Clothing Company to Pay $3 Million to Settle False Claims Act Case Initiated by Investigative-Firm Whistleblower

By the Constantine Cannon Whistleblower Team

The U.S. Attorney for the Eastern District of New York recently announced a settlement of a False Claims Act case initially brought by a whistleblower against Lafayette 148, Inc., a clothing company based in Brooklyn, New York.  The FCA case alleged that Lafayette “falsely certify[ied] that it was eligible for a pandemic-era second-draw Paycheck Protection Program (PPP) loan and obtaining forgiveness of that loan.”[1]

False Claims Act Cases Based on PPP Loans

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law in 2020, was intended to provide emergency relief and funding to individuals, families, and businesses impacted by the COVID-19 pandemic.  In connection with that effort, the Paycheck Protection Program, managed by the Small Business Administration (SBA), provided forgivable loans to eligible small businesses.  The PPP provided loans in two draws.  To apply for a second-draw PPP loan, an eligible borrower business had to certify it met program requirements, including that it, with its affiliates, had fewer than 300 employees.[2]

What Was the Alleged FCA Violation in This Case?

According to the DOJ, Brooklyn-based Lafayette had a workshop and production facility in China.[3]  The FCA case alleged that Lafayette “knowingly defrauded the federal government by obtaining a $2 million PPP loan and forgiveness of that loan when it was not eligible.”[4]  In particular, the DOJ claimed that Lafayette was ineligible for a second-draw PPP loan because “its certification about the number of its employees and its operations associated with China were false.”[5]

How Much Did Lafayette Agree to Pay to Settle the Case?

To settle the allegations involving the original $2 million loan, Lafayette agreed to pay a total of $3 million to the United States.[6]

Qui Tam Lawsuits: Private Parties Can Report Fraud Under the False Claims Act

Like many False Claims Act cases, including FCA cases involving allegations of COVID-19 or PPP fraud, this case was initiated by a whistleblower (called a relator).  Under the qui tam (or whistleblower) provisions of the FCA, private parties may file lawsuits on behalf of the government and receive a portion of the monetary recovery.  In this case, the relator will receive a 10% share of the recovery.[7]

In many cases, the relator is an insider at the company, such as a current or former employee, a supplier, or a customer, who has information about the alleged fraud and witnessed it first-hand.

In this case, however, the relator was a company called Verity Investigations, LLC.  According to the Complaint filed in the case, Verity is “an investigative firm formed by two professionals with widespread experience in detecting and reporting fraud on the U.S. public fisc.”[8]  Increasingly, individuals or entities that have performed data analysis have brought False Claims Act claims based on those analyses.  Indeed, as we previously addressed in a post, the DOJ recently announced a new initiative for “data miner” whistleblowers helping to detect fraud against the government.

In this case, the investigative-firm relator alleged that it “review[ed] the Form 5500 that Defendant’s employees’ 401(k) plan filed with the Department of Labor,” as well as “other evidence,” which “indicated that the 401(k) plan had more than 300 ‘active participants’ in each of 2019, 2020, and 2021.”[9]  Verity further alleged that in 2021, Lafayette submitted its SBA Form 2483-SD and “represented that it and its affiliates had 298 employees—narrowly under the 300-employee limit needed to be eligible to apply”; however, according to Verity’s allegations, Lafayette and its affiliates “had far more than 300 employees in each of 2019, 2020, and 2021.”[10]

Remarks on the Case

Small Business Administration (SBA) General Counsel Wendell Davis commented: “SBA is committed to identifying and pursuing those alleged to have perpetrated fraud on COVID Relief Programs to the detriment of small businesses.  By working closely with the US Attorney’s Office in the Eastern District of New York and our other law enforcement partners, SBA continues its enhanced efforts to uncover fraud and pursue recoveries on behalf of taxpayers.”[11]

According to Constantine Cannon whistleblower attorney Ginger Buck: “The government is committed to pursuing COVID-19 fraud, and whistleblowers, including those that perform data analysis, can play a critical role in helping uncover schemes that misuse government funds and undermine programs intended to aid people during a crisis.”

Our Firm Helps Whistleblowers

Our firm represents many whistleblowers with FCA cases. If you believe you have a case, please contact us and we will connect you with an experienced whistleblower attorney.

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[1] See https://www.justice.gov/usao-edny/pr/brooklyn-clothing-company-pays-3-million-settle-claims-it-defrauded-federal-covid-loan (DOJ press release).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] United States ex rel. Verity Investigations, LLC v. Lafayette 148, Inc., 24-cv-4352 (E.D.N.Y.), ECF No. 1 (Compl.) ¶ 7.

[9] Id. ¶ 6.

[10] Id. ¶¶ 54-55.

[11] https://www.justice.gov/usao-edny/pr/brooklyn-clothing-company-pays-3-million-settle-claims-it-defrauded-federal-covid-loan (DOJ press release).

Tagged in: COVID-19, False Claims Act, qui tam,