The United States has filed a civil complaint alleging that two brothers fraudulently obtained more than $8 million in pandemic-related loans by lying on applications and claiming funds for three businesses that don’t exist.
The loans were issued through the Paycheck Protection Program (PPP), which was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a federal law enacted in March 2020 designed to provide emergency financial assistance to the millions of Americans suffering the economic effects caused by the COVID-19 pandemic.
The PPP offered relief by authorising hundreds of billions of dollars in potentially-forgivable loans to small businesses for job retention and certain other expenses.
The loan applications required the borrower to certify the type of business, the number of employees the business supported, and that the business was in operation as of February 15, 2020.
Borrowers were eligible to seek forgiveness of the loans if they spent the loan proceeds on employee payroll and other eligible expenses.
The civil complaint alleges that between March 25, 2021, and April 28, 2021, brothers Duraid A. Zaia and Kusay Karana obtained four PPP loans for four businesses, two purportedly owned by Zaia and two by Karana.
The complaint alleges that the businesses were either non-existent or were grossly exaggerated in size. The complaint alleges that Zaia and Karana obtained approximately $8.3 million in PPP loans through those fraudulent applications.
In one example, the complaint alleges that Zaia applied for a PPP loan for a business called “Ramona Egg Ranch.” The complaint describes how Zaia certified in his application that this business employed 75 people and had annual payroll costs exceeding $9.5 million.
But, according to the complaint, federal income tax returns that Zaia submitted in support of that loan reported annual payroll costs of just $62,848.
In another example, the complaint alleges that soon after Zaia submitted the Ramona Egg Ranch application, he submitted a second application for a business called “The Duriad A. Zaia Sole Proprietorship.” The complaint describes how Zaia certified that the business employed 137 people and that it was established in 2016.
But, according to the complaint, the business could not have operated at all in 2020 because it did not have an Employer Identification Number (EIN) until March 30, 2021.
As the complaint explains, without an EIN, a business could not legally pay employees because it would not have a tax identification number to report employee wages, payroll taxes, or its own income taxes.
The complaint also alleges that Zaia and Karana bolstered their loans by fabricating lists of employees who worked at their businesses. The complaint asserts that the lists of employees are fraudulent because they show a large percentage of employees simultaneously working at two or more different businesses on a full-time basis.
In one example, the complaint describes how Zaia submitted a list of 108 employees that supposedly worked at one of Zaia’s businesses, and Karana submitted a list of 110 employees that supposedly worked at one of Karana’s businesses.
But 41 people with the same name and the same full-time equivalent salary appeared on both lists.
The complaint alleges that after Zaia and Karana were denied forgiveness of their loans and then defaulted on all their loans, the United States, through the Small Business Administration (SBA), repaid the lenders that issued the loans.
The complaint asserts that, taken together, the principal, interest, and processing fees for the brothers’ loans resulted in a loss of over $8.6 million to the United States.
The United States’ complaint asserts that Zaia and Karana violated the False Claims Act (FCA). The United States filed its complaint after it intervened in a lawsuit filed by a private citizen against Zaia and the Ramona Egg Ranch.
Under its so-called qui tam provisions, the FCA allows private citizens with knowledge of fraud against the federal government to sue on behalf of the government and potentially receive a portion of recovered funds.
