DOJ Announces First False Claims Act Settlement With PPP Lender
On September 13, 2022, the United States Department of Justice (DOJ) announced a settlement with Prosperity Bank, a regional bank with branches in Texas and Oklahoma, for processing a Paycheck Protection Program (PPP) loan on behalf of an ineligible borrower.
Although the settlement was for less than $20,000, it is nonetheless noteworthy because it is the first time DOJ has publicly settled with a PPP lender for alleged violations of the False Claims Act (FCA) (though DOJ has been actively pursuing fraud cases against PPP borrowers for some time).1 Importantly, this settlement announcement comes on the heels of recent legislation that created a 10-year statute of limitations period for PPP-related fraud (equivalent to the longest statute of limitations available under the FCA). The takeaway is that PPP lenders, as well as other institutions that made loans under other pandemic-related programs such as the Main Street Lending Program, should be prepared for many years of government investigation and enforcement actions targeting PPP fraud.
The original PPP program, a creation of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was designed to help small businesses meet their payroll (and certain other qualifying expenses) during the unprecedented shutdowns of the early COVID-19 pandemic. The PPP program depended on private lenders making loans to small businesses on behalf of the US government. And, despite significant hurdles, lenders rose to the challenge and began processing PPP applications on April 3, 2020—seven days after the CARES Act was signed into law.
The single loan at issue in the Prosperity settlement was made in May 2020, during the second phase of the program, to Woodlands Pain Institute PLLC.2 The loan application asked whether the borrower—or any individual owning more than 20% equity—was subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction. When filling out the application, Dr. Emad Bishai—the sole owner of Woodlands Pain Institute—checked the box marked “No” and initialed his answer; however, at that time, Dr. Bishai was subject to criminal charges in Montgomery County.
According to the Department of Justice, Prosperity Bank employees “knew” of the charges against Dr. Bishai, which made him ineligible for the loan. The bank nonetheless approved the application, receiving a 5% processing fee from the Small Business Administration, in violation of the FCA.
While the DOJ settlement announcement states that Prosperity employees “knew” Dr. Bishai was ineligible for a PPP loan at the time that they processed his application, few additional details were provided regarding the alleged wrongdoing, including whether there were any aggravating factors. But based on the publicly available information, the Prosperity settlement should be concerning to any lenders that were making PPP loans in the early days of the program. Early PPP lenders (and their lawyers) will recall that the PPP loan rollout was a chaotic period where time was of the essence and the rules governing the brand-new PPP program were being interpreted, clarified and updated in real-time.
The False Claims Act is a federal law that makes it a crime for any person or organization to knowingly make a false record or file a false claim regarding federal programs, including the PPP program. Typically, PPP False Claims Act cases are brought against borrowers who submit false information, not lenders. Notwithstanding the important role that private lenders played in the PPP program, as well as other pandemic-related programs, and the challenges that those lenders faced to make the PPP program work, we anticipate that the DOJ’s settlement with Prosperity is the tip of the iceberg for FCA investigations and enforcement actions against PPP lenders, including under the FCA.
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Arnold & Porter represents borrowers, lenders, and other service providers in all manner of issues arising under the PPP and other CARES Act programs. Our team of former high-level government prosecutors, experienced litigators, and seasoned regulatory attorneys provides unparalleled insights and extensive experience in investigations, defense, regulatory, and compliance matters involving the various CARES Act programs, including on matters before the Department of Justice, SBA-OIG, state attorneys general, OCC, FDIC, and Federal Reserve Board. Lenders and borrowers with questions about what this enforcement action means for them are encouraged to reach out to their current Arnold & Porter contact or one of the many Arnold & Porter partners and counsel working on these issues.
*Nate King contributed to this Advisory. Mr. King is a graduate of Catholic University of America, Columbus School of Law and is employed at Arnold & Porter's New York office. Mr. King is admitted only in Washington State. He is not admitted to the practice of law in New York.
© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
For a complete list of government enforcement actions related to CARES Act fraud, please see the Arnold & Porter CARES Act Fraud Tracker.
Government Accountability Office, Paycheck Protection Program: Program Changes Increased Lending to the Smallest Businesses and in Underserved Locations at 2 (Sept. 2021). The second phase of the PPP program ran from April 27–August 8, 2020.