Why was the program always at risk of fraud?

The Reddit questions and threads began within days of the publication by the United States Small Business Administration of the names of thousands of companies that received loans under the Federal Salary Protection Program.

Why, they asked, did a youth baseball league in Lafayette need a federal loan of $ 5 to $ 10 million?

The loan, awarded to the Lafayette Youth Baseball Association on May 6, according to data released by the SBA, was part of a much-criticized program that allowed small businesses and nonprofits affected by economic closings of the coronavirus to ask Quickly borrow money to stay afloat. If they used at least 75 percent of the loan to pay employees, all or part of the loan would become a grant.

Online detectives were quick to call the association, which was among the nearly 88,000 California companies that allegedly received loans of at least $ 150,000 and up to $ 10 million.

“As one woman said, ‘You are just a small sports organization, how come you got more money than the San Francisco Symphony?’ Well, we didn’t, “said Judy McNeil, executive director of the association, who received a loan of less than $ 100,000 to pay executive staff, arbitrators and other employees.” Somewhere, an employee or someone moved a point. decimal and we become millionaires. “

The story is emblematic of the problems with the PPP initiative. Recently released data has been riddled with inconsistencies and loans that never occurred, but poor record keeping is only part of the problem for a program that many experts believe is at risk of fraud.

“Due to the number of loans approved, the speed with which they were processed, and limited guarantees, there is a significant risk that some fraudulent or inflated requests will be approved,” the Government Accountability Office wrote in a report on the PPP later this year. June. “Additionally, the lack of clear guidance has increased the likelihood that borrowers may misuse loan proceeds or be surprised that they do not qualify for full loan forgiveness.”

According to experts, it would be almost impossible to know how much of that is happening from the published data. The clearest inconsistencies are most akin to Lafayette’s Little League. Consider venture capital firms Index Ventures and Foundation Capital, which are among those that receive between $ 5 million and $ 10 million. The companies did not take the loans, but the companies they financed did, and that is how they made the list, according to Fortune magazine. The electronic scooter company Bird, which laid off 406 employees in just one day, was included in the list, and although a Citibank employee started an application for the Silicon Valley company, they never actually applied for a loan, said the founder of Bird on Twitter.

Charges have already been filed against at least five APP borrowers in four states, including a man in Rhode Island who applied for three restaurants, including two that had been closed for a long time and one owned by his brother, as well as a reality star in Atlanta. . who used the money for child support payments and to buy a Rolex and a Rolls Royce. In early June, Geoffrey M. Palermo, 56, of Novato, was accused of receiving $ 1.7 million in PPP money for a car shop business he owned in the Bay Area, allegedly using inflated payroll data to get more money. At the time, the company, GMP Cars, was not paying payroll taxes, making it difficult for its fired employees to receive unemployment insurance, according to the Justice Department.

“APP funds are intended to protect the many, not to enrich the few. The fraud alleged in the indictment reversed Congress’ intention by depriving employees and enriching Palermo, “US Attorney David L. Anderson said in a statement.

Those kinds of cases are likely to keep coming to light, said Christopher Ferguson, a white-collar crime attorney with Kostelanetz & Fink in New York, but outside observers are hard to spot without access to confidential documents. IRS payroll records.

According to public data, there could be warning signs if, for example, a company received a large loan despite having only a handful of employees, he said.

“Another great red flag is whether a company suddenly just existed at the time of the loan application or so,” said Ferguson.

These questions have come up about four companies with similar names that were registered between May 22 and 29 and that list a business address that is a private home in Campbell, according to records from the California Secretary of State. The companies, 88 Cloud Computing, 88 Enterprise Services, 88 Investment Empire and 88 Venture Capital, received four loans, each between $ 350,000 and $ 1 million, shortly after the companies registered with the secretary of state.

The loans were approved by three different financial institutions on June 2 and 24, according to SBA data. According to SBA published rules, to be eligible for a PPP loan, a business must have existed on February 15.

According to SBA records, two of the companies are listed as having no employees and two have 24 employees each. The only person listed as a manager or member of the four limited liability corporations is Lebnitz Tran, who according to public records has lived in the Campbell home which is listed as the business address on both the Secretary of State and on SBA loan records. .

“You never know, there could be legitimate reasons for all of that, but that’s the kind of thing that seems like possible red flags without knowing more,” Ferguson said, adding that it was difficult to comment on specific companies without much more information than is available. publicly.

A man who opened the door to the house listed at the business address said he was visiting. According to the Santa Clara County Assessor’s Office, the house is owned by a family trust that does not mention Tran.

The risk of questionable loans is due in part to the program’s focus on speed, which places much of the responsibility for verifying eligibility at the banks that process the loans and the companies that apply for them. But Scott Pearson, an attorney and partner at Manatt Financial Services in Los Angeles, said outright fraud is likely relatively rare.

“If a company goes (for a loan) and it’s a bogus company and it doesn’t exist and it doesn’t have employees, that’s fraud,” he said. But proving that would require filing payroll taxes from the IRS and loan applications filed with the bank and the SBA. “Without that information, I don’t see how any conclusions can be reached.”