PPP borrowers should beware of embezzlement
Whistleblowers pose a significant threat to recipients of government stimulus funds, including programs like the Paycheck Protection Program.
At the end of August, the Justice Department announced the first settlement under the False Claims Act following a qui tam or whistleblower action. Over the next few months, whistleblower lawsuits will continue to emerge under seal, likely spawning a flood of FCA investigations and litigation.
On August 26, the DOJ announced that Seth Bernstein, owner of charter company JetReady, had agreed to pay $ 287,055 to settle allegations that he embezzled the proceeds from the PPP loan. Allegations resolved by settlement brought by former JetReady employee Victoria Hablitzel in an action that tam.
According to Hablitzel’s complaint and the government press release, Bernstein applied for PPP funds in April 2020 and, days after receiving a PPP loan of $ 1,173,382, embezzled $ 98,929 to cover, among other things, charitable contributions to support the construction of a drive-in drive-in in Nantucket, Massachusetts, and at the sports fields in Winter Park, Florida. JetReady did not use any of the PPP funds for payroll or to bring employees back on leave, as scheduled by the program.
Under the FCA’s triple damages provision, the $ 287,055 settlement appears to be just under three times the amount Bernstein allegedly embezzled.
It is important to note that the whistleblower was the deputy controller of the company and therefore was in a unique position to trace PPP funds. In addition, the company account that the PPP funds were transferred to had a negative account balance before the transfer, which means that any expense made from that account was surely paid with PPP funds. The government may refuse to prosecute cases where it is unable to properly trace the funds, or when the borrower is able to show that it spent the PPP funds on approved expenditures and / or would have made the disputed expenditures regardless of receipt of the PPP loan.
The FCA allows individuals to bring an action on behalf of the United States to recover public funds allegedly obtained by fraud. The government is investigating the allegations as the complaint remains under seal and ultimately chooses to intervene or refuse. Even if the government refuses, the “relator” can continue to pursue the case on behalf of the government subject to certain restrictions. In either case, the relator can receive up to 30 percent of any payback.
Due, in part, to this powerful financial incentive, most P3 beneficiaries are more vulnerable to scrutiny catalyzed by current and former employees than by the government itself.
This was the case with the Bernstein settlement. Although Bernstein fell into the “safe harbor” of $ 2 million or less, he was the subject of a thorough investigation by the DOJ due to an action that tam from the former assistant controller of JetReady, who was laid off along with many other JetReady employees in March 2020. The pandemic, of course, has caused many similar layoffs, and it’s likely that at least some disgruntled former employees have become whistleblowers.
Other actions that tam related to pandemic stimulus funds are expected to be released under seal soon.
The Bernstein Settlement Timeline provides an overview of FCA’s investigations involving the PPP.
Bernstein received a $ 1.1 million PPP loan in April 2020. Hablitzel filed his qui tam complaint in July 2020. And the government decided to unseal the complaint “for settlement” in August 2021. In d In other words, the government investigated for about a year. Extrapolating this timeline, whistleblowers likely began filing qui tam actions regarding these loans in the spring and summer of 2020. If the government takes about a year to investigate these cases, a flood of tam actions should emerge. under seal in the coming months.
The Bernstein Settlement demonstrates the methods the government will use to protect FCA receivables involving PPP loans in bankruptcy proceedings. The agreement states that the United States will rescind the FCA release and bring a civil action to recover much more than the settlement amount if Bernstein’s obligations under the agreement are avoided for any reason, including including bankruptcy.
Generally, the DOJ considers the FCA’s liability to be debt that is not dischargeable and that takes precedence over most competing claims in a bankruptcy case.
Whistleblowers are probably the most significant threat to small PPP beneficiaries, and their allegations are only beginning to surface. Any PPP beneficiary who receives a civil investigation request from the FCA or a similar request for information from the government should assume the existence of a qui tam action and consult a lawyer.
Attorney David A. Vicinanzo leads the National Government Investigations and White Collar Advocacy Practice for Nixon Peabody. Morgan C. Nighan is a partner in Nixon Peabody’s Complex Commercial Litigation practice and is also part of the firm’s COVID-19 client response team.These articles are shared by the partners of The Granite State News Collaborative. For more information, visit collaborativenh.org.