Advice From Former Federal Prosecutors | #employeefraud | #recruitment | #corporatesecurity | #businesssecurity | #

The passage of the CARES Act has made available more than $349 billion in potentially forgivable loans to small businesses (500 employees or fewer) via the Paycheck Protection Program (PPP). Naturally, many companies are applying for PPP loans to mitigate the impacts of the COVID-19 pandemic. We have even heard some small-business owners crow that this is “free money.”

Be careful. For many small employers like mine, especially those who have never considered applying for government aid before, the PPP loan program does have potential legal minefields to avoid. Earlier this week (Free Money For Small Business? Beware Legal Risks Of Paycheck Protection Loan Program Until More Guidance Issued), I explored how the allure of “free money” in a forgivable PPP loan could raise risks—specifically through the hardship certification required in the loan application.

Dave CallawayDerek Cohen, and Grant Fondo, former federal prosecutors now with the law firm Goodwin Procter, investigated and prosecuted individuals who committed crimes relating to the Troubled Asset Relief Program (TARP) and other funding programs offering crisis aid. As you may recall, TARP was set up during the financial crisis of 2008–2009. Below is advice from these attorneys on avoiding potentially serious legal problems related to the PPP.  Heed their insights to avoid the risk of prison—or at the least an embarrassing, costly, and time-consuming government investigation.

10 Real-World Observations And Recommendations From Former Federal Prosecutors

1. The government has learned from the fraud relating to TARP, Katrina, and other federal programs. The PPP application form tries to close many of the loopholes people threaded in the past, and reviewers/auditors/Inspectors General will know where to look.

2. The signer of the certification is verifying the truth of the application. That person needs to have done his or her due diligence and ask questions to verify that the information is correct. The extent of required due diligence will depend on the context, of course, but the signer should not simply rely on information provided by others unless it is reasonable to do so, and he or she must never minimize or ignore inaccurate or suspect information.

For example, the signer is certifying representations relating to a 20% holder’s criminal history. While an email confirmation is likely sufficient for a well-known VC fund, for less-well known entities it would be better to at least run a Google
search on that holder. For individuals, better still would be to also use the company’s “new employee” background check service to run a quick criminal history check, even if the holder is a past or present founder or employee.

3. The primary focus for criminal prosecutions will be on outright fraud, not incorrect but genuine misunderstandings of the PPP. Prosecutors frequently pass on cases when companies had competent counsel advising them during the process.

4. Employees v. independent contractors: Be careful certifying the company has fewer than 500 employees if it has a significant number of independent contractors. The law in this area is in flux (especially in California with the passage of AB 5), and you will not want to be in a position of having to argue that you “thought” your contractors did not count against the limit.

5. Fraud and abuse will be a strong focus of the government post funding. There will be auditors and investigative task forces. The usual prosecution thresholds will not apply, thus no fish will be too small for the net.

While the government will not be able to investigate every recipient, and of course dollar amounts and the degree of fraud matter, once a recipient comes to the government’s attention (and this can happen in multiple ways), the fact that the loan was relatively small, or the conduct of others was more egregious, will not mean the recipient will get a pass.

6. Assume there will be random as well as targeted reviews of PPP recipients. Be ready for it.

7. Avoid any appearance of self-dealing. Prosecutors will be hyperattentive to related-party transactions.

8. The fraud/problems may happen at any stage, including:

  • The application process
  • Assessing whether to take the loan if approved (e.g., have circumstances changed?)
  • Spending of the funds
  • Responding to government questions/updates
  • Responding to audits

Have a process in place for all five stages staffed with the right person for the job, comply with that process and document it, save the documentation, and be diligent at all stages. Remember that federal bounties exist to reward whistleblowers who report misconduct involving federal programs, so if a mistake has been made, do not try to hide it. Take any whistleblower complaints, or potential ones, very seriously.

9. Review all prior loan/lines of credit applications, representations to landlords, decks shown to VCs, etc. Your PPP loan application should be consistent with those prior representations, or you need to be able to explain the difference.

10. If you are a start-up in a highly regulated area, think hard about soliciting further government oversight. Many investigations are the result of an unrelated inquiry. If you do not really need the money, it might be wiser to take a pass.

7 Reasons Why Optics Matter

1. Regulators and courts will not be sympathetic to recipients who are in any way perceived (however unfairly) to have taken advantage of the COVID-19 Pandemic crisis.

2. As prosecutors, they preferred cases where there was clear evidence of greed/excess. Avoid executive bonuses (cash in particular, but equity compensation, too), perks, excessive marketing expenditures, non-essential capital improvements, expensive holiday parties, limos/private planes, etc.—even after the crisis passes.

3. Make sure the money goes where it is supposed to, and that you would have no concerns defending the use of the funds if investigated down the road.

4. Consider having executives take a pay cut and having board members forego their compensation for 6-12 months. If possible, and notwithstanding that “money is fungible,” use other funds to pay executives and board members.

5. Did the company in the last 12 months raise significant funds, pay large bonuses, issue large stock grants to executives, or make significant capital improvements (particularly if unrelated to building a design or manufacturing facility)? Is so, that is all the more reason to seriously evaluate the cost-versus-benefit of applying for funds that may, down the road, be referred to as “government handouts.”  

6. Avoid bad emails/Slack messages/texts. No jokes about government funding, and avoid using terms like “free money.” If you know that there are already these type of emails or text messages floating around your company, discuss it with legal before applying.

7. Keep a low profile in regard to receiving the funds. If your company is named in the press or by Congress as an example of abusing the intent of the act, expect a government inquiry.

Understand What You’re Getting Into

These former criminal prosecutors counsel that to avoid legal problems all of these must be considered and evaluated. Of course, carefully monitor and understand the ongoing Treasury and SBA guidance, and any relevant regulations published about the loan program.

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