The questions and Reddit threads started within days of the U.S. Small Business Administration’s release of the names of thousands of businesses that received loans under the federal Paycheck Protection Program.
Why, they asked, did a youth baseball league in Lafayette need a $5 to $10 million federal loan?
The loan, issued 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 coronavirus economic shutdowns to 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 turn into a grant.
Online sleuths were quick to call the association, which was among nearly 88,000 California businesses that supposedly received loans of at least $150,000 and up to $10 million.
“As one woman put it, ‘You’re just a little 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, which received a loan of less than $100,000 to pay executive staff, umpires and other employees. “Somewhere, a clerk or somebody moved a decimal point and we became millionaires.”
The story is emblematic of issues with the PPP initiative. Recently released data has been fraught with inconsistencies and loans that never actually happened, but the poor record-keeping is only part of the problem for a program that many experts believe is at risk of fraud.
“Because of the number of loans approved, the speed with which they were processed, and the limited safeguards, there is a significant risk that some fraudulent or inflated applications were approved,” the Government Accountability Office wrote in a report on the PPP in late June. “In addition, the lack of clear guidance has increased the likelihood that borrowers may misuse loan proceeds or be surprised they do not qualify for full loan forgiveness.”
It would be nearly impossible to tell how much of that is going on from the data that’s been released, experts say. The clearest inconsistencies are more akin to the Lafayette little league. Consider the venture capital firms Index Ventures and Foundation Capital, both of which are listed as receiving between $5 million and $10 million. The companies didn’t take out the loans, but businesses they were funding did, which is how they landed on the list, according to Fortune magazine. The electronic scooter company Bird, which laid off 406 employees in just one day, was listed, and although a Citibank employee did start an application for the Silicon Valley company, they never actually filed for a loan, Bird’s founder said on Twitter.
Charges have already been brought against at least five PPP borrowers in four states, including a man in Rhode Island who applied for three restaurants, including two that had long been closed and one owned by his brother, as well as a reality TV 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, from Novato was charged with receiving $1.7 million in PPP money for an auto shop business he owned in the Bay Area, allegedly using inflated payroll data to get more money. At the time, the company, GMP Cars, wasn’t paying payroll taxes, making it hard for his laid-off employees to receive unemployment insurance, according to the Department of Justice.
“PPP funds are intended to protect the many, not to enrich the few. The fraud alleged in the indictment reversed Congressional intent by depriving employees and enriching Palermo,” U.S. Attorney David L. Anderson said in a statement.
Those kinds of cases are likely to keep coming to light, said Christopher Ferguson, an attorney who specializes in white-collar crime with Kostelanetz & Fink in New York, but they’re hard for outside observers to spot without access to documents such as confidential IRS payroll records.
Based on the public data there could be warning signs if, for example, a company received a large loan despite having just a handful of employees, he said.
“Another huge red flag is if a company suddenly just came into existence at or about the time of the loan application,” Ferguson said.
Such questions have arisen about four similarly-named companies that were registered between May 22 and May 29 and list a business address that is a private home in Campbell, according to records with 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 to $1 million not long after the companies were registered with the secretary of state.
The loans were approved by three different financial institutions on June 2 and June 24, the SBA data said. According to rules published by the SBA, to be eligible for a PPP loan, a company needed to have been in existence on February 15.
Two of the companies are listed as having no employees and two have 24 employees each, according to SBA records. The only person listed as a manager or member for the four limited liability corporations is Lebnitz Tran, who according to public records has lived at the Campbell home that is listed as the address for the companies in both the secretary of state registration and SBA loan records.
“You never know, there could be legitimate reasons for all of that, but those are the sorts of things that look like potential red flags without knowing more,” Ferguson said, adding that it was hard to comment on specific companies without significantly more information than what is publicly available.
A man who answered the door at the home listed as the businesses’ address said he was just visiting. According to the Santa Clara County Assessor’s Office, the home is owned by a family trust that doesn’t mention Tran.
The risk for questionable loans is due in part to the program’s focus on speed, which placed a lot of the responsibility for verifying eligibility on banks processing the loans and businesses applying for them. But Scott Pearson, an attorney and partner at Manatt Financial Services in Los Angeles, said outright fraud is probably relatively rare.
“If a company goes (for a loan) and it’s a fake company and it doesn’t exist and it doesn’t have any employees, that’s out and out fraud,” he said. But proving that would require payroll tax filings from the IRS and loan applications submitted to the bank and the SBA. “Without that information, I don’t see how you could jump to any conclusions.”
What is probably much more prevalent, but even harder to prove, are cases where a loan is given to a real business that wasn’t negatively impacted by the pandemic, he said. It could be that the business legitimately thought it would be affected — for example, a brewery worried about being shut down that wound up making more money than usual after deciding to produce hand sanitizer.
Even outright fraud cases might take years to adjudicate. Ferguson pointed to the 2008 Troubled Asset Relief Program, which funneled billions of dollars to troubled financial institutions during the Great Recession. One fraud case that grew out of that program just concluded earlier this year, when the defendant was sentenced.
“That just gives you an example,” Ferguson said. “Ten years later, there are still cases being adjudicated from TARP fraud.”
Erin Woo contributed to this report.