In the movie Wall Street, Michael Douglas makes the famous statement “Greed is good” as a means of explaining why the desire to accumulate wealth helps fuel societal wealth. Whether the statement is actually true or not is a matter to be debated among economic theorists and theologians. It is clear, however, that greed is one of the most common motives behind financial crimes, but it is not the only motive. Sometimes economic necessity, the employee who embezzles money because his child is dying of cancer and he has run out of money and has no health insurance, drives criminal conduct. Frequently, motives are difficult or impossible to determine.
Take the CARES Act for example. In an effort to combat the economic collapse associated with COVID-19, Congress pumped $2.2 trillion into the U.S. economy with little foresight or oversight. A small portion of these funds was provided directly to taxpayers, but most of the money was quickly pumped through state and local governments and financial institutions with an emphasis on getting the money into the economy as quickly as possible. As a result, the normal due diligence associated with grants, loans and other forms of financial support was ignored. The results are predictable.
In Pennsylvania, for example, a number of prison inmates have been indicted for applying for COVID-19 related unemployment. While one might expect prison inmates to perpetrate a crime, two Pennsylvania state court judges also applied for pandemic unemployment assistance despite the fact that they were employed on senior status as judges. These cases are just the tip of the iceberg. The Protection Program, meant to keep employees employed by requiring recipients of forgivable loans to spend at least 60% of the loans they receive on payroll. Already cases are appearing.
The first pandemic fraud related case to be brought by the Department of Justice (DOJ) appears to be the case of United States v. Sanborn and Butzigeron May 5th, 2020, but since that time, cases appear to be popping up everywhere. In United States v. Ugarte, a company already under indictment for Wire Fraud was charged with an additional count of Bank Fraud for making a false statement in a loan document. Although one of the alleged false statements involved a denial that the company was under indictment, DOJ also alleges fraud because the company spent more than 60% of the money it received on payments for Kenworth tractors rather than spending at least 60% of the money it received on payroll. Similar cases were filed in the District of Columbia and New York. In Pennsylvania, it has been alleged that millions of dollars in Payroll Protection loans went to political lobbying firms despite explicit provisions in the CARES Act prohibiting loans to political organizations.
These cases, and the FBI already reports hundreds of cases under investigation, will mostly involve allegations of Mail Fraud, Wire Fraud, Bank Fraud and violations of the False Claims Act. As state and local governments begin to go back and evaluate how COVID-19 relief funds were actually distributed, they will undoubtedly find thousands if not tens of thousands of instances where individuals and companies received money they should not have received. The government, in its discretion, will have to determine who should be prosecuted and who should not be prosecuted.
How does the government decide who to prosecute and who not to prosecute? There are DOJ memoranda and the U.S. Attorney’s Manual, but these sources cannot be relied upon, and the process used by DOJ is opaque. This is where the concept of greed comes in. In most instances, DOJ does not consider greed to be good. If an individual or a company has obtained paycheck protection funds for the purpose of enriching senior executives, that is probably not good. If an individual has obtained funds to pay employees and keep a business running, that is not as bad. There are also a myriad of other factors DOJ uses in determining who to indict and who not to indict. Sometimes these decisions turn on the personal feeling of a special agent or an assistant U.S. attorney. These individuals tend not to believe that “greed is good”.
Motive is not an element of any of the fraud statutes or the False Claims Act. If a crime has been committed, it does not matter, in the eyes of the law, why a crime was committed. Juries cannot be asked to nullify criminal conduct because a defendant had a pure motive. Intent, however, is an element of all of the fraud statutes and the False Claims Act. The government is therefore required to prove not only a guilty act, the receipt of funds to which the recipient was not entitled, but also to prove that the recipient acted with a specific intent to defraud.
A specific intent to defraud is a high bar for the government to meet. It means that at the time a false statement was made, it was made with an intent to deceive or to cheat the person or company that received the statement. False statements occur for any number of reasons, a person at the time he or she makes a statement may believe what he or she said to be true. They may have a mistaken belief as to underlying facts. A false statement must also be “material”, and the individual making the statement may believe that what he or she said “was not important”. In other words, it would not have made a difference. The false statement may be made on the reliance of another source that maker of the statement believes to be credible. These are just some examples.
In the case of the Paycheck Protection Program, it is noteworthy that funds were allocated and distributed without much official guidance. In fact, supposedly trustworthy government officials up to and including the President made inaccurate and misleading statements about the amount of funding and how it could be used long after the funds were allocated. Some of these misleading statements continue to the date of publication of this article. If a recipient of funds relied upon the representation of government officials and accepted funds to which the recipient was not entitled, even if those representations were wrong and the recipient was not entitled to receive funds, there would still not be an intent to defraud. Of course, cases are always factually nuanced, and each case needs to be addressed on its own individual merits.
The matter of Judge Lawrence Clark formerly of the Court of Common Pleas of Dauphin County is intriguing. Judge Clark dedicated his life to the cause of law enforcement and spent twenty years as a Trooper in the Pennsylvania State Police before his retirement. He is reputed to have been a tough, no non-sense conviction-oriented judge who was tough on sentencing. Why would such an individual suddenly decide to engage in fraud? Certainly, some people who portray a law and order image are, deep in their souls, actually criminals, but a more likely explanation is that Judge Clark simply did not understand the requirements of the pandemic unemployment assistance program. The same can be said for the hundreds of thousands of businesspeople who have participated in the Paycheck Protection Program. It should be emphasized that Judge Clark has not been charged with any criminal conduct.
What should a company or an individual do if there is a possibility that the company or individual received funds to which they were not entitled? The first thing to do is to retain an experienced white-collar defense attorney to investigate any questionable transactions to determine if the company did indeed receive funds to which it was not entitled. Next, the company should, if possible, pay back the payments it received and correct any false statements that were made. It is also appropriate to institute a compliance program to make sure the issue that caused receipt of funds to which the company was not entitled is not repeated. There are other steps that may need to be taken depending upon the circumstances.
The retention of counsel early on in the case, preferably before the FBI or state authorities begin an investigation is the best way to ensure a positive outcome. If the target of an investigation has dealt effectively with an issue, it is less likely that state or federal officials will pursue criminal charges. The absence of greed also makes a prosecution less attractive.
“18 Pennsylvania Prison Inmates and Accomplices Charged with Fraudulently Obtaining Pandemic Unemployment Assistance Funds”,https://www.justice.gov/usao-edpa/pr/18-pennsylvania-prison-inmates-and-accomplices-charged-fraudulently-obtaining-pandemic.
 “Pa. Supreme Court ends Senior Status of Two Dauphin County Judges”, https://www.pennlive.com/news/2020/06/pa-supreme-court-strips-2-dauphin-county-senior-judges-of-status.html.
“Indictments Unsealed Alleging Pay-To-Play Bribery Scheme By Manager, Trucking Companies At Utah FedEx Ground Hub”, https://www.justice.gov/usao-ut/pr/indictments-unsealed-alleging-pay-play-bribery-scheme-manager-trucking-companies-utah.
“Millions of Paycheck Protection Dollars went to Pennsylvania Lobbyists”, https://whyy.org/articles/millions-of-paycheck-protection-dollars-went-to-pennsylvania-lobbyists/.
Available at: https://www.justice.gov/jm/justice-manual.