Court filing
False Claims Act complaint — Berteletti v. Kabbage
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Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 1 of 53
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
DO NOT PLACE IN PRESS BOX
§
§
[UNDER SEAL] §
§ FILED IN CAMERA
vs. § AND UNDER SEAL
§ PURSUANT TO
[UNDER SEAL] § 310U,S.C.§ 3730
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Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 2of53
IN THE UNITED STATES DISTRICT COURT cf 23
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UNITED STATES OF AMERICA § Oo
ex rel. David Berteletti, § 45
§ Civil Action No.
Plaintiffs, §
§
VS. § JURY TRIAL DEMAND
§
KABBAGE, INC., §
KABBAGE PAYMENTS LLC, § FILED IN CAMERA
AND DOES 1-50, § AND UNDER SEAL
§ PURSUANT TO
Defendants. § 31 U.S.C. § 3730
§
§ DO NOT ENTER INTO PACER
§
§ DO NOT PLACE IN PRESS BOX
§
§
COMPLAINT
1. Qui Tam Relator, David Berteletti, brings this action on behalf of the United States of
America and himself to recover damages and penalties from the Defendants under the
Federal False Claims Act, 31 U.S.C. § 3729 et seq.
2. Defendants have knowingly submitted and caused the submission of false claims for
approval and payment in the form of Paycheck Protection Program (“PPP”) Lender and
Agent processing fees, PPP loan applications, PPP loan forgiveness applications to the
U.S. Small Business Administration (“SBA”), and loan applications to the Federal Reserve
Banks. In so doing, Defendants violated the False Claims Act.
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Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 3 of 53
As detailed herein, Defendants fraudulently completed thousands of PPP loan application
forms by inflating the base calculations on which each borrower’s PPP loan amount, and
the Defendants’ PPP processing fees, were based. Specifically, Defendants knowingly
completed and submitted for approval and payment PPP loan applications that improperly
added the amount of borrowers’ state and local income tax withholdings on top of gross
wages, thereby inflating each completed PPP loan application by amounts specifically
excluded by the PPP legislation and PPP loan application rules. These actions significantly
inflated the amount of each affected borrower’s loan when it was approved by the SBA.
The fraudulently inflated loan amounts, in turn, resulted in Defendants seeking and
receiving PPP processing fees in amounts greater than those to which they were entitled.
Forgiveness of the inflated loan amounts also serves as a fraudulent basis for the SBA to
reimburse Kabbage the full amount of each forgiven loan.
In the less than five months of the PPP’s existence, nationwide Kabbage processed —
approximately $7 billion in PPP loans, drew on the Federal Reserve’s PPP Loan Facility
for nearly $1.52 billion, and, it is estimated, sought and received more than $330 million
dollars in fees from the PPP in loan processing fees for loans processed nationwide.
Based on currently available federal PPP borrower data, Kabbage served as an SBA PPP
Lender for more than 2,900 PPP loans for Massachusetts businesses alone. The
Massachusetts loans have a minimum value of more than $50 million dollars.
As a result of the Defendants’ actions, the government (1) paid Defendants PPP loan
processing fees based upon fraudulently inflated PPP loan applications, (2) approved and
funded loans based on fraudulently inflated PPP loan applications, (3) approved and funded
loans based on fraudulently inflated PPP loan applications in an amount hundreds of
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millions of dollars more than it would have had the applications contained the correct
information. Further, Defendants’ actions causes faultless borrowers to seek forgiveness
for the fraudulently inflated PPP loans they received, which causes the SBA to approve and
reimburse Kabbage for the value of the forgiven loans, causing further harm to the
government.
Kabbage further defrauded the government when it borrowed nearly $1.52 billion from the
Federal Reserve’s emergency PPP Loan Facility by pledging inflated PPP loan values as
collateral for government funds.
In short, purely for their own financial gain, Defendants committed a fraud of opportunity
during the most significant public health crisis of the last generation. At all times, as
described herein, Defendants’ actions were knowing and willful.
JURISDICTION AND VENUE
This action arises under the United States Civil False Claims Act (“FCA”), 31 U.S.C. §.
3729, et seq.
This Court has jurisdiction of the subject matter of this action pursuant to 31 U.S.C. §.
3732(a) and U.S.C. §1331 and has personal jurisdiction over the Defendants because
Defendants transact business in this District.
Venue is proper in this District under 28 U.S.C. §. 1391 and 31 U.S.C. §. 3732(a) because
Defendants transact business in this District and acts violative of the FCA occurred in this
District.
Relator is the original source of these allegations and has direct and independent knowledge
of the information herein within the meaning of the False Claims Act, 31 U.S.C. §
3730(e)(4)(B).
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Relator denies that there has been a public disclosure or that the facts alleged herein have
been publicly disclosed in any Federal criminal, civil, or administrative hearing in which
the Government or its Agent is party in a Congressional, Government Accountability
Office, or other Federal report, hearing, audit, or investigation.
Should any public disclosure have occurred, unbeknownst to Relator, prior to the filing of
this Complaint, Relator’s knowledge is independent of such disclosure and Relator’s
knowledge would materially add to any public allegations or information.
Prior to filing this Complaint, Relator voluntarily disclosed to the United States the
information on which his allegations are based.
PARTIES
Relator, David Berteletti, is a citizen of the United States and the Commonwealth of
Massachusetts. Mr. Berteletti has over 40 years of experience servicing the tax and
accounting needs of successful closely held businesses. He has extensive experience
dealing with service-related industries, high net worth individuals and issues concerning
wealth and estate planning. Mr. Berteletti holds a CPA license from the Massachusetts
Board of Public Accountancy. He received a bachelor’s degree in Management with an
Accounting concentration from Boston College. He also earned a master’s degree in
Taxation from Bentley College. He is also a member of the American Institute of Certified
Public Accountants and the Massachusetts Society of Certified Public Accountants.
Defendant, Kabbage, Inc., is an Atlanta-based financial technology (“Fintech”) company
with a principal office located at 925B Peachtree Street NE, Suite 1688, Atlanta, GA 30309,
and additional offices located in San Francisco, CA, Denver CO, and New York, NY.
Defendant Kabbage Payments, LLC is a Delaware corporation and is Kabbage’s registered
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payment service provider and payment facilitator. Collectively, Kabbage Inc. and Kabbage
Payments, LLC are referred to herein as “Kabbage.”
Kabbage was originally founded to provide small businesses a way to access short-term
lines of credit for under $250,000, and primarily for those with mediocre credit. On its website,
www.kabbage.com, Kabbage describes its business as: “Supporting small businesses is our
business. We're leveling the playing field with big cash flow solutions for small businesses.”
As described herein, Kabbage acted as both a Lender Service Provider (“Agent”) and
approved Lender pursuant to the PPP for hundreds of thousands of small businesses,
including businesses and borrowers in Massachusetts.
As alleged herein, prior to becoming an SBA-approved Lender, Kabbage acted as an Agent
completing PPP loan applications on behalf of hundreds of banks and financial institutions
throughout the United States (the “DOES” alleged herein).
REGULATORY BACKGROUND
The Paycheck Protection Program
In response to the devastating social and economic effects of the COVID-19 pandemic,
Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
on March 27, 2020.
Included in the CARES Act legislation was the Paycheck Protection Program (“PPP”),
created under a new section — section 7(a)(36) - of the Small Business Act of 1953. The
PPP initially provided $349 billion in financial assistance to businesses in the form of
forgivable loans to help those businesses continue operating during the COVID-19 crisis.
The loans were backed 100% by the Small Business Administration (“SBA”).
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Within weeks of passage of the CARES Act the $349 billion in forgivable PPP loan
guarantees available to businesses was exhausted. As a result, Congress added an
additional $310 billion to PPP funding on April 24, 2020, bringing the total to $659 billion.
The PPP closed as of August 8, 2020 with approximately $130 billion remaining, and has
not been reauthorized as of the date of this Complaint.
In addition to Congress’s funding for the SBA, on April 16, 2020 the Federal Reserve used
its own emergency powers pursuant to Section 13(3) of the Federal Reserve Act to supply
direct liquidity to participating financial institutions through term financing. Known as the
“Paycheck Protection Program Liquidity Facility” (“PPPLF’’), the Federal Reserve
provided non-recourse loans to any lender who was eligible to originate PPP loans. This
direct injection of cash to Lenders ensured that all lenders who wanted to participate in the
PPP would have enough funds to provide PPP loans.
PPP Lenders that obtained PPPLF funds from the Federal Reserve pledged their PPP loans
at face value as collateral. Lenders could access the PPPLF for an amount up to the
principal amount of PPP loan collateral they pledged to the Federal Reserve. Lenders
borrowed the money from the Federal Reserve though the discount window at a fixed rate
of 35 basis points (.35%).
As alleged herein, Kabbage applied for and drew on the PPPLF for at least $1.52 billion in
loans from the Federal Reserve. The Federal Reserve monies provided to Kabbage were in
turn used to directly fund the PPP loans for Kabbage’s customers.
The purpose of the PPP was to help small businesses meet payroll and continue operating
during the unprecedented economic effects of the Coronavirus pandemic. According to the
SBA’s PPP website:
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“The Paycheck Protection Program is a loan designed to provide a direct incentive for small
businesses to keep their workers on the payroll. SBA will forgive loans if all employee
retention criteria are met, and the funds are used for eligible expenses.”
PPP rules provide that PPP loans are forgivable in full if a borrower used at least 60% of
the loan for eligible payroll costs over a span of 24 weeks. Non-payroll costs such as
mortgage interest, business rent, and utilities are also eligible for forgiveness. PPP Lenders,
like the Defendants, are directly reimbursed by the SBA for the amount of PPP loans
provided to borrowers if the borrower’s PPP funds were used for the appropriate purposes
and therefore subject to forgiveness.
The PPP was intended to provide a streamlined, uniform process where small businesses
could easily connect with SBA-approved Lenders (and other Lenders) to qualify for and
receive the much-needed Congressionally approved funds.
With certain exceptions not relevant to the allegations in this Complaint, PPP funds were
available to any U.S.-based business with fewer than 500 employees per location; sole
proprietors, independent contractors, self-employed persons; 501(c)(3) non-profit organizations,
501(c)(19) veterans organizations, and Native American Tribal business concerns.
PPP loans have an interest rate of 1%. Loans issued prior to June 5, 2020 have a maturity of two
years, whereas loans issued after June 5, 2020 have a maturity of five years. In addition, loan
payments will be deferred for six months, no collateral or personal guarantees were required to
obtain the loans, and neither the government nor Lenders were allowed to charge small
businesses any fees for the loan application or processing.
Proceeds of the loans could be used to pay certain business expenses, including payroll
costs, costs related to the continuation of healthcare benefits and insurance premiums,
employee salaries and commissions, interest on mortgage obligations, rent and utility
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payments, interest on debt incurred before February 15, 2020, and refinancing an SBA
Economic Injury Disaster Loans (“EIDL”) made between January 31, 2020 and April 3,
2020.
The PPP legislation also allowed entities to assist with PPP loan applications as “Agents”
in conjunction with an SBA approved Lender. Pursuant to the government’s PPP
Information Sheet, “Agents,” also known as “Lender Service Providers,” (“LSPs”)
included consultants, accountants, attorneys, and “someone who assists a Lender with
originating, disbursing, servicing, liquidating, or litigating SBA loans; a loan broker; or
any other individual or entity representing an applicant by conducting business with the
SBA.”
While the PPP loans were administered by SBA and originated by third-party Lenders and
Agents, borrowers were not allowed to submit applications for PPP loans directly to the
SBA, making the use of an approved Lender or Agent necessary.
The PPP waived several normal SBA loan requirements, including borrower, Lender, and
prepayment fees, and the requirement that borrowers also have available credit. The
Federal Government issued specific guidance related to the PPP to assist the lending
process.
SBA Lenders and Agents
Pursuant to the SBA’s April 15, 2020 Interim Final Rule (“April 15 IFR” or “Paycheck
Protection Program Rule”), the SBA was authorized to guarantee loans under the PPP
through June 30, 2020 and all SBA Section 7(a) Lenders were automatically approved to
make PPP loans on a delegated basis. The loan guarantee period was extended further to
August 8, 2020.
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SBA 7(a) Lenders are those institutions qualified to administer loans to small businesses.
The stated purpose of SBA 7(a) loans is to encourage Lenders to provide fair loans to
businesses that might not otherwise obtain funding on reasonable terms and conditions by
having the government guarantee most of the loan amount. SBA 7(a) loans are provided
by private Lenders — usually banks — that are approved by the SBA. Once issued, loans
are then partially guaranteed by the SBA (up to 85% for non-PPP loans).
Generally, in order to become a 7(a) Lender, an institution must meet the following SBA
criteria: have a continuing ability to evaluate, process, close, disburse, service, and liquidate
small business loans; be open to the public to issue loans (and not be a financing subsidiary,
engaged primarily in financing the operations of an affiliate); have continuing good character and
reputation, and otherwise meet and maintain the ethical requirements as identified in 13 CFR
Part 120.140; and be supervised and examined by a state or federal regulatory authority,
satisfactory to the SBA.
In response to the extraordinary circumstances posed by COVID-19, the SBA provided in
its April 15 IFR that the authority to make PPP loans could be extended to additional non-
7(a) Lenders determined by the Administrator and the Secretary to have the necessary
qualifications to process, close, disburse, and service loans made with the 100% SBA
guarantee.
These included any federally insured depository institution or any federally insured credit
union who was not designated in “Troubled Condition” by its primary Federal regulator,
as well as any depository or non-depository financing provider that:
a. Originates, maintains, and services business loans or other commercial financial
receivables and participation interests;
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Applies the requirements of Bank Secrecy Act;
Has been operating since February 15, 2019; and
Has originated, maintained or serviced at least $50,000,000 in business loans or
other commercial receivables during a consecutive 12 month period in the last 36
months;
Or is a service provider to any insured depository institution that has a contract to
support such institution’s lending activities in accordance with 12 USC 1867(c) and
is in good standing with the appropriate federal banking agency.
Non-Bank and Non-Insured Depository institutions wishing to participate in the PPP that
were not previously SBA Lenders but met the criteria set forth above were required to apply
to the SBA. These application materials included Form 3507, the “CARES Act Section
1102 Lender Agreement — Non-Bank and Non-Insured Depository Institution Lenders.”
Form 3507 required the non-bank institution to affirmatively attest to the above criteria
necessary to become a Lender and to:
a.
“Assume all obligations, responsibilities, and requirements associated with
delegated processing of covered loans made under the Paycheck Protection
Program;
For purposes of making covered loans to an eligible recipient under the Paycheck
Protection Program, Lender is responsible, to the extent set forth in the PPP Loan
Program Requirements, for all decisions concerning the eligibility (including size)
of a borrower for a covered loan;
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Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 12 of 53
c. To the best of its knowledge, Lender certifies that it is in compliance and will
maintain compliance with all applicable requirements of the Paycheck Protection
Program and PPP Loan Program Requirements;
d. That any false statements made to the U.S. Small Business Administration and
Department of the Treasury can result in criminal prosecution under 18 U.S.C.
1001, 15 U.S.C. 645, and other provisions and imposition of civil money penalties
under 31 U.S.C. 3729.”
Form 3507 defined “PPP Loan Program Requirements” as the term “Loan Program
Requirements” is defined in 13 CFR § 120.10. That definition, in turn, states that such
Requirements include “official SBA noticesand forms applicable to the 7(a)
Loan Program,” of which the PPP is a part. In its Form 3507 certification, Kabbage was
therefore required to “maintain compliance” with any official SBA Notice regarding the
PPP.
Il. PPP Lender and Agent Processing Fees
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Approved PPP Lenders and their approved Agents earned fees from the SBA for processing
PPP loans.
As described below, Kabbage and the DOES earned fees from the PPP in two ways: first,
as an Agent of authorized SBA Lenders and, second, as a SBA-approved direct Lender to
businesses. Lenders and Agents were not allowed to collect any fees from the borrower and
were instead compensated directly by the SBA.
Kabbage completed and caused to be submitted PPP loan applications as an Agent on
behalf of approved SBA Lenders from approximately April 7, 2020 through May 18, 2020.
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Kabbage completed and submitted PPP loan applications as an SBA Lender from at least
May 18, 2020 until August 8, 2020.
Under the terms of the PPP, the SBA compensated Lenders for processing based on the
principal amount of the Loan at the time of disbursement -- according to the following
schedule:
a. 5% for loans of not more than $350,000;
b. 3% for loans of more than $350,000 and less than $2,000,000;
c. 1% for loans of at least $2,000,000.
Under the PPP, Agents were not allowed to collect fees from the borrowers. Instead, Agents
were paid by the Lender out of the Lender’s own processing fees, reducing the Lender’s
fee by the percentage paid to its Agent. The total amount an Agent could collect from the
Lender for the preparation and processing of a PPP loan application (including the referral
of a borrower to the Lender) could not exceed:
a. 1% for loans of not more than $350,000;
b. 0.5% for loans of more than $350,000 and less than $2 million; and
c. 0.25% percent for loans of at least $2 million.
Thus, within each strata of loan amount, whether acting as Agent or Lender, the
Defendants’ PPP fees increased in direct proportion to the amount of each borrower’s loan.
The greater the loan, the greater the fee.
To receive their processing fees, Lenders were required to follow the May 21, 2020 SBA
Procedural Guidance Notice (“May 21 Notice”). The May 21 Notice is a “PPP Loan
Program Requirement” pursuant to 13 CFR § 120.10 because it is an
official SBA Notice and form applicable to the 7(a) Loan Program.
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According to the May 21 Notice, once a PPP Lender successfully reported to SBA that a
loan had been fully disbursed, the SBA paid the Lender.
Lenders were required to use SBA Form 1502 — “Guaranty Loan Status & Lender
Remittance Form” - to report fully disbursed loans to SBA. Form 1502 required the
Lender to certify the truth and accuracy of the financial details of the loan, including the
amount, installment date, interest amount, and other data. This information, along with all
the underlying loan details, had to be entered into the SBA Form 1502 spreadsheet and
emailed to SBA servicing centers.
The May 21 Notice provided, “Lenders must make a one-time confirmation in the Lender’s
FTA Lender portal before SBA will disburse PPP processing fees to Lender.” Specifically,
Lenders were required to confirm the following:
By checking the ‘I confirm’ box below, the Lender is agreeing that for each SBA
Form 1502 submitted by Lender to request payment of Paycheck Protection
Program (PPP) processing fees, Lender confirms (1) that all PPP loans included in
the report were fully disbursed to the borrowers on the disbursement dates entered
and in the loan amounts entered in the report; (2) Lender will make no further
disbursements on the PPP loans included in the report; (3) all information in the
report is true and correct, and (4) the report has been submitted by an authorized
employee or Agent of Lender acting within the scope of Lender’s authority and
Lender acknowledges responsibility for all entries and certifications made on its
behalf. (emphasis supplied)
The SBA confirmed that the PPP Lender bears responsibility for all entries and certification
made on a Lender’s behalf by an Agent, such as Kabbage: “the Lender acknowledges that
the Agent or LSP is acting within the scope of Lender authority and Lender acknowledges
responsibility for all information submitted and entries and certifications made on its
behalf.”
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FACTS
Kabbage’s Participation in the PPP
Before the onset of the COVID-19 pandemic, Kabbage was struggling financially. Prior
to its PPP work, Kabbage’s had supplied services to approximately 225,000 businesses
since its launch in 2009, according to media sources.
In March 2020, immediately prior to the passage of the PPP, the SBA announced it would
provide aid to businesses affected by COVID-19 through its already-established Economic
Injury Disaster Loan (“EIDL”) program. EIDL loans were made available to small businesses
and private, non-profit organizations in designated areas of a state or territory to help alleviate
economic injury caused by the Coronavirus.
The SBA EIDL program is different than the traditional SBA 7(a) regime. Unlike the SBA’s
standard 7(a) program, where banks originate the credit for small-business loans, which
are guaranteed by the administration, the SBA is the creditor for the FIDL program and
private partners, including fintech companies like Kabbage, were prohibited from working
on these EIDL loans.
Unable to provide EJDL loans, by March 20, 2020, a bankingdive.com article titled,
“Kabbage asks Congress to retool SBA’s lending rules amid coronavirus crisis,” reported
that Kabbage was actively “lobbying the Trump administration, the U.S. Treasury, the
National Economic Council and members of Congress, as well as the SBA, to allow the
agency to use existing partners in its 7(a) structure to help onboard customers, automate
underwriting and credit checks and feed that information digitally to the SBA for its
disaster loan program.”
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This change would have directly and immediately benefitted Kabbage, since it originated
its small business loans through its banking partner, Celtic Bank, which was already a
_partner in the SBA's 7(a) program. Had the EIDL change been approved, Kabbage would
have been eligible to process loans on Celtic’s behalf and earn lucrative fees as a result.
Kabbage was never approved to assist with COVID-19 related EIDL loans.
Although the March 27, 2020 passage of the CARES Act created the opportunity for
service providers to facilitate loans for approved 7(a) Lenders as Agents, the opportunity
did not, at that time, extend to Fintech firms like Kabbage.
On March 31, 2020, the U.S. Department of the Treasury released guidance on various
aspects of the PPP, including guidance relevant to Lenders under the program. As detailed
herein, that guidance explicitly provided that the PPP loans could be made only by existing
section 7(a) SBA qualified Lenders, federally insured depository institutions, federally
insured credit unions, and farm credit system institutions, but that loans could also be made
by “Additional Lenders” that the Administrator and Secretary of the Treasury determined
were qualified. Again, this definition excluded entities like Kabbage.
Without government approval to provide EIDL or PPP funds, on March 29, 2020, Kabbage
paused its traditional small business loan lending services to all customers. On March 30,
2020 media sources reported that Kabbage furloughed “a significant number” of its 600
workers and closed one of its offices. Kabbage admitted at the time that the announcement
would come as “a shock” to employees.
Days later, on April 3, 2020, despite being unapproved to process funds on behalf of SBA
Lenders (nor approved to directly lend as an SBA Lender), Kabbage nonetheless began
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encouraging customers to apply for PPP loans on its website, without disclosing to
customers that it was not approved to do so.
As result of its successful lobbying efforts, Kabbage was finally approved as a service
provider to process PPP funds as an Agent to SBA-approved Lenders on or around April 7,
2020.
On April 15, 2020, as detailed herein, the SBA’s Interim Final Rule was published, allowing
for non-bank and non-financial institutions like Kabbage to qualify as an SBA-approved
PPP Lenders, and not merely Agents, upon the submission of an approved Form 3507.
Kabbage submitted Form 3507 and was approved as an SBA Lender no later than May 18,
2020.
As an SBA-approved Lender, Kabbage could lend to customers directly and could earn.
significantly higher PPP fees than it could as an Agent.
Ostensibly, without cash reserves to lend comparable to the funds allocated to the PPP or
by the PPPLF, and without access to the Lender capital it accessed when working as an
Agent, Kabbage took advantage of the PPPLF, with its CEO boasting in June 2020 Forbes
article: “we are not aware of any other fintech that is accessing the liquidity lending
facility.”
According to Federal Reserve records, Kabbage borrowed at least $1.52 billion dollars
from the PPPLF from April through August 2020. These funds were then used by Kabbage
to provide PPP loans to Kabbage customers, and an equal amount of Kabbage’s PPP loans
served as collateral for the Federal Reserve.
Given its own financial situation and prospects as a going concern in early 2020, Kabbage
now had significant incentive to process as many loan applications as possible, as quickly
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as possible, for as much as possible. As both an Agent and Lender, Kabbage stood to earn —
hundreds of millions of dollars in fees (as it ultimately did) based on the volume of
processed and submitted PPP loans.
Indeed, by the time the PPP closed on August 8, 2020, Kabbage announced that it had
processed $7 billion in loans for nearly 300,000 new customers, more than doubling its
customer base in less than 6 months. As it triumphantly announced in a press release, in
the final week of the availability of the PPP funds alone, Kabbage processed 46,000
applications for almost $900 million in PPP loans. As a result, by the time the PPP expired
in August of 2020, Kabbage was the second largest PPP Lender in the United States by
application volume behind only JP Morgan — the largest bank, by assets, in the United
States.
Between the time Kabbage was approved as a service provider and when it was approved
as an SBA Lender in May 2020, it was reported in the Financial Times that Kabbage earned
nearly $175 million in processing fees. Once Kabbage became an SBA Lender, based on
the volume of loans it processed and provided, it was reported in the Miami Herald that
Kabbage earned another $150 million in fees. All PPP processing fees were approved and
paid by the Federal government based upon information and certifications made by
Kabbage.
During the PPP lending period, Kabbage boasted in a press release that the median time
from applying to approval for a PPP loan for its borrowers was a mere 4 hours and, more
disconcerting, that over 75% of its approved applications were processed without human
intervention or manual review.
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Indeed, in the same document, Kabbage admitted that “prior to the PPP, Kabbage had never
processed a loan for the SBA. In less than two weeks, Kabbage entirely restructured its
lending platform and developed new automated systems to ingest, analyze, verify, and
approve PPP applications . . .”
Kabbage’s commitment to automation and technology and, by its own admission, its
headlong rush to roll out a completely new platform to process PPP loans, resulted in the
submission of tens of thousands of false claims for payment or approval, as detailed herein.
Kabbage’s submission of false claims caused the SBA to approve payment of billions of
PPP loans for borrowers, and hundreds of millions of PPP fees for Kabbage that were
fraudulently inflated. Had the government known the truth, it would not have made the
payments.
Kabbage’s actions unfairly decreased the remaining pool of PPP money available to
businesses affected by the COVID-19 pandemic.
Meanwhile, Kabbage took full advantage of its willingness to cut corners and ignore SBA
rules and guidance to become the second-largest PPP Lender. No more than five months
after furloughs and an office closure, and a mere ten days after the close of the PPP,
Kabbage’s enhanced reputation earned it a new, lofty $1 billion valuation, and American
Express announced it was acquiring “key assets of’ Kabbage on August 17, 2020.
Defendants’ Fraudulent Scheme
In addition to the certification required by the May 21 Notice, several forms and
certifications were required for borrowers and Lenders to access PPP funds. Collectively,
these forms mandated that each Lender seek the appropriate information from borrowers
and that the borrowers supply that information in a truthful manner.
18
81.
82.
83.
84.
85.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 20 of 53
Borrowers could not submit their information directly to the SBA. As such, it was
reasonable for borrowers to rely on the accuracy and propriety of the information requested
by Lenders such as Kabbage.
SBA Form 2483 is known as the “Paycheck Protection Program Borrower Application
Form.” Form 2483 was provided by Lenders to borrowers and required the borrower to
provide the Lender with all the pertinent information needed for the Lender and the SBA
to calculate the borrower’s PPP loan. Borrowers had to certify that the information listed
was correct and truthful.
In conjunction with every Borrower Loan Application Form 2483, Lenders also had to
submit SBA Form 2484 — Lender’s Application Paycheck Protection Program Loan
Guaranty. Form 2484 required the Lender to attest to the size of the loan, certain details of
how the loan was calculated, and to confirm that the borrower had certified to the Lender
that it met the criteria of the PPP terms. Form 2484 also required that the Lender certify to
the SBA that: “The Lender has complied with the applicable Lender obligations set forth
in paragraphs 3.b(1)-(ili) of the Paycheck Protection Program Rule .. .”
Section 3.b(i)-(Giii) of the Paycheck Protection Program Rule (the SBA’s April 15 IFR)
required the Lender to, “confirm the dollar amount of the average monthly payroll costs
for the preceding calendar year by reviewing the payroll documentation submitted with the
borrower’s application.”
Lenders could also replace Form 2483 with an on-line lending portal, as Kabbage did and
as described below. The SBA allowed on-line portals if they sought the same certified
information as Form 2483.
19
Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 21 of 53
86. Under the terms of the PPP and as reflected on the Borrower Application Form 2483, the
key metric for determining PPP loan size was the amount of each borrower’s monthly
payroll costs. This calculation determined how much the borrower could seek, regardless
of the legal form of their business.
87. Under the PPP, qualifying small businesses could apply for SBA PPP loans for up to 2.5
times their average monthly payroll costs, subject to an overall cap of $10 million.
88. Using this monthly payroll cost figure, the SBA’s April 15 IFR provided the formula for
determining how much an employer could borrow:
a.
“Step 1: Aggregate payroll costs (defined in detail below in f.) from the last twelve
months for employees whose principal place of residence is the United States.
“Step 2: Subtract any compensation paid to an employee in excess of an annual
salary of $100,000 and/or any amounts paid to an independent contractor or sole
proprietor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by
12)
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL)
made between January 31, 2020 and April 3, 2020, less the amount of any
“advance” under an EIDL COVID-19 loan (because it does not have to be repaid).”
89. Because of the importance of the monthly payroll costs, the SBA included in its April 15
IFR (and in subsequent interpretations) explicit guidance explaining which costs could and
could not be included in an employer’s calculation.
20
90.
91.
92.
93.
Case 1:20-cv-12114-GAO Document1i- Filed 11/25/20 Page 22 of 53
Lenders, like Kabbage, were therefore required to instruct borrowers to include only those
monthly payroll costs specifically enumerated by the SBA.
According to the April 15 IFR, monthly payroll costs consist of “aggregate costs from the
previous 12 months or from calendar year 2019 of any compensation to employees (whose
principal place of residence is in the U.S.) in the form of:
a. Salaries, wages, or commissions (capped at $100,000 per employee);
b. Cash tips or the equivalent (calculated based on employer records of past tips or, in
the absence of such records, a reasonable, good-faith employer estimate of such
tips);
Cc. Payments for vacation, parental, family, medical, or sick leave;
d. Allowance for separation or dismissal;
e. Payments for the provision of employee benefits consisting of group health care
coverage, including insurance premiums and retirement; and
f. | Payments of state and local taxes assessed on compensation of employees.”
In order to make certain that Lenders understood the scope and purpose of the PPP, the
SBA issued several rounds of guidance on what could be counted as “monthly payroll
costs” and how each Lender should determine cost calculations for each kind of borrower
(i.e. corporation, partnership, self-employed).
On June 26, 2020, the SBA published guidance entitled, “How to Calculate Maximum
Loan Amounts - By Business Type” (“June 26 Guidance”). The June 26 Guidance outlined
the cost data sources Lenders were to instruct borrowers to use to ensure appropriate
maximum loan eligibility. This document provided the sources of information a Lender
21
94.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 23 of 53
should instruct each different type of borrower to use in determining its maximum loan
eligibility.
Question 5 of the June 26 FAQ (“Frequently Asked Questions”) Guidance asked, “How is
the maximum PPP loan amount calculated for S corporations and C corporations (up to
$10 million)?” In providing an answer, the SBA instructed that: “The following
methodology should be used to calculate the maximum amount that can be borrowed for
corporations, including S and C corporations.
Step 1: Compute 2019 payroll costs by adding the following:
2019 gross wages and tips paid to your employees whose principal
place of residence is in the United States, which can be computed
using 2019 IRS 941 Taxable Medicare wages & tips (line Sc-column
1) from each quarter plus any pre-tax employee contributions for
health insurance or other fringe benefits excluded from Taxable .
Medicare wages & tips, subtracting any amounts paid to any
individual employee in excess of $100,000 and any amounts paid to
any employee whose principal place of residence is outside the U.S;
2019 employer health insurance contributions (portion of IRS Form
1120 line 24 or IRS Form 1120-S line 18 attributable to health
insurance);
2019 employer retirement contributions (IRS Form 1120 line 23 or
IRS Form 1120-S line 17); and
22
95.
96.
97.
98.
Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 24 of 53
e 2019 employer state and local taxes assessed _on employee
compensation, primarily state unemployment insurance tax (from
state quarterly wage reporting forms).” (emphasis supplied)
The same guidance was provided for all other business types. For someone self-employed
with employees, “2019 gross wages and tips paid to your employees” and “2019 employer
state and local taxes assessed on employee compensation” The guidance was the same for:
partnerships (“2019 gross wages and tips paid to your employees” and “2019 employer
state and local taxes assessed on employee compensation’); nonprofit institutions (2019
gross wages and tips paid to your employees. ” and “2019 employer state and local taxes
assessed on employee compensation”); and nonprofit religious institutions (“2019 gross
wages and tips paid to your employees” and “2019 employer state and local taxes assessed
on employee compensation”).
Thus, PPP Agents and Lenders knew, with specificity, all employer data needed for Form
2483 and the appropriate source of that information: “gross” wages and tips paid to
employees, other employer-based contributions and costs, and state and local taxes
assessed on employee compensation.
“Gross wages” are the full amount an employer pays an employee before taxes and other
deductions are withheld. If an employee’s salary is $5,000 per month, the employer pays
her $5,000 per month in gross wages.
In addition to gross wages and employer health insurance and retirement contributions, the
only other expenditure the SBA allowed in monthly payroll costs calculations were
“employer state and local taxes assessed on employee compensation.”
23
_ Case 1:20-cv-12114-GAO = Document1 Filed 11/25/20 Page 25 of 53
99.
100.
101.
102.
103.
This meant that borrowers were also allowed to add whatever taxes they, as employers,
were assessed by the state or locality on employee compensation. As the SBA’s April 15
IFR and June 26 Guidance instructs, these types of employer state and local taxes assessed
on employee compensation are generally state unemployment tax assessments.
Every state in the country requires employers to pay payroll taxes based on employee
compensation to help fund state unemployment programs. In Massachusetts, for example,
the state and local taxes “assessed on employee compensation” are paid solely by the
employer. Unlike withholding taxes, unemployment taxes do not come out of the
employee’s paycheck because they are not assessed on or paid by the employee (in certain
other states, employees also contribute.)
The Department of Unemployment Assistance (“DUA”) assesses Massachusetts
employers a tax on the first $15,000 of employee wages of every employer covered under
the Unemployment Insurance Law (G.L. c. 151A, § 14(a).) The tax rate is also based in
part on the employer’s experience rating, which is the calculation of an employer's average
number of employees whose employment ended during the past 3 years who subsequently
received unemployment insurance. The employer’s tax rate is also based in part on the
statutory rate schedule in effect for Massachusetts employers.
Massachusetts employers are also assessed state taxes on employee compensation for
health insurance for unemployment insurance claimants (.12% of the first $15,000 of an
employee’s wages) and for workforce development (.06% of the first $15,000 of an
employee’s wages).
The unemployment tax amounts are miniscule compared to state income tax. The
Massachusetts income tax rate, for example, is a flat 5.05% on gross wages. Generally, the
24
104.
105.
106.
107.
108.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 26 of 53
rate in states with income taxes range from 1.0% to 13.3% with higher percentages
applying to higher income brackets.
Collectively, these are the taxes “assessed by the state or locality on employee
compensation” paid solely by the employer in Massachusetts that were enumerated for
inclusion in an employer’s calculation of its monthly payroll costs.
The inclusion of these types of taxes furthers the PPP’s goal of keeping employers and their
businesses running, as employers were still obligated to pay state taxes during the COVID-
19 pandemic. This same reason explains why employers could include what they paid in
employee health insurance and retirement contributions, as they were costs actually
incurred by the employer.
Thus, Agents and Lenders who properly complied with the terms of the PPP and followed
the SBA guidance should have instructed borrowers to include the amount of these state
and local taxes assessed on compensation in their applicable portals and forms, and were
required to ask the borrower for supporting documentation.
Nowhere in the text of the PPP or any SBA guidance or, however, are Lenders allowed to
instruct borrowers to add state and local income tax withheld to an employer’s calculation
of monthly payroll costs.
State and local income withholding taxes are fundamentally different from state and local
taxes assessed on compensation of employees. Withholding taxes based on income are
taxable to employees’ gross wages. While as a matter of convention they are generally
withheld from an employee’s paycheck by the employer and then remitted by the employer
to the state on the employee’s behalf, it is axiomatic that the employer does not “pay” the
employee’s state and local income tax.
25
109.
110.
111.
112.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 27 of 53
Employee income taxes withheld by an employer are not employer payroll costs. Because
employees, not employers, pay state and federal income tax on employee income, an
employer’s total payroll costs do not include the amount of income tax an employee had
withheld. Thus, the SBA never allowed employers to add what employees paid in income
tax to the employer’s monthly payroll costs.
In fact, under paragraph 3(g) of the April 15 IFR, the SBA explicitly disallowed federal
income tax withholdings from payroll costs. Paragraph g states: “Ts there anything that is
expressly excluded from the definition of payroll costs? Yes. The Act expressly excludes
the following: (iii) Federal employment taxes imposed or-withheld between February 15,
2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal
Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required
to be withheld from employees.”
The SBA also provided detailed guidance on this parallel issue of whether Federal income
tax withholdings could be counted as payroll costs and were again unequivocal in their
position that they could not. In its June 25, 2020 FAQ’s, the SBA included Question 16,
which asked: “How should a borrower account for federal taxes when determining its
payroll costs. . .°? The SBA stated that:
Payroll costs are calculated on a gross basis without regard to federal taxes
imposed or withheld, such as the employee’s and employer’s share of
Federal Insurance Contributions Act (FICA) and federal income taxes
required to be withheld from employees .. .
[T]he SBA interprets this statutory exclusion to mean that payroll costs are
calculated on_a_ gross basis, without subtracting federal taxes that are
imposed on the employee or withheld from employee wages.
The SBA even provided a clarifying example: “[Ajn employee who earned $4,000 per
month in gross wages, from which $500 in federal taxes was withheld, would_count as
26
113.
114.
115.
116.
117.
118.
Case 1:20-cv-12114-GAO Documenti- Filed 11/25/20 Page 28 of 53
$4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to
the federal government.” Congress’s intent was plain: gross salary meant salary before tax
withholdings.
Wantonly ignoring the plain language of the PPP statute and all available guidance,
Kabbage added the state equivalent of the hypothetical state income taxes to the already
“gross” income number. Because gross wages are without deductions, adding state
withholding tax to the gross wage amount results in a calculation that is more than 100%
of gross wages.
For example, on gross wages of $5,000 and a state income tax of 5%, Kabbage’s
methodology, when so applied, results in the submission of “gross wages,” of $5250, or
105% of the true gross wages total.
Kabbage violated the PPP and, further, did not follow explicit SBA guidance with respect
to the calculation of average monthly payroll costs. Kabbage’s deliberate, willful, and
knowing actions are without any support.
By adding the amount of state and local income taxes withheld by an employer on an
employee’s behalf fe a gross wages calculation, Kabbage fraudulently inflated employers’
costs, increasing the amount of their PPP loans and increasing the amount of Kabbage’s
dependent PPP fee. ©
By instructing borrowers to submit incorrect information on loan applications to the SBA
as a Lender, Kabbage knowingly presented and caused to be presented to the SBA false or
fraudulent claims for payment or approval of PPP loans.
In addition, while acting as a PPP Agent, Kabbage knowingly caused the many banks and
financial institutions for whom it served as an Agent to present to the SBA false claims for
27
119.
120.
Case 1:20-cv-12114-GAO Documenti1- Filed 11/25/20 Page 29 of 53
payment and approval, to the extent they submitted PPP loan applications based upon
Kabbage’s fraudulently inflated gross wage calculations.
These banks and financial institutions (the DOES alleged herein) also had an independent
responsibility to ensure the accuracy of the information Kabbage was collecting on their
behalf as an Agent. In order to receive their own Lender processing fees from the SBA
pursuant to the May 21 Notice, each Lender had to attest in Form 1502 that, “the Lender
acknowledges that the Agent or LSP is acting within the scope of Lender authority and
Lender acknowledges responsibility for all information submitted and entries and
certifications made on its behalf.”
Thus, all PPP fee applications based on Kabbage’s fraudulently inflated gross wage
calculations, whether submitted by Kabbage as a Lender, or by another Lender where
Kabbage was acting as an Agent, were false claims for payment and approval in violation
of the False Claims Act.
Ill. Kabbage’s PPP Portal
121.
122.
123.
Kabbage’s online PPP application portal (“Portal”) repeats the fraudulent implementation
of the PPP as described above
While the SBA allowed Lenders like Kabbage to create their own websites for inputting
borrower information, such online portals had to include the same information as the
Borrower Application Form 2483.
In contravention of the SBA rules, Kabbage created a non-compliant portal that required
borrowers to enter information that Kabbage knew to be excluded from the calculation of
payroll costs: state and local income withholding taxes. By its design, Kabbage’s Portal
28
124.
125.
126.
127.
128.
129.
130.
131.
132.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 30 of 53
fraudulently inflated the amount of PPP loans sought and approved by the Federal
government.
Relator personally used Kabbage’s Portal on behalf of his clients who sought, and were
approved for, PPP loans whose amounts were based on fraudulently inflated gross income
calculations. Relator used the Kabbage Portal to successfully submit PPP loan information
on behalf of two Massachusetts-based borrowers.
Kabbage’s Portal first asked a prospective borrower for their business name, legal name,
and then their company structure, which, as Kabbage noted “will determine the tax
documents you need to upload.” A borrower could then choose from sole proprietorship,
general partnership, corporation, or LLC.
Relator entered the appropriate information on behalf of a Massachusetts-based S-
corporation client (“Client 1”).
Kabbage’s Portal next asked whether, pursuant to the PPP, the borrower was a 501(c)(3)
nonprofit, 501(c)19) veteran’s organizations, tribal business, or eligible self-employed, as
those categories required potentially different forms.
Relator, on behalf of Client 1, entered “none of the above.”
Kabbage’s Portal then prompted for Client 1’s Tax ID number and their 6-digit NAICS |
code, which Relator entered.
After including these, the Kabbage Portal asked whether Client 1 was a franchise listed in
the SBA’s Franchise Directory, and when the applicant started its business.
Relator, on behalf of Client 1, selected “no” and the appropriate date.
Depending on the type of corporate structure the borrower initially selected, Kabbage next
asked for information input provided in certain federal tax documents.
29
133
134.
135.
136.
137.
138.
139.
140.
141.
142.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 31 of 53
If the applicant was an LLC or S-corporation, the Kabbage Portal asked if they had filed a
Form W-3 for “yourself or your employees in 20199”
Relator, on behalf of Client 1, selected “yes.”
Form W-3s are Transmittals of Wage and Tax Statements that accompany and summarize
the data in Form W-2.
Form W-3 shows the IRS the total amount an employer paid to all its employees, as well
as the total federal and state income, Social Security, and Medicare taxes the employer
withheld from its employees. It also provides the IRS the number of employees and the
number of W-2 Forms included in the employer’s filing.
When Relator responded “yes” to whether Client 1 had filed W-3s, the Kabbage Portal
required additional information. In the first field on its Portal, Kabbage required the
borrower to “enter the value in box 1 of your 2019 Form W-3.”
Box 1 of Form W-3 is the gross total wages, tips, commissions, and other compensation.
Under the terms of PPP and the official SBA guidance, the Kabbage Portal correctly
instructed borrowers to input this information into an employer’s monthly payroll costs.
Relator, on behalf of Client 1 and following the Kabbage Portal’s instructions, input the
appropriate amount -- the amount from box 1 of Client 1’s 2019 Form W-3 -- into this first
field.
The Kabbage Portal next required the borrower to input the value in box 5 of the 2019 W-
3. Box 5 of Form W-3 is “Medicare Wages and Tips.”
Under the terms of PPP and the official SBA guidance, the Kabbage Portal correctly
instructed borrowers to input this information into an employer’s monthly payroll costs.
30
143.
144.
145.
146.
147.
148.
149.
150.
151.
Case 1:20-cv-12114-GAO Documenti- Filed 11/25/20 Page 32 of 53
The information in Box 5 is often the same as the information in Box 1. The higher of the
two is used in determining the gross payroll costs.
Relator, on behalf of Client 1 and following the Kabbage Portal’s instructions, input the
amount from box 5 of the Client 1’s 2019 Form W-3 -- into this second field.
Finally, the Kabbage Portal instructed the borrower to “add the values in boxes 17 and 19
of your 2019 Form W-3,” noting under the blank field that these were the “total state and
local income tax paid in 2019.”
Boxes 17 and 19 of Form W-3 are in fact “state income tax” and “local income tax,”
respectively, and represent the total amount in state and local income tax that the employer
withheld from its employees.
Relator, on behalf of Client 1 and following the Kabbage Portal’s instructions, input the
added values of lines 17 and 19 of Client 1’s 2019 Form W-3 -- into this third field.
As described herein, Kabbage’s and the Kabbage Portal’s instruction to borrowers to
include state and local income tax withholdings as part of the payroll cost calculation
violated the PPP and FCA.
Next, the Kabbage Portal required borrowers to answer questions regarding Client 1’s
remaining monthly payroll cost criteria.
The Kabbage Portal asked whether in 2019, the borrower filed an IRS Form 940 detailing
either of the following: vacation, parental, family, medical or sick leave; and severance, as
allowance for dismissal.
Under the terms of PPP and the official SBA guidance, the Kabbage Portal correctly
instructed borrowers to input this information into an employer’s monthly payroll costs.
Relator, on behalf of Client 1, selected “no.”
31
152.
153.
154.
155.
156.
157.
158.
159.
160.
161.
Case 1:20-cv-12114-GAO Documenti1- Filed 11/25/20 Page 33 of 53
The next page of Kabbage’s Portal asked whether a borrower wanted to “include employer-
sponsored healthcare benefits in your average monthly payroll calculation?”
Under the terms of PPP and the official SBA guidance, the Kabbage Portal correctly
instructed borrowers to input this information—if they so chose—into an employer’s
monthly payroll costs.
Relator, on behalf of Client 1, selected “no” as Client 1 had no such payroll costs.
The Kabbage Portal next asked whether a borrower had “U.S.-based employees whose
combined 2019 wages, tips, and other cash compensations exceeded $100,000?”
Under the terms of PPP and the official SBA guidance, the Kabbage Portal correctly
instructed borrowers to answer this question because it was directly relevant in the
calculation of an employer’s monthly payroll costs, as per-employee compensation greater
than $100,000 was excluded from the gross payroll cost calculation.
Relator, on behalf of Client 1, selected “no.”
Next, the following Kabbage Portal field asked, “Is the United States the principal place of
residence for all employees of the Applicant included in the Applicant’s payroll
calculation?”
Under the terms of PPP and the official SBA guidance, the Kabbage Portal correctly
instructed borrowers to answer this question as salary for employees residing outside of
the United States was excluded from the gross payroll cost calculation.
Relator, on behalf of Client 1, selected “yes.”
Kabbage next asked whether the “Applicant received an SBA Economic Injury Disaster
Loan between January 31, 2020 and April 3, 2020?”
32
162.
163.
164.
165.
166.
167.
168.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 34 of 53
Under the terms of PPP and the official SBA guidance, the Kabbage Portal correctly
instructed borrowers to answer this question, as these loans were relevant to the calculation
of the gross payroll cost calculation
Relator, on behalf of Client 1, selected “no.”
The Kabbage Portal then presented Client 1 with a loan eligibility figure based on an
“average monthly payroll calculation.” This calculation was done by adding Client 1’s
gross wages (box 1) and (erroneously) Client 1’s state and local income tax withholdings
(boxes 17 and 19), which resulted in an annual payroll cost figure of $72,843. Kabbage
then divided this annual cost figure by 12 to get $6,070.00, Client 1’s average monthly
payroll calculation. This amount included the state and local income tax withholdings on
top of gross wages.
The Kabbage Portal reported that Client 1 was eligible for a PPP loan that had been based
on fraudulently inflated payroll calculations that had included the amount of state and local
income tax withheld on top of gross wages. The loan amount directly correlated to the
amount of payroll costs inflated by Kabbage.
Kabbage further compounded the fraud by multiplying Client 1’s inflated monthly payroll
cost figure by 2.5 (the figure provided for in the April 15 IFR) to inaccurately determine
that Client 1 was eligible for a loan of $15,175.00 - 2.5 times the original inflated gross
income amount.
On June 23, 2020, Client 1 was in fact issued a PPP loan in the amount of $15,175.00.
Kabbage applied for and received PPP fees based on Client 1’s loan. Those fees were based
directly on the inflated amount of $15,175.00.
33
169.
170.
171.
172.
173.
174.
175.
176.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 35 of 53
Relator worked with a second client, “Client 2,” who also submitted PPP loan application
forms through Kabbage using Kabbage’s Portal.
The Kabbage Portal sought the same data for Client 2 as it did for Client 1. Specifically,
the Portal also required Client 2 to add state and local income tax withholding amounts
(boxes 17 and 19) to Client 2’s gross wage data (box 1).
The Kabbage Portal then presented Client 2 with a loan eligibility figure based on an
“average monthly payroll calculation.” Client 1’s average monthly payroll calculation, an
amount that included the state and local income tax withholdings, was $16,848.40.
The Kabbage Portal reported that Client 2 was eligible for a PPP loan that had been based
on fraudulent payroll calculations that had included the amount of state and local income
tax withheld on top of gross wages. The loan amount directly correlated to the amount of
payroll costs inflated by Kabbage.
As with Client 1, Kabbage then further compounded the fraud by multiplying Client 2’s
inflated monthly payroll cost figure by 2.5 (the figure provided for in the April 15 IFR) to
inaccurately determine that Client 1 was eligible for a loan of $42,121.00 - 2.5 times the
original inflated gross wages amount.
On July 30, 2020, Client 2 was in fact issued a PPP loan in the amount of $42,121.00.
Kabbage applied for and received PPP fees based on Client 2’s loan. Those fees were based
directly on the inflated amount of $42,121.00.
Upon information and belief, Kabbage’s Portal calculated all PPP loans using the same
methodology, and thus included state and local withholding tax amounts on top of gross
wages to the calculation of average monthly payroll. Kabbage then submitted, and caused
34
177.
178.
179.
180.
181.
Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 36 of 53
to be submitted, the SBA PPP loan applications to the government for payment and
approval.
As aresult, each loan application containing the inflated monthly payroll cost figure which
Kabbage presented or caused to be presented to the SBA for approval was a false claim,
submitted in violation of the False Claims Act.
Further, each claim Kabbage submitted for PPP Agent or Lender fees arising from the
inflated loans described herein was a separate false claim, submitted in violation of the
False Claims Act.
Throughout the PPP process, PPP borrowers were required to use an SBA-approved
Lender, or approved processing Agent to apply for their PPP loan. Under these
circumstances, borrowers had no reason to question whether the information sought and
submitted by Kabbage was appropriate or proper. Their only obligation was to ensure the
requested data was accurate. PPP borrowers had no reason to suspect or believe that the
information Kabbage was requiring them to include into the calculation of monthly payroll
costs would result in the submission of false claims to the government.
Kabbage’s Portal was additionally defective because it did not allow borrowers to include
the amount of assessed state and local unemployment tax payments (separate from state
income tax withholdings), even though these costs were authorized under the April 15 IFR
and other official SBA guidance.
Specifically, after Kabbage’s Portal asked borrowers for their W-3 figures, Kabbage
ignored the state and local unemployment assessments. In excluding the unemployment
assessments, however, Kabbage noted that “To speed up application processing time,
Kabbage is not currently including state and local unemployment taxes in the calculation
35
Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 37 of 53
of your expected loan amount. This may result in a slightly lower loan amount but allows
us to submit your application faster.”
182. These additional, legitimate monthly payroll costs would have provided more funds to
borrowers—all of whom would have benefited from every dollar made available to them—
but would have required Kabbage to spend extra time reviewing documentation. As noted
herein, unemployment assessments were generally far less compared to the amount of state
tax assessments, and their omission would not offset the fraudulent addition of state tax
withholdings in the calculation of average monthly payroll costs.
183. Regardless, the blanket exclusion of the unemployment assessments from monthly payroll
costs shows that Kabbage was willing to shortchange both its customers and the Federal
Government at the same time.
IV. Kabbage’s Use of Government PPPLF Funds
184. The Federal Reserve Banks are instrumentalities of the Federal Government and the
operating arms of its central bank. The Federal Reserve Act empowers the Federal Reserve
Banks to issue legal tender and to finance the Federal Reserve’s activities by purchasing
public and private debts. The Federal Reserve Act also authorizes the Federal Reserve
Banks to administer emergency lending facilities. The PPPLF is such a facility, as it was
created pursuant to the Federal Reserve Bank’s emergency authority under Section 13(3)
of the Federal Reserve Act, under which Congress granted the Federal Reserve Banks the
ability to extend emergency credit.
185. In establishing the PPPLF, the Federal Reserve Banks act as agents of the United States
because the United States created the Federal Reserve Banks to act on its behalf to extend
emergency credit to eligible institutions; the Federal Reserve Banks in fact extended such
36
186.
187.
188.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 38 of 53
emergency credit to those institutions (such as Kabbage); and the Federal Reserve Banks .
did so in compliance with the rules enacted by Congress.
The PPPLF became operational on April 16, 2020 for traditional bank depository
institutions to access. On April 30, 2020, the Federal Reserve expanded access to the
PPPLF to non-depository institutions, such as Kabbage.
The PPPLF provided Kabbage access to the Federal Reserve’s Discount Window, a
standing facility though which the Federal Reserve makes short-term loans to eligible
institutions. Lenders such as Kabbage could access the PPPLF for amounts up to the
principal amounts of aggregate PPP loan collateral pledged in return to the Federal Reserve.
In order to access the Discount Window under the PPPLF, Kabbage was required to submit
a “Paycheck Protection Program Liquidity Facility Letter of Agreement (Non-Depository
Institutions)” (“PPPLF Agreement”). The PPPLF Agreement outlined the terms under
which the PPPLF would advance Kabbage the loan amounts it requested by requiring
Kabbage to confirm and certify the value of the PPP loan amounts it was required to pledge
as collateral. In order to receive the loan amounts it applied for, Kabbage had to “warrant[],
represent[] and covenant[] that each such Item pledged as collateral for Advances under
the Facility:
a. Isa “covered 7(a) loan” under the terms of the PPP;
b. Complies with all requirements of the PPP, including without limitation any rules
or guidance issued by the SBA implementing the PPP, and any requirements set
forth in any agreement the Borrower is required to execute by the SBA in
connection with the PPP;
c. Has been duly approved under delegated authority for guaranty by the SBA;
37
189.
190.
191.
192.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 39 of 53
d. Satisfies applicable Collateral requirements in the Circular; and
e. Was either (1) originated by us or (2) purchased by us in accordance with the SBA’s
requirements for the sale and purchase of whole PPP Loans (in either case, such
that we are the beneficiary of the SBA’s guarantee of such PPP Loans).”
(emphasis supplied).
The PPPLF Agreement further confirmed that the “PPPLF Collateral valuation for each
Item shall equal the principal amount of the PPP Loan outstanding at the time the PPP Loan
is pledged as PPPLF Collateral.”
Once it was authorized to access the Discount Window, Kabbage could apply for and
borrow only as much as the value of the PPP loans it could pledge as collateral. To
accomplish this, Kabbage was required to submit a “Transmittal Form for Pledge of Small
Business Administration Paycheck Protection Program Loans (SBA PPP) for the Paycheck
Protection Program Liquidity Facility (PPPLF) and Request for PPPLF Advance PPPLF--
Non-Depository Institution” (“Transmittal Form”).
The Transmittal Form required Kabbage to list the principal amount of each PPP loan it
was pledging to the Federal Reserve and in doing so, to certify that Kabbage was “pledging
the SBA PPP pool below as collateral to secure an advance that the Borrower hereby
requests be made pursuant to the PPPLF under the terms and conditions of the PPPLF
Letter of Agreement.” |
Consistent with the terms described above, Kabbage applied for and received loans in the
amount of $1.52 billion from the PPPLF by submitting Transmittal Forms containing
information about the value of Kabbage’s PPP loans. The Federal Reserve only approved
and funded Kabbage’s loan requests because of the value of the pledged collateral.
38
193.
194.
195.
196.
197.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 40 of 53
Kabbage could only pledge collateral based on the principal amount of the PPP loans it
originated.
The PPP loans Kabbage approved were based on Kabbage’s false and inflated monthly
payroll cost calculations, which caused borrowers to receive false and inflated PPP loan
amounts. As a result, the principal amount of every PPP loan obtained through Kabbage’s
fraud was also false and caused the Federal Reserve to advance money from the PPPLF to
Kabbage based on these false and inflated loan values.
Kabbage therefore violated the False Claims Act when it requested loans from the PPPLF
based on the false and inflated PPP loan amounts it pledged as collateral.
Kabbage also violated the False Claims Act when it used the $1.52 billion it received from
the PPPLF to directly fund the false and fraudulent PPP Borrower Loan Applications, as
alleged herein.
Loan Forgiveness
As critical as PPP loans were for businesses trying to keep their staff and to stay open, the
prospect of full loan forgiveness was even more important. The PPP provides that loans
can be fully forgiven if certain criteria are met, including verification by the lender and
borrower that a specific percentage of the PPP loan was used for “payroll costs.” These
“payroll costs” are substantially similar to the “payroll costs” needed to determine the
amount of a PPP loan in the first instance -- gross wages and tips paid to employees and
employer state and local taxes assessed on employee compensation -- that Kabbage
systematically and falsely overinflated, as alleged herein.
Broadly, the enumerated requirements for loan forgiveness are: that a small business use at
least 60% of the PPP loan on eligible “payroll costs” during the 24 week period beginning
39
198.
199.
200.
201.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 41 of 53
on the day the PPP loan was disbursed; that the remaining 40% of the PPP loan be only
used for utilities, mortgage interest, and rent; that the small business not reduce employee
wages by more than 25%; and that the business not reduce the number or hours of its
employees (unless an employee refused to be rehired for the same wages and hours).
According to the SBA’s procedural guidance, Lenders are responsible for collecting
information from borrowers regarding loan forgiveness eligibility and transmitting that
information to the SBA for approval. If a borrower’s request for loan forgiveness is
approved, the SBA reimburses the Lender for the full amount of the PPP loan the Lender
. disbursed.
Lenders, like Kabbage, were therefore incentivized to ensure that each borrower’s use of
PPP loan funds met the forgiveness criteria, so the Lender’s capital outlay to the borrower
would be reimbursed in full by the government.
To qualify for PPP loan forgiveness, a borrower must complete and submit SBA Form 3508
— PPP Loan Forgiveness Calculation Form (or 3508EZ or 3508S) to the lender. Forms
3508, 3508EZ, and 3508S require the borrower to enter all information regarding the
borrower’s use of the PPP loan money during the applicable time period. Documentation
in support of these calculations must also be attached.
According to the SBA’s July 23, 2020 Procedural Notice (“July 23 Notice”), a “PPP Loan
Program Requirement” pursuant to 13 CFR § 120.10, the PPP Lender of record must
review the Loan Forgiveness Calculation Form confirm the borrower’s loan forgiveness
calculations. Further, the Lender must “confirm[] receipt of the borrower certifications in
the SBA Form 3508 form” and “confirm[] receipt of the documentation the borrower must
submit to aid in verifying payroll and nonpayroll costs.”
40
Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 42 of 53
202. The July 23 Notice states that “Lenders are expected to perform a good-faith review, in a
203.
204.
205.
reasonable time, of the borrower’s calculations and supporting documents concerning
amounts eligible for forgiveness.” Thereafter, the Lender must complete the review of the
Loan Forgiveness Application and issue a decision regarding forgiveness eligibility to
SBA, along with the required documents. Subject to any SBA review of the loan or loan
application, the SBA will then remit the appropriate forgiveness amount to the Lender.
The SBA also created a secure PPP Forgiveness Platform (“Platform”) to accept loan
forgiveness decisions, supporting documentation, and requests for forgiveness payments.
The Platform is available only to PPP Lenders and not to PPP borrowers.
The Platform “makes available a user interface for lenders to upload required data and
documentation, monitor the status of the forgiveness request, and respond to SBA in case
of an inquiry or if SBA selects the loan for review.” In using the Platform, the SBA requires
that “lenders must confirm the following for each PPP forgiveness submission before SBA
will accept the submission:
a. this submission accurately reflects the Lender’s decision regarding the borrower’s |
loan forgiveness application;
b. the information provided by the Lender to SBA with this submission accurately
reflects the Lender’s records for the PPP loan;
c. c. the Lender has made its decision in accordance with the requirements set forth in
Part III.2.a. of the PPP Interim Final Rule on SBA Loan Review Procedures and
Related Borrower and Lender Responsibilities, as amended . . .”
As with non-Platform forgiveness applications, in order for the loan to be forgiven and for
Kabbage to receive reimbursement, Kabbage must submit the above documentation
4]
206.
207.
208.
209.
210.
Case 1:20-cv-12114-GAO Documenti1- Filed 11/25/20 Page 43 of 53
through the Platform attesting that the borrower supplied the correct information about how
the PPP loan was used. Again, Kabbage is also required to “perform a good-faith review,
in a reasonable time, of the borrower’s calculations and supporting documents concerning
amounts eligible for forgiveness,” including the amount of, and whether the loan was used
for, “monthly payroll costs.”
Because Kabbage’s Loan Forgiveness applications rely on the same inflated data and
calculations as the PPP loan applications, Kabbage’s submission of Borrower Loan
Applications are also false claims.
Certifications to the contrary notwithstanding, it is impossible for Kabbage to perform a
meaningful “good faith review” of or otherwise certify the accuracy of loan figures that
were fraudulently inflated when Kabbage was the cause of the falsity.
As such, Kabbage violated the False Claims Act when it submitted fraudulently inflated
Loan Forgiveness applications to the SBA for payment and approval.
HOW KABBAGE DEFRAUDED THE GOVERNMENT
As detailed herein, Kabbage and DOES defrauded the United States in conjunction with:
their requests for processing fees; their submission of PPP Borrower Loan Applications;
their submission of Loan Forgiveness Applications; and their requests for loans from the
PPPLF.
The SBA would only pay Kabbage its processing fees if Kabbage submitted a Form 1502,
which required Kabbage to confirm that “all the information,” including the /oan size in
each Form 1502 was “true and correct.” Because Kabbage knew (and caused) the dollar
amount of the average monthly payroll costs to be inflated, any borrower’s information and
loan size that was so inflated was untrue and incorrect.
42
211
212.
213.
214.
215.
216.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 44 of 53
Thus, each and every Form 1502 submitted by Kabbage containing loan amounts that were
inflated by its scheme as alleged herein were false claims for payment of processing fees
by the SBA.
As a result of the submission of these false claims, the SBA paid Kabbage hundreds of
millions of dollars in processing fees to which it was not entitled.
In addition, Kabbage knowingly caused any Lenders (including DOES) for whom it served
as an Agent and to present to the SBA false claims for payment and approval, when those
Lenders submitted a Form 1502 based upon Kabbage’s fraudulently inflated gross wage
calculations and resulting loan size figure.
Kabbage further defrauded the government in its submission of PPP Borrower Loan
Applications (Form 2483). PPP Borrower Loan Applications that included the amount of
state and local income taxes borrowers withheld on top of gross wages in the calculation
of monthly payroll costs were false on their face. Because gross wages are already without
deductions, adding state withholding tax to the gross wage amount results in a calculation
that is more than 100% of gross wages. By adding income taxes fo a calculation of gross
wages, Kabbage fraudulently inflated each employer’s payroll costs, which fraudulently
increased the amount of their PPP loan received by the borrowers.
In addition, while acting as a PPP Agent, Kabbage knowingly caused Lenders for whom it
served as an Agent (the DOES) to present to the SBA false claims for payment and
approval, to the extent they submitted PPP Borrower Loan Applications based upon
Kabbage’s fraudulently inflated gross wage calculations.
Kabbage directly funded at least $1.52 billion worth of PPP loans for borrowers using loans
Kabbage obtained from the Federal Reserve’s emergency lending facility, the PPPLF.
43
217.
218.
219.
220.
221.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 45 of 53
As such, each and every PPP Borrower Loan Application Kabbage submitted which
contained inflated monthly payroll costs -- and which was approved and funded with
PPPLF money borrowed by Kabbage -- was a false claim for payment or approval.
Kabbage’s banking partners (the DOES) -- for whom Kabbage served as both Agent and
worked in conjunction with as a Lender -- also borrowed billions of dollars from the PPPLF
that were used to pay the fraudulent loan applications Kabbage submitted to the SBA. As
such, each and every loan application Kabbage submitted on behalf of borrowers that
contained inflated monthly payroll costs, and which were approved and funded with PPPLF
money borrowed by DOES, were false claims for payment or approval.
Kabbage submitted other false and fraudulent documentation in conjunction with its PPP
Borrower Loan Applications. Kabbage submitted forms to the SBA with its PPP Borrower
Loan Applications expressly certifying that Kabbage complied with all the requirements of
the PPP and other federal statutes when it knew it had not.
Because it was a non-bank institution seeking to become a Lender, Kabbage was required
to sign Form 3507, attesting that it would: “assume all obligations, responsibilities, and .
requirements associated with delegated processing of covered loans made under the
Paycheck Protection Program;” that it was “responsible, to the extent set forth in the PPP
Loan Program Requirements, for all decisions concerning the eligibility (including size) of
a borrower for a covered loan;” and that it would, “certif[y] that it is in compliance and
will maintain compliance with all applicable requirements of the Paycheck Protection
Program and PPP Loan Program Requirements.”
Form 3507 also required Kabbage to acknowledge that “any false statements made to the
U.S. Small Business Administration and Department of the Treasury can result in criminal
44
222.
223.
224,
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 46 of 53
prosecution under 18 U.S.C. 1001, 15 U.S.C. 645, and other provisions and imposition of
civil money penalties under 31 U.S.C. 3729.”
Kabbage’s Form 3507 certifications were false because Kabbage added state income
withholding taxes in monthly payroll cost calculations on top of gross wages, thereby
significantly inflating the PPP loan amounts for its borrowers. Despite its certifications to
the contrary, Kabbage failed to “assume the obligations, responsibilities, and requirements”
of a Lender under the PPP because adding state and local income withholding taxes on top
of gross wages was not allowed. For the same reasons, Kabbage’s Form 3507 was false
because it could not truthfully “certif[y] that it is in compliance and will maintain
compliance with all applicable requirements of the Paycheck Protection Program and PPP
Loan Program Requirements.” Kabbage’s Form 3507 certifications were also false because
it falsely certified it would “maintain compliance” with the May 21 Notice (a PPP Loan
Program Requirement) regarding submission of accurate Form 1502 requests for
processing fees.
Kabbage’s Form 2484 certifications, which were required to be submitted in conjunction
with every single Borrower Loan Application (Form 2483), were also false. Form 2484
required Kabbage to expressly certify that it had “complie[d] with the applicable Lender
obligations set forth in paragraphs 3.b(i)-(iii) of the Paycheck Protection Program Rule . .
.” Section 3.b(i)-(iii) required the Lender to “confirm the dollar amount of the average
monthly ‘payroll costs for the preceding calendar year by reviewing the payroll
documentation submitted with the borrower’s application.”
Kabbage’s Form 2484 certifications that included state income withholding taxes in
monthly payroll cost calculations—thereby inflating the PPP loan amounts for its
45
225.
226.
227.
228.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 47 of 53
borrowers—were false. Because of this, Kabbage was unable to, pursuant to section 3.b(i)-
(iii) of the Paycheck Protection Program Rule (the April 15 IFR) “confirm the dollar
amount of the average monthly payroll costs” because it had already knowingly caused
those amounts to be false.
Kabbage defrauded and will continue to defraud the United States because of its Loan
Forgiveness Applications. Kabbage’s false PPP Borrower Loan Applications caused, and
will continue to cause, the SBA to reimburse Kabbage each time borrowers seek
forgiveness of their PPP loans.
In order for each PPP loan to be forgiven and for the government to reimburse Kabbage
the amount of the forgiven PPP loan, Kabbage must submit a Loan Forgiveness Application _
to the SBA, which includes verification of, and documentation that, the borrower supplied
the correct information about how they used the PPP loan, including for monthly payroll
costs.
Because Kabbage’s Loan Forgiveness Applications rely on the same inflated data and
calculations for monthly payroll costs as the PPP Borrower Loan Applications, Kabbage’s
submission of Loan Forgiveness Applications for reimbursement, and the SBA’s resulting
payments to Kabbage, will make the underlying PPP Borrower Loan Applications false
claims, and are themselves false claims presented to the SBA for payment and approval.
Kabbage also defrauded the United States when it requested and received loans from the
PPPLF. Kabbage’s requests for PPPLF loans were false claims because the principal PPP
loan amounts it pledged as collateral were based on fraudulently inflated PPP loan values
-- a result of Kabbage fraudulently calculating the borrower’s monthly payroll costs, as
alleged herein.
46
229.
230.
231,
232.
233.
234.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 48 of 53
Each Transmittal Form Kabbage submitted to the Federal Reserve containing inflated PPP
loan values was a false claim presented to the United States for payment and approval.
Kabbage further defrauded the United States when it submitted PPPLF documents to the
Federal Reserve Banks in conjunction with its PPPLF Transmittal Forms in which it
expressly certified it was in compliance with the terms of the PPP and official SBA
guidance when it knew it was not.
In order to access the PPPLF in the first instance, Kabbage had to agree to the terms set
forth by the Federal Reserve through the PPPLF Agreement. This document required
Kabbage to certify that in pledging the collateral used as the basis for the size of the loan
from the Federal Reserve, Kabbage would “Compl{y] with all requirements of the PPP.
including without limitation any rules or guidance issued by the SBA implementing the
PPP, and any requirements set forth in any agreement the Borrower is required to execute
by the SBA in connection with the PPP.”
By fraudulently inflating borrowers’ monthly payroll costs as the basis for the size of a PPP
loan, Kabbage did not comply with the requirements of the PPP, or the guidance of the
SBA. As such, Kabbage’s express certifications to the contrary were false.
FIRST CAUSE OF ACTION
False Claims Act: 31 U.S.C. §3729(a)(1)(A): Presenting and Causing False Claims
Relator incorporates by reference all paragraphs to this complaint set out above as if fully
set forth here.
As alleged herein, Defendant Kabbage violated the False Claims Act when it presented and
caused to be presented materially false and fraudulent claims for payment or approval to
the United States Small Business Administration in the form of fraudulent PPP Borrower
47
235.
236.
237.
238.
239.
240.
241.
Case 1:20-cv-12114-GAO Document1 Filed 11/25/20 Page 49 of 53
Loan Applications, PPP Loan Forgiveness Applications, Form 1502 claims for processing
fees, Form 3507 certifications, and Form 2484 certifications.
Kabbage additionally caused the DOES to present or cause to be presented materially false
and fraudulent claims for payment or approval to the United States Small Business
Administration in the form of the DOES’ PPP Borrower Loan Applications, PPP Loan
Forgiveness Applications, Form 1502 claims for processing fees, and Form 2484
certifications.
Kabbage and the DOES presented or caused to be presented such claims with actual
knowledge of their falsity, or with reckless disregard or deliberate ignorance of whether or
not they were false.
The United States sustained damages because of Defendants’ wrongful conduct and
submission of false claims.
Kabbage also violated the False Claims Act when it presented and caused to be presented
materially false and fraudulent claims for payment or approval to the Federal Reserve
Banks in the form of fraudulent loan applications to the PPPLF.
The fraudulently inflated loan applications were presented by Kabbage to the Federal
Reserve Banks by way of Transmittal Forms, in which Kabbage falsely stated the values
of its PPP loans in pledging them as collateral.
The United States, through its agents the Federal Reserve Banks, loaned Kabbage more
money than it was entitled to because of Kabbage’s fraud. The money Kabbage received
by the Federal Reserve was money made available and supplied by the United States.
Kabbage presented or caused to be presented such claims with actual knowledge of their
falsity, or with reckless disregard or deliberate ignorance of whether or not they were false.
48
242.
243.
244.
245.
246.
Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 50 of 53
The United States sustained damages because of Defendants’ wrongful conduct and
submission of false claims.
SECOND CAUSE OF ACTION
False Claims Act: 31 U.S.C. §3729(a)(1)(B): False Statements Material to False
Claims
Relator incorporates by reference all paragraphs to this complaint set out above as if fully
set forth here.
Kabbage made, used, caused to be used false records or statements to get false or fraudulent
claims paid and approved by the SBA, and that were material to the SBA’s payment of the
false claims at issue in this case.
Kabbage made false certifications and representations when submitting false claims for
payment. Kabbage’s false certifications of compliance in its Form 3507 caused the SBA
to approve its initial participation in the PPP, which allowed Kabbage to present all of the
false claims, as alleged herein.
Kabbage’s false representations and certifications in each one of its fraudulently inflated
Form 2484 submissions, as alleged herein, caused the SBA to pay and approve Kabbage’s
false PPP Borrower Loan Applications, which also later caused, and will continue to cause,
the SBA to forgive those loans and reimburse Kabbage based on Kabbage’s false Loan
Forgiveness Applications presented to the SBA for payment.
247.
Kabbage’s false representations and certifications in each one of its Form 2484
submissions, as alleged herein, also caused the SBA to pay and approve Kabbage’s false
Form 1502 claims for processing fees.
49
Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 51 of 53
248. The express false certifications and representations made and caused to be made by
Defendants were material to the United States’ payment of the false claims.
249. Defendants made or caused to be made such false records or statement with actual
knowledge of their falsity, or with reckless disregard or deliberate ignorance of whether or
not they were false.
250. The United States sustained damages because of Defendants’ wrongful conduct
251. Kabbage further made, used, caused to be used false records or statements to get false or
fraudulent claims paid and approved by the Federal Reserve, and that were material to the
Federal Reserve’s payment of the false claims at issue in this case.
252. Kabbage made false certifications and representations when submitting false claims for
payment. Kabbage’s false certifications of compliance in its PPPLF Agreement caused the
Federal Reserve to approve its initial participation in the PPPLF, which allowed Kabbage
to present its false claim loan applications, as alleged herein.
253. The express false certifications and representations made and caused to be made by
Defendants were material to the United States’ payment of the false claims.
254. Defendants made or caused to be made such false records or statement with actual
knowledge of their falsity, or with reckless disregard or deliberate ignorance of whether or
not they were false.
255. The United States sustained damages because of Defendants’ wrongful conduct.
PRAYER FOR RELIEF
WHEREFORE, Relator, on behalf of himself individually and acting on behalf of the United
States prays that judgment be entered against Defendants as follows:
50
Case 1:20-cv-12114-GAO Document1 = Filed 11/25/20 Page 52 of 53
That this Court enter judgment against Defendants in an amount equal to three times the
amount of damages the United States has sustained because of Defendants' actions, plus a civil
penalty for each violation, pursuant to the statute, with interest.
That Relator be awarded the maximum amount available under Sections 3730(d) and
3730(c)(5) of the False Claims Act.
That Relator be awarded all reasonable expenses that were necessarily incurred in prosecution
of this action, plus all reasonable attorneys' fees and costs, as provided by 31 U.S.C. § 3730(d).
And such other relief shall be granted in the favor of the United States and the Relator as this
Court deems just and proper.
Relator hereby demands a jury trial.
DATED_ 4S Mavembe~ dKO
Respectfully Submitted:
fp
Michael A. Lesser, Esq. BBO# 631128 >
Evan R. Hoffman, Esq. BBO# 678975
THORNTON LAW FIRM LLP
One Lincoln Street, 13" Floor
Boston, MA 02111
(Tel.): 617-720-1333
(Fax) : 617-720-2445
E-mail: mlesser@tenlaw.com
E-mail: ehoffman@tenlaw.com
D1
1
Case 1:20-cv-12114-GAO Document 1 - Filed 11/25/20, Page 53 of 53
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