DOJ Catch of the Week: Kabbage Inc.

This week’s Department of Justice (DOJ) Catch of the Week goes to bankrupt financial technology company Kabbage Inc. (doing business as KServicing).  On Monday (May 13), DOJ announced that the company agreed to pay up to $120 million to settle charges it violated the False Claims Act by improperly securing Small Business Administration (SBA) loans through the COVID relief Paycheck Protection Program (PPP).  The ultimate payout will depend on the assets available to the bankruptcy estate for distribution to unsecured creditors.

Congress created the PPP in March 2020 as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to support small businesses during the COVID-19 pandemic.  Eligible PPP borrowers could seek forgiveness of the loans as long as they used loan funds for payroll and other eligible expenses.  Participating PPP lenders were required to ensure borrower eligibility by confirming their average monthly payroll costs.  Lenders also were required to follow applicable Bank Secrecy Act/Anti-Money Laundering (BSA/AML) requirements.  The SBA paid PPP lenders a fixed fee based calculated as a percentage of the loan amount.

According to the government, Kabbage inflated tens of thousands of PPP loans, causing the SBA to guarantee and forgive loans that exceeded the amounts borrowers were eligible to receive under the program.  The government further charged Kabbage with failing to implement appropriate fraud controls to comply with PPP and BSA/AML obligations.  Specifically, the government alleged Kabbage removed underwriting steps to increase the number of PPP loans it processed and thereby maximize the accompanying processing fees.  The government further alleged Kabbage employed substandard fraud protocols resulting in its submission to the SBA of thousands of fraudulent or suspect PPP loan applications.

Kabbage’s bankruptcy aside, this settlement represents one of the largest PPP settlements to date and further demonstrates DOJ’s continued commitment to go after those defrauding the PPP program.  In announcing the settlement, the government stressed this commitment with a chorus of officials highlighting the government’s zero-tolerance for PPP fraud:

• The PPP was intended to provide critical assistance to businesses to alleviate the economic challenges imposed by the pandemic.  [DOJ] is committed to holding accountable lenders that knowingly contributed to the misuse of such funds by approving PPP loans for ineligible borrowers or otherwise failing to comply with applicable program requirements.  [DOJ Civil Chief Brian Boynton]
• Instead of safeguarding those [PPP] funds, Kabbage doled out inflated and fraudulent loans, in an effort to maximize its profits. . ..  This office will continue pursuing any company or individual, like Kabbage, that took advantage of the PPP.  [Acting U.S. Attorney Joshua Levy (DMA)]
• PPP lenders . . . who broke that trust should be held accountable, as they ignored signs of fraud, and chose profit at the expense of taxpayers and struggling small businesses badly hit by the COVID-19 pandemic.  This settlement with Kabbage demonstrates our office’s firm commitment to pursuing all parties who played a part in committing PPP fraud.  [U.S. Attorney Damien Diggs (EDTX)]
• SBA has made it a top priority to pursue participants in the PPP Program who committed fraud or otherwise abused the program.  [SBA General Counsel Therese Meers]
• Today we are sending a clear message that compliance with program rules is non-negotiable, especially when supporting the nation’s small businesses during the pandemic.  This settlement highlights our dedication to preserving the integrity of the PPP and holding entities accountable for misusing taxpayer-funded programs.  [SBA Assistant Inspector General for Investigations Shafee Carnegie]

Like most False Claims Act cases, the settlement here originated with a whistleblower lawsuit filed under the statute’s qui tam provisions, which allow private parties to bring lawsuits on behalf of the government against those committing fraud against the government.  This matter involved two such lawsuits: one by an accountant who submitted PPP loan applications to Kabbage; the other by a former analyst in Kabbage’s collections department.  As provided for in the statute, these whistleblowers are entitled to anywhere from 15-30% of the government’s ultimate recovery.

If you would like more information on what it means to be a whistleblower or think you may have information relating to COVID-19 fraud, please feel free to contact us so we can connect you with a member of the Constantine Cannon whistleblower lawyer team for a free and confidential consultation.