Serial Relator Brings Multiple Lawsuits Alleging False Claims Act Violations Premised on Paycheck Protection Program Fraud
A district court in the Southern District of New York recently unsealed a qui tam case brought by relator GNGH2, Inc., a for-profit company, against 15 entities that allegedly operated nursing homes in the Bronx, New York and in Florida and various health care staffing agencies. The U.S. Attorney’s Office declined to intervene in the suit. GNGH2, Inc. alleged that the entities applied for and received Paycheck Protection Program (PPP) loans from the Small Business Administration (SBA) under the Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES Act) in an amount exceeding $35 million. According to the suit, the entities were under common ownership with Citadel Care Centers and were not entitled to the loans and forgiveness of them because in the aggregate they exceeded “the maximum assets, payroll size, and revenue for qualification” under the PPP.
The PPP provided forgivable loans to help small businesses and nonprofit institutions impacted by the COVID-19 pandemic to make payroll and cover other expenses. It was authorized initially by the CARES Act, modified by subsequent legislation, and reauthorized by the Coronavirus Response and Relief Supplemental Appropriations Act of 2021. Under the PPP, generally, small businesses with up to 500 employees, including the self-employed, were eligible to take out loans up to $10 million.
Between October 2020 and March 2022, GNGH2, Inc. also filed five separate qui tam actions that various courts ordered unsealed between May and August 2022. Also in these cases, GNGH2, Inc. alleged that companies applied for and received PPP loans on the basis of false applications and certifications, and on this basis, that the entities violated the False Claims Act (FCA). One of these five actions has led to a recovery, the others have been declined and, with one exception, were dismissed.
Earlier in October, the U.S. Attorney’s Office for the Eastern District of Wisconsin announced a settlement with a Milwaukee public relations firm for $2.25 million to resolve GNGH2, Inc.’s allegation that it was not entitled to a “second-draw” payment of PPP funds. In December 2020, Congress authorized borrowers who had received an earlier PPP loan to apply for a “second-draw” loan, but excluded from PPP eligibility organizations that were required to register under the Foreign Agents Registration Act (FARA). At the time of its second-draw application, allegedly the PR firm was performing work for a foreign ministry, triggering a FARA-registration obligation that rendered it ineligible to apply for a second-draw loan; however, it applied for and received a $2 million loan that led to the settlement.
Apart from the Wisconsin case, GNGH2, Inc. has not had success in the four other cases filed in the Southern District of New York and the District of New Jersey. The U.S. Attorney’s Office for the Southern District of New York declined to intervene in GNGH2, Inc.’s suit alleging PPP violations it filed against another PR firm. The docket in that matter does not reflect that the relator has served the complaint, or whether it intends to proceed and litigate the action. Also in the Southern District of New York, GNGH2, Inc. brought a PPP-based claim against five entities allegedly operating together for exceeding “the maximum assets, payroll size, and revenue for qualification.” The U.S. Attorney’s Office declined to intervene and the case was later voluntarily dismissed. Likewise, in a similar case filed in the District of New Jersey, GNGH2, Inc., voluntarily dismissed the qui tam filing after the United States declined to intervene.
In another case brought by GNGH2, Inc., the Southern District of New York U.S. Attorney’s Office declined to intervene in the qui tam action. The U.S. Attorney’s Office obtained a PPP loan repayment from the corporation named in the complaint, which had mistakenly received loan proceeds to which it was not entitled because of its status as a publicly-traded company on the NASDAQ exchange. GNGH2 brought a motion to obtain a share of the loan repayment under the “alternative remedy” provision of the FCA, 31 USC §3730(c)(5), but the court ruled that the motion was premature on the basis that the qui tam litigation was pending.
The filings do not reveal the identities of the owners of GNGH2, Inc., and whether the allegations are based on any information beyond the publicly available information regarding all recipients of PPP loans and the corporate entities names in these qui tam filings. Cases like these, similar to data-mining cases, are not viewed favorably by the government and, in addition to declination, are subject to dismissal by motion under the “public disclosure” bar of the FCA, as well as dismissal by the United States under Section 3730(c)(2)(A) of the FCA, which is the broad authority for the Department of Justice to seek and obtain dismissals. Nonetheless, as evidenced in the case filed in Wisconsin, allegations based on public data by a corporate relator may lead to recoveries and awards to the corporate relator. We have represented companies with respect to allegations of false certifications under the PPP, and will continue to monitor closely developments in this area.