As part of its ongoing effort to provide guidance on how the Paycheck Protection Program (“PPP”) is supposed to work, the Small Business Administration (“SBA”) has been issuing “Frequently Asked Questions” or “FAQs.” While these questions are no doubt frequently asked, the answers do not necessarily clear up the confusion out there. This client alert attempts to forecast some of the scrutiny that will undoubtedly accompany one of the biggest domestic spending programs in recent history.
As part of its ongoing effort to clarify the details of the PPP, the Department of the Treasury and the SBA have issued a series of guidance documents, including a growing list of “Frequently Asked Questions” or “FAQs.” FAQ #31 seeks to clarify one of the most vexing issues facing applicants and borrowers: what makes such a loan “necessary?” While the Coronavirus Aid, Relief, and Economic Security (CARES) Act suspends the ordinary SBA requirement that borrowers must be unable to obtain credit elsewhere, the SBA has nevertheless advised that PPP borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA has further advised that borrowers “must make this certification in good faith, taking into account their business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” If that didn’t create enough ambiguity, FAQ #37 has caused even more. It asks: “Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The answer provided simply says: “See response to FAQ #31.” This has caused great consternation among private equity companies, particularly those wholly or partially owned by wealthy individuals or private equity firms. If the SBA takes the position that “access to capital” would include an equity investment by a current shareholder regardless of the terms of that additional equity, any company with a “wealthy” shareholder could arguably be ineligible for PPP funds.
Apparently, recognizing the confusion this guidance was causing, SBA later announced a “safe harbor” for applicants by stating that “any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by the SBA to have made the required certification in good faith.” This safe harbor deadline was recently extended to May 14 with the promise of additional guidance. What can companies that received PPP loans expect in the way of possible federal government scrutiny going forward?
For many borrowers, particularly recipients of relatively large loans, i.e., over $2 million, scrutiny is more probable than merely possible. This will likely take the form of audits conducted by either SBA program auditors or auditors from the SBA Office of Inspector General (“OIG”), which will likely be mobilized to conduct some targeted audits of a special subset of loans. With the total volume of PPP loans being so large, not every loan can or will be audited, but many will receive considerable scrutiny. Beyond the audits, some subset of the loans that are audited will turn up red flags that will result in OIG investigations. Investigations differ from audits in that unlike audits that are aimed at finding the existence of anomalies, including evidence of fraud, the related investigations will be focused on determining the origin of the anomaly, i.e., was it an error or was it the product of intentional conduct, and if the latter, whose conduct? To the extent these OIG investigations reveal possible criminal conduct, including violations of 18 USC 1001, which prohibits making false statements to a federal agency, referrals will be made to the FBI or directly to the relevant U.S. attorney’s office. Most such OIG referrals, whether related to the PPP or any other government program, are declined by the Department of Justice (“DOJ”) in favor of administrative remedies, but some, whether because of the dollar amount involved or the perceived egregiousness of the conduct, are actually accepted for prosecution.
Moreover, when it comes to the PPP, DOJ has already signaled its intent to be very proactive, even before any of the usual process described above has run its course. Such an announcement is somewhat unusual, and might be described as “putting the cart before the horse.” DOJ typically does not announce the opening of an investigation—more common is the sequence described above wherein investigative work leads to criminal charges, which are then announced only after the investigation is completed. Nevertheless, as was recently reported, DOJ’s Criminal Division is currently conducting a review of loan applications made as part of the PPP. The Market Integrity and Major Fraud Unit, an office within the Fraud Section of the Criminal Division, has a history of taking the lead in similar reviews, and will apparently lead this effort. With the assistance of the banks that processed loans, DOJ will likely focus on loan applications for indicia of fraud. This will be a complicated endeavor as some of the application’s certifications are relatively straightforward, but others are not and are fraught with ambiguous and subjective judgement calls the applicant must make.
Beyond the likelihood of audits and, in cases of clear fraud, criminal investigations, Congress is also likely to weigh in. The congressional interest is most likely to be focused on the PPP itself, concentrating on whether the program is being managed by the Department of the Treasury and SBA in the way Congress intended. But congressional oversight could also be aimed at particular lenders and borrowers who might make attractive targets due to their volume or size.
The bottom line is this: for most borrowers who were clearly eligible and who made all required certifications accurately and in good faith, the PPP will be an incredibly helpful way to keep their business alive, just as was intended by Congress and the SBA. For others, even those who are arguably eligible and certified in good faith, the particular facts of their business may draw scrutiny. Program participants should take such scrutiny very seriously and rely on competent and experienced legal counsel to help safely navigate this potentially perilous harbor.
Information is changing daily and some of the content included in this alert may have changed or been updated since publication.
Click here to read more Brownstein alerts on the legal issues the coronavirus threat raises for businesses.
This document is intended to provide you with general information regarding the Paycheck Protection Program. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.