THE HARD RAIN THAT MAY FALL FROM ACCEPTING COVID RELIEF
By: Alan Strasser and Gary Marx
Massive rapid federal programs inevitably bring massive legal complications. Confronting an economic and health crisis in the spring of 2020, Congress created trillions in disaster relief without detailed rules about how to distribute it, relying instead on the creation of Congressional oversight committees and newly-empowered inspectors general to oversee compliance with the broad goals of the CARES Act.
A long list of federal officials has the authority and interest to investigate what happened to the $649 Billion set aside for the Paycheck Protection Program (PPP). Businesses that borrowed money under PPP, hoping that the loan would be forgiven, may receive requests for information from a myriad of sources--Congressional committees, the Justice Department, Inspectors General at the Small Business Administration and the Treasury Department, the Pandemic Response Accountability Committee, and private lawyers hoping to bring cases on behalf of the government. And, while one hopes that Congressional investigations will be bipartisan, it is easy to imagine that events of the next month may produce much sharper partisan divides with risks of unflattering attention and publicity for loan recipients.
A candid and complete response to any one of these requests may have attract the attention of another investigator with different motivations. The legal analysis of how to respond to an inquiry is far too complicated to break down into slogans or simple formulas. Who has made the request? Is it a letter sent by a single member of Congress or a or a subpoena from a federal grand jury? Is it an inquiry from an Inspector General or a request for information from a lawyer whom you have never met? Have camera crews appeared outside your (newly-reopened) office, or worse still, at your house? Any response will require careful thought and a weighing of the consequences of one response for other possible investigations.
This article highlights some of the sources from which recipients may expect inquires and provides broad guidelines on how best to respond to requests for information.
A Storm Is Looming
Congressional investigations into the federal programs that were aimed at softening the economic blows of the pandemic have begun. A House Select Subcommittee already has found fault with the outgoing Administration handling of Covid relief, the Justice Department has brought at least 80 federal criminal cases, government watchdogs have issued critical reports, the news media have published critical articles, and private litigants have begun circling the programs hoping to profit from exposure of misuse of the funds. The programs have the elements necessary to feed a storm—gigantic sums of money, vague and changing regulations, and aggravating publicity about the recipients of government benefits. Whether the storms turn out to bring floods or only mist, it would be wiser to prepare now.
The Paycheck Protection Program (PPP) was intended to soften the sharp economic decline as the pandemic began to spread in the United States. The PPP set aside $649 billion for loans to businesses at favorable rates, without requiring collateral or external proof of need. Private lenders made the loans, and the Small Business Administration (SBA) guaranteed them. The law allowed businesses to obtain forgiveness of the loan—effectively turning it into a grant—if they used the loan proceeds to maintain their payrolls.
Enacted in an atmosphere of great urgency, the PPP lacked detailed requirements for the loans. More interested in spreading relief widely than in creating detailed rules to prevent fraud or even to verify eligibility, the SBA had made more than 5 million loans for more that $525 billion by August 8, 2020. Questions soon arose about the recipients, which included investment management firms that oversaw billions in capital, 45 major law firms, Kanye West’s Yeezy clothing line, private membership clubs and publicly-traded restaurant chains like Shake Shack, not to mention organizations tied to political leaders in both parties. The public backlash after disclosure of just some of the recipients was so severe that several companies announced that they were returning the loans and even that they have never applied for one in the first place. A federal judge in Washington has ordered the SBA to identify all the recipients, an order the government has appealed.
The Gathering clouds
We see already the first signs of vigorous investigations into the operation of the CARES programs. The Department of Justice announced 80 criminal cases against individuals who allegedly defrauded the programs out of millions of dollars. Some cases allege outlandish frauds, such as the person who allegedly created fictitious business entities with names based on the popular TV program Game of Thrones (“White Walker LLC”) and then fraudulently obtained more than $1Million in loans. Other cases involved borrowers who allegedly used loan proceeds to buy fancy cars, got loans for defunct businesses, or who falsely claimed to be farmers despite living in the suburbs.
The Government Accountability Office (GAO) has brought increasing scrutiny to SBA. GAO warned in June that the PPP program faced a “significant risk” of fraud because of its confusing rules and lack of safeguards, and urged SBA to develop plans to avoid those risks. In October Congressional testimony, the GAO noted that “COVID-19 Loans Lack Controls and Are Susceptible to Fraud” because SBA had not “fully implemented” the GAO recommendations. The SBA has been slow to issue guidance on the forgiveness of loans. SBA announced on November 1 that it would require lenders to complete a 9-page questionnaire for each borrower to be able to verify the borrower’s eligibility for the previously-approved PPP loans; a trade association has sued to invalidate the questionnaire in federal court. By November 22, SBA announced it had forgiven about $38 Billion in loans.
The House Oversight Committee created a Select Subcommittee on the Coronavirus Crisis to investigate the response to the pandemic. The Select Subcommittee reported that by October 30 it already had conducted 30 investigations, and held multiple public hearings and briefings. Its investigations, the Select Subcommittee wrote, “have shed light on how the Trump Administration has failed to stop or even slow the spread of the virus and has failed to protect struggling Americans from economic harm.”
Nongovernmental groups may join in the investigations, seeking recovery or rewards under federal statues such as the False Claims Act (FCA) or federal securities laws. Private parties seeking to enforce the FCA may bring lawsuits on behalf of the federal government to recover money from loan recipients. The FCA, a broad remedial statute, imposes treble damages and gives the private plaintiffs the right to share in the government’s recovery and force the sued party to pay the private plaintiff’s legal fees. The private plaintiffs, called “whistleblowers” by their lawyers and “bounty hunters” by opposing counsel, are often former—or even current –employees who bring these cases seeking financial recovery or personal vindication. The SEC reported that it received a record number of whistleblower tips in the year ended September 30, and many of those are related to COVID programs and relief.
One more element adds to the pressure to investigate: sharp criticism in the news media. There have been a spate of press articles decrying faults in the PPP program, such as “Small-business loans to big companies prompt Congress to overhaul PPP rules” (Washington Post, December 15,2020]), “Brazen Virus Aid Fraud Appalled Some Lenders” (New York Times, December 11, 2020] , and “Evidence of PPP Fraud Mounts, Officials Say”(Wall Street Journal, November 8,2020), just to pick three. Press attention attracts the attention of government investigators and increases the chances that inquiring minds will issue subpoenas and other official instruments to explore the questions raised by a variety of media.
The Forecast
As troubling as these gathering clouds may be, the storm may draw more power from the aftermath of the recent election. If different parties control the two houses of Congress, the Democrats may find themselves unable to satisfy their legislative goals, and may turn instead to investigate the perceived failures of the prior Administration to illustrate the needs for new legislation or to change the legislative dynamic. The House in particular is highly likely to investigate. We expect the House to continue in the new year the Select Subcommittee, which already found serious deficiencies in the programs. Further disclosure of the recipients of the PPP loans may inflame constituents or elements of either party, prompting calls for deeper inquiry. Discussions about new stimulus legislation may lead to calls to explore how well the previous programs worked and to eliminate their loopholes and drawbacks. On top of all that, there remains the puzzling problem that the SBA failed to spend more than $130 billion in authorized funds under the PPP program despite desperate need and widespread reports that many apparently eligible borrowers had their applications denied. All of these factors will push toward more Congressional investigations.
Who Can investigate?
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Congress
Congress faces few limits on its power to gather information, which is, as the Supreme Court recently reminded us, “broad and indispensable,” so long as it is tied to a legitimate task of Congress. Those purposes, the Court said, include “surveys of defects in our social, economic or political system for the purpose of enabling the Congress to remedy them.” A review of the effectiveness, efficiency and fairness of PPP and EIDL fits comfortably within that broad mandate. A long line of precedents grants wide deference to Congressional subpoenas.
Congressional requests for information may be as simple as a phone call or as ominous as a subpoena. The request may be the beginning of an investigation or part of an investigation that began months ago. The request may be narrow and targeted or broad and unfocused. There is always more to learn from the perspective of Congressional Committees and their staff.
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The Justice Department
The Criminal Division of the Justice Department also has broad power to investigate, although the inquiry must be limited to determining possible violations of existing federal criminal law. The federal criminal code is particularly broad when federal money is involved, so the Department will be able to roam freely. The False Claims Act also give the Justice Department broad authority to issue civil investigative demands—essentially pre-litigation subpoenas to explore violations of that statute.
The Justice Department does not have to announce its investigations, and it does not routinely identify the targets of its investigations. It may already have begun to investigate, and may have issued subpoenas to other parties and interviewed of witnesses who cannot or will not reveal the Department’s interest. Private party lawsuits under the False Claims Act must be filed under seal, so the targets of those lawsuits learn of them learn of them only months—or even years—later.
Disaster Preparedness
The hardest part may be choosing a response that balances protections from the traps in each of these inquires. A forthright response to Congress may provide incriminating evidence for a criminal investigation. Invocation of the Fifth Amendment before Congress may invite attention from the Justice Department and from would-be whistleblowers. No formula or simple slogan covers the complexity of interplay among investigations. So, keep this in mind:
Don’t assume the worst. A congressional request is not necessarily a reason for concern. Congress has ample reason to investigate the complexity and failures of PPP—vague, ambiguous and changing rules, slow decisions on loan forgiveness, puzzling allocations of money. A congressional request may only be the basis for Congress to explore the conduct of government officials or the lenders who served as intermediaries, rather than the recipient.
Don’t assume the best either. Some committees may be more interested to find instances of fraud or misconduct than to assess the overall effectiveness of the program. They may be looking to make examples of loan recipients or applicants in support of other legislative agendas. No one wants to become the poster child for some abuse of the one of these programs.
Don’t assume there are no alternatives. For example, telephone requests from Congressional committees have no legal force. While there is no legal penalty to ignoring the call, it may be wiser to respond rather than invite a more burdensome and all-encompassing subpoena. Negotiation is likely to be more effective than a court challenge, which is unlikely to succeed.
Beware the impact of publicity. Congressional members and staff have ample access to the national and industry press, not to mention social media and other internet sources. There are few safeguards against Congressional leaks, and it is hard to win a public relations battle with a Congressional committee.
Get ahead of the problem. If you applied for a PPP loan, look again at your application and ask whether an unsympathetic reviewer would find it lacking. If circumstances changed and made it hard for you to comply with PPP rules, gather the evidence that shows the mitigating circumstances. Figure out where you will get outside help if you face one or more of these investigations—which lawyers you want, whether you should have separate congressional representation, and how you will coordinate your own defense. Even while the clouds gather, you can take steps to avoid an unexpected drenching.