Relator’s Shares Paid Out on Processing Fees and Penalties, Not on Total Loan Recoveries

We’ve been talking a lot about PPP loans in this blog, and for good reason: it’s a hot area of fraud right now. But with False Claims Act cases usually taking at least a year to resolve, the results of PPP-related whistleblower cases have been unknown.

However, some recent settlements and unsealings finally give us some clarity on what to expect with these cases going forward.

Learn the latest from False Claims Act attorneys.

Early PPP Fraud and the FCA: A Tenuous Link 

When the Paycheck Protection Program was unleashed by the federal government, it quickly became obvious that while it was going to help a lot of people and businesses in need, it was also likely to be plagued with fraud.

Almost immediately, we started receiving calls from individuals who were aware of people applying for and receiving loans based on falsified information. Just as quickly, the government started to announce criminal indictments for people who got the loans and spent them on expensive vacations, apparel, and cars.

This seemed like an obvious area for bringing False Claims Act cases, but nobody was exactly sure whether that was appropriate. Ultimately, the Department of Justice informally suggested to whistleblower lawyers that the ill-gotten loans themselves were not necessarily subject to the False Claims Act.

Under the program, applicants received the loans from private banks. Accordingly, there were seemingly only two sources of damages for False Claims Act relators.

First, the federal government pays the banks a processing fee based on the size of the loan. Second, if the loan is forgiven, the federal government reimburses the bank for the loan.

Only in the latter situation, it seemed, would the full amount of the loan be subject to the trebled damages of the False Claims Act. Otherwise, the damages in that case where your cousin fraudulently obtained a loan for $100,000 is only the 3.5% processing fee, or $3,500, plus a potential penalty.

This was not exactly the reward a lot of our callers were expecting. Few wanted to go forward with a lawsuit after learning this, but fortunately, we were able to convince many of them to file anonymous tips so that the authorities could investigate the fraud nonetheless.

PPP Fraud Settlements Go Public

I was recently contacted and interviewed by a Bloomberg Law reporter who was writing an article about PPP and the False Claims Act. He had learned about a lawyer in Utah who spent hours sifting through public records looking for companies that obtained multiple PPP loans and filing False Claims Act cases based on his findings.

Exactly the type of data mining whistleblower I will be talking about at the Federal Bar Association’s Qui Tam Conference!

The reporter asked me about these cases settling for the amount of the loan and a small penalty, and I was able to explain the above: if the loans had not been forgiven, then the only damages to the government was the small processing fee.

After he published the article about this lawyer, I was able to see my understanding was correct. As was reported, “One settlement made public by the DOJ gave the whistleblower a payout of $4,500, after a Florida duct-cleaning company agreed to pay a small fine and return one of two $170,000 loans it received.”

In other words, his relator’s share was based on the “small fine” of $30,000, which was premised on the $8,500 processing fee. A copy of the settlement can be found here.

A day after the article was published, another settlement was announced: a Virginia-based IT firm repaid a $192,000 loan in addition to $31,000 in damages and penalties. The whistleblower will receive a share of the latter amount in that case as well.

Needless to say, this whistleblower isn’t likely to become a millionaire from uncovering and reporting these crooks, but what must be said is that the financial rewards are not why he did this in the first place. I reached out to him, and he wrote back:

The thought of the likely fraud involved in this program bugged me. Not many members of the public have the ability to research/data-mine the loans, research and understand the False Claims Act, and draft and file lawsuits. As a lawyer, I was able to do all that. Hopefully, I uncovered some criminal fraud activity that enabled the DOJ to pursue charges. As for payback for all the time, effort, and money I put into this little project, that would be nice, but unlikely.

This trait is common in whistleblowers—the goal is not to make a fortune but to right wrongs. This whistleblower should be commended for his efforts. He has given the federal government the playbook by which it may uncover more fraudulent loans on its own.

Moreover, when some of the loans turned out to be legitimate, he stopped filing the lawsuits because he didn’t want innocent people to get into trouble. This highlights an issue with data-mined cases: you don’t know what you don’t know. It is easy to find outliers in the data, but it’s not always as clear why they are outliers.

Are they a hospitalist billing for more time than a human can bill? That seems pretty clear until you find out they are supervising a team of medical students. Are they a contractor that’s violating multiple federal regulations? Again, that seems like a clear case to the outsider until you learn that they received a special exemption from the federal agency.

Get a Complimentary Evaluation from a Government Fraud Attorney

Ultimately, you can’t find out whether the perceived fraud is actual fraud until you file and put the government on the case. Sometimes it works out, but often it doesn’t, as was the case with this whistleblower.

To learn more about the modern relator, join me at the upcoming FBA conference. If you believe you have spotted an outlier in the data—whether it be PPP loans, Medicare funds, customs payments, or otherwise—contact us for a free consultation.