Alleged Fraud-In-The-Inducement Results in $6.3M Settlement

The government’s focused policing of its massive COVID-19 spending—in particular its Paycheck Protection Program (PPP) lending—continues to yield settlements and convey lessons for recipients of federal funding. In the PPP enforcement arena, DOJ has become increasingly sophisticated in its detection and prosecution of fraud and false claims, utilizing advanced data analytics and inter-agency collaboration to identify loan application discrepancies across industries.

The latest settlement, against Southern California dental offices and their founders and former owners, highlights False Claims Act risk that can attach at the time an entity applies for federal funding. The $6.3 million settlement, reached with West Coast Dental Administrative Services LLC and its affiliate dental practices, resolves allegations related to seven purportedly improper second-draw PPP loans.

The CARES Act strictly limited second-draw PPP loan to businesses with 300 or fewer employees to ensure that only small businesses genuinely struggling could access PPP lending. The dental practices were accused of improperly obtaining their PPP loans by misrepresenting their eligibility during the loan certification process, including by failing to disclose common ownership and misstating employee numbers.

The DOJ’s COVID-19 Fraud Task Force continues to identify, investigate, and prosecute individuals and companies that commit COVID-related fraud.  This settlement, in particular, highlights the importance of compliance with eligibility requirements—and of careful attention to the content of required certifications—when seeking financial assistance from government programs.

Obtaining a grant, contract, or government benefit through knowing false statements or fraudulent conduct is punishable under the False Claims Act.

A claim is “knowingly” false where there is either:

• Actual knowledge of falsity;
• Reckless disregard of truth or falsity; OR
• Deliberate ignorance of truth or falsity.

Federal grantees and contractors should take note of the critical importance of accurate certifications when applying for federal grants, contracts, or other assistance to avoid allegations of fraud-in-the-inducement or “promissory fraud,” where a false statement, omission, or misrepresentation caused or induced the government to award a grant or enter into a contract that, but for the false or omitted information, the government would not have granted or awarded.

Consequences of false certifications and false statements in applications and bids can be severe—the False Claims Act provides for treble damages, meaning that damages are assessed at three times the amount of damages the government sustains because of the violation. In addition, while the statute identifies per claim penalties of $5,000 to $10,000, that figure is continually adjusted upward with inflation. Between damages and penalties, potential exposure can be significant.

If you have any questions regarding False Claims Act investigations or litigation, please contact Feldesman Partners and Enforcement Insider Editors Rosie Dawn  Griffin (rgriffin@feldesman.com) and Mindy B. Pava (mpava@feldesman.com) or call 202.466.8960. Be sure to also check out our Enforcement Insider blog to stay up to date on the latest enforcement actions and court decisions of interest to federal grantees and other recipients of federal funding.