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00;00;00;00 - 00;00;23;09
Jonathan Porter
Welcome to another episode of Husch Blackwell's False Claims Act Insights podcast. I'm your host, Jonathan Porter. Last month was the five year anniversary of the beginning of the Covid 19 pandemic. I saw a slew of friends post online about what they were doing in the early days of Covid. You know, empty grocery store shelves, social distancing, toilet paper hoarding.
00;00;23;09 - 00;00;47;13
Jonathan Porter
You toilet paper hoarders, you know who you are. Recalling the early days of the pandemic has been kind of a weird retro perspective for all of us, I think. But something something else happened in the early days of Covid that impacts false Claims Act enforcement, even still today. And that's the CARES act. Today, we're commemorating the five year anniversary of the start of one of the most abused laws ever.
00;00;47;15 - 00;01;10;19
Jonathan Porter
The CARES act. The CARES act was the federal government's $2 trillion response to the Covid 19 pandemic. In almost from the beginning, the CARES act got ripped off. I was still a federal prosecutor when the CARES act was passed, and I remember talking with colleagues and FBI agents about posts on social media telling people just how easy Covid fraud was.
00;01;10;19 - 00;01;31;06
Jonathan Porter
And boy, was it. People have tried to estimate how much fraud there was, and I don't know which methodology to use, but it's safe to say that CARES act fraud was substantial and possibly the biggest fraud in the history of federal programs. It was huge. Now, most of the enforcement on Covid fraud has been criminal and rightly so.
00;01;31;08 - 00;01;57;08
Jonathan Porter
But the False Claims Act has made a surprisingly strong appearance in Covid fraud enforcement over the last several years, and in some pretty interesting ways. And so today, on this five year anniversary of the beginnings of Covid fraud, we're exploring how whistleblowers and the Justice Department are using the false claims Act to address Covid fraud. Joining me to talk about Covid fraud enforcement under the False Claims Act is my colleague, Bob Peabody.
00;01;57;11 - 00;02;23;19
Jonathan Porter
Bob is a white collar lawyer in Husch Blackwell's Boston office. He spent 15 years as a prosecutor, both state and federal. And Bob draws on that hefty background to help our clients with all types of government investigations, including False Claims Act investigations. Now, before embarking on a career in law, Bob was an award winning member of the Harvard University football team, where he played offensive tackle.
00;02;23;21 - 00;02;48;21
Jonathan Porter
But Bob, in preparing to have you on the podcast today, I did a little research and I saw that in Harvard's 1976 team football roster, you were listed at six foot four, 193 pounds and Bob, offensive tackles they've gotten a lot bigger since those days. But now, Bob, seriously, I'm thrilled to have you on our team now, and I'm grateful that you've joined the podcast today.
00;02;48;21 - 00;02;53;19
Jonathan Porter
I'm looking forward to you telling our listeners a little bit about Covid fraud and False Claims Act.
Bob Peabody
Well, thank you, Jonathan.
00;02;53;19 - 00;03;15;24
Bob Peabody
I appreciate you bringing the invitation. I'm glad to know you over the last two years since you've been at Husch Blackwell, we worked a very complex case together and really got to be good friends. So I'm honored to be on your very ___ podcast. It must have been a misprint. The program I was to 290, 297- I was to 27 227 pounds, which is a figure I try to keep at as best I can.
00;03;15;29 - 00;03;34;06
Bob Peabody
Mostly I can, but we worked hard. We were small. We were smaller tackles and guards back in those days. My son played college football division three. He was 300 pounds so. But 197. I ought to find that. Keep that in my scrapbook. In any event, I'm pleased to be here at and your topic is obviously good interest to me.
00;03;34;06 - 00;03;54;14
Bob Peabody
I remember when Covid hit and we were all locked down immediately after March 20th or so, and I was trying to figure out ways to keep myself busy. And so as I learned more and more about the CARES act and the $2.2 trillion over time that was processed by the Congress, it struck me the same. It struck you, this is going to be a rife with fraud.
00;03;54;16 - 00;03;55;17
Bob Peabody
Heavens to Betsy.
00;03;55;20 - 00;04;25;12
Jonathan Porter
To Bob, as I said in the open, the vast majority of Covid fraud was truly criminal. At DOJ, I prosecuted some egregious Covid fraud people who just faked bank records and tax returns to trick SBA and banks into large loans that they blew on insane stuff. I prosecuted accountants who did this. A pastor who invented a business to buy himself a Mercedes, attorney who invented a string of fake businesses, and a guy who used a fake business to buy an expensive Pokemon card.
00;04;25;13 - 00;04;41;22
Jonathan Porter
The media like that one. But those are all very, very criminal acts. So, Bob, with all that blatantly criminal conduct, tell us why we're talking about Covid fraud in the context of the False Claims Act today. Why is a civil remedy being used to combat criminal conduct?
00;04;41;25 - 00;05;09;19
Bob Peabody
Well, Jonathan, with $2.2 trillion worth of CARES act subsidies, they went across the country in a number of different categories, not just the Paycheck Protection Program, but bailing out large corporations and health care and hospitals. The False Claims Act is a obviously an effective way to recoup those overages, those excesses, those fraudulent, not necessarily criminal frauds, but still fraudulent excesses that people did to try to obtain more and more funds to keep their companies or their entities alive.
00;05;09;22 - 00;05;37;03
Bob Peabody
And the False Claims Act provides a very straightforward and useful processes to investigate and then to sue under civil litigation practices. It can be used to prosecute, or I should say, to litigate against civil offenders. There are criminal aspects to it as well, but it's easier to do that way because the burden of proof is less. It's a preponderance of the evidence, 5149 and it's really about to recover funds, not to send people to jail or to send fines and so forth.
00;05;37;05 - 00;05;59;29
Bob Peabody
So it's a very effective way to going after this enormous fraud that the criminal process did a share of it. But now the civil aspect under the False Claims Act will really recover a great deal. As you know, it dates back to the Civil War. Abe Lincoln, Congress imposed the False Claims Act because they were upset with American companies overcharging the federal government for, you know, bullets and then cannons and things like that, and wanted to recoup the balances.
00;06;00;03 - 00;06;28;26
Bob Peabody
And it was very successful. It's been, in effect, although it's expanded and evolved over time. One of the factors that we deal with as litigators is the whole whistleblower or the qui tam portion of it, which basically allows civilians, whether they're in a company or outside a company, if they're aware of fraud, overcharging the government for benefits or for whatever the case may be, overcharging for bullets and things like that, they can blow the whistle, which the federal government will then absorb, perhaps, and pursue the litigation on their behalf.
00;06;28;28 - 00;06;51;27
Bob Peabody
The government is pleased with this whistleblower protection because they have sort of triple or quadruple their investigators, these hidden, you know, watchdogs and truth tellers in the company. They bring fraud to the government's attention, which the government would not know way through their own investigators. So it's really expanded and grown. And of course, there's a huge financial incentive for whistleblowers to bring these to the government's attention.
00;06;52;00 - 00;07;12;03
Bob Peabody
And the process is they must bring the action they file suit. They the whistleblower, with the assistance of counsel, the government reviews it all, follow the seal. The government reviews it carefully if they want to adopt it and take the case on themselves, which every whistleblower pines for, then they'll do so. But they also can refuse it, allowing the whistleblower themselves to litigate the case themselves.
00;07;12;05 - 00;07;36;09
Bob Peabody
But the government remains involved in the whole process. What we're seeing, what the civil litigants are doing or is the case of adoption pursuing it themselves, and the sanctions and the damages was as significant. Every violation of the False Claim Act, every signature on every bill or invoice made to the government is an actionable amount that can bring 30 to $40,000 per violation, as well as additional fines and restitution.
00;07;36;10 - 00;08;00;25
Bob Peabody
So it's it's very effective and very onerous in very punitive that those people that violate it. Last year, the DOJ so more than $2.2 billion in, false claims, judgments and settlements actually into 2022 and 1.9 billion of that, really the large majority was whistleblower complaints. And as I said, it's an incentive for whistleblowers to bring these cases because they can recover between 15 and 30% of what the government was.
00;08;00;27 - 00;08;26;11
Bob Peabody
There are also parallel proceedings. The government can just as easily bring a criminal case along with a civil case, and that happens a lot, you know. Well, the poor defended the test. Balibo. The suitcase had a criminal indictments. It's usually ends badly. But you mentioned that some of your series offices, rather than doing full bore investigations and full bore rookie tams, they're using the False Claims Act to investigate and file suit against much smaller dollar Covid fraudsters.
00;08;26;13 - 00;08;52;09
Bob Peabody
And in places like the Northern District of Mississippi that used the phrase. The office has sued hundreds of Covid loan recipients and in fact won most of the cases because many of the recipients still want to litigate later a default judgment. And then it's up to the government to recover whatever assets they have. Buildings, houses, cars, widgets. But that's another way for the government has actually been successful in trying to recoup every last penny they can find that's been defrauded under the CARES act.
00;08;52;11 - 00;09;22;27
Jonathan Porter
Thanks, Bob. So I remember in the early days of Covid, those of us who were doing these cases talking and saying, hey, we're not going to touch a small fraction of this with criminal cases. And we were talking about, what are we supposed to do here? We don't have the manpower to indict everyone who committed Covid fraud. And it's interesting that you have U.S. attorney's offices, like the northern Mississippi, who came up with a sort of clever way of tackling this issue by suing the small dollar ones, by investigating the big ones criminally and then suing the small dollar ones.
00;09;22;27 - 00;09;38;28
Jonathan Porter
And like you said, Bob, a lot of these are ending in default judgments because the last thing you want to do is say, no, I didn't commit Covid fraud. You sit for deposition all of a sudden, boom. You've admitted to faking tax documents and bank records and backdating stuff. So yeah, it's an interesting thing. It really hasn't caught on, though.
00;09;39;01 - 00;10;03;25
Jonathan Porter
I think you see a handful of those truly criminal cases being brought under the False Claims Act. But I think a lot of small dollar, blatant fraud is just not going to be prosecuted, and it's not going to be handled in any way by DOJ, which has been really interesting. But Bob, you know, in addition to blatantly criminal conduct being identified in key terms or, you know, DOJ using the FCA to get judgments in these small dollar code fraud cases.
00;10;03;27 - 00;10;33;17
Jonathan Porter
DOJ is also started getting settlements against loan recipients where the conduct is more borderline criminal. In recent months, we've seen FCA complaints filed against companies that have made misleading statements on their Covid loan applications. In example, there is a recent FCA complaint the DOJ just filed against a Virginia lobbyist. For whatever reason, when Congress created these Covid loans, it said that lobbyists could not get loans.
00;10;33;19 - 00;10;59;25
Jonathan Porter
So there's a question on PGP and Eidl applications about whether you are engaged in lobbying activities. Well, this Virginia lobbyist disclosed being a lobbyist and was denied a loan, but then applied again, and this time represented itself as a public affairs business, not a lobbyist. Public affairs and DOJ seems to have foregone criminal action on that one. But instead they filed a complaint in federal court under the False Claims Act.
00;10;59;25 - 00;11;07;11
Jonathan Porter
So, Bob, tell our listeners about those types of misrepresentation cases that we're seeing brought under the False Claims Act.
00;11;07;14 - 00;11;30;17
Bob Peabody
Well, in that case, the lobbyist case that you mentioned, I believe that was a Paycheck Protection Program, a peep proceeding. And many of our viewers, particularly her business, probably obtained PPE loans. Everybody did, because it was a way, especially if you were smaller company, to survive at least the beginning of Covid for several months, there was a 350 billion authorized in the beginning and another 250 later on in 2020.
00;11;30;17 - 00;11;49;29
Bob Peabody
So so a lot of money went forward to keep businesses afloat and employees paid. And much like the cases we discussed before, the government has a right to pursue a criminal case or a civil case. But frankly, it's easier, as we discussed before, to bring selections used to juries. Officers in the DOJ have civil offices, too, with many good lawyers in there.
00;11;50;01 - 00;12;09;03
Bob Peabody
They can sue and bring those cases to a lot less heartache and stress and strain. I think, in the lobbyist case, clearly there was a sense of mens rea there that he was trying to work around it. He was told no once and then he just refashioned himself as another entity. And I think there was probably a pretty good criminal case there that he was a liar and that you could prove it.
00;12;09;03 - 00;12;31;24
Bob Peabody
But the resources are greater, is much, much greater to pursue, and the chances of victory or success at trial are harder to obtain. So I can see why they decided to pursue it as a civil enforcement action. I mean, I think there's a probably a pretty good defense if I was his lawyer or her lawyer that she goofed or he goofed, you know, he just thought that he's prepared the application incorrectly and that he was a public affairs.
00;12;32;00 - 00;12;51;24
Bob Peabody
Oh, my fault. That's not going to get you a conviction. But it probably gets a settlement and money returned. I'm not sure. In that case, with your ex, you received the funds? Probably did. Otherwise they wouldn't be pursuing it. But you have to pay it back. Obviously with interest. As I said before, DOJ does prefer civil enforcement actions based on the burden of proof and the ability to get resolution.
00;12;51;24 - 00;13;13;24
Bob Peabody
And most civil cases do settle. They just do, as criminal laws. You know, I always say that they're playing to civil litigators, but they're better criminal categories because they're more experienced in their past as prosecutors and then as a defense attorneys in a civil case. You could also see, even if there was a defensive, I didn't know what I was doing, you could get instructions to the jury of reckless disregard for the truth or what.
00;13;13;24 - 00;13;30;07
Bob Peabody
I would also call the, willful blindness. Also do in the sand, you know, which requires that the defendant could be viewed as actually having the appropriate knowledge if they deliberately avoided learning the truth and the words head in the sand and turn the other way, or they believe the fact that existed and took actions to avoid learning about it.
00;13;30;07 - 00;13;49;04
Bob Peabody
So it's right there in front of them. I've never done a case with willful blindness, but I think it would be very interesting to do it because the jury would be scratching. Well, of course you knew. So that would be a very effective tool to litigate or lean for someone like that. You would, had raised with me this whole question about a Michigan company known as A&P.
00;13;49;06 - 00;14;14;10
Bob Peabody
They were a fuel systems company to the automotive industry, and they got a fairly significant loan of, almost $10 million back in 2021. But once the due diligence and the audit procedure proceedings took place, because once all this money came out, most of those funds, most of those loans were forgiven. But the larger ones, the Treasury Department and small business and actually looked into to audit them to see whether, in fact, they really were title.
00;14;14;10 - 00;14;33;09
Bob Peabody
And they found that the company was owned by a company in the People's Republic of China. And that's not necessarily Nix's peep loan, but it is a problem if, in fact, it's a large company that exceeds, you know, 500 employees and things like that. And yeah, it did. So they had to return those funds. I believe, in the course of the prosecution.
00;14;33;11 - 00;14;56;14
Bob Peabody
Now they're in fact they settle for $14 million with DOJ. But it was a civil proceeding. Again, easier to win, easier to settle, easy to resolve, less manpower, less expense. And I think that's why it makes the FCA so potent, is that the evildoers can be prosecuted criminally, but those that just stole the took the money and either unknowingly or unwittingly and didn't deserve it have to give it back.
00;14;56;16 - 00;15;16;14
Bob Peabody
But you know, this raises the good question, I think, for business men and business women out there who run companies back in those days when people were applying and I worked for a different firm at that time, there were a lot of companies. The confusion and the chaos and how to fill out the applications. And did they have cash reserves that then disqualify them?
00;15;16;14 - 00;15;34;19
Bob Peabody
Did they not? And was the cash reserves part of the principle, etc., etc.. So, well, any time you get a lawyer involved and we were writing these applications, there's some defense and protection. If the government says you did it wrong, that's certainly an important part of it then and frankly now if you're being audited.
00;15;34;22 - 00;15;57;00
Jonathan Porter
Yeah, absolutely. Bob, I love that you brought up reckless disregard to me. Reckless disregard is one of the most interesting facets of the False Claims Act. It's one thing to say that you knew that you were committing fraud is another thing to say. Hey, you are aware of a substantial likelihood that something here was amiss and you just chose to ignore it, and that was reckless on your part.
00;15;57;00 - 00;16;29;08
Jonathan Porter
It's essentially saying, hey, jury, we want you to try to second guess what was going on here. And that's not available in criminal cases, as you said. But at the FCA, it's sort of asking the jury, hey, why don't you figure out what would you have done something differently? And that's a weird that's a really interesting concept that I don't know that the authors of the original False Claims Act knew that that's what was going to eventually happen, but it really opens the door up to a lot of cases being brought under the False Claims Act that couldn't be brought criminally because of the standards there in that very different knowledge structure.
00;16;29;08 - 00;16;54;28
Jonathan Porter
And so it's really interesting. Yeah, Bob, I think you're seeing a bunch of cases that are going to be brought in the False Claims Act, where it's sort of questionable as to whether the representation made on these applications were actually truthful. I wrote recently about an Idaho home health agency that got a TP loan. In the PCP loan, it's certified that it was not committing any federal or state crimes.
00;16;55;01 - 00;17;14;02
Jonathan Porter
And then a couple of years later, they get investigated for making false claims to Idaho's Medicaid program. And so they settle with Idaho's Medicaid program. They actually entered a plea to Medicaid fraud. But then DOJ has now gone back and filed the false claims that complaint against the health agency, saying, well, look at that. You said that you weren't committing any crimes.
00;17;14;02 - 00;17;33;04
Jonathan Porter
And two years after you did that, you pled to a crime that covered that time period. And so now all of those PCP was that were forgiven, those who got to come back. And so that's how a small problem becomes a really big problem under the False Claims Act. Because of these representations that you made when you're getting these lines, which is really, really interesting.
00;17;33;04 - 00;17;56;03
Jonathan Porter
So moving forward a bit, Bob, you know, as we mentioned before, last year's DOJ, FCA statistics, they showed a record number of key jams and Covid fraud key terms. That's a big portion of those record numbers. But while most key terms are filed by insiders blowing the whistle on fraud, some of these new Covid fraud items are being filed by data mining companies.
00;17;56;03 - 00;18;19;15
Jonathan Porter
My friend Jason Marcus has had success in this area, filing key jams for Relator's that are data mining companies that can dig through publicly available data to spot PGP fraud. Bob, this is a big change in how FCA works is probably not something that Congress saw coming when it passed the False Claims Act way back after the Civil War, but it is seeing results with these data mining companies.
00;18;19;15 - 00;18;25;08
Jonathan Porter
So, Bob, what are your thoughts about this trend of data mining companies filing key damps?
00;18;25;11 - 00;18;48;00
Bob Peabody
Well, obviously there's so much money involved. Going back to $2.2 trillion is a lot of money to work with for the government to recover, for whistleblowers to participate in that recovery. And now, you mentioned the data mining, third party vendors, so to speak, to where they are to profit as well. So it's there's a lot of incentive to pursue these cases.
00;18;48;02 - 00;19;09;25
Bob Peabody
A significant incentive. I'm of two minds of this maybe is because I have gray hair. I'm older, but on one hand, obviously this is good for the government. You've got more eyes looking at fraud with all these various subsidies. Not just CARES act, all kinds of subsidies, you know, contracts, financing under the federal subsidies for, you name it, health care, military and the like.
00;19;09;25 - 00;19;32;19
Bob Peabody
But, you had all these guys looking at that and so you tripled your insiders this week. These data mining company. I'm not sure exactly how they work. Or whether they find the whistleblower, the whistleblower finds them, or they find a whistleblower after they've identified the fraud really doesn't matter, but it generates more investigations, both civil and criminal, certainly increases the recoveries the government is going to make.
00;19;32;21 - 00;19;53;24
Bob Peabody
It couldn't identify it, as I was alluding to a broader class of fraudsters out there, and it probably serves to incentivize companies not to get involved in infamous claims, use submissions, just the fact that everyone's looking the government, the insider, whistleblowers and the outsiders. But on the other hand, and this is my obviously maybe it's my age to hide.
00;19;53;24 - 00;20;13;18
Bob Peabody
I don't like the concept of bounty hunters. They're bounty hunters. They're looking for pelts, you know, up in the northern, the northern Canada, they're searching for potential fraud, and they're likely to settle on for all that isn't fraud, or do whatever they can to get in under the door, much like a later whistleblower wants the government to adopt their case.
00;20;13;20 - 00;20;31;06
Bob Peabody
And what is their technology? Perhaps it's sophisticated, perhaps it's not. And who are these companies? You mentioned your friend. I'm sure he's a fine, upstanding man. But who else is out there doing it? You know, believe me that it's like the financial investment business. There are too many people who know what they're doing or pursuing that.
00;20;31;06 - 00;20;40;29
Bob Peabody
So is their technology verifiable? Is it trustworthy? I would think the guy would be circumspect in vetting these kinds of leads. So that's just my view.
00;20;41;01 - 00;20;59;24
Jonathan Porter
Thanks, Bob. Yeah, I get the two minds. I think no one is in favor of government fraud. We on the defense side. That doesn't mean we're pro fraud. We're anti-fraud. And so in general, steps to avoid fraud is good. But I also don't know that a data mining company is exactly the right person to be bringing these cases.
00;20;59;26 - 00;21;25;04
Jonathan Porter
In theory. Look at how large our federal government is. You would hope that they would have data mining programs within the federal government to catch fraud like this, but I guess they don't, or it's not as effective as there's these companies that are being run and then turning into whistleblower ING companies, which is just an interesting, it's, you know, hopefully there are smarter people than me who are out there trying to figure out, is this something that we really want the False Claims Act to become?
00;21;25;04 - 00;21;43;04
Jonathan Porter
Because I think that this could be replicated in other industries where all of a sudden you've got data mining companies that are saying, well, we think that this hospital is up coating something, or this defense contractor is doing X or Y wrong. That, I think would be an interesting trend that other people should figure out. Is this what we really want or not?
00;21;43;06 - 00;22;14;22
Jonathan Porter
So, Bob, when we were first realizing the enormous amount of fraud involved in PBP, one of the things that struck me was that the financial institutions that processed PDBs could end up with big false claims, like problems. And that, to me, is a big, important concept that I want to make sure that we cover in this episode. So the way Congress set up financial institutions were the first line of defense banks processed the loans, as they do many other types of SBA loans.
00;22;14;22 - 00;22;39;14
Jonathan Porter
And the question was to what degree should the banks have caught a lot of these fraudulent loans? And that was just theory for several years until recently, when DOJ started taking action against PCP lenders. The most notable action to me was a few months back when DOJ intervened in a key term against one of the biggest PCP lenders, a financial company called Kabbage.
00;22;39;17 - 00;23;04;19
Jonathan Porter
According to the complaint, Kabbage caused the submission of false claims through maintaining inadequate fraud prevention controls. But Bob Kabbage is just one of many, many banks that processed PBP loans. What do you make of an FCA case against banks for failing to catch fraud? And what should other banks that could have these investigations coming be thinking about future enforcement?
00;23;04;21 - 00;23;05;25
Jonathan Porter
Well, I remember.
00;23;05;27 - 00;23;27;19
Bob Peabody
Back in 20, I have a number of friends. I'm sure you do two or small businessmen. And, it was their bankers that informed them of these peop. Subsidies are coming down the pike and a particular close friend runs a furniture and, and textile business. Amelie leapt on to that and put it together. And he relied on his local bank, the magnet, lending money for businesses to do it all for him.
00;23;27;22 - 00;23;47;24
Bob Peabody
He didn't get a lawyer, he just did it himself and relied on the bank officer to sort of walk him through the application. And I think in most cases back then, those banks were drinking to fire hoses. They were deputized to do the the application process for grants that they don't normally do. They deal with loans, you know, commercial loans for capital expansion, things like that.
00;23;47;24 - 00;24;04;13
Bob Peabody
So the onus is obviously on the on the Who's receiving the loan. In this case, they were just a conduit of the government to help get funds to these companies was a natural place to go. The banks is obviously a facility with finances and things of that nature. I sense was that they were as confused as everybody else.
00;24;04;13 - 00;24;37;06
Bob Peabody
They were drinking through the fire hoses and trying to process this as quickly as possible because people needed these subsidies ASAP, for obvious reasons. And April, May, June, July of 2020 was just, they were inundated, as I mentioned before, and I think negligence on their part for not catching this or catching that or being aware. And by the way, the rules were changing to it was moving the goalposts, as they say, qualifications, forgiveness, responsibilities, definitions of what costs because you could apply cost a mortgage cost to that for one case, taxes.
00;24;37;09 - 00;25;01;19
Bob Peabody
They were all changing at the time and I think people were hugely confused. So I think if I'm the government enforcing this, I want to look about the good faith of both the bank and the individual. I probably wouldn't pursue it. But as time went on, people, you know, the GoPro stopped, the rules were clear and I think PvP went on for several months, even into late 20 and early 21, until it stopped.
00;25;01;22 - 00;25;26;23
Bob Peabody
And I think by that point, if people were committing fraud and careless, then you know, they have hell to pay for that. The your cabbage example and cabbage was a subsidiary of the American Express. They had a fancy name for it later K ventures or K finance or something like that. But you're right, it was massive. But the facts as I read them, showed a lot more sort of deviousness on their part to process.
00;25;26;23 - 00;25;52;06
Bob Peabody
It reminds me of countrywide loans during the mortgage crisis. Anybody who came in would get a loan, you know, no document, no nothing. This wasn't dissimilar to that. They inflated loans for people, according to one of the articles I read, where they really weren't entitled to those large amounts. This was shown on cabbage side. They acknowledged they double counted in state and expenses just to get the loan bigger, because their commission or their fee obviously could be bigger.
00;25;52;09 - 00;26;12;00
Bob Peabody
They didn't stick to the hundred thousand dollars per employee limits. Cfpb wasn't funding people for years, it was just a short stopgap. Same with leave and severance. They were cooking the numbers on that and they were aware of errors. They were aware of what they were doing as early as April of 2020. So they actually were more sophisticated than perhaps your local bank was.
00;26;12;02 - 00;26;31;26
Bob Peabody
They removed underwriting steps. They said substandard fraud check thresholds. This is cabbage. They use automated tools that were inadequate. I mean, it was a mess, you know, it was it was a stew of confusion and chaos and fraud. They were fortunate enough to be able to resolve their case civilly, even though it seems like a pretty good criminal case to me.
00;26;31;28 - 00;26;48;03
Bob Peabody
I think one of the reasons they did it because they're bankrupt and one under, and the best the government could get from that, I think my memory is, is they received $121 million as a creditor in the bankruptcy. So, you know, wait your turn to see if you get any money back from it. And I think that's why they moved.
00;26;48;06 - 00;27;05;22
Bob Peabody
And I suspect Kabbage resolved this very quickly once it was understood, since they were going under anyway. But these were key stamps. Actually, I noticed that one of the key items was one of the whistleblowers was from Massachusetts and the other was from, Texas, and they shared, so I'm not sure what they shared. So there was no funds at the end of that.
00;27;05;22 - 00;27;16;22
Bob Peabody
But nonetheless, those kinds of cases, I think are attractive to pursue civilly or criminally. But I would leave that community banker at Lynn Bank and trust, alone, particularly if they didn't know what they were doing.
00;27;16;24 - 00;27;35;24
Jonathan Porter
Thanks, Bob. Yeah, it's interesting. And we could do a whole other podcast on exactly what happened at Kabbage. What's interesting is a few months back, as you said, there are a lot of keep scams against Kabbage. But what's interesting is there are still key teams that are going forward against cabbages former executives. And that's a really interesting concept.
00;27;35;24 - 00;27;57;27
Jonathan Porter
Is, you know, cabbage is now bankrupt, but the executives are still fighting these key terms. I think DOJ actually joined in one of those key jams against the former cabbage executives late last year. And so these are still so moving forward. So really interesting, Bob, to me, you know, what's interesting is yes, we're talking at all the accusations against cabbage.
00;27;58;00 - 00;28;20;22
Jonathan Porter
But I could say the same thing about the SBA. So the SBA administered the economic injury disaster loans. That was something that did not involve banks. That was a direct to SBA program also under the CARES act. And I can tell you, SBA just did not do a good job of vetting those Eidl applications. They got ripped off, you know, just as hard as the banks did.
00;28;20;29 - 00;28;55;09
Jonathan Porter
I recall sitting down with federal agents where we're looking at these cases, figuring out which ones to charge, which ones to investigate more, which ones to try to focus our attention in, and seeing that there were a bunch of these Eidl loans that SBA had the answer in front of them, they still approved it. SBA would ask for backup documents to verify that they had the revenue amounts, so they'd ask for their tax returns and people would upload their real tax returns that showed they made no money and yet still the SBA officers are approving all of these huge loans.
00;28;55;09 - 00;29;14;23
Jonathan Porter
And so to me, it's a little interesting where this concept of we're going to hold the banks responsible for all this fraud. And yet SBA itself did the exact same thing for other programs. I think ultimately, when we're talking about CARES act enforcement, we should be a little humble here and just say, look, the government was pushing out money as quickly as possible.
00;29;14;23 - 00;29;36;22
Jonathan Porter
That was the directive from Congress. The banks were doing the same thing just because it could have been done better. That doesn't mean that it was fraud in the first instance. And so to me, I would hope that people who are thinking who should pay the price for Covid fraud, let's think carefully about what SBA could have done better and whether we want to hold other people to a higher standard than what we're holding SBA to.
00;29;36;22 - 00;29;53;26
Jonathan Porter
So that's my own personal opinion there. So, Bob, I think a lesson in all of these cases is one, enforcement in this area is still coming. And two, there are a lot of ways to slip up in terms of eligibility where you could have issues under the False Claims Act. And I know we've covered a few, but there are a lot more.
00;29;53;28 - 00;30;13;28
Jonathan Porter
You mentioned companies with common owners, companies that have affiliates where you ought to have combined the revenue, determine eligibility. There's so many other ways you could mess up here. So, Bob, if companies have concerns over whether they were eligible to get these loans in the first place, what should they be thinking about here? Close this out with some guidance on that front.
00;30;14;00 - 00;30;43;15
Bob Peabody
Well, it's a self-serving comment, but if you're a business and you have a budget for business expenses, you should hire a lawyer or you should go to your current lawyer, whether you be a business lawyer, whether it be your tax lawyer, whether it be a lending lawyer, and raise these concerns now, since you're there in the public eye, in the front pages of newspapers and see and revisit perhaps the millions and dollars you recovered or received from the BPO program or other CARES act programs for that matter, see whether we did it right.
00;30;43;18 - 00;31;04;02
Bob Peabody
And you really can't do that without competent counsel to advise you in those categories. Even white collar lawyers like us who just know how the government thinks and what they're looking for and what the hot spots will be, would be very useful to do as well. And review your applications and review the funds coming in and review how long you receive them and who received them.
00;31;04;05 - 00;31;24;09
Bob Peabody
The government will inevitably come and audit you if you receive a lot of money through these programs. It takes time because they only have so many people doing the audits. But they will come. They will find you, and you better be prepared to respond accordingly. And if there are issues that maybe you could have fixed or were wrong, this is a really a ripe opportunity to, in some cases, self report.
00;31;24;12 - 00;31;40;29
Bob Peabody
I would say self-reporting is a very productive thing. You've come to the government to say Maricopa and they always tend to deal with you. Basically your were present with you. They tend to deal with you a little bit more benignly, but just for your own peace of mind. And so all this money, as you said, was pushed out the door back five years ago.
00;31;41;06 - 00;32;06;10
Bob Peabody
And the largest subsidy program in the history of the world, the government is not going to go lightly because they can recover a lot and they have recovered a lot. So contact your lawyer, sit down with him or her, sort through these issues. Get ahead of it. Always get ahead of the government. Mrs. adage, your former agent used to tell me, turn to investigator, get ahead of the government and determine as you navigate the whole false claim qui tam Covid relief landscape that you're aware that is fraught with peril.
00;32;06;12 - 00;32;29;10
Jonathan Porter
Thanks, Bob. Yeah, that is the advice is if you think you've got these issues always, always, always get ahead of it the way DOJ and a judge and a jury is going to be different. If you sort of self disclose, if you come forward, you make it right yourself. That's always going to be different. That's not to say that you can fix an investigation problem by yourself disclosing.
00;32;29;10 - 00;32;50;09
Jonathan Porter
I prosecuted one attorney who committed Covid fraud, and after FBI showed up at her door, she all of a sudden paid all of the money back and said, well, Cy, you can't prosecute me now because I paid it back. It doesn't work like that. But still, if you repay before DOJ or FBI comes knocking, I think that's going to be a tremendous credit to you.
00;32;50;09 - 00;33;11;15
Jonathan Porter
And so, Bob, your advice is excellent. Get ahead of any issues you may have. Call a lawyer and just understand there are ways for you to mitigate things that were not done well in the past. And so, Bob, your guidance there is spot on. And Bob, I appreciate you coming on the podcast and offering your your expertise to folks who may think they have some issues with the CARES act.
00;33;11;23 - 00;33;33;09
Jonathan Porter
Thank you. To close this out, as Bob mentioned, there were a record number of key items filed last year. DOJ data shows that a lot of those were in the PGP or idle world. And so key terms filed last year. Those investigations are happening this year. And so, as Bob said, now's a good time for you sort of figure out, did I do something wrong and can I get ahead of it?
00;33;33;10 - 00;33;55;06
Jonathan Porter
Because I don't think that these cases are stopping now. Congress amended the statute of limitations for Covid fraud from five years to ten years. And so these cases are going to be continued to be investigated. They're going to be there for a while. You just running out the clock. That's a bad strategy because there's five more years on the statute of limitations for Covid fraud.
00;33;55;08 - 00;34;10;04
Jonathan Porter
And so you getting ahead of this is a good idea. I would recommend getting ahead of any sort of issues that you have and not sitting there for the next five years hoping that you don't, you know, get caught, call a lawyer now and then figure out whether you've done something right or wrong. And so that's our conversation for today.
00;34;10;04 - 00;34;29;00
Jonathan Porter
We're going to continue to bring you cases like this. Are episodes like this where we're going to talk about how the False Claims Act is being used in new and interesting ways. And so however you're listening to this, you can subscribe whatever you want to do to continue listening to us, but we appreciate all of our listeners. We hope you appreciated this discussion of Covid fraud.
00;34;29;00 - 00;34;36;27
Jonathan Porter
We appreciate you listening, and we'll see you next time.