By Matthew D. Lee and Marissa Koblitz Kingman
The owner of a Florida jet company has agreed to pay a large penalty for using government aid – which was directed to his business – on his own personal expenses. The scheme came to light because of a whistleblower lawsuit that was filed by a former employee of the company on behalf of the government. The employee received almost $60,000 as a result. Such suits, brought under the False Claims Act (FCA), are a key part of how the federal government is rooting out fraud relating to the Coronavirus Aid, Relief, and Economic Security (CARES) Act and its Paycheck Protection Program (PPP).
The CARES Act
The CARES Act, enacted in March 2020, was intended to provide emergency financial assistance to those suffering economic losses related to COVID-19. It included $2.2 trillion in economic aid for Americans and their businesses. The law provided forgivable PPP loans to small businesses to cover payroll and other specified expenses and included the Provider Relief Fund, which was designed to provide needed medical care to Americans suffering from COVID-19.
Almost immediately after the act was passed, the DOJ began working to investigate and prosecute pandemic-related fraud. But in addition to criminal prosecutions, the government used civil tools like the FCA to address CARES Act-related fraud. The FCA permits the government and private citizens to seek monetary recovery for penalties related to false claims for federal funds.
The False Claims Act
The FCA, 31 U.S.C. §§ 3729 – 3733, is a federal statute originally enacted in 1863 in response to defense contractor fraud during the American Civil War. The FCA allows the government to recover damages and penalties for false claims made to the government in an attempt to gain some kind of federal payment. The FCA states that violators are liable for treble damages, plus a penalty that is linked to inflation.
In addition to allowing the government to pursue claims against people for fraud, the FCA also allows private citizens to file suits on behalf of the government (“qui tam” lawsuits). Private citizens who successfully bring a qui tam lawsuit could receive a portion of the government’s recovery. This financial incentive motivates employees to bring whistleblowers actions. Companies should be aware that current and former employees who believe they have uncovered such fraud at their employer’s company will therefore likely want to bring a qui tam action. As discussed in our prior alert, because the FCA permits private citizens to seek monetary recovery for penalties related to false claims for federal funds, businesses should expect whistleblower actions pursuant to the FCA to continue to intensify.
The Government’s Fraud Task Force
On May 17, 2021, the government enhanced its efforts to investigate and prosecute fraud. U.S. Attorney General Merrick B. Garland announced the establishment of a task force to marshal the resources of the DOJ in partnership with other agencies to enhance enforcement efforts against COVID-19 related fraud.
In announcing the creation of the task force, the DOJ said it had already been working together with its partner agencies to hold hundreds of bad actors accountable. The task force was created to incorporate the existing coordination mechanisms within DOJ and is expected to work closely with other government agencies to combat fraud. The task force includes several entities within the DOJ, including the Criminal and Civil Divisions, the Executive Office for United States Attorneys and the FBI.
Other government agencies have also been invited to be part of the task force, including the Department of Labor, the Department of the Treasury, the Department of Homeland Security, the Small Business Administration, the Special Inspector General for Pandemic Relief and the Pandemic Response Accountability Committee. The task force bolsters efforts to investigate and prosecute the most culpable criminals and other alleged bad actors.
Recent FCA Settlement
Following an investigation by the task force, Seth Bernstein, the owner of a jet charter company, agreed to pay $287,055 to settle allegations that he used PPP loan proceeds for his personal expenses. The government alleged that Bernstein applied for and received a PPP loan totaling $1,173,382. Within a day of receiving the loan proceeds, Bernstein allegedly diverted $98,929 of the funds to pay for personal, non-company related expenses.
A former employee of the jet charter company subsequently brought a suit under the qui tam provision. From 2017 until early May 2020, the former employee served as a Senior Accountant and, after a promotion, Assistant Controller for Bernstein’s company.
On March 9, 2020, the company’s Chief Financial Officer and Co-Chairman, Daniel Hebert, informed the former employee and whistleblower that the company would be laying her off with three months’ severance pay. During her severance period, she was encouraged to still come into work, which she did until she accepted another position. The whistleblower’s last day at the company was on May 7, 2020.
What to Expect Next
The aggressive crackdown of fraud related to the COVID-19 pandemic has been unwavering. But in addition to criminal charges, the public should expect a steady increase in civil FCA settlements.
Federal authorities have continued to receive an outpouring of complaints from whistleblowers related to suspected fraudulent activity.
The government makes reporting alleged fraud easy for the public by having a national hotline dedicated to pandemic-related fraud as well as an accessible online complaint form.
Any business owner who is concerned about compliance with the CARES Act or about potential exposure to COVID-19 related fraud allegations should immediately consult counsel.
Do not wait to be contacted by law enforcement.
Those who have already received a subpoena or inquiry from any law enforcement agency should immediately consult with counsel who can assess the full potential for civil and criminal exposure before responding.