The ink has hardly dried on the pages of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and there is already heated debate about whether some businesses improperly took advantage of the government aid. For example, within days of learning that it had received a $10 million loan, Shake Shack agreed to return the funds after facing criticism that a company with $100 million in cash on hand should not have qualified for such assistance.
This public debate is a precursor to a wave of government investigations and enforcement actions arising from the CARES Act. The newly-created Special Inspector General for Pandemic Relief has a $25 million budget, and we can expect a slew of future claims under the False Claims Act (“FCA”), targeting abuse of the relief funds. Even before the CARES Act was passed, Attorney General Barr directed the Department of Justice to prioritize Covid-19-related fraud, and to appoint coronavirus fraud coordinators.
Regulators are likely to focus on the requirement that the small business loans (issued through the Paycheck Protection Program of the CARES Act) are “necessary to support the ongoing operations of the Applicant” in light of “current economic uncertainty.” There is no standard for what constitutes necessity under this statement, and businesses are trying to figure out what this means while also scrambling to keep their doors open.
How will regulators view the many businesses that are not facing the same level of peril as say, an individually-owned restaurant, but are genuinely concerned about surviving through the expected recession? On its face, the law does not require a showing that there were no other sources of funding – an indication that is was not created solely to benefit those with the most urgent need and can be given to businesses that may have alternate sources of financing. But companies that end up profitable this year after taking the loan may have to fight the perception that the aid was not warranted, or that it was taken by business owners looking for “easy” money to boost profits.
A few simple steps now may pay dividends later if you face a CARES Act or related investigation:
Send a clear message to any employees about the importance of compliance;
Maintain good records about steps taken to cut costs based on projections at the time of applying for the funds, and fold in your financial advisors to help with the accuracy of projections supporting your application;
Consider assigning an employee (or committee) to be the “Covid-19 Czar,” tasked with keeping track of developments, maintaining files (or directing others to do that), reviewing disclosures, etc.; and
Check with counsel regarding any questions.
Ultimately, any steps that you can take to prove that you were acting in good faith will be helpful, and such steps will help to separate you from those that are taking advantage of this difficult situation.
For more information regarding strategy involving government investigations, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Ellen London.
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