Business Law Journal

Early PPP related enforcement actions concentrated on the most brazen and egregious fraudulent conduct, including the misuse of PPP proceeds for ostentatious luxury items.  However, recent investigations indicate a broadening of that investigative scope to include more technical violations of the law.  For example, the first such case involved a company that had falsely certified that it was not in bankruptcy and therefore eligible for a PPP loan.  As part of its settlement with the Department of Justice (“DOJ”), the company returned the loan proceeds and agreed to pay $100,000 in damages and penalties.  Recent PPP investigations have broadened even further, to companies that may have simply been confused as to whether or not they were eligible for the loans.[1] 

This broadening of investigatory scope poses particular risks for private clubs, which have recently been the target of increased PPP-related investigations under the False Claims Act (“FCA”).  Essentially, the FCA imposes criminal and/or civil penalties for falsely billing or overcharging the government.  The DOJ and their attorneys have been particularly active in Southern California, and there have been an increasing number of PPP-related investigations into private clubs in that region.  To our knowledge, these investigations have been civil (rather than criminal) in nature to date.

Yet even civil enforcement carries significant risks, since the FCA provides for penalties based on each individual false claim of between $5,500 and $11,000 and a possible penalty of three times the amount of damages the government has sustained (treble damages).  Companies facing recent PPP enforcement actions have settled with the DOJ for hundreds of thousands of dollars in civil penalties.[2]

What Clubs are Likely to Face

Private clubs may receive attention from both federal investigators and private whistleblowers pursuant to the FCA.  Whistleblowers, who are incentivized by potential bounties of percentage share in the government’s recovery under the FCA, often lead the charge.  Indeed, PPP loan cases are particularly suited to whistleblower allegations as they may be predicated on information known only to insiders.

As increasing numbers of private clubs in California have recently learned, the DOJ in civil FCA investigation typically issues Civil Investigation Demands (“CID”)—essentially demands for documents and interrogatory answers related to the investigation.  The responses to the CID can be used against the company in the targeted investigation, used to open a separate investigation, or can be provided to other federal law enforcement agencies.  In other words, a company’s response to a CID must be carefully evaluated.

How Clubs Can Prepare for and Defend Against an Investigation

Companies can take steps right now to prepare for these types of investigations, including reviewing their PPP loan application and working with an attorney to evaluate whether any loan was properly applied for and received.  Depending on what those reviews find, companies should consider their options, including proactive communications with the DOJ.  Speaking from experience as one of us is a former Assistant United States Attorney, as well as our years of experience representing clients under investigation by federal prosecutors, proactive communication does carry some risk but it can pay large dividends for companies.  In considering these steps, companies should lean on attorneys experienced with governmental prosecutors and self-reporting.

Receiving a CID is a serious matter and companies contacted by the DOJ should immediately work with experienced counsel to review potentially responsive materials and communicate with the DOJ in an effort to mitigate risk and receive the most favorable outcome possible.  Investigations alleging technical violations of PPP eligibility requirements are often subject to nuanced arguments and experienced defense counsel may be able to significantly limit the scope of the investigation.

AALRR is ready and able to help with this process and or any questions you may have.  Please contact the authors of this article or your trusted adviser at AALRR to discuss next steps or questions. 

[1] In total, as of March 2022, DOJ had already conducted over 240 investigations into more than 1,800 entities alleged to have committed over $6 billion in alleged PPP-related misconduct. See Justice Department Announces Director for COVID-19 Fraud Enforcement | OPA | Department of Justice. 

[2] For recent examples see the DOJ’s press releases at: (1) California Agricultural Companies and Their Owner Agree to Pay $600,000 to Settle False Claims Act Allegations Relating to Improperly Inflated Paycheck Protection Program Loans | OPA | Department of Justice;  and at (2) Three California Companies Settle False Claims Act Allegations Relating to Improper Paycheck Protection Program Loans | OPA | Department of Justice