed that large businesses were receiving PPP loans because of their relationships with their banks, Treasury Secretary Mnuchin attempted to minimize this negative publicity by announcing that all loans over $2 million would be audited.  Subsequently, the  SBA expanded on Secretary Mnuchin’s announcement by declaring that it would review any loan as appropriate.  PPP recipients now face the uncomfortable reality that their loans, regardless of amount,  will be scrutinized by the federal government to determine whether the loans were granted properly.  If the federal government determines that a recipient committed misconduct during the loan process, a criminal case could follow.

A PPP borrower subject to a criminal investigation initially faces a lengthy investigation  where federal agents subpoena all documents relating to the PPP loan and interview the pertinent witnesses.  After compiling this information, the agents will prepare a report and submit it to the United States Department of Justice where a federal prosecutor will determine whether to convene a grand jury to indict the PPP recipient.   The federal prosecutor will usually permit the PPP recipient (the “target”) or his attorney to argue that no indictment should be issued by the grand jury.  However, if evidence has already been presented to the grand jury, an indictment is almost a sure thing unless the PPP recipient decides to plead guilty.

The subject matter of any criminal investigation into a PPP loan will focus on the certifications that a PPP recipient is required to initial prior to submitting the PPP application form.  One certification that the PPP recipient is required to sign explicitly informs the borrower that he could be subject to criminal prosecution: “the information provided in the loan application and the information provided in all supporting documents and forms is true and accurate in all material respects.  I understand that knowingly making  a false statement to obtain a guaranteed loan from SBA is punishable under the law[.]”.The certification proceeds to identify several federal criminal statutes including 18 USC § 1001 (false statements to executive, legislative, and judicial branches) and 18 U.S.C. § 1014 (false statement to financial institutions insured by the Federal Deposit Insurance), which could be utilized in a criminal prosecution.  Of course,  there are several other criminal statutes that federal prosecutors could rely upon in any criminal prosecution of a PPP borrower such as mail fraud (18 USC §§ 1341), wire fraud (18 USC §1343), bank fraud (18 USC § 1344), and conspiracy (18 USC § 371).

The remaining certifications constitute the fundamental underpinnings of any prosecution.  One requires the borrower to certify that, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Yet, if the loan proceeds were not necessary to support the business’ operation during the pandemic, the federal government could prosecute the borrower for a false certification.  For example, the government could argue that a a business with millions of dollars in its bank account made a false certification.  The government would argue that the loan was not necessary to support the ongoing operations of the business, because the business had plenty of money to maintain itself during the pandemic.  Likewise, any small business which continues to profit during the pandemic will have a difficult time convincing the government that the PPP loan was necessary to support its ongoing operations.  While these are just two examples, they illustrate that the government can utilize this certification to initiate a criminal prosecution of a PPP borrower if the facts warrant such a scenario.

The borrower must also certify that, “[t]he funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as charges for fraud.”  Based upon this certification, if a borrower uses the PPP proceeds for any unauthorized use, including personal expenses, he could be criminally charged and, if found guilty, incarcerated.  It is not a defense to argue that the loan proceeds were used to halt being evicted from a personal residence or to prevent foreclosure of the personal home.  While it might be tempting to use the loan proceeds in such a manner, such a use could result in a criminal prosecution.  Money is not fungible in this regard.

The PPP recipient must also ensure that he “will provide to the Lender documentation verifying the number of full-time equivalent employees on the Applicant’s payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 25% of the forgiven amount.”  Like the other certifications, this one could lead to criminal problems for borrowers who want to extract larger loans from the PPP program.  If a borrower inflates the number of employee or the dollar amount of his payroll costs in order to obtain a larger loan, the federal government would have a basis to bring criminal charges.  Indeed, it is not outside the realm of possibility that a borrower in desperate need of a monetary lifeline would even fabricate a mortgage or rent payment.

Simply put, PPP borrowers must abide by the explicit language of all the certifications contained in the PPP application.  If they do so, they will not be embroiled in any criminal litigation.  However, if they receive and/or spend proceeds in contravention of any of the certifications, they could be charged with various criminal offenses.  No one wants to face that possibility.

Ross Nabatoff is a former federal prosecutor and private attorney based in Washington, D.C.  Mr. Nabatoff represents clients in civil and criminal litigation in state and federal courts throughout the United States.  While in separate firms, David Tayman and the other attorneys of Tayman Lane Chaverri LLP co-counsel certain matters with Mr. Nabatoff. 


If you are dealing with a PPP-related investigation, or if you have any questions about the issues discussed in this article, please do not hesitate to reach out to David Tayman (dtayman@tlclawfirm; (202) 695-8147) or Ross Nabatoff ([email protected]; (202) 650-0337).