SBA PPP – Extended(?) Amid Low Demand for Both PPP and Main Street; PE in Crosshairs Again

Just as the PPP program is being extended, the DOJ has outlined its enforcement priorities, which includes an ominous warning to PE sponsors of PPP borrowers.  The House and Senate have now both passed a bill extending the PPP lending period from June 30 to August 8, which now heads to the president.  If all of this sounds a bit familiar, you’re not wrong.  Keep in mind that the Senate and House are now extending from June 30 to August 8 the PPP “covered period” that was originally set to expire on June 30, … which the PPPFA had ALREADY EXTENDED TO DECEMBER 31 … but which Treasury and SBA decided would end on June 30 anyway, notwithstanding that PPPFA.  I believe this is the equivalent of the House and Senate *strenuously* objecting to the June 30 deadline.

For now the SBA website still notes that the deadline has lapsed:

The extension comes with more than $132B still available, which is almost incredible after the initial onslaught of demand.  For the first few weeks of June, PPP demand had slowed to $2-3B per week, but surged in the last 10 days of the program as SBA approved more than $6B of loans from June 21-30.  While still a far cry from the original numbers, the ongoing (or in some states, restarting) shutdowns are impacting small businesses for significantly longer than originally expected when the CARES Act was passed in March.  Stay tuned for more on this and other stimulus measures being considered.

At the same time, the Fed’s Main Street program is “not getting a ton of interest” according to Fed Chairman Powell.  This matches our experience, where our finance team is having dozens of conversations per week with lenders, prospective Main Street Borrowers and their PE sponsors, but not seeing deals gain traction.  While well-intentioned and clearly based on the lessons learned from TARP and other programs in the 2008 crisis, the programs guidelines simply don’t fit most borrowers who already have leveraged-loan style credit facilties.  Stay tuned for more on this from us next week.  It will be interesting to see how this plays out over the coming weeks, as many (if not most) middle market borrowers who have not already amended their covenants are likely to trip their June 30 covenants.  

On the enforcement side, last Friday, the “second-in-command” of the DOJ’s Civil Division, which overesees the Civil Fraud Section, gave a speech to the U.S. Chamber of Commerceoutlining their False Claims Act (FCA) enforcement priorities, includind with respect to PPP.  David Rybicki, who recently joinded us from DOJ, notes the following highlights with respect to PPP:

PPP enforcement initiatives will be a priority:  “Going forward, the Civil Division will make it a priority to use the False Claims Act to combat fraud in the Paycheck Protection Program.”

·         DOJ singles out PE firms: “Our enforcement efforts may also include, in appropriate cases, private equity firms that sometimes invest in companies receiving CARES Act funds.  When a private equity firm invests in a company in a highly-regulated space like health care or the life sciences, the firm should be aware of laws and regulations designed to prevent fraud.  Where a private equity firm takes an active role in illegal conduct by the acquired company, it can expose itself to False Claims Act liability.  A pre-pandemic example is our recent case against the private equity firm Riordan, Lewis, and Haden, where we alleged that the defendants violated the False Claims Act through their involvement in a kickback scheme to generate referrals of prescriptions for expensive treatments, regardless of patient need.” 

NOTE:  While the RLH claiminvolved TRICARE kickbacks, it included a $21M settlement which may prove enticing to the DOC and the FCA plaintiff’s bar to at least allege direct involvement by PE sponsors in their portfolio companies’ PPP borrowings.   This reinforces the importance of our previous advice to keep meticulous records documenting both the approval process for PPP loans, the usage of PPP process and the forgiveness application.  All of those matters should be handled primarily, if not exclusively, by portfolio company officers, with customary oversight by the company’s board of directors (or LLC managers).  PE sponsors who are more directly invovled in the operations of a portfolio company’s business may expose themselves to risk for liabilty for such operations, under the FCA or otherwise. 

·         FCA efforts to target only “actionable fraud:”  “If a company is eligible for a loan and submits certifications in good faith, that company will have nothing to fear from the Civil Division.  We are concerned only with actionable fraud.  In selecting enforcement targets, we will follow the law, and we will not pursue companies that access CARES Act programs in good faith and in compliance with the rules.”

·         Brand Memo redux: “You might anticipate some qui tam actions based on alleged deviations from those non-binding guidance documents.  But as you know, it is the Department’s position that noncompliance with guidance documents cannot by itself form the basis of an FCA case.”

We will continue to monitor the situation for updates on both PPP and Main Street (our primary teams for those are copied above).  Please let us know if you have questions that you’d like us to address. 

In the meantime, have a happy and safe Independence Day weekend.