The new Covid-19 aid plan for small businesses that President Trump signed this week does not address some weaknesses in the original stimulus legislation that allowed companies with a checkered background to get billions of dollars in payments.
The $ 900 billion pandemic aid bill includes an additional $ 284 billion for the Check Payment Protection Program to support small businesses. In the previous stimulus, 5.2 million small businesses applied for outstanding loans of $ 525 billion.
Nearly 1,500 companies that received nearly $ 2 billion in PPP loans have faced allegations of violations of government regulations or criminal conduct, according to a Wall Street Journal analysis of recipients and news sources.
Another 432 companies laid off workers after being approved for nearly $ 1 billion in loans, according to an analysis of national layoff notices filed primarily by large companies by Good Jobs First, a nonprofit organization based in Washington, DC, which promotes corporate and government accountability.
The government has charged dozens of people in at least 36 allegations of fraudulently obtaining coronavirus relief funds, many for allegedly falsifying PPP loan applications and misappropriating funds, according to a Department of State magazine. Justice.
The original PPP program skipped the typical lender diligence to speed up money to troubled companies. Problems such as violating regulations would probably have been revealed in typical loans. Requirements may change when the Small Business Administration determines the application process and rules for new cash. Investigators are just beginning to unravel dubious loans and reports of possible PPP first-round fraud.
“Prevention is always better than detection,” said Bruce Dorris, chief executive of the Association of Certified Fraud Examiners. “There will be tens of billions of dollars in fraud that we will find in the first round of funding.”
The latest round of PPP financing allows for loans of up to $ 2 million to companies with less than 300 employees, compared to $ 10 million for employers with up to 500 workers in the first round. Companies must also demonstrate at least a 25% drop in revenue between comparable quarters in 2019 and 2020 to qualify for the new program.
This time, Congress focused more on helping businesses than on maintaining jobs by allowing borrowers to spend funds on a wider range of unpaid expenses.
The new legislation does not provide for how the government will verify the decline in revenue or whether companies that face litigation or have violated government regulations should be eligible. The bill gives the SBA 10 days to implement the changes.
Analysts say up to four million small businesses could be lost by 2020 as the pandemic takes its toll on local economies. WSJ visits Yuma, Arizona, where small business owners say another round of congressional stimuli may be too late. Photo: Adam Younker for the Wall Street Journal
“You don’t get a mortgage unless you can prove you make a certain amount of money,” said Ann Gittleman, CEO of Duff & Phelps, a multinational financial consulting firm. “I would have assumed there would have been more documentation that would have required this route.”
An SBA spokeswoman said the agency was working quickly to update the rules for PPP borrowers and lenders.
The Journal’s analysis is based on data from all 5.2 million PPP recipients published in response to a lawsuit filed by news organizations, including Journal publisher, Dow Jones & Co. allegations of violations of government regulations from information sources. The matches were confirmed by comparing the address listed on the loan with the publicly disclosed company locations identified in the news articles.
The data includes unpublished details of 4.5 million recipients who borrowed less than $ 150,000. These smaller borrowers accounted for 28% of the $ 525 billion distributed between April and August.
The nearly 1,500 companies with troubled backgrounds received loans averaging $ 526,000 to support an average of 36 jobs. Nearly 400 of those companies borrowed at least $ 1.5 million, including a telemarketer warned by authorities to allegedly promote counterfeit coronavirus treatments and a private equity firm accused by investors and a state securities regulator. of managing a Ponzi scheme, according to the Journal.
Many of the loan recipients were charged with more common business offenses.
The role of PPP in Covid Aid
Rhode Island-based Madeira Inc. restaurant received a $ 143,000 PPP loan in April. The U.S. Department of Labor filed a lawsuit against the restaurant in 2019 accusing it of violating the Fair Labor Standards Act by withholding overtime pay from employees who worked more than 40 hours a week. A court ordered the restaurant in May to pay its employees $ 40,000 in compensation and damages.
Restaurant employees mentioned in the complaint declined to comment or were unable to contact them.
The SBA said in November that it would audit companies that received loans of $ 2 million or more. The new legislation also increases the SBA’s oversight authority and appropriates an additional $ 50 million for future audits. The new bill prevents the participation of listed companies and requires disclosure of some government officials who received loans but do not describe the documentation requirements for borrowers.
The SBA is working with investigators to recover funds from obvious fraud, but loans that are inadequate will require other remedies, such as fines, said Tarek Helou, a former Justice Department prosecutor who is now a partner at Wilson Sonsini Goodrich & Rosati.
“Someone who lies about owning a company and buying a Lamborghini, of course that’s criminal,” Helou said. “Someone who’s not sure what will happen to their company in a week or two because they receive different sources of information about their income … Should this person go to jail? I don’t think so.”
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Porch.com, which secured a $ 8 million PPP loan in April, illustrates three different gray areas of the law. The home service software provider and moving company is being sued for allegedly violating federal no-call rules, according to court records.
The company’s founder and CEO, Matt Ehrlichman, said Porch.com was fighting demand and that the text messaging system in question was no longer in use.
Porch.com also benefited from the housing boom this year, with revenue expected to reach $ 120 million next year, up from $ 36 million in 2018, according to a July press release.
When the company applied for the loan, the situation was very different. Transaction volumes “fell off a cliff when the pandemic hit” and layoffs were a possibility without the loan, Ehrlichman said.
The company bounced back until a merger with an investment company with a blank check that closed on Christmas Eve. The deal gave Porch.com $ 323 million in new capital and a share price on Nasdaq shares.
“I would love to give credit and call on the government,” Ehrlichman said. “I think Porch is a great example of the intent of this whole program.” I wouldn’t say if the company would return the PPP money.
Write to Shane Shifflett to [email protected]
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