Will There Be Policy Changes in the Investigation and Prosecution of Alleged Paycheck Protection Program Fraud Under President Biden’s Department of Justice?

By: Andrea L. Moseley

As you might see from the above, not-so-subtle, “light at the end of the tunnel” graphic metaphor, my answer to the headline question is a buoyant “yes.” I continue to track the evolution of the Department of Justice’s (DoJ’s) pursuit of businesses that have allegedly engaged in fraudulent conduct relating to the Paycheck Protection Program (PPP). On the ever-winding PPP road, there are some hot-off-the-fire developments to fold into my ongoing analysis.

For more background, see my posts: What Might Trigger an Investigation into my Paycheck Protection Loan?, or Pandemic Relief Fraud, Prosecutions Are Going the Distance-Is this what we expected? to catch up on recent trends in the uptick of DoJ enforcement actions against individuals and businesses suspected of engaging in PPP fraud.

Why is Former Attorney General Eric Holder, Jr. back on DoJ’s radar?

Well, he is not, as far as I know. But, his DoJ Policies are alive and kicking. On January 29, DoJ announced it was rescinding the former Attorney General Jeff Sessions charging and sentencing Policy, and, at least on an interim basis, reinstating a portion of the Obama-era Policy on charging and sentencing. These DoJ “charging and sentencing” memoranda govern all federal prosecutors’ charging and sentencing decisions. There is no doubt that this change will impact ongoing and future PPP investigations and prosecutions, among other DoJ enforcement actions.

The basic premise of the newly resuscitated Holder Policy, originally dated May 19, 2010, is that prosecutors must make individualized assessments of the fact and circumstances of each case. In other words, charging and sentencing decisions have to be made on a case-by-case basis.

Under the Sessions May 10, 2017 Policy, the central axiom was “that prosecutors should charge and pursue the most serious, readily provable offense.” With zero leniency to spare, the 2017 policy required federal prosecutors to charge the crime that carried the most severe penalty. This requirement paid no homage to other less severe options in charging decisions regardless of the unique facts of the case or a defendant’s individualized circumstances. The policy was one size fits all and that size is whatever is most severe.

The reinstated 2010 policy, dictates that prosecutors “should ordinarily” charge the most serious and readily provable offense, but this “must always be made in the context of ‘an individualized assessment of the extent to which particular charges fit the specific circumstances of the case, are consistent with the purpose of the Federal criminal code and maximize the impact of Federal resources on crime.’” And, “[i]n all cases, the charges should fairly represent the defendant’s criminal conduct, and due consideration should be given to the defendant’s substantial assistance in an investigation or prosecution.”

Of course, this is an interim policy designed to hold a place while Merrick Garland is stuck in “Senate limbo” for the weeks ahead. Nonetheless, I seriously doubt that DoJ would have reinstituted the 2010 Policy without believing that it is entirely consistent with the charging and sentencing policy that Merrick Garland is expected to implement.

The effects of these changes may not be felt immediately but as a practical matter, those facing investigation and prosecution will have much more reason to believe that negotiations, in both civil and criminal matters are not rigidly fixed. Importantly, the reinstated 2010 Policy directs prosecutors to evaluate whether a “substantial Federal interest” is served by bringing criminal charges and whether “an adequate non-criminal alternative to prosecution” exists before bringing charges.

Given the fact that the rollout of pandemic relief funds has been anything but a model of clarity, there are a lot of grey areas for DoJ to sort through in deciding who to charge criminally. Last July, I talked about where DoJ would likely draw the line between civil and criminal enforcement.

When I first wrote about civil vs. criminal enforcement, the only policy preview I had at my disposal was from a June 2020 speech given by Principal Deputy Assistant Attorney General Ethan Davis that outlined the Civil Division’s enforcement priorities. In his speech, he reaffirmed that combating illegal activity relating to COVID-19 was a top priority of DoJ.  He pronounced that the federal government is not setting out to target businesses operating in good faith.

Now, DoJ’s first civil settlement has finally taken shape. From my perspective, this first settlement agreement (the “SlideBelts” settlement) could be good news for my clients facing scrutiny for their PPP loans. That is, if the SlideBelts settlement is a true bellwether.

On January 12, 2021, DoJ announced that it had settled with SlideBelts regarding allegations of fraud related to the PPP. DOJ settled the $4.2 million claim against SlideBelts, an admittedly bankrupt internet retailer, and its president for $100,000. SlideBelts had filed for bankruptcy in August 2019. Bankruptcy debtors are ineligible for PPP loans, and SlideBelts submitted three PPP loan applications anyway (to a credit union, and to two different federally insured financial institutions). In response to a question on the PPP loan applications about whether the loan applicant was involved in any bankruptcy, SlideBelts stated that it was not.

The notable takeaway for me as a white collar litigator is that, so far, the subjects of the SlideBelts settlement have been spared felony convictions and possible incarceration for attempting to fraudulently obtain over $4 million dollars in PPP loans on behalf of their business.  This is news because the SlideBelts case contains facts which could have been pursued criminally. The three false statements about SlideBelts bankruptcy appears to be knowing and intentional misrepresentations in the eyes of DoJ. And, fortunately for SlideBelts, DoJ elected to settle on civil terms. Note, that the United States explicitly reserved and did not release SlideBelts from any criminal liability. However, it is unlikely that DoJ would criminally charge these individuals after reaching a civil settlement agreement. Nonetheless, the lack of release for criminal conduct places SlideBelts in a very tenuous and vulnerable position.

The facts surrounding this first DoJ civil settlement in combination with the reinstitution of the 2010 DoJ memo leaves much hope that there is room for negotiation and diplomacy while defending those accused of making material missteps with their PPP loans. I still reserve my concerns that DoJ will begin to criminally prosecute cases that fall in grey areas, on the line between civil and possibly criminal. However, that said, these two recent developments begin to pave realistic and navigable paths toward successfully seeking alternatives to criminal prosecution.

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