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First Arrests For COVID-19 Stimulus Fraud

May 11, 2020

Two New Englanders have the dubious distinction of being the first persons in the nation prosecuted for COVID-19 stimulus fraud. Federal authorities arrested the two men last week. They allegedly conspired to obtain by fraud forgivable loans guaranteed by the Small Business Administration (SBA). Among other things, they falsely claimed to employ dozens of persons at four different businesses. In fact, no employees worked for any of those businesses.

The U.S. Attorney’s Office in Rhode Island is prosecuting the case. The criminal complaint alleges that the men filed fraudulent loan applications seeking over $500,000 in forgivable loans guaranteed by the SBA under the Paycheck Protection Program (PPP).

The CARES Act and PPP

Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES) on March 29, 2020. CARES is designed to provide emergency assistance to Americans suffering economic hardship due to the COVID-19 pandemic. One of its key components is making forgivable loans available to small businesses through the PPP. To date, Congress has authorized over $650 billion to fund PPP.

PPP offers qualifying small businesses low-interest loans. To qualify, loan recipients must certify that the loan is “necessary to support the ongoing operations of the Applicant.” In addition, business must use the funds for payroll costs, mortgage interest, rent, and/or utilities. Further, to be eligible for loan forgiveness, businesses must spend the funds within eight weeks of receipt and use at least 75 percent of the forgiven amount for payroll.

Defendants’ Stimulus Fraud Scheme

David Staveley of Andover, Massachusetts, and David Butziger of Warwick, Rhode Island, are the defendants. They are the first persons to be charged with defrauding the CARES Act SBA PPP. The defendants allegedly emailed one another about falsifying applications for loans guaranteed through the PPP and about falsifying documents to support their applications.

According to prosecutors, Mr. Staveley applied for loans claiming that he needed over $438,500 to pay employees at three struggling restaurants. In fact, those employees did not exist. Indeed, two of the three restaurants had closed by the time their states’ coronavirus efforts required restaurants to shut down. Mr. Staveley allegedly had no relationship with the third restaurant on his application.

Mr. Butziger applied separately for a $105,381 loan for a company called Dock Wireless. In doing so, he told an undercover FBI agent posing as a bank officer that he had seven full-time employees, including himself. Mr. Butziger claimed he had laid off the employees but would use PPP funds to rehire and pay them. Thereafter, investigators interviewed the supposed employees, who said that they had never worked for Butziger or Dock Wireless.

Fortunately, neither Mr. Staveley nor Mr. Butziger succeeded in obtaining loans. Authorities have charged them with conspiring to make false statements to influence the SBA and with conspiring to commit bank fraud. Staveley faces an further charge of aggravated identity theft. In addition, the government has charged Butzinger with bank fraud.

Expect Aggressive Enforcement of Stimulus Fraud

Congress designed the PPP program to help small businesses survive the stay-at-home orders issued to fight COVID-19. American taxpayers are funding the program with over $650 billion. As we have written before, it is sadly inevitable that some people will take advantage of the current crisis to rip off taxpayers. In DOJ’s press release announcing these charges, Assistant Attorney General Brian Benczkowki stated:

Every dollar stolen from the Paycheck Protection Program comes at the expense of employees and small business owners who are working hard to make it through these difficult times. The Criminal Division is committed to working with our law enforcement partners to root out abuse of the important relief programs established under the CARES Act.

Although this was the first criminal case DOJ has brought for COVID-19 stimulus fraud, there undoubtedly will be more to follow. Whistleblowers play an important role in helping to stop those who would divert much-needed funds from small businesses to line their own pockets.