Paycheck Protection Program: Potential Liability Grows

Although the Paycheck Protection Program ended in 2021, PPP loan enforcement and litigation remain alive and well.

Government and private actions during the past 12 months signal a continued focus on alleged fraud and mismanagement. That follows up on earlier enforcement efforts alleging fairly simple fraud schemes involving inflated payrolls or misapplication of funds.

Now private litigants are broadening the scope of potential PPP liability through civil False Claims Act lawsuits.

The scrutiny underscores the need for lenders to maintain effective document-retention policies. They also should implement legal record holds and engage counsel if authorities or private litigants take legal action.

Investigating PPP Lenders

• The SBA OIG recently examined the agency’s oversight of fintech lenders and third-party service providers in the PPP. It asserted in a November report that “non-bank PPP lenders made $14.2 billion in suspected fraudulent loans at a rate more than five times higher than loans made by traditional bank lenders.”
• The U.S. House Committee on Small Business criticized fintech companies last month in a report on alleged fraud in the Small Business Administration’s (SBA) COVID-19 lending programs.
• In May 2024, the Department of Justice announced a resolution with financial technology company Kabbage. The DOJ alleged Kabbage violated the False Claims Act by “knowingly fail[ing] to implement appropriate fraud controls” required to meet its obligations as a participant in the PPP.
• Kabbage was just one of several companies mentioned in a December 2022 congressional report exploring a disproportionate number of fraudulent PPP loans among fintechs and fintech partner banks. The report detailed what it viewed as “the poor performance” of investigated fintechs and financial institutions.

Private False Claims Act Litigation

• Another recent development involves a reported wave of private False Claims Act litigation regarding suspected PPP fraud. (The False Claims Act permits private citizens to file lawsuits on behalf of the government alleging fraud in exchange for 15-30% of what the government recovers.)
• The possibility of six- or seven-figure payouts is enticing potential “whistleblowers,” even those who were never company insiders. The first quarter of 2024 alone saw more than 600 “whistleblower” suits filed in the PPP context, with more than $43 million awarded to citizens who have alleged fraud.
• Legal scrutiny has largely focused on the recipients of purportedly fraudulent loans. However, financial institutions who serviced these loans could end up as targets of private litigants as well, as we have seen in fintech investigations by the government.

What Should PPP Lenders Do?

• Lenders should ensure they have effective document-retention policies.
  • Liability under the False Claims Act can extend up to 10 years after the final action involving the PPP loan at issue.
  • The SBA typically requires lenders to maintain records for six years.
• Any lender who receives a subpoena or inquiry from the DOJ, Inspector General, a congressional committee or another government agency – or is served with a civil False Claims Act lawsuit – should immediately implement legal records holds and engage counsel to assist with the response.

For more information or to discuss these developments further, please contact Preston Burton, Joe Walker, Amanda Lawrence, Jay Williams, or another member of the Orrick team.