Payroll Protection Plan fraud revealed through a chorus of whistleblowers

Tom Temin Tell us what you’ve observed here in relation to the PPP fraud and whistleblowers. What’s going on? What’s the big picture?

Jason Marcus Yeah, thanks. So PPP has been a little bit different than probably a lot of the whistleblower cases you talk about on your program. There were billions of dollars in potential fraud. And normally with whistleblower programs, of course, you have an insider who knows about their company or another company that’s committing fraud, and it’s usually for hundreds of millions of dollars. But you can’t really have that in PPP, because PPP went out to however many, literally millions of different applicants. And so your insider is only going to know about one, maybe a few if they’re affiliated. So what’s different about the PPP and what we have seen is that this has been primarily driven by data miners, which is kind of a term of art. They’re not really necessarily all data miners, but I represent, for example, investigative journalists who simply, manually comb through the data and have their ways of finding, the kind of fraud they would normally report about. They said, well, here we can find it in the data and file a whistleblower case. But I’ve also had Silicon Valley types who are actually running AI and algorithms and finding the outliers that way. And that’s where most of these cases have come from, is from these outsiders who have looked in the data published by the SBA, and found potential cases there.

Tom Temin And what is the mechanism here? Do they discover it, do they file a lawsuit or do they bring that information to the government which then sues the people? Or how does this work? Because it is different than, like you say, if someone is a big government contractor and thinks there’s a 15 million dollar fraud going on.

Jason Marcus Yeah, it’s the same. So they file a case under the False Claims Act. So it’s the same general whistleblower program that most whistleblowers would file under. There is certainly an SBA tip line. They’ve received hundreds of thousands of tips, more than they would ever be able to actually follow up on. And if you go that route, you can report your suspicions. You don’t ever know if there’s actually going to be some follow through, there’s no reward for that. But if you put together what you feel like is a substantial case that’s worth actually bringing, then you can hire an attorney. You have to have an attorney to file one of these. You file a lawsuit under seal, under the False Claims Act, and then you serve the Department of Justice, and work with the Department of Justice to investigate the fraud. And if they ultimately come back with a recovery, then you would get a percentage of that for having brought the case.

Tom Temin And couple of questions. I guess these particular types of whistleblowers then are not subject to retaliation because they don’t work for the outfits they’re blowing the whistle on.

Jason Marcus Yeah, that’s right. They’re usually pretty safe. So the irony there being that we have to be more picky about what we file, because as a whistleblower, I call them PPP prospectors. There’s a gold rush on and they want to be the first to file. And so they want to file everything because there really is no downside to them for filing, sort of what I consider part of my role as relators counsel is almost to protect the government a little bit and make sure that only the strongest, best cases are going forward so that we’re not wasting all of the government resources.

Tom Temin Yes, because by the same token, if someone comes from X, Y, Z contractor and thinks there has been overcharging of the government hourly rates, for example, and there are an auditor in that company and they can definitely document the millions of dollars of overcharges and make a false claims type of claim. In this case, they’re external, so they don’t really have direct knowledge of fraud. It’s only, I guess you would call it circumstantial evidence. That makes it harder, I would think, to be able to say for sure, yeah, this is fraud going on.

Jason Marcus Yeah, and it depends in part on the theory. There are some theories of PPP fraud which are very straightforward. This company is a marijuana dispensary, and marijuana dispensaries were not eligible for PPP because they engage in illegal activity. There’s not too much to that. You don’t really need an insider for that. And then there’s a more speculative level of here’s why we think they weren’t eligible based on their size or their revenues and things. And you can sort of put the pieces together using the public data. But frequently what will happen you’re exactly right, Tom. The kind of the missing piece on this is the fraud. And that’s what the government is always looking for, is not just they weren’t eligible, but they didn’t make a mistake. And so usually your whistleblower provides what’s called scienter, which is, yeah, I was in on these meetings or we talked about, well, we’re a marijuana dispensary, but I bet we can get away with it. And they don’t have that here. So there is a missing piece to a lot of these cases. But at the end of the day, if ultimately a company wasn’t eligible and they shouldn’t have gotten that money, I would expect the Department of Justice to at least recover the money that was lended.

Tom Temin We’re speaking with attorney Jason Marcus. He’s a partner at Bracker & Marcus. And are these cases, Qui Tam? That is is there a settlement if it happens, do they get a share of it?

Jason Marcus Usually, yes. So these are formal qui tam cases, but it’s actually a continuation of what I was just talking about. Is sometimes the government doesn’t find any evidence of intent, and there may be a settlement that is just, Ok, pay us back. We see what happened here. It was confusing. It’s not easy to Monday morning quarterback PPP, but those regulations were very confusing and they were changing all the time. So there are some instances where you can go back and say, yeah, this was a reasonable mistake. In those cases, the government might just recover the money. And if there’s no what we call a multiplier, if there’s no additional penalty on top of the repayment, then at least there’s a Department of Justice argument that there’s no fraud. So there’s no relator share. So ideally you get something on top of that, and then everybody walks away happy.

Tom Temin And how can you be sure that the relator then is not simply trying to harass a business they don’t like? Maybe they got bad General Tso’s chicken and they are trying to bring in a Chinese restaurant because they think of PPP Fraud is a good way to get even.

Jason Marcus And frankly, that’s part of all of our cases. As more of our cases in the non-PPP context, when you have a disgruntled former employee, which is how the defense is always going to paint them, as you know, this is retaliatory. We’re not doing anything wrong. They’re just angry. In the PPP world, I think that’s probably even more rare. There’s no reason to go through this kind of hassle over some bad chicken. But also, as part of my job as a lawyer is to vet that. I’m not going to file anything. That doesn’t make sense to me. And again, PPP is so complicated it usually has to be pretty clearly fraud before I’m ready to file a case.

Tom Temin And when you have used, say, artificial intelligence or some algorithms you say or as you described, or some system to identify a group of people, of recipients of PPP funds that you think are fraudulent, then you’ve got a bunch of little defendants potentially. And how does that roll up into something that the Justice Department might decide to pursue?

Jason Marcus So fortunately, the Department of Justice has been really adamant that they are interested in this area of fraud. So there have definitely been cases that I think if they were kind of your classic whistleblower case, maybe the damages don’t really add up. There’s a lot of work involved. Here, I think the Department of Justice has been more willing to go after small frauds. And it also depends on where you’re filing. So I have a colleague in the northern district of Mississippi, for example, who has gone out and has dozens I mean, I’d say well over 100 settlements for what at the time was the maximum for a sole proprietorship, which was $20,833. And you think, well, this is not worth your time. But he’s grinding, and he’s getting those settlements, he’s getting the money back, because this is really a priority for the Department of Justice.

Tom Temin And what are some of the bigger cases you’ve seen through this methodology of fraud? Dollar wise?

Jason Marcus Yeah. So I think the two biggest cases, one of which was a case that we filed, were both for $9 million. And these were cases based on companies, what we call an affiliation roll, which were companies that had brother and sister companies that were all related, and they were really part of a single corporate group, but they all separately applied for loans. And the SBA looks at that and says, No, you’re actually one big company, and these are meant for small businesses. And so in those cases, it was victory automotive was one in D.C. and we had a case against a roofing company in Texas, and they both settled for 9 million.

Tom Temin I guess the question is how come the SBA didn’t notice that in the first place when the applications came in?

Jason Marcus It’s a great question, and ultimately I think it’s just resources. SBA cases were rare before PPP. There was the occasional, somebody doesn’t qualify. They’re pretending to be a small business, but they’re too big. Maybe they have a veteran just kind of a figurehead so they can get veteran contracts. But the SBA is not a big organization. It’s not a big agency. And next thing you know you have $1 trillion program land in their laps that they’re supposed to handle and administer. And there was a lot of triage. There are some things that, we get a lot of calls about things that were very clearly not appropriate at the time that the SBA has had to say. It’s just too much. We can only handle so much. And so the government is, in my opinion, really relying on whistleblowers and relying on data miners because there’s so much fraud. It took two years to track down all the people who had false businesses and use the money for Lamborghinis. And so to go after legitimate businesses who maybe didn’t qualify, it’s just too much. So it’s just unfortunate. You wish that Congress would pass additional legislation, because they will make more money if they can put more people in office.

Tom Temin It sounds like there’s enough grist for this mill to grind on for years.

Jason Marcus I think so. So the government actually I think they wisely, early on passed an extension of the statute of limitations. Usually you have about six years to file a false Claims Act case, and the government said, let’s make that ten. There’s just so much PPP fraud. This is going to take a really long time. And yeah we’re three years in and I get calls literally every single day with people interested in filing PPP cases.