The 59-page indictment, filed in federal court in Manhattan, alleges the men and others at Archegos sometimes timed their trades to drum up the interest of other investors, while borrowing money to make bigger and bigger bets. The Department of Justice states, “Hwang and his co-conspirators invested in stocks mostly through special contracts with banks and brokers called “swaps.” As alleged, these swaps allowed Hwang to cause massive buying of certain stocks, including at carefully selected days and times, to artificially pump up stock prices. Hwang, Halligan, and their co-conspirators lied to banks and used a series of manipulative trading techniques to keep those prices high and prevent them from falling. The lies fed the inflation, and the inflation led to more lies. The scale of this alleged fraud was stunning. In one year, Hwang turned a $1.5 billion portfolio and fraudulently pumped it up into a $35 billion portfolio.” The effective size of the firm’s stock positions swelled to $160 billion — rivaling some of the biggest hedge funds in the world. The case marks the biggest financial-crime charges to come out of the Southern District of New York under the leadership of Mr. Damian Williams, who was sworn in October 10, 2021.

The SEC has also filed a civil complaint stating that Mr. Becker, the former chief risk officer at Archegos, and Mr. Tomita, the firm’s former top trader, had led discussions with the banks about the firm’s trading positions but that Mr. Hwang and Mr. Halligan had directed and set the tone for those discussions. For more background on this case, please click here.

But now, the DOJ, IRS, SEC etc are shifting their focus to more complex investigations. We have clients where the government is scrutinizing every aspect of the loan application such as

-was the box checked stating that you only had one entity

-were the necessity calculations correct

-were the payroll calculations correct

-was there an EIDL advance?

-was number of employees not correct due to using 1099s?

When applying for a PPP loan, you sign and certify that “the funds will be used to retain workers and maintain payroll; or make payments for mortgage interest, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures as specified under the Paycheck Protection Program Rules; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”

The SBA is now auditing every loan worth over $2 million. Since you certify on the loan application: “I understand that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, covered utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, and not more than 40% of the forgiven amount may be for non-payroll costs. If required, the Applicant will provide to the Lender and/or SBA documentation verifying the number of full-time equivalent employees on the Applicant’s payroll as well as the dollar amounts of eligible expenses for the covered period following this loan.” It is easy for the government to try and not forgive the loan/pursue a civil judgement/pursue criminal charges.

Criminal charges can include:

18 USC § 1001 false statements

18 USC § 1014 loan fraud

18 USC § 1344 bank fraud

18 USC § 1341 mail fraud

18 USC § 1343 wire fraud

But also can include

18 USC § 1028A aggravated identity theft

Tax charges

Forfeiture SEC enforcement actions

(Please see, for example, Parallax SEC Complaint)

The government can also use the False Claims Act to enforce settlements relating to PPP loan issues. In January 2021, the DOJ announced its first civil settlement stemming from PPP loan fraud against SlideBelts, Inc., a California company who agreed to pay $100,000 in damages and penalties for making a misrepresentation in its application about its involvement in a bankruptcy proceeding among other things.

If the bank is asking a lot of questions about your PPP loan or application for forgiveness, or if the situation has been referred to the fraud department, call and seek a legal consultation with us here at Conaway & Strickler or contact us here.