Legal Alerts

COVID-19 Response: CARES Act Borrowers Beware - The Past is Prologue

Washington, D.C. (April 23, 2020) - With more than $349 billion distributed in the Small Business Administration (SBA) Paycheck Protection Program (PPP) (and more being appropriated this week), plus $1 trillion to be allocated in Federal Reserves Main Street Lending funds under Title IV of the CARES Act, the stage is set for both mistakes and fraud. Massive stimulus programs inevitably lead to criminal and civil investigations into fraud, abuse, and negligence. Previous experience under the 2008 Troubled Asset Relief Program (TARP) can provide important lessons learned.

The TARP program was created as a result of the 2008 financial crisis. The CARES Act was created as a result of the 2020 COVID-19 crisis. Other similarities between TARP and certain provisions of the CARES Act are striking.

  • The TARP was authorized to provide $700 billion to strengthen overall market stability in light of the 2008 financial crisis.
    • The CARES Act provides almost $900 billion for PPP and emergency relief and taxpayer protections.
  • The TARP was designed to help financial institutions weather the crisis by providing financial support in the form of loans to underwater businesses, support for consumers, and loans and investment to the auto industry and other businesses.
    • The CARES Act is designed to provide financial support to underwater businesses, help unemployed consumers, and extend loans and investments to the airline industry and other distressed businesses.
  • The Emergency Economic Stabilization Act of 2008 created the TARP as well as the Special Inspector General for TARP (SIGTARP).
    • The CARES Act also contains a provision to create a Special Inspector General for Pandemic Recovery (SIGPAN).

Fraud, Abuse, and Even “Mistakes” Could Result in Civil or Criminal Investigations

In any program that distributes more than $2 trillion in loans, loan guarantees, or other financial assistance, fraud and mistakes will occur.

In the TARP program, the duties of the SIGTARP are to “conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets by the Secretary of the Treasury under any program established by the Secretary.” In the CARES Act, the duties of the SIGPAN are described in virtually identical language – to “conduct, supervise, and coordinate audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury under any program established by the Secretary.”

The implementing procedures also are virtually the same. The SIGPAN will provide a list of the categories of loans, loan guarantees, and investments authorized by the CARES Act, including a listing of the eligible businesses receiving benefits under each category. In addition, as of the date on which the information is collected, the SIGPAN will provide an estimate of the total amount of each loan, loan guarantee, and other investment made under the CARES Act that is outstanding, the amount of interest and fees accrued and received with respect to each loan or loan guarantee, the total amount of matured loans, the type and amount of collateral, if any, and any accrued losses or gains accrued.

While a key focus of SIGTARP investigations involves outright fraud, mistakes are also investigated and prosecuted. Almost all of the programs in the CARES Act require borrower, lender, and governmental certifications for participation. The Treasury Department’s April 23, 2020 Frequently Asked Questions document provides a warning that these certifications will be closely examined, and will likely be a primary focus of inspectors general whose job it is to ensure that a program is operating as Congress intended, and as it is supposed to be implemented, in order to prevent fraud and abuse.

What happens when certifications are proven to be wrong or when funds are used for unintended purposes? In the TARP, the SIGTARP has investigated numerous claims of questionable activity. To date, SIGTARP reports that as a result of its investigations, 438 people have been criminally charged, 381 have been convicted, and 300 have been sent to prison, including more than 168 bank lenders and borrowers. SIGTARP has recovered more than $11 billion in misspent funds. This excludes several civil and criminal investigations that have not resulted in criminal prosecution or recovery of funds, but for which individuals and entities have had to expend time and money to resolve.

Oversight of the CARES Act will be closely monitored. The Government Accountability Office (GAO) has a statutory mandate to “issue a report on its oversight of CARES Act spending 90 days after enactment; issue bi-monthly reports through the first year; and conduct oversight of the programs covered by the CARES Act,” in order to investigate allegations of fraud, waste, abuse, and mismanagement. The CARES Act also created a Pandemic Response Accountability Committee that will be made up of inspectors general from, at minimum, nine federal agencies, with responsibility for oversight of outlays for the entire bill. In addition, a Congressional Oversight Commission will be created to oversee economic stability efforts conducted by the Treasury Department and the Federal Reserve Board.

The SIGPAN will have authority to investigate specific allegations of wrongdoing and bring both criminal and civil charges against participants in the various CARES Act programs. As its creation is virtually identical to the SIGTARP, it is likely to follow the same procedures to ferret out fraud and abuse that most certainly will exist in a multi-trillion dollar program. Those submitting and processing applications for stimulus funds must exercise extreme care with certifications and should consult with counsel as appropriate.

Lewis Brisbois’ COVID-19 Response Team includes attorneys with SIGTARP and related experience and can assist clients as needed to assist with risk identification and management. Visit our COVID-19 Response Resource Center for more information.


Thomas A. Brooks, Partner

Katherine I. Funk, Partner

Jane C. Luxton, Partner

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