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 PPP Loan Fraud: A Case Study 

Michael Santos

Michael Santos

PPP Loan Fraud: A Case Study

Many honest people make business decisions without understanding how those decisions could lead to government investigations or charges for white-collar crime. Over the next year, our team anticipates that thousands of people will face criminal charges because of the way they pursued loans through the Payroll Protection Program (PPP Loans).

We think a case study may prove helpful. A grand jury in the Eastern District of Wisconsin filed an indictment on October 20, 2020. That indictment brought several counts under the following criminal statures:

  • Bank Fraud, Title 18 USC Section 1344 and Section 2.
  • Money Laundering, Title 18 USC Section 1957.

For those who don’t know, a statute is the criminal law. In order to convict a person, prosecutors must prove beyond a reasonable doubt that the defendant committed each element of the offense.

For bank fraud, the elements are straight forward:

  • Knowingly executes, or attempts to execute, a scheme to defraud a financial institution, or
  • Obtains money by false or fraudulent pretenses, representations, or promises.
    • Penalty is up to 30 years in prison.

For money laundering, the elements are more elaborate. Basically, if a person uses money derived from a criminal act, the government may bring charges for money laundering.

In this case, the grand jury brought the indictment against the following people:

  • Thomas E. Smith
  • Stephen E. Smith
  • Samual A. Davis,
  • Robert Hamilton, and
  • Jonathan E. Henley

Plea Agreement for PPP Loan Fraud:

In most cases, defense attorneys will advise a person to plea not guilty at the start of proceedings. After the defense attorney works through discovery, the defense attorney will get a better understanding of the government’s case. In a case involving white-collar crime, the evidence is rather clear. Prosecutors will have an abundance of information, including:

  • Email messages
  • Text messages
  • Bank records
  • Loan application records

If a defense attorney did not prevail in negotiating a pre-charge, deferred-prosecution or non-prosecution agreement, and a grand jury issued an indictment, the chances for a conviction and sentencing hearing increase exponentially.

On February 23, 2021, the Department of Justice issued a press release on Thomas Smith. Mr. Smith, a 46-year-old businessman from Pewaukee, Wisconsin. Mr. Smith pleaded guilty for his role in fraudulently obtaining more than $1 million Paycheck Protection Program (PPP) loans.

PPP Loan Fraud Guilty Plea:

According to the DOJ press release, Smith admitted that he fraudulently sought $1.2 million in PPP Loans.

Sentencing Memorandum for PPP Loan Fraud:

Although we don’t know what mitigation strategies Mr. Smith pursued, the outcome shows that he did not receive much credit at sentencing. Mr. Smith’s defense attorney submitted a rather boilerplate memorandum. Clink the link below to access the memorandum that Michael J. Steinle of the law firm Terschan, Steinle, Hodan & Ganzer filed:

A person facing a sentencing hearing may find value in reading the memorandum available from the above link. In that memorandum, the attorney requested a sentence in the range of 12 to 18 months of imprisonment.

Sadly, the sentencing memorandum did not persuade U.S. District Court Judge Brett H. Ludwig to grant leniency at sentencing.

What went wrong?

Guidelines Table for PPP Loan Fraud:

Anyone can get a better understanding of the United States Sentencing Guidelines with the following articles:

The table provides that we can start with a base offense level of 7 because the statutory maximum term of more than 30 years, as indicated above. Since the loss amount exceeds $550,000, but is less than $1,500,000, we would increase the base offense level by 14. That brings the total to 21 points.

Since Mr. Smith accepted responsibility and pleaded guilty, that would drop the offense level by three points. Theoretically, that should have left him with an offense level of 18.

For a category 1, the sentencing range would span from 27-33 months. For a category 2, the sentencing range would span from 30-37 months.

Sentencing Result for PPP Loan Fraud:

The press release from yesterday, June 2, 2021, however, shows that Judge Ludwig sentenced Mr. Smith to 57 months in prison “for fraudulently obtaining over $1 million in Paycheck Protection Program (PPP) loans guaranteed by the Small Business Administration (SBA) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

In the press release, the government writes:

The Fraud Section leads the department’s prosecution of fraud schemes that exploit the PPP. In the months since the PPP began, Fraud Section attorneys have prosecuted more than 100 defendants in more than 70 criminal cases. The Fraud Secion has also seized more than $65 million in cash proceeds derived from fraudulently obtained PPP funds, as well as numerous real estate properties and luxury items purchased with such proceeds.

Mitigation Strategy:

Any mitigation strategy should begin with a full understanding of the stakeholders. Then, the person should begin to ask questions:

  • How will stakeholders perceive me?
  • What will they think of my attorney?
  • Who will have the most influence at the sentencing hearing?
  • What other steps can take to improve outcomes going forward?
  • What seeds can begin sowing today to improve prospects for the best-possible outcome?
  • Has my attorney done everything possible to show why I’m a worthy candidate for leniency?
  • What steps have I taken to help my attorney advocate more effectively on my behalf?
  • What steps can I begin taking now to improve advocacy efforts later?

Time to Serve for PPP Loan Fraud:

Although we know that U.S. District Court Judge Brett H. Ludwig sentenced Mr. Smith to 57 months, we don’t know how much time he will spend in prison. Factors that may influence in sentence length include:

  • The amount of good time he receives.
  • The amount of earned time he receives.
  • The programs he successfully completes.
  • The efforts he has made to build a strong self-advocacy platform.

The best time to plant an oak tree is 20 years ago. The second-best time is today. Although we all wish that we had made better decisions in the past, we can start laying the groundwork to influence a better outcome later.

A good resource to estimate may be our sentencing calculator:

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