Amended Complaint — United States ex rel. James R. Berkley v. Ocean State, LLC (Dkt. 28, D.R.I.)
Summary
A Second Amended Complaint in United States of America ex rel. James R. Berkley v. Ocean State, LLC, et al., C.A. No. 1:20-cv-00538-JJM-PAS, in the U.S. District Court for the District of Rhode Island, filed 10/28/22 as Document 28. The defendants are Ocean State, LLC, New Harbor Capital Fund LP, New Harbor Capital Fund II LP, New Harbor Capital Management LP, Blueprint Test Preparation, LLC and Fyzical Acquisition Holdings, LLC. The relator alleges False Claims Act violations through a false claim under the SBA's Paycheck Protection Program and describes Ocean State as a private equity portfolio company 84% owned and controlled by New Harbor Capital. The complaint describes the relator as a Chartered Financial Analyst who founded a private equity real estate fund. It seeks treble damages, civil penalties of $11,665 to $23,331 per violation, and a jury trial.
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“Amended Complaint — United States ex rel. James R. Berkley v. Ocean State, LLC (Dkt. 28, D.R.I.).”
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Case 1:20-cv-00538-JJM-PAS Document 28 Filed 10/28/22 Page 1 of 55 PageID #:
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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
UNITED STATES OF AMERICA ex rel.
JAMES R. BERKLEY
Plaintiff,
C.A. No. 1:20-cv-00538-JJM-PAS
vs.
OCEAN STATE, LLC,
PLAINTIFF DEMANDS TRIAL BY JURY
NEW HARBOR CAPITAL FUND LP, NEW
HARBOR CAPITAL FUND II LP,
NEW HARBOR CAPITAL
MANAGEMENT LP, BLUEPRINT TEST
PREPARATION, LLC, FYZICAL
ACQUISITION HOLDINGS, LLC
Defendants.
SECOND AMENDED COMPLAINT
Plaintiff, United States of America ex rel. James R. Berkley, brings this action against
defendants, Ocean State, LLC (“Ocean State”), New Harbor Capital Fund LP, New Harbor
Capital Fund II LP, New Harbor Capital Management LP, Blueprint Test Preparation, LLC
(“Blueprint Test Prep”) and Fyzical Acquisition Holdings, LLC (“Fyzical Holdings”)
(collectively, the “Defendants”), and alleges as follows:
NATURE OF THE ACTION
1. This action is brought by relator, James R. Berkley (“Relator” or “Berkley”), on
behalf of the United States of America (the “United States” or the “Government”) and against
the named Defendants alleging violations of the False Claims Act, 31 U.S.C. §§ 3729 et seq. (the
“False Claims Act”), and Relator claims entitlement to a portion of any recovery obtained by the
United States as a qui tam plaintiff authorized by 31 U.S.C. § 3730.
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2. Relator brings this action to impose liability upon Defendants for violation of 31
U.S.C. § 3729 and non-compliance with various federal laws, regulations, and guidance by
submission of a false claim for payment made under the United States Small Business
Administration (“SBA”) Paycheck Protection Program (“PPP”).
PARTIES
3. Relator, James R. Berkley, is a citizen of Massachusetts residing in Hopkinton,
Massachusetts. Berkley is a Chartered Financial Analyst with a BS in finance from Bentley
University and a MS in finance from the Bentley University McCallum Graduate School of
Business. Berkley is the founder of FI Real Estate Capital Management, LLC (“FIRE CM”),
which is a private equity real estate fund. Prior to forming FIRE CM, Berkley worked for years
as a vice president and equity analyst at various asset management, investment and research
firms and investment banks. Through his experience, Berkley has a deep understanding of the
private equity fund model, compensation structure and practices.
4. Defendant, Ocean State, is a Delaware limited liability company with a principal
place of business at 2130 Mendon Road, Cumberland, Rhode Island 02864. Ocean State is a
private equity firm portfolio company that is 84% owned and controlled by Chicago-based
private equity firm New Harbor Capital Fund LP and/or its parent fund New Harbor Capital
Management LP.
5. Upon information and belief, defendant, New Harbor Capital Fund LP, is a
Delaware limited partnership with a principal place of business at 500 West Madison Street,
Suite 2830, Chicago, IL 60661. Upon information and belief, New Harbor Capital Fund LP is a
private equity fund and is managed and controlled by its parent New Harbor Capital
Management LP.
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6. Upon information and belief, defendant, New Harbor Capital Fund II LP, is a
Delaware limited partnership with a principal place of business at 500 West Madison Street,
Suite 2830, Chicago, IL 60661. Upon information and belief, New Harbor Capital Fund II LP is
a private equity fund and is managed and controlled by its parent New Harbor Capital
Management LP.
7. Upon information and belief, defendant, New Harbor Capital Management LP, is
a Delaware limited partnership with a principal place of business at 500 West Madison Street,
Suite 2830, Chicago, IL 60661. Upon information and belief, New Harbor Capital Management
LP is a private equity firm and is the parent of New Harbor Capital Fund LP and New Harbor
Capital Fund II LP and other New Harbor Capital funds. Upon information and belief, at all
relevant times, New Harbor Capital Management LP has owned a controlling stake in New
Harbor Capital Fund LP and New Harbor Capital Fund II LP and has managed, controlled, and
directed the conduct of New Harbor Capital Fund LP and New Harbor Capital Fund II LP on
behalf of New Harbor Capital Fund LP and New Harbor Capital Fund II LP’s investors. (New
Harbor Capital Fund LP, New Harbor Capital Fund II LP and New Harbor Capital Management
LP may be referred to collectively herein as “New Harbor Capital”).
8. Upon information and belief, defendant, Blueprint Test Prep, is a California
limited liability company with a principal place of business at 6080 Center Drive, Suite 520, Los
Angeles, CA 90045. Upon information and belief, Blueprint Test Prep is a private equity firm
portfolio company that is majority owned and controlled by New Harbor Capital. Upon
information and belief, at all relevant times, New Harbor Capital has owned a controlling stake
in Blueprint Test Prep and has managed, controlled, and directed the conduct of Blueprint Test
Prep with resect the matters alleged herein.
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9. Upon information and belief, defendant, Fyzical Holdings, is a Delaware limited
liability company with a principal place of business at 1751 Mound Street, Suite 102, Sarasota,
FL 34236. Upon information and belief, Fyzical Holdings is a private equity firm portfolio
company that is majority owned and controlled by New Harbor Capital. Upon information and
belief, at all relevant times, New Harbor Capital has owned a controlling stake in Fyzical
Holdings and has managed, controlled, and directed the conduct of Fyzical Holdings with resect
the matters alleged herein.
10. Upon information and belief, New Harbor Capital Management LP made its
investments in Ocean State, Blueprint Test Prep and Fyzical Holdings through a private equity
funds, New Harbor Capital Fund LP, New Harbor Capital Fund II LP and/or other related funds.
New Harbor Capital Management LP is the manager of New Harbor Capital Fund LP, New
Harbor Capital Fund II LP, and other related funds and controlled and directed the conduct of
Ocean State, Blueprint Test Prep, LLC and Fyzical Holdings on behalf of New Harbor Capital
Fund LP, New Harbor Capital Fund II LP and/or its other funds’ investors.
JURISDICTION AND VENUE
11. This action arises under the False Claims Act, 31 U.S.C. §§ 3729-3733. This
Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §§ 1331 and 1345
and 31 U.S.C. §§ 3730 and 3732.
12. This Court has personal jurisdiction over Defendants pursuant to 31 U.S.C. §
3732(a) because Ocean State can be found, resides, and transacts business within Rhode Island,
because one or more acts proscribed by the False Claims Act occurred in Rhode Island, and
because each of the Defendants has sufficient contacts with the United States as a whole and
have availed themselves of the privileges of American law and they could reasonably anticipate
being involved in litigation in the United States.
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13. Venue is proper under 28 U.S.C. § 1391(b) and (c), because events giving rise to
this action occurred in this forum and plaintiff suffered harm in this forum.
14. Additionally, venue is proper in this district under 28 U.S.C. §1395 and 31 U.S.C.
§ 3732(a) because Ocean State can be found, resides, and transacts business within Rhode Island.
THE FALSE CLAIMS ACT
15. Originally enacted in the 1860s to combat fraud against the Union Army during
the Civil War, the False Claims Act is the primary tool with which the United States combats
false or fraudulent claims against the Government and protects federal funds. The Supreme
Court has held that the False Claims Act’s provisions must be construed broadly to reach “all
types of fraud, without qualification, that might result in financial loss to the Government.”
United States v. Neifert-White Co., 390 U.S. 228, 232 (1968).
16. The False Claims Act provides that a person is liable to the United States
Government for each instance in which the person knowingly presents, or causes to be presented,
a false or fraudulent claim for payment or approval. 31 U.S.C. § 3729(a)(1)(A).
17. The False Claims Act also makes liable any person who “knowingly makes, uses,
or causes to be made or used, a false record or statement material to a false or fraudulent claim.”
31 U.S.C. § 3729(a)(1)(B).
18. The False Claims Act also contains a “reverse false claim” provision, which
makes liable any person who “knowingly makes, uses, or causes to be made or used, a false
record or statement material to an obligation to pay or transmit money or property to the
Government, or knowingly conceals or knowingly and improperly avoids or decreases an
obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729(a)(1)(G).
An obligation includes “the retention of any overpayment.” Id. § 3729(b)(3). Generally
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speaking, an “overpayment” means any funds that a person or entity receives or retains to which
that person or entity is not entitled. 42 U.S.C. § 1320a–7k(d)(4)(B).
19. The False Claims Act defines “knowingly” to mean that a person “(i) has actual
knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the
information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31
U.S.C. § 3729(b)(1)(A). The False Claims Act provides that no proof of specific intent to
defraud is required. 31 U.S.C. § 3729(b)(1)(B).
20. The False Claims Act defines the term “material” as “having a natural tendency to
influence, or be capable of influencing, the payment or receipt of money or property.” 31 U.S.C.
§ 3729(b)(4).
21. The False Claims Act defines the term “claim” to mean, in relevant part: “any
request or demand, whether under a contract or otherwise, for money or property and whether or
not the United States has title to the money or property, that – (i) is presented to an officer,
employee, or agent of the United States; or (ii) is made to a contractor, grantee, or other
recipient, if the money or property is to be spent or used on the Government’s behalf or to
advance a Government program or interest, and if the United States Government – (I) provides
or has provided any portion of the money or property requested or demanded; or (II) will
reimburse such contractor, grantee, or other recipient for any portion of the money or property
which is requested or demanded.” 31 U.S.C. § 3729(b)(2)(A).
22. The Supreme Court has made clear that a request for payment made under a
federal loan guarantee that was obtained in violation of a statute, regulation, or program
requirement, by the use of a false statement, or by means of other fraudulent conduct qualifies as
a “claim” under the False Claims Act. See Neifert-White Co., 390 U.S. at 232-33 (the term
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“claim” is not limited to legally enforceable claims, but includes all fraudulent attempts to cause
government to pay out money).
23. The False Claims Act is an “expansive” statute, reaching “all types of fraud,
without qualification, that might result in financial loss to the Government.” Cook Cnty., Ill. v.
United States ex rel. Chandler, 538 U.S. 119, 129, 123 S. Ct. 1239, 155 L. Ed. 2d 247 (2003)
(quoting Neifert-White Co., 390 U.S. at 232).
24. Any person who violates the False Claims Act “is liable to the United States
Government for a civil penalty of not less than [$11,665] and not more than [$23,331] … plus 3
times the amount of damages which the Government sustains because of the act of that person.”
31 U.S.C. § 3729(a)(1); 28 C.F.R. § 85.5(a)(9); 28 C.F.R. § 85.5.
FACTUAL BACKGROUND
A. The SBA Paycheck Protection Program
1. SBA Loan Programs in General
25. Created in 1953, the mission of the United States Small Business Administration
(SBA) is to help small business owners and entrepreneurs pursue the American dream. The SBA
is a cabinet-level agency of the United States. It is fully dedicated to small business and provides
counseling, capital, and contracting expertise as the nation’s only go-to resource and voice for
small businesses.
26. The SBA works with lenders to provide loans to small businesses. The SBA
doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made
by its partnering lenders, community development organizations, and micro-lending institutions.
27. Loans guaranteed by the SBA range from small to large and can be used for most
business purposes, including long-term fixed assets and operating capital. Certain loan programs
set restrictions on how businesses can use the funds.
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28. Additionally, SBA loan programs have unique eligibility requirements. In
general, eligibility is based on what a business does to receive its income, the character of its
ownership, and where the business operates. Normally, businesses must meet size standards, be
able to repay, and have a sound business purpose.
2. Applicable Laws, Regulations, and Guidance for the SBA’s Paycheck
Protection Program
29. On March 27, 2020, the President signed the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”) (Pub. L. 116-136) to provide emergency assistance
and health care response for individuals, families, and businesses affected by the coronavirus
pandemic. The SBA received funding and authority through the CARES Act to modify existing
loan programs and establish a new loan program to assist small businesses nationwide adversely
impacted by the COVID-19 emergency.
30. Section 1102 of the Act temporarily permits SBA to guarantee 100 percent of 7(a)
loans under a new program titled the Paycheck Protection Program (PPP). Section 1106 of the
Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed
under the PPP.
31. The SBA and the United States Department of the Treasury (“Treasury”) worked
together to implement PPP, releasing regulations and guidance on a regular basis.
32. Title I of the CARES Act established PPP under a new Section 7(a)(36) of the
Small Business Act of 1953 (the “Small Business Act”). PPP was subsequently expanded by the
Paycheck Protection Program and Health Care Enhancement Act, which was signed into law on
April 24, 2020, and extended by the Paycheck Protection Program Flexibility Act (the
“Flexibility Act”), which was signed into law on June 5, 2020.
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33. Loans guaranteed under the PPP will be 100 percent guaranteed by SBA, and the
full principal amount of the loans may qualify for loan forgiveness.
34. Because PPP is a loan program under Section 7(a) of the Small Business Act, it is
subject to the regulations applicable to SBA Section 7(a) business loans except where the
CARES Act or applicable regulations provide otherwise.
35. Section 7(a) loan regulations are generally found in 13 C.F.R. part 120. PPP is
also subject to SBA affiliation rules in 13 C.F.R. § 121.301(f).
36. In addition to the laws and regulations that apply to PPP loans, the SBA has
issued ongoing official guidance regarding PPP loans. Relevant guidance is discussed below.
37. On April 2, 2020, the SBA published its first Interim Final Rule on Business Loan
Program Temporary Changes; Paycheck Protection Program (the “Interim Final Rule”).
38. On April 3, 2020, the SBA published an Interim Final Rule on Applicable
Affiliation Rules (“IFR #2”).
39. Also on April 3, 2020, SBA published a summary of affiliation rules applicable to
PPP (the “Affiliation Guidance”), which confirmed that the affiliation rules of 13 C.F.R. §
121.301(f) apply to PPP.
40. On April 24, 2020, SBA published an Interim Final Rule on Requirements for
Promissory Notes, Authorizations, Affiliation, and Eligibility (“IFR #4”), which provided
clarification regarding eligibility for private equity fund portfolio companies, and a guide on
How to Calculate Maximum Loan Amounts.
41. On April 30, 2020, SBA published an Interim Final Rule on Corporate Groups
and Non-Bank and Non-Insured Depository Institution Lenders (“IFR #7”).
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42. On May 8, 2020, SBA published an Interim Final Rule on Extension of Limited
Safe Harbor with Respect to Certification Concerning Need for PPP Loan Request (“IFR #9”).
43. On May 20, 2020, SBA published an Interim Final Rule on Second Extension of
Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan and Lender
Reporting (“IFR #13”).
44. On May 22, 2020, SBA published an Interim Final Rule on Loan Forgiveness
(“IFR #14”) and an Interim Final Rule on SBA Loan Review Procedures and Related Borrower
and Lender Responsibilities (“IFR #15”).
45. On June 11, 2020, SBA published an Interim Final Rule on Revisions to First
Interim Final Rule (“IFR #17”) to revise the Interim Final Rule to account for changes made by
the Flexibility Act.
46. On June 22, 2020, SBA published an Interim Final Rule on Revisions to Loan
Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule (“IFR
#20”) to revise IFR #14 and IFR #15 to account for changes made by the Flexibility Act.
47. Since early April 2020, guidance from SBA can be found in a regularly updated
FAQ (the “SBA FAQ”) that is posted on the SBA and Treasury websites.
3. PPP Loan Eligibility
48. A business is eligible for a PPP loan if it meets any one of the following
standards:
i. Together with its affiliates, it has 500 or fewer employees, regardless of their
principal place of residence. See 15 USCS § 636(a)(36)(D)(i)(I); SBA FAQ
Question 44 (published May 5, 2020).
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ii. Together with its affiliates, it meets the SBA employee-based size standard for the
North American Industry Classification System (“NAICS”) code applicable to its
primary industry.1 See 15 USCS § 636(a)(36)(D)(i)(II); SBA FAQ Question 3.
iii. Its primary industry is in NAICS category 72 (accommodations and food service)
and it has, together with its affiliates, no more than 500 employees per physical
location. See 15 USCS § 636(a)(36)(D)(iii).
iv. On its own, it meets the size standard (employee-based or receipts-based)
established by SBA for the NAICS code applicable to its primary industry, and
together with its affiliates, it meets the size standard (employee-based or receipts-
based) established by SBA for the NAICS code applicable to either its primary
industry or the primary industry of itself and its affiliates on a combined basis,
whichever standard is higher. See 13 C.F.R. § 121.301(a); SBA FAQ Question 2.
v. It has, together with its affiliates, $15 million or less of tangible net worth as of
March 27, 2020, and $5 million or less of average net income after Federal
income taxes (excluding carry-over losses) for the last two full fiscal years before
the date of application. See 15 USCS § 632(a)(5)(B); SBA FAQ Question 2.
49. In counting employees for purposes of determining PPP eligibility, PPP
applicants may use (a) their average number of employees over the previous 12 months, (b) their
average number of employees for calendar year 2019, or (c) their average number of employees
for each pay period during the last 12 calendar months completed prior to the loan application. If
the business has been operational for less than 12 months, it may use the average number of
employees for each of the pay periods that it has been operational. See 13 C.F.R. § 121.106(b);
SBA FAQ Question 14. The employee test for determining PPP loan eligibility is a head-count
test, including full-time, part-time, temporary, leased, and furloughed employees. See 13 C.F.R.
§ 121.106(a).
50. Certain businesses are ineligible for PPP loans even if they meet the size tests
described above. Among the ineligible businesses, financial businesses primarily engaged in the
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SBA size standards based on industry codes are found in 13 C.F.R. § 121.201.
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business of lending and speculative businesses are ineligible. See Interim Final Rule § 2(c); 13
C.F.R. § 120.110; SBA Standard Operating Procedure (SOP) 50 10 5(K), Subpart B, Chapter 2.
51. As a result, private equity funds and management companies are ostensibly
ineligible for PPP loans. SBA has taken the position that “[h]edge funds and private equity firms
are primarily engaged in investment or speculation, and such businesses are therefore ineligible
to receive a PPP loan.” See IFR #4 § 2(a).
52. Private equity fund portfolio companies may be generally eligible for PPP loans,
assuming they meet the size standards (described above) and are not in an ineligible business.
53. However, the SBA’s affiliation rules apply and can cause other portfolio
companies of the private equity fund to be aggregated for purposes of the size test (see below).
54. In addition, the SBA notes that “all borrowers should carefully review the
required certification on the Paycheck Protection Program Borrower Application Form (SBA
Form 2483) stating that ‘[c]urrent economic uncertainty makes this loan request necessary to
support the ongoing operations of the Applicant.’” See IFR #4 § 2(b).
55. SBA guidance further provides that “Borrowers must make this certification in
good faith, taking into account their current business activity and their ability to access other
sources of liquidity sufficient to support their ongoing operations in a manner that is not
significantly detrimental to the business.” See SBA FAQ Question 31.
56. An applicant is not specifically required to show that it is unable to obtain credit
elsewhere in order to get a PPP loan, but SBA guidance issued on April 23, 2020 and April 26,
2020 informs this analysis. The CARES Act waives the SBA requirement that a borrower show
it is unable to obtain credit elsewhere. See 15 USCS § 636(a)(36)(I).
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57. However, SBA FAQ Question 31 indicates that availability of alternate liquidity
sources is relevant to whether an applicant can certify in good faith that a PPP loan is necessary,
as required by the PPP loan application. See SBA FAQ Question 37 (published April 23, 2020).
While SBA FAQ Question 31 refers to “public company[ies] with substantial market value and
access to capital markets,” SBA FAQ Question 37 extends SBA FAQ Question 31 to all
businesses owned by private companies with adequate sources of liquidity. See SBA FAQ
Question 37 (published April 26, 2020).
58. SBA FAQ 31 states:
In addition to reviewing applicable affiliation rules to determine
eligibility, all borrowers must assess their economic need for a PPP
loan under the standard established by the CARES Act and the PPP
regulations at the time of the loan application. Although the CARES
Act suspends the ordinary requirement that borrowers must be
unable to obtain credit elsewhere (as defined in section 3(h) of the
Small Business Act), borrowers still must certify in good faith that
their PPP loan request is necessary. Specifically, before submitting
a PPP application, all borrowers should review carefully the
required certification that “[c]urrent economic uncertainty makes
this loan request necessary to support the ongoing operations of the
Applicant.” Borrowers must make this certification in good faith,
taking into account their current business activity and their ability to
access other sources of liquidity sufficient to support their ongoing
operations in a manner that is not significantly detrimental to the
business. For example, it is unlikely that a public company with
substantial market value and access to capital markets will be able
to make the required certification in good faith, and such a company
should be prepared to demonstrate to SBA, upon request, the basis
for its certification.
59. For applicants that applied for and received a PPP loan but then believed, based
on subsequent SBA guidance, that they could not certify in good faith that current economic
uncertainty makes their PPP loan necessary to support ongoing operations, the SBA provided a
safe harbor that permitted borrowers to repay PPP loans in full by May 18, 2020.
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60. Borrowers that repaid their PPP loans in full by May 18, 2020, will be deemed to
have made the required certification of need in good faith. See IFR #4 § 5 as modified by IFR
#9 and IFR #13 § 1; SBA FAQ Question 31, as modified by SBA FAQ Question 43 and SBA
FAQ Question 47.
61. In addition, the SBA has stated that: “Any borrower that, together with its
affiliates, received PPP loans with an original principal amount of less than $2 million will be
deemed to have made the required certification concerning the necessity of the loan request in
good faith.” Affiliation for this purpose is determined based on the rules that apply for
determining eligibility for a PPP loan. See SBA FAQ Question 46.
4. Affiliation for Purposes of PPP Size Tests
62. The SBA defines “affiliation” as one business controlling or having the power to
control another or when a third party (or parties) controls or has the power to control both
businesses. See 13 C.F.R. § 121.301(f); Affiliation Guidance. The SBA has an expansive view
of what constitutes “control,” and it does not matter whether control is exercised, so long as the
power to control exists. SBA applies four specific affiliation rules for purposes of the PPP size
tests:
i. Affiliation based on ownership. For determining affiliation based on equity
ownership, a concern is an affiliate of an individual, concern, or entity that owns
or has the power to control more than 50% of the concern’s voting equity. If no
individual, concern, or entity is found to control, SBA will deem the board of
directors or president or chief executive officer (or other officers, managing
members, or partners who control the management of the concern) to be in control
of the concern. SBA will deem a minority shareholder to be in control if that
individual or entity has the ability, under the concern’s charter, bylaws, or
shareholder’s agreement, to prevent a quorum or otherwise block action by the
board of directors or shareholders. See 13 C.F.R. § 121.301(f)(1).
ii. Affiliation arising under stock options, convertible securities, and agreements to
merge. For purposes of determining control and affiliation, options, convertible
securities, and agreements to merge (including agreements in principle) are
considered effective as if exercised or consummated, as the case may be, unless
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subject to conditions precedent which are incapable of fulfillment, speculative,
conjectural, or unenforceable under state or Federal law, or where the probability
of the transaction (or exercise of the rights) occurring is shown to be extremely
remote. Significantly, a person or entity that controls one or more other entities
cannot use options, convertible securities, or agreements to appear to eliminate
control before actually doing so. SBA will not give present effect to a person’s or
entity’s ability to divest all or part of its ownership interest in order to avoid a
finding of affiliation. See 13 C.F.R. § 121.301(f)(2).
iii. Affiliation based on management. Where the chief executive officer or president
of an entity (or other officers, managing members, or partners who control the
management of the entity) also controls the management of another entity, the
two entities will be deemed affiliates under common control. Where a single
person or entity that controls the board of directors or management of one entity
also controls the board of directors or management of another entity, the two
entities will be deemed affiliates under common control. Where a person or entity
controls the management of another entity through a management agreement, the
entities are deemed affiliated. See 13 C.F.R. § 121.301(f)(3).
iv. Affiliation based on identity of interest. Where there is an identity of interest
between close relatives with identical or substantially identical business or
economic interests (e.g., in the same or similar industry in the same geographic
area), such interests are presumed to be affiliated. This presumption may be
rebutted with evidence showing that the interests are separate. See 13 C.F.R. §
121.301(f)(4).
63. Affiliation is particularly relevant for private equity and venture funds because, if
a private equity or venture fund is deemed to be an affiliate of a PPP applicant, all other affiliates
of the fund (e.g., all other portfolio companies controlled by the fund) will be deemed affiliates
of that PPP applicant.
64. Moreover, if the fund is part of a family or series of funds under common control,
the affiliates of those funds would also be deemed affiliates of the PPP applicant. In many cases,
such extended affiliation would make it impossible for the applicant to meet the size standards
for PPP eligibility.
65. In addition, private equity management companies are deemed affiliates of the
funds they manage by virtue of common management or common control, which make them
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affiliates of controlled portfolio companies and exclude them from PPP eligibility. In any of
these situations, a PPP applicant must account for affiliates in size determinations.
66. There are certain circumstances in which the affiliation rules do not apply. See 15
USCS § 636(a)(36)(D)(iv). Specifically, during the “covered period” (which is defined as
February 15, 2020 through June 30, 2021) the CARES Act waives the affiliation rules with
respect to eligibility of a PPP applicant that is one of the following:
i. A business within NAICS category 72 that has no more than 500 employees.
ii. A business operating as a franchise with a franchise identifier code assigned by
SBA in the SBA Franchise Directory.
iii. A business that receives financial assistance from a small business investment
company licensed by SBA (“SBIC”).
67. Potentially, a portfolio company controlled by a private equity fund could qualify
for a PPP loan using the tangible net worth and net income test (described above), assuming the
portfolio company and its affiliates, which would include the fund’s other controlled portfolio
companies, meet the tangible net worth and net income tests on a combined basis.
5. PPP Loan Terms
68. PPP loans funded before the enactment of the Flexibility Act mature two years
from the date of funding, see Interim Final Rule § 2(j), unless modified by the lender and
borrower, see Flexibility Act § 2(b). PPP loans funded after the enactment of the Flexibility Act
on June 5, 2020, mature five years after the date of funding. See Small Business Act §
7(a)(36)(K)(ii), as amended by Flexibility Act § 2.
69. No payments are due on a PPP loan until the SBA has paid the lender the amount
of the PPP loan to be forgiven or notified the lender that no forgiveness will be allowed, but
interest will accrue during that period. See 15 USCS § 636(a)(36)(M)(ii), as amended by
Flexibility Act § 3(c); Interim Final Rule § 2(n), as revised by IFR #17 § 1(c).
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70. Thereafter, most banks will charge monthly or quarterly payments of principal
and interest until maturity. However, any borrower that does not apply for forgiveness within
ten months after the end of its eight-week or 24-week covered period must begin making
payments of principal and interest on or after the expiration of that ten-month period. See 15
USCS § 636(a)(36)(M)(v), as amended by Flexibility Act § 3(c).
71. Lenders must notify borrowers when SBA pays the forgiveness amount or
determines that no forgiveness is allowed. See Interim Final Rule § 2(n), as revised by IFR #17
§ 1(c).
6. Permitted Uses and Forgivable Uses of PPP Loan Funds
72. PPP loan proceeds may be used for the following expenses:
i. Payroll costs.
ii. Costs related to the continuation of group health care benefits during periods of
paid sick, medical, or family leave, and insurance premiums;
iii. Employee salaries, commissions, or similar compensations.
iv. Payments of interest on any mortgage obligation (but not principal payments or
prepayments).
v. Rent (including rent under a lease agreement).
vi. Utilities.
vii. Interest on any other debt obligations that were incurred before the covered
period.
See 15 USCS § 636(a)(36)(F)(i).
73. Prior to the enactment of the Flexibility Act on June 5, 2020, the SBA required
that at least 75% of PPP loan proceeds be used for payroll costs. See Interim Final Rule § 2(r).
The Flexibility Act revised the CARES Act to provide that a borrower must use at least 60% of
PPP loan proceeds for payroll costs in order to be eligible for forgiveness of its PPP loan, see
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CARES Act § 1106(d)(7), as added by Flexibility Act § 3(b), and IFR #17 revised the Interim
Final Rule to require that at least 60% of PPP loan proceeds be used for payroll costs. See IFR
#17 § 1(e), amending Interim Final Rule § 2(r). Additionally, not all permitted uses of PPP loan
proceeds qualify for forgiveness.
74. Technically speaking, PPP loan proceeds may be used for other allowable
purposes under Section 7(a) of the Small Business Act. However, the PPP loan application
requires the applicant to disclose the purpose of the loan and includes a certification that the
proceeds of the loan will be used “to retain workers and maintain payroll or make mortgage
interest payments, lease payments, and utility payments….” Based on that certification,
borrowers may not use PPP loan proceeds for purposes that were not disclosed in the loan
application or would not fall within the certification on the loan application form.
75. If a borrower uses PPP loan funds for unauthorized purposes, SBA will require
those amounts to be repaid. If a borrower knowingly uses PPP loan proceeds for unauthorized
purposes, it will be subject to additional liability, such as fraud charges. If a borrower’s
shareholder, member, or partner uses PPP loan proceeds for unauthorized purposes, SBA will
have recourse against that shareholder, member, or partner. See Interim Final Rule § 2(s).
76. Subject to various limitations, the outstanding principal amount of a PPP loan can
be forgiven to the extent that PPP loan proceeds were used to pay the following:
i. Payroll costs.
ii. Mortgage interest (but not principal payments or prepayments) on mortgage
obligations on real or personal property incurred before February 15, 2020.
iii. Rent under leases for real or personal property in force before February 15, 2020.
iv. Utilities where service began before February 15, 2020.
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See CARES Act § 1106(b).
77. However, the Flexibility Act amended the CARES Act to provide that a borrower
must use at least 60% of PPP loan proceeds for payroll costs in order to be eligible for
forgiveness of its PPP loan, see CARES Act § 1106(d)(7), as added by Flexibility Act § 3(b), and
IFR #17 revised the Interim Final Rule to require that at least 60% of PPP loan proceeds be used
for payroll costs see IFR #17 § 1(e), amending Interim Final Rule § 2(r).
78. The CARES Act and initial SBA forgiveness guidance tie forgiveness of PPP loan
proceeds to use during an eight-week period beginning when the PPP loan is funded or, with
respect to payroll costs of certain borrowers, beginning with the start of the first pay period after
the PPP loan is funded.
79. The Flexibility Act revised the CARES Act to permit (but not require) borrowers
to use PPP loan proceeds over 24 weeks instead of eight weeks, provided that the 24-week
period may not extend beyond December 31, 2020. See CARES Act § 1106(a)(3), as amended
by Flexibility Act § 3(b). The “covered period” will be 24 weeks unless a borrower elects to use
the original eight-week period.
80. In order to obtain forgiveness of a PPP loan, borrowers must submit to their PPP
lenders a Loan Forgiveness Application plus documentation showing the permitted use of PPP
loan proceeds and employment and payroll records for the relevant periods, together with
certifications of accuracy.
81. The lender must perform a good faith review of the borrower’s calculations and
supporting documents and work with the borrower to remedy any errors the lender identifies.
The lender is not required to independently verify the borrower’s reported information. See IFR
#15 § 2(a), as amended by IFR #20 § 2(b).
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82. The lender has 60 days after it has received a complete forgiveness application to
make a determination of the forgiveness amount, if any, and submit its determination and
supporting documentation to SBA. Subject to any SBA review of the loan or loan application,
SBA will pay the forgiveness amount, plus interest accrued through the date of payment, to the
lender within 90 days after the lender submits its determination to SBA. See CARES Act §
1106(e)-(g); IFR #15 § 2(b), as amended by IFR #20 § 2(b).
83. A PPP borrower may submit its forgiveness application any time on or before the
maturity date of the loan if the borrower has used all of the PPP loan proceeds for which it is
requesting forgiveness. A borrower may apply before the end of its chosen eight-week or 24-
week covered period, but if it does so and has reduced any employee’s salary or hourly wage by
more than 25%, it must account for the excess reduction for the full eight-week or 24-week
covered period, as applicable. If a borrower does not file its forgiveness application within ten
months after the end of its eight-week or 24-week covered period, it must begin paying principal
and interest on the PPP loan. See IFR #14 § 2(b), as added by IFR #20 § 1(c).
84. SBA began approving PPP forgiveness applications and remitting forgiveness
payments to PPP lenders for PPP borrowers on October 2, 2020.
7. The PPP Loan Application and Required Certifications
85. The PPP Loan Application form requires the applicant to certify its number of
employees.
86. The PPP Loan Application form also requires the applicant to identify all owners
of 20% of more of the equity of the applicant.
87. For limited liability companies, the instructions to the PPP loan application state
that all members owning 20% or more of the company are “owners.”
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88. The loan application requires an express certification that the applicant “has read
the statements included in this form, including the Statements Required by Law and Executive
Orders, and I understand them.”
89. The loan application also requires an express certification that “[t]he applicant is
eligible to receive a loan under the rules in effect at the time this application is submitted that
have been issued by the Small Business Administration (SBA) implementing the Paycheck
Protection Program under Division A, Title I of the Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) (the Paycheck Protection Program Rule).”
90. The loan application also requires an express certification that the applicant
“employs no more than the greater of 500 or employees or, if applicable, the size standard in
number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.”
91. The loan application also requires an express certification that “[a]ll SBA loan
proceeds will be used only for business-related purposes as specified in the loan application and
consistent with the Paycheck Protection Program Rule.”
92. The loan application also requires the applicant to expressly certify that “[c]urrent
economic uncertainty makes this loan request necessary to support the ongoing operations of the
Applicant.”
93. The loan application also requires the applicant to expressly certify that “[t]he
funds will be used to retain workers and maintain payroll or make mortgage interest payments,
lease payments, and utility payments, as specified under the Paycheck Protection Program Rule;
I understand that if the funds are knowingly used for unauthorized purposes, the federal
government may hold me legally liable, such as for charges of fraud.”
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94. The loan application also requires the applicant to expressly certify that “the
information provided in this application and the information provided in all supporting
documents and forms is true and accurate in all material respects” and that “[the applicant]
understand[s] that knowingly making a false statement to obtain a guaranteed loan from SBA is
punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more
than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more
than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured
institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of
not more than $1,000,000.”
95. The loan application also requires the applicant to expressly certify that “[the
applicant] acknowledge[s] that the lender will confirm the eligible loan amount using required
documents submitted.”
96. The loan application requires an authorized representative of the applicant to sign.
97. As noted, at least with respect to larger companies and businesses owned by
private companies with adequate sources of liquidity, the SBA has indicated that applicants must
take into account “their current business activity and their ability to access other sources of
liquidity sufficient to support their ongoing operations in a manner that is not significantly
detrimental to the business.” See SBA FAQ Questions 31 and 37. Accordingly, in making the
express certification, applicants are required to consider their need for PPP funding in light of
SBA FAQ Question 31, stated above.
98. Absent the applicable express certifications for a PPP loan as described above, the
applicant is not eligible to receive PPP loan funds and the lender cannot approve the loan for PPP
funds.
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99. Each of the foregoing PPP loan application certifications is material condition to
SBAs approval, guarantee and payment of any claim submitted under the PPP. SBA does not
review PPP loan applications for approval prior to the loan funds being disbursed; instead, it
relies on its lenders to comply with SBA requirements and to ensure that every loan is in fact
eligible for the PPP. The certifications are required for approval of the PPP loan application and
for each applicant to receive payment of PPP loan funds. The certifications are critical to SBA’s
and the United States’ ability to ensure that only qualified and eligible loans are approved and
paid. And the certifications are needed to protect SBA and the United States from undue risk
and loss.
100. The SBA permitted any borrower that received a PPP loan and believed upon
reconsideration that it could not make the required certification in light of SBA’s guidance to
repay the PPP loan in full by May 18, 2020. According to the SBA, it would deem any borrower
that repaid by May 18, 2020 to have made the required certification of need in good faith. See
IFR #4 § 5 as modified by IFR #9 and IFR #13 § 1; SBA FAQ Question 31, as modified by SBA
FAQ Question 43 and SBA FAQ Question 47.
101. On May 13, 2020, the SBA published FAQ Question and Answer 46 (“FAQ 46”),
which provides a new safe harbor based on the principal amount of PPP loans received by a
borrower and its affiliates: “Any borrower that, together with its affiliates, received PPP loans
with an original principal amount of less than $2 million will be deemed to have made the
required certification concerning the necessity of the loan request in good faith.” (Affiliation for
this purpose is determined based on the rules that apply for determining eligibility for a PPP
loan, as announced in IFR #2.)
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102. FAQ 46 also gives PPP borrowers with loans greater than $2 million that do not
satisfy the new safe harbor a means to limit their exposure to sanctions from the SBA. If the
SBA determines that such a borrower did not have an adequate basis for the certification of need,
SBA will notify the borrower and seek repayment in full of the PPP loan, and tell the lender that
the borrower is not eligible for loan forgiveness. FAQ 46 provides that SBA will not pursue
further administrative enforcement or refer the borrower to other governmental agencies based
on its determination regarding the certification of need if the borrower repays the loan in full
after receiving notification from SBA. See SBA FAQ Question 46.
103. Notably, repaying the loan pursuant to FAQ 46 does not shield the borrower from
all potential liability. FAQ 46 merely states that SBA will not pursue additional action based on
a determination that the borrower lacked an adequate basis for the certification of need. A
borrower is still liable if there are other violations of the PPP statute or implementing
regulations. Further, nothing in FAQ 46 prevents the Government or a qui tam relator or
whistleblower who believes that the borrower knowingly made a false statement in connection
with its PPP loan application from bringing a complaint under the False Claims Act.
B. Ocean State, Blueprint Test Prep and Fyzical Holdings’ PPP Loan Applications
and Receipt of PPP Loan Funds
1. Ocean State, Blueprint Test Prep, Fyzical Holdings and Their Private Equity
Firm Parent New Harbor Capital
104. Founded in 2013, Ocean State is an independent provider of primary care, urgent
care and related services in Rhode Island.
105. In October 2017, Chicago-based private equity firm New Harbor Capital Fund LP
and its parent New Harbor Capital Management LP (collectively, New Harbor Capital)
completed a controlling equity investment in Ocean State.
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106. That is, in October 2017, New Harbor Capital Management LP made a controlling
investment in Ocean State through the private equity fund, New Harbor Capital Fund LP. In its
capacity as the manager of New Harbor Capital Fund LP, New Harbor Capital Management LP
controlled and directed the conduct of Ocean State on behalf of investors of the fund. New
Harbor Capital Management LP Operating Partner John Roselli became an officer (CEO) of
Ocean State and served as board member along with other New Harbor Capital Management LP
partners. Through New Harbor Capital Fund LP’s controlling stake in Ocean State, New Harbor
Capital Management LP controlled a majority of the seats on Ocean State’s management/board
of directors.
107. New Harbor Capital Fund, LP is a private equity fund with a gross asset value of
approximately $260,099,243 as of March 30, 2020.
108. In addition to New Harbor Capital Fund LP, New Harbor Capital Management,
LP is the parent fund for at least three other private equity funds: New Harbor Capital Fund II-A,
LP, New Harbor Capital Fund-A, LP, and New Harbor Capital Fund II, LP.
109. New Harbor Capital Fund II LP had a gross asset value of approximately
$225,398,276 as of March 30, 2020.
110. In total, upon information and belief, New Harbor Capital Management, LP had
discretionary assets under management of $509,963,209 (gross asset value) as of March 30,
2020.
111. New Harbor Capital is registered with the SEC as a large advisory firm meaning
that it has regulatory assets under management of $100 million or more.
112. In addition to Ocean State, New Harbor Capital’s other current private equity
portfolio companies during the relevant time-period included: Fix-It 24/7; Quigley Eye
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Specialists; Blueprint Test Prep, LLC; Fyzical Therapy & Balance Centers; LGM Pharma;
Wedgewood Pharmacy; Certica Solutions; and New York Kids Club.
113. In or around April 2018, New Harbor Capital completed a controlling equity
investment in Blueprint Test Prep. Blueprint Test Prep is a LSAT test preparation provider in
the United States, offering in-person and asynchronous online courses, private tutoring, self-
study materials and application consulting services.
114. That is, as with Ocean State, in April 2018, New Harbor Capital Management LP
made a controlling investment in Blueprint Test Prep through the private equity fund, New
Harbor Capital Fund II LP. In its capacity as the manager of New Harbor Capital Fund II LP,
New Harbor Capital Management LP controlled and directed the conduct of Blueprint Test Prep
on behalf of investors of the fund. One or more New Harbor Capital Management LP partners
became officer(s) of Blueprint Test Prep. Upon information and belief, through New Harbor
Capital Fund II LP’s controlling stake in Blueprint Test Prep, New Harbor Capital Management
LP controlled a majority of the seats on Blueprint Test Prep’s management/board of directors.
115. In or around December 2017, New Harbor Capital completed a controlling equity
investment in the Fyzical-brand franchise through Fyzical Holdings. Upon information and
belief, Fyzical Holdings is a holding company incorporated in December 2017 and set up for the
acquisition and ownership of separate franchise owner-operators of physical rehabilitation
centers with an emphasis on balance therapy, medical based fitness and wellness programs
operating under the Fyzical brand. Upon information and belief, as a holding company, Fyzical
Holdings does not perform physical rehabilitation services itself. Instead, it is the Fyzical
franchisee owner-operators that perform that work under the Fyzical name.
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116. As with Ocean State and Blueprint Test Prep, in December 2017, New Harbor
Capital Management LP made a controlling investment in Fyzical Holdings through the private
equity fund, New Harbor Capital Fund LP or New Harbor Capital Fund II LP or another fund. In
its capacity as the manager of New Harbor Capital Fund LP and/or New Harbor Capital Fund II
LP and/or other fund, New Harbor Capital Management LP controlled and directed the conduct
of Fyzical Holdings on behalf of investors of the fund. One or more New Harbor Capital
Management LP partners became officer(s) of Fyzical Holdings. Upon information and belief,
through New Harbor Capital Fund LP or New Harbor Capital Fund II LP or other fund’s
controlling stake in Fyzical Holdings, New Harbor Capital Management LP controlled a majority
of the seats on Fyzical Holdingss’ management/board of directors.
2. Ocean State, Blueprint Test Prep and Fyzical Holdings’ Express
Certifications Made in Their PPP Loan Applications
117. On or about April 3, 2020, Ocean State submitted a PPP borrower application
form.
118. Ocean State certified that the purpose of the loan was for only payroll,
lease/mortgage interest, and utilities. Ocean State did not identify any other purpose for the loan.
119. As required, Ocean State identified in the application New Harbor Capital Fund
LP as the owner of 84% of Ocean State.
120. Ocean State certified in the loan application that it “has read the statements
included in this form, including the Statements Required by Law and Executive Orders, and I
understand them.”
121. Ocean State certified in the loan application that “[t]he applicant is eligible to
receive a loan under the rules in effect at the time this application is submitted that have been
issued by the Small Business Administration (SBA) implementing the Paycheck Protection
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Program under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act
(CARES Act) (the Paycheck Protection Program Rule).
122. Ocean State certified in the loan application that it “employs no more than the
greater of 500 or employees or, if applicable, the size standard in number of employees
established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.”
123. Ocean State certified in the loan application that “[a]ll SBA loan proceeds will be
used only for business-related purposes as specified in the loan application and consistent with
the Paycheck Protection Program Rule.”
124. Ocean State certified in the loan application that “[c]urrent economic uncertainty
makes this loan request necessary to support the ongoing operations of the Applicant.”
125. Ocean State certified in the loan application that “[t]he funds will be used to retain
workers and maintain payroll or make mortgage interest payments, lease payments, and utility
payments, as specified under the Paycheck Protection Program Rule; I understand that if the
funds are knowingly used for unauthorized purposes, the federal government may hold me
legally liable, such as for charges of fraud.”
126. Ocean State certified in the loan application that “the information provided in this
application and the information provided in all supporting documents and forms is true and
accurate in all material respects” and that “[the applicant] understand[s] that knowingly making
a false statement to obtain a guaranteed loan from SBA is punishable under the law, including
under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to
$250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not
more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by
imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.”
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127. Ocean State certified in the loan application that “[the applicant] acknowledge[s]
that the lender will confirm the eligible loan amount using required documents submitted.”
128. The loan application was signed by Ocean State’s Controller, Sarah Charette, as
Ocean State’s authorized representative.
129. Similarly, in or around April 2020, Blueprint Test Prep and Fyzical Holdings also
each submitted a PPP borrower application form.
130. Upon information and belief, Blueprint Test Prep and Fyzical Holdings each
certified that the purpose of the loan was for only payroll and for no other purpose.
131. Upon information and belief, as required, Blueprint Test Prep and Fyzical
Holdings each identified in the applications New Harbor Capital Fund LP and/or New Harbor
Capital Fund II LP and/or other New Harbor Capital fund as the majority owner of the equity of
each.
132. Blueprint Test Prep and Fyzical Holdings each made all of the same above-
referenced required certifications in their respective PPP loan applications as did Ocean State.
133. At the time of their PPP applications, New Harbor Capital and its portfolio
companies—Ocean State, Blueprint Test Prep and Fyzical Holdings—had knowledge of the
various federal laws, regulations, and guidance related to the PPP loan application, certifications,
eligibility and use requirements.
3. Ocean State, Blueprint Test Prep and Fyzical Holdings Each Received PPP
Loan Funds
134. According to SBA PPP loan data made public by the SBA and Treasury, Ocean
State received PPP loan funds of $3,159,800 million through Bristol County Savings Bank,
which was approved on April 10, 2020.
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135. Based on standard PPP eligibility rules, Ocean State’s total 2019 payroll expenses
were between $9.6 million and $24 million in order to qualify for the PPP loan amount received.
Based on Ocean State’s reported 277 jobs retained, this equals an estimated average yearly
compensation between $34,657 and $86,643 per employee.
136. Because the loan received by Ocean State is at least $2 million, it is subject to a
full review by the SBA to ensure eligibility and compliance with PPP program requirements.
137. In addition to Ocean State, the data show that at least two of New Harbor
Capital’s other portfolio companies applied for and received PPP loan funds.
138. Blueprint Test Prep applied for and received PPP loan funds of $1,267,200
million through PNC Bank, NA, which was approved on April 14, 2020.
139. Based on standard PPP eligibility rules, Blueprint Test Prep’s total 2019 payroll
expenses were between $4.8 million and $9.6 million in order to qualify for the PPP loan amount
received. Based on its reported 160 jobs retained, this equals an estimated average yearly
compensation between $30,000 and $60,000 per employee.
140. Because the loan received by Blueprint Test Prep, together with its affiliates, is at
least $2 million, it is subject to a full review by the SBA to ensure eligibility and compliance
with PPP program requirements. See SBA FAQ Question 46.
141. Fyzical Holdings applied for and received PPP loan funds of $3,076,600 million
through Webster Bank, NA, which was approved on April 27, 2020.
142. Based on standard PPP eligibility rules, Fyzical Holdings’ total 2019 payroll
expenses were between $9.6 million and $24 million in order to qualify for the PPP loan amount
received. Unlike most businesses, it did not report the number of jobs retained by its receipt of
the PPP loan, so per-employee payrolls cannot be estimated.
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143. Because the loan received by Fyzical Holdings is at least $2 million, it is subject
to a full review by the SBA to ensure eligibility and compliance with PPP program requirements.
144. Necessarily, Blueprint Test Prep and Fyzical Holdings also made all of the
required certifications in their respective PPP loan applications. Otherwise, they would not have
received the PPP loan funds.
145. Thus, Ocean State and its affiliates, Blueprint Test Prep and Fyzical Holdings,
collectively applied for and received PPP loan funds of $7,503,600 and reported 437 jobs
retained by their receipt of the PPP loans.
4. New Harbor Capital Directed Ocean State, Blueprint Test Prep and Fyzical
Holdings’ PPP Loan Applications and Receipt of PPP Loan Funds
146. As alleged, New Harbor Capital controlled and directed the conduct of Ocean
State, Blueprint Test Prep, LLC and Fyzical Holdings, including, but not limited to, Ocean State,
Blueprint Test Prep and Fyzical Holdings’ PPP loan applications and receipt of PPP loan funds.
In the very least, New Harbor Capital was aware of Ocean State, Blueprint Test Prep and Fyzical
Holdings’ PPP loan applications and receipt of PPP loan funds. As a result, New Harbor Capital
may be held liable for the submission of false claims by its portfolio companies. See, e.g.,
United States ex rel. Martino-Fleming v. S. Bay Mental Health Centers, No. 15-CV-13065-PBS,
2021 WL 2003016 (D. Mass. May 19, 2021); United States ex rel. Carmen Medrano v. Diabetic
Care RX, LLC, No. 15-CV-62617, 2018 WL 6978633 (S.D. Fla. Nov. 30, 2018).2
2
See also Press Release, U.S. Dep’t of Just., Compounding Pharmacy, Two of Its Executives, and Private Equity
Firm Agree to Pay $21.36 Million to Resolve False Claims Act Allegations (Sept. 18, 2019),
https://www.justice.gov/opa/pr/compounding-pharmacy-two-its-executives-and-private-equity-firm-agree-pay-
2136-million; NOTE: Make Hay While the Sun Shines: Private Equity and the False Claims Act, 74 Vand. L. Rev.
797 (April 1, 2021); Brian Bewley & Kaitlyn Dunn, Government Files Amended FCA Complaint Against Private
Equity Firm and Its Portfolio Company, JD SUPRA (Apr. 1, 2019),
https://www.jdsupra.com/legalnews/government-files amended-fca-complaint-69787/ [https://perma.cc/6VY9-
8SBY] (“This case . . . represents the first time DOJ has intervened in an FCA suit against a private equity firm
alongside a healthcare portfolio company accused of submitting false claims.”); Nathan J. Andrisani, Eric W.
Sitarchuk & Matthew D. Klayman, DOJ Targeting Private Equity Firms in False Claims Act Litigation, TEMP. 10-
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147. New Harbor Capital was more than merely a passive investor in Ocean State,
Blueprint Test Prep and Fyzical Holdings. New Harbor Capital provided management,
oversight, and strategic guidance for the operations of these portfolio companies.
148. As noted, as to Ocean State, at all relevant times New Harbor Capital was an 84%
owner of Ocean State and its Operating Partner, John Roselli, was Ocean State’s CEO and
served as board member along with other New Harbor Capital partners. New Harbor Capital,
through Mr. Roselli and other partners, actively participated in, controlled and directed, the
management and conduct of its portfolio company, Ocean State, including, but not limited to,
Ocean State’s PPP loan application and receipt and use of PPP loan funds.
149. Likewise, upon information and belief, at all relevant times New Harbor Capital
was a majority owner of Blueprint Test Prep and Fyzical Holdings and New Harbor Capital
actively participated in, controlled and directed, the management and conduct of its other
portfolio companies, Blueprint Test Prep and Fyzical Holdings.
150. In this regard, as with Ocean State, at all relevant times New Harbor Capital was a
majority owner of Blueprint Test Prep and Fyzical Holdings and one or more of its partners were
officers and directors of Blueprint Test Prep and Fyzical Holdings. New Harbor Capital, through
one or more of its partners, actively participated in, controlled and directed, the management and
conduct of its portfolio companies, Blueprint Test Prep and Fyzical Holdings, including, but not
Q, https://www2.law.temple.edu/10q/doj-targeting-private-equity-firms-in-false-claims-act-litigation/
[https://perma.cc/4UZN-SCZJ] (“Based on its recent complaint in intervention . . . , DOJ may be setting its sights on
a new class of potential defendants in FCA cases: private equity firms.”); Christopher Hewitt & Jayne Juvan,
Diabetic Care RX Case Is a Warning Sign for Private Equity, LAW360 (May 7, 2018, 1:44 PM),
https://www.law360.com/articles/1041067/diabetic-care-rx-case-is-a-warning-sign-forprivate-equity
[https://perma.cc/9PCC-Z7ZG] (“The United States government recently sent shock waves through the private
equity industry by charging a private equity firm for its portfolio company’s alleged health care fraud.”).
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limited to, Blueprint Test Prep and Fyzical Holdings’ PPP loan applications and receipt and use
of PPP loan funds.
151. Upon information and belief, New Harbor Capital controlled, directed and/or
assisted Ocean State, Blueprint Test Prep and Fyzical Holdings with respect to their PPP
applications, the information and certifications contained therein, and these portfolio companies’
use of PPP funds.
C. Defendants Knowingly Submitted and Caused to be Submitted False Claims for
Payment to the SBA
1. Ocean State, Blueprint Test Prep and Fyzical Holdings Falsely Certified the
Necessity of Their PPP Loans, with New Harbor Capital’s Knowledge,
Direction, and Oversight
152. As noted, applicants for PPP funds must make several express certifications when
applying for loans and loan forgiveness. One of those express certifications is that “[c]urrent
economic uncertainty makes this loan request necessary to support the ongoing operations of the
Applicant.”
153. Because the SBA requires an express certification of necessity to determine
eligibility, and thoroughly discussed the certification in guidance, a false certification of
necessity is a materially false misrepresentation that would have affected SBA’s decision to
approve a PPP loan.
154. The SBA notes that “all borrowers should carefully review the required
certification on the Paycheck Protection Program Borrower Application Form (SBA Form 2483)
stating that ‘[c]urrent economic uncertainty makes this loan request necessary to support the
ongoing operations of the Applicant.’” See IFR #4 § 2(b).
155. SBA FAQ 31 explains that applicants making the PPP loan certification should
“tak[e] into account their current business activity and their ability to access other sources of
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liquidity sufficient to support their ongoing operations in a manner that is not significantly
detrimental to the business.”
156. SBA FAQ 31 states the general principle that, in order to certify in good faith that
the PPP loan is necessary, as required by the PPP loan application, a borrower must take into
account other sources of liquidity (e.g., cash and cash equivalents, short-term funds, bank loans,
liquidating assets, capital raises, etc.) that could be utilized instead of a PPP loan, and SBA FAQ
Question 37 extends SBA FAQ Question 31 to all businesses owned by private companies with
adequate sources of liquidity. See SBA FAQ Question 37.
157. Despite the fact that the PPP was intended for small businesses, many apparently
large businesses, such as companies backed by private equity firms, claimed PPP funds while
making the necessity certification. Ocean State, Blueprint Test Prep and Fyzical Holdings are
each one of those companies.
158. In December 2014, New Harbor Capital Fund, LP completed final closing of a
$146 million fund. In May 2017, New Harbor Capital Fund II, LP closed a $265 million fund.
As described, on or around the date of Ocean State, Blueprint Test Prep and Fyzical Holdings’
PPP loan applications, New Harbor Capital Fund LP had a gross asset value of approximately
$260,099,243, New Harbor Capital Fund II LP had a gross asset value of approximately
$225,398,276, and their parent fund, New Harbor Capital Management, LP, had discretionary
assets under management of $509,963,209.
159. Upon information and belief, in and around between March 13, 2020 and the end
of the loan forgiveness covered period of the subject PPP loans, New Harbor Capital had
substantial cash and cash equivalents and other assets on hand and available to its portfolio
companies. Given the opaque, non-transparent nature of the private equity industry in general,
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and New Harbor Capital and its portfolio companies in particular, coupled with the self-
certifying “honor-system” of the PPP loan process, specific information concerning New Harbor
Capital and its portfolio companies’ liquidity and contractual relationships with one another is
peculiarly within their knowledge and control.
160. Nevertheless, as detailed herein, through Berkley’s experience and knowledge of
the private equity fund model and compensation structure, coupled with his investigation and
analysis into New Harbor Capital and its portfolio companies, Berkley discovered that despite
being well-capitalized with substantial cash and cash equivalents and other liquidity sources on
hand and available, rather than inject its own money, extend funding, sell off assets or tap other
available sources of liquidity in order to assist its portfolio companies—Ocean State, Blueprint
Test Prep and Fyzical Holdings—New Harbor Capital and its portfolio companies chose instead
to wrongfully take millions in PPP money that was intended to provide relief to small businesses
affected by the pandemic and for which neither New Harbor Capital nor its portfolio companies
were eligible. At the same time, New Harbor Capital paid its employees and owners substantial
compensation. New Harbor Capital could have and should have supported its portfolio
companies in a crisis. Instead of doing so, New Harbor Capital and its portfolio companies went
with willing hands to take money from public support that could have gone to firms with less
access to credit and greater need. New Harbor Capital and its portfolio companies manipulated
the COVID-19 pandemic for profit.
161. Highlighting this point, on November 22, 2019, Fortuna Three Realty, LLC
(“Fortuna”), which is a single member limited liability company owned by Berkley (or,
technically, his wife), purchased a commercial real estate office building in Providence, Rhode
Island, where Ocean State was a tenant under two separate leases for the first and second floors
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of the building. Following its purchase of the building, Fortuna became Ocean State’s landlord
under these two preexisting leases that Ocean State had with the prior owner/landlord.
162. Beginning in March 2020, Ocean State stopped making rent payments to Fortuna
under its lease for the second floor (which it had abandoned in January 2019), claiming among
other things that it was unable to pay rent due to the COVID-19 pandemic. On March 17, 2020,
John Roselli—New Harbor Capital’s operating partner and Ocean State’s CEO—sent an email
from his New Harbor Capital email address but with a signature block indicating his role as
Ocean State’s CEO. In that email, Mr. Roselli failed to distinguish among New Harbor Capital
and Ocean State and he spoke on behalf of them collectively. In his email, Mr. Roselli used the
collective pronouns “we” and “our” to discuss the operations and rent payments of New Harbor
Capital’s portfolio company, Ocean State, and when referencing a cash infusion being sought by
New Harbor Capital.
163. After Ocean State stopped making payments, Berkley communicated on several
occasions with Mr. Roselli to inquire when Ocean State would resume payments. Specifically,
Berkley asked Mr. Roselli why Ocean State did not just use money available at the sponsor level:
i.e., why didn’t Ocean State obtain funding from its owner New Harbor Capital to cover the
payments given the fact that New Harbor Capital was a well-capitalized private equity fund that
could easily serve as an available source of liquidity for Ocean State. Mr. Roselli did not
indicate that New Harbor Capital did not have the liquidity available to support Ocean State.
Instead, his response was simply “that’s not how it works.” Mr. Roselli’s statement shows, or
at least supports the strong inference, that New Harbor Capital had adequate liquidity available
to support Ocean State and its other portfolio companies’ ongoing operations, but New Harbor
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Capital and the portfolio companies under its direction and control chose instead to take over $3
million in PPP loans rather than tap New Harbor Capital’s available liquidity.
164. Berkley also learned from his communications with Mr. Roselli that New Harbor
Capital had done a typical leveraged buyout of Ocean State, but then New Harbor Capital
mismanaged its investment and decided to default on a loan with its bank to try and negotiate
better loan terms before throwing any more money into Ocean State. In short, based on Mr.
Roselli’s disclosures to Berkely, rather than use New Harbor Capital’s cash for what it viewed as
throwing good money after bad, Ocean State (or, more specifically New Harbor Capital) pointed
to COVID-19 as a pretext to avoid Ocean State’s payment obligations and chose to take over $3
million in PPP money, even though Ocean State was admittedly able to pay its debts as they
became due in the ordinary and usual course of business, was owned by a well-capitalized
private equity fund that was an available source of liquidity, and was fully able to fulfill its
payment obligations to Fortuna but simply chose not to do so.
165. Berkley also interviewed numerous Ocean State landlord/employees at other
Ocean State locations (i.e., doctors that had previously sold their practices to New Harbor
Capital but still owned the buildings and now worked for Ocean State). Through these
interviews, Berkely discovered that Ocean State—under the control and direction of New Harbor
Capital—had also stopped paying rent to these landlords and was shaking them down for major
rent concessions based on the pretext of the COVID-19 pandemic and despite taking PPP money
and despite being owned by a well-capitalized private equity fund that was an available source of
liquidity.
166. Berkley also interviewed a recently laid off Ocean State employee who
corroborated that Ocean State was not paying rent and laying off employees despite taking PPP
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money and despite being owned by a well-capitalized private equity fund that was an available
source of liquidity.
167. As noted herein, New Harbor Capital had $509,963,209 in assets under
management as of March 2020 in or around the date of Ocean State, Blueprint Test Prep and
Fyzical Holdings’ PPP loan applications. (See ¶¶ 110, 158 supra.) New Harbor Capital’s
profitability flourished during the pandemic. As of March 2022, New Harbor Capital’s assets
under management had ballooned to $840,383,271.
168. Based on Berkley’s experience and investigation, and upon information and
belief, New Harbor Capital adheres to the industry standard 2 and 20 form of private equity fund
compensation structure. Under this pay structure, 2% represents the annual management fee
which is applied to the total assets under management and is paid to the private equity fund
manager regardless of how well the investment is performing. A 20% carried interest fee (or,
performance fee) is charged on the profits that the private equity fund generates above a certain
predefined benchmark and is payable when an investment (i.e., a portfolio company) is sold.
The annual 2% flat rate charged on total assets under management is used to pay staff salaries,
administrative and office expenses, and other operational expenses. The 20% carried interest fee
is used to reward the private equity fund’s key executives and portfolio managers. This bonus
structure is what makes private equity fund managers some of the highest paid financial
professionals. And this does not even include other fees that New Harbor Capital presumably
collects from its portfolio companies. These can include consulting fees, advisory fees,
monitoring fees, servicing fees, transaction fees, director’s fees, and others. These fees too can
be quite significant.
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169. Accounting only for the annual 2% management fee based on New Harbor
Capital’s $509,963,209 assets under management as of March 2020, there was over $10 million
in management fees going to New Harbor Capital each year. And again, that doesn’t even take
into account the carried interest fees or other fees New Harbor Capital received during that time.
170. Again, though, New Harbor Capital prospered during the pandemic. Against the
$840,383,271 assets under management as of March 2022, there was almost $17 million in
management fees going to New Harbor Capital per year.
171. This compensation structure leads to New Harbor Capital reaping huge sums of
money. The management fees alone—which are only supposed to cover a fund’s running
costs—are sufficient to make New Harbor Capital’s owners and employees very rich. Upon
information and belief, during the loan forgiveness period of the subject PPP loans, New Harbor
Capital’s employees and/or owners were compensated in an average amount of approximately
$477,222 and ranging from a low of approximately $416,708 to a high of approximately
$548,942. And again, this does not even include the 20% carried interest fee paid to New Harbor
Capital when an investment is sold.
172. This seemingly innocuous information shows, or at least supports the strong
inference, that New Harbor Capital and its portfolio companies—Ocean State, Blueprint Test
Prep and Fyzical Holdings—applied for and received taxpayer-backed PPP loan funds of over
$7.5 million despite having access to millions (if not billions) in cash that could have been used
to support these portfolio companies and despite paying its owners and employees exorbitant
sums of money. These portfolio companies plainly could have survived the pandemic without
taxpayer funds. They knew they didn’t need the PPP money but they took it anyway.
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173. What’s more, after taking over $3 million in PPP money, New Harbor Capital
exited its investment in Ocean State in March 2021 when it sold off Ocean State to VillageMD, a
national primary healthcare provider. In typical private equity playbook fashion, at the time
Ocean State was acquired in October 2017, New Harbor Capital planned to increase Ocean
State’s value and sell it for a profit a few years later. To do this, as Mr. Roselli and the other
Ocean State doctors and workers confirmed, New Harbor Capital loaded up Ocean State with
debt and management fees. Then, to make Ocean State more attractive to other buyers, New
Harbor Capital slashed costs, including by laying off employees and renegotiating leases at
significant discounts when COVID-19 appeared, and paying off debt financing. Rather than
using the PPP money (much less its own money) to support Ocean State’s ongoing operations
and keep Ocean State’s doors open, New Harbor Capital instead chose to sell off its investment
in Ocean State months after taking over $ 3 million in PPP money.
174. Again, this sale shows, or at least supports the strong inference, that Ocean State
did not need access to the PPP emergency relief program, which was intended for struggling
small businesses. Rather than use its own money, the PPP funds functioned as an easy taxpayer
grant that New Harbor Capital used to pay down debt, position Ocean State for sale, and then
enrich its investors and executives via the 20% carried interest payment upon Ocean State’s sale.
New Harbor Capital’s focus on profit—including its plans to sell Ocean State in the near term—
propelled it to cause its portfolio companies to submit the unlawful PPP loan applications at
issue.
175. Ocean State was not the only portfolio company that New Harbor Capital cashed
out of around the time of the subject PPP loans. Between August 2020 and April 2021, New
Harbor Capital sold off its investments in at least four other portfolio companies: Community
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Psychiatry Management, New York Kids Club, Certica Solutions and Wedgewood Pharmacy.
These sales too show, or at least support the strong inference, that Ocean State, Blueprint Test
Prep and Fyzical Holdings did not need to take PPP money because New Harbor Capital had
more than sufficient liquidity to support them.
176. At all relevant times, New Harbor Capital and its portfolio companies—Ocean
State, Blueprint Test Prep and Fyzical Holdings—had knowledge of the various federal laws,
regulations, and guidance related to the PPP loan application, certifications, eligibility and use
requirements.
177. As alleged herein, New Harbor Capital and its portfolio companies—Ocean State,
Blueprint Test Prep and Fyzical Holdings—conspired to defraud the public fisc by knowingly
applying for and receiving PPP loan funds for which they were not eligible or entitled to receive.
Berkley was able to discern this fraud through his investigation and experience and his synthesis
and analysis of otherwise facially valid and innocuous garden-variety information concerning
these Defendants and the subject PPP loans. As alleged herein, through its ownership,
management, and exercise of control over its portfolio companies, New Harbor Capital initiated
and directed Ocean State, Blueprint Test Prep and Fyzical Holdings’ decision to submit PPP loan
applications and receipt and use of PPP loan funds knowing that these portfolio companies were
not eligible or entitled to receive the PPP loan funds. Indeed, New Harbor Capital has claimed
that in responding to COVID-19 it worked side-by-side with the leaders and management of its
portfolio companies.
178. Through his experience and efforts, Berkley discovered that Ocean State falsely
certified in its application that a PPP loan was “necessary” and that it could not “access other
sources of liquidity sufficient to support its ongoing operations,” which was intended to preclude
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affiliates of large companies such as Ocean State from receiving support, according to the
Treasury Department. See SBA FAQ Question 31, 37.
179. Likewise, through his experience and efforts, Berkley discovered that New
Harbor Capital’s other portfolio companies—Blueprint Test Prep and Fyzical Holdings—also
falsely certified in their applications that a PPP loan was “necessary” and that they could not
“access other sources of liquidity sufficient to support [their] ongoing operations.”
180. As described, on the date of Ocean State’s PPP loan application, 84% of Ocean
State’s equity (or membership interests) was owned by New Harbor Capital Management LP’s
private equity fund, New Harbor Capital Fund LP.
181. Likewise, as described, on the date of Blueprint Test Prep and Fyzical Holdings’
PPP loan applications, a majority of Blueprint Test Prep and Fyzical’s equity (or membership
interests) was owned by New Harbor Capital Management LP’s private equity fund, New Harbor
Capital Fund LP and/or New Harbor Capital Fund II LP and/or another New Harbor Capital
fund.
182. To wit, taking into account New Harbor Capital’s liquidity, significant financial
resources and 84% ownership of Ocean State, Ocean State knowingly misrepresented that its
PPP loan request was “necessary” to support its ongoing operations insofar as Ocean State had
alternate sources of liquidity available and was able to access those sources without significantly
damaging its business.
183. Likewise, taking into account New Harbor Capital’s liquidity, significant
financial resources and controlling ownership of Blueprint Test Prep and Fyzical Holdings,
Blueprint Test Prep and Fyzical Holdings each also knowingly misrepresented that its PPP loan
request was “necessary” to support its ongoing operations insofar as Blueprint Test Prep and
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Fyzical had alternate sources of liquidity available and were able to access those sources without
significantly damaging its business.
184. Ocean State, Blueprint Test Prep, and Fyzical Holdings’ false certifications of
necessity were material because the certification affected their eligibility for the PPP loan and the
SBA’s decision to approve and guarantee the loans and the SBA would not have done so but for
these false certifications.
185. As alleged, New Harbor Capital directed and oversaw Ocean State, Blueprint Test
Prep, and Fyzical Holdings’ PPP loan applications and the information and certifications
contained therein. In the least, New Harbor Capital had knowledge of Ocean State, Blueprint
Test Prep, and Fyzical Holdings’ PPP loan applications and the information and certifications
contained therein. As a result, New Harbor Capital may be held liable for the submission of
false claims by its portfolio companies. (See ¶ 146 supra.)
186. All Defendants—inclusive of New Harbor Capital, Ocean State, Blueprint Test
Prep and Fyzical Holdings—knew that compliance with the certification of “necessity” was a
condition of eligibility for the PPP loans and the SBA’s decision to approve the loans and
material requirement for SBA’s guarantee and payment of the PPP loans.
2. Ocean State, Blueprint Test Prep and Fyzical Holdings Falsely Certified
Compliance with the PPP Size and Affiliation Rules, with New Harbor
Capital’s Knowledge, Direction, and Oversight
187. The CARES Act expressly limits PPP loans to businesses with less than 500
employees, or otherwise qualifying as a small business concern under other SBA standards, with
certain limited exceptions.
188. The “alternative size standard” for PPP loans also allows businesses to qualify if,
as of March 27, 2020, the maximum tangible net worth of the business is not more than $15
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million, and their average net income after federal income taxes for the two full fiscal years
before the date of the application was not more than $5 million.
189. Businesses must include the employees of affiliate businesses in its size
determinations, according to the SBA’s affiliation rules. See 13 C.F.R. § 121.301(f)(1);
Affiliation Guidance.
190. New Harbor Capital is an affiliate of Ocean State because inter alia it owns and
has the power to control more than 50% of Ocean State’s voting equity.
191. Likewise, upon information and belief, New Harbor Capital is an affiliate of
Blueprint Test Prep and Fyzical Holdings because inter alia it owns and has the power to control
more than 50% of Blueprint Test Prep and Fyzical Holdings’ voting equity
192. Because New Harbor Capital is an affiliate of Ocean State, both New Harbor
Capital along with all other affiliates of New Harbor Capital (e.g., all other portfolio companies
that are majority owned and/or controlled by New Harbor Capital) are deemed affiliates of
Ocean State. The same is true for Blueprint Test Prep and Fyzical Holdings.
193. Upon information and belief, New Harbor Capital is the majority owner of and
controls or has the power to control its other portfolio companies, including: Fix-It 24/7; Quigley
Eye Specialists; Blueprint Test Prep; Fyzical Holdings, Fyzical Therapy & Balance Centers;
LGM Pharma; Wedgewood Pharmacy; Certica Solutions; and New York Kids Club.
194. Accordingly, New Harbor Capital is an affiliate of each of these other portfolio
companies and, in turn, the portfolio companies are affiliates of Ocean State, Blueprint Test Prep
and Fyzical Holdings for purposes of PPP size and net-worth tests. See 13 C.F.R. § 121.301(f);
Affiliation Guidance.
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195. As a result of this extended affiliation, it was impossible for Ocean State to meet
the size standards for PPP eligibility and Ocean State and New Harbor Capital knew or should
have known that Ocean State did not meet these standards and was thus ineligible for a PPP loan.
196. Likewise, as a result of this extended affiliation, it was also impossible for
Blueprint Test Prep and Fyzical Holdings to meet the size standards for PPP eligibility and New
Harbor Capital, Blueprint Test Prep and Fyzical Holdings knew or should have known that
Blueprint Test Prep and Fyzical Holdings did not meet these standards and were thus ineligible
for a PPP loan.
197. Upon information and belief, the CARES Act’s limited waiver of the affiliation
rules does not apply to Ocean State, Blueprint Test Prep or Fyzical Holdings because during the
covered period they: (i) were not a business within NAICS category 72; (ii) were not a business
operating as a franchise with a franchise identifier code assigned by SBA; and (iii) did not
receive financial assistance from a SBIC. See 15 USCS § 636(a)(36)(D)(iv); see also SBA FAQ
Question 23 (published April 13, 2020) (“If a franchise brand is listed on the SBA Franchise
Directory, each of its franchisees that meets the applicable size standard can apply for a PPP
loan. (The franchisor does not apply on behalf of its franchisees.)”) (Emphasis added). Thus,
the affiliation rules apply to Ocean State, Blueprint Test Prep and Fyzical Holdings.
198. First, together with its affiliates, Ocean State, Blueprint Test Prep and Fyzical
Holdings each had more than 500 employees at the time it filed its PPP application. See 15
USCS § 636(a)(36)(D)(i)(I); SBA FAQ Question 44.
199. Ocean State reported 277 employees in its PPP application.
200. Upon information and belief, New Harbor Capital had approximately 19
employees at the time of Ocean State’s PPP application.
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201. Blueprint Test Prep reported 160 employees in its PPP application and, upon
information and belief, has annual revenue of roughly $30 million.
202. Upon information and belief, Quigley Eye Specialists had approximately 70
employees at the time of Ocean State’s PPP application.
203. Upon information and belief, LGM Pharma had approximately 191 employees
and an estimated annual revenue of $38 million at the time of Ocean State’s PPP application.
204. Upon information and belief, Wedgewood Pharmacy had approximately 650
employees and an estimated annual revenue of $43 million at the time of Ocean State’s PPP
application.
205. Upon information and belief, Certica Solutions had approximately 130 employees
and an estimated annual revenue of $27 million at the time of Ocean State’s PPP application.
206. Upon information and belief, New York Kids Club had approximately 452
employees and an estimated annual revenue of $86 million at the time of Ocean State’s PPP
application.
207. Accordingly, together with its affiliates, each of Ocean State, Blueprint Test Prep
and Fyzical Holdings had approximately 1,968 employees and an estimated annual revenue of
over $232 million at the time it filed its PPP application (not including Fyzical Holdings).
208. Second, each of Ocean State, Blueprint Test Prep and Fyzical Holdings, together
with its affiliates, did not meet the SBA employee-based size standard for the NAICS code
applicable to its primary industry (found in 13 C.F.R. § 121.201). See 15 USCS §
636(a)(36)(D)(i)(II); SBA FAQ Question 3.
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209. Ocean State’s NAICS code is 621999 (“All Other Miscellaneous Ambulatory
Health Care Services”) and there is no applicable employee-based size standard for NAICS code
621999. Accordingly, Ocean State could not rely on this size-standard test.
210. Nor could Blueprint Test Prep or Fyzical Holdings rely on this size-standard test.
Blueprint Test Prep’s NAICS code is 611691 (“Exam Preparation and Tutoring”) and there is no
applicable employee-based size standard for NAICS code 611691. Fyzical Holdings’ NAICS
code is 541990 (“All Other Professional, Scientific, and Technical Services”) and there is no
applicable employee-based size standard for NAICS code 541990.
211. Third, neither Ocean State, Blueprint Test Prep, nor Fyzical Holdings’ primary
industry is not in NAICS category 72 (accommodations and food service). See 15 USCS §
636(a)(36)(D)(iii). Accordingly, Ocean State, Blueprint Test Prep and Fyzical Holdings could
not rely on this size-standard test.
212. Fourth, neither Ocean State, Blueprint Test Prep nor Fyzical Holdings, on its own,
does not meet the size standard (employee-based or receipts/revenue-based) established by SBA
for the NAICS code applicable to its primary industry (621999, 611691, 541990), and together
with its affiliates, it does not meet the size standard (employee-based or receipts/revenue-based)
established by SBA for the NAICS code applicable to the higher of its primary industry or the
primary industry of itself and its affiliates on a combined basis.3 See 13 C.F.R. § 121.301(a);
SBA FAQ Question 2.
213. Fifth, each Ocean State, Blueprint Test Prep and Fyzical Holdings had, together
with its affiliates, $15 million or more of tangible net worth as of March 27, 2020, and $5 million
3
The receipts/revenue-based size standard for Ocean State and Fyzical Holdings’ NAICS code is $16.5 million and
$8 million for Blueprint Test Prep. See https://www.ecfr.gov/cgi-bin/text-
idx?SID=b919ec8f32159d9edaaa36a7eaf6b695&mc=true&node=pt13.1.121&rgn=div5#se13.1.121_1201 (last
accessed August 3, 2021).
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or more of average net income after Federal income taxes (excluding carry-over losses) for the
last two full fiscal years before the date of application. See 15 USCS § 632(a)(5)(B); SBA FAQ
Question 2.
214. Based on the foregoing, Ocean State knowingly miscalculated and misrepresented
its employee-count and net worth, its compliance with the PPP size and affiliation rules, and its
eligibility for a PPP loan.
215. Ocean State’s false certification of employee-count and/or net worth was material
because the certification affected Ocean State’s eligibility for the PPP loan and the SBA’s
decision to approve the loan and the SBA would not have done so but for Ocean State’s false
certification.
216. Additionally, based on the foregoing, New Harbor Capital’s other portfolio
companies—Blueprint Test Prep and Fyzical Holdings—also knowingly miscalculated and
misrepresented their employee-count and net worth, their compliance with the PPP size and
affiliation rules, and their eligibility for a PPP loan.
217. Blueprint Test Prep and Fyzical Holdings’ false certifications of employee-count
and/or net worth were material because the certification affected their eligibility for the PPP loan
and the SBA’s decision to approve the loans and the SBA would not have done so but for these
false certifications.
218. As alleged, New Harbor Capital directed and oversaw Ocean State, Blueprint Test
Prep, and Fyzical Holdings’ PPP loan applications and the information and certifications
contained therein. In the least, New Harbor Capital had knowledge of Ocean State, Blueprint
Test Prep, and Fyzical Holdings’ PPP loan applications and the information and certifications
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contained therein. As a result, New Harbor Capital may be held liable for the submission of
false claims by its portfolio companies. (See ¶ 146 supra.)
219. All Defendants—inclusive of New Harbor Capital, Ocean State, Blueprint Test
Prep and Fyzical Holings—knew that compliance with the certification of the PPP size and
affiliation rules was a condition of eligibility for the PPP loans and the SBA’s decision to
approve the loans and material requirement for SBA’s approval, guarantee and payment of the
PPP loans.
D. Ocean State, Blueprint Test Prep and Fyzical Holdings Failed to Repay PPP Loan
Funds for Which They Were Not Entitled, with New Harbor Capital’s Knowledge,
Direction, and Oversight
220. As described above, Ocean State, Blueprint Test Prep and Fyzical Holdings each
falsely certified in its application that a PPP loan was “necessary” to support its ongoing
operations.
221. Ocean State, Blueprint Test Prep and Fyzical Holdings also each falsely certified
in its application compliance with the PPP size and affiliation rules.
222. Additionally, as described herein, New Harbor Capital had direct involvement in
and knowledge of the PPP applications submitted by Ocean State, Blueprint Test Prep and
Fyzical Holdings and the information and certifications contained therein.
223. As described above, for applicants that applied for and received a PPP loan but
then believed, based on subsequent SBA guidance, that they could not certify in good faith that
current economic uncertainty makes their PPP loan necessary to support ongoing operations, the
SBA provided a safe harbor that permitted borrowers to repay PPP loans in full by May 18,
2020.
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224. Borrowers that repaid their PPP loans in full by May 18, 2020, will be deemed to
have made the required certification of need in good faith. See IFR #4 § 5 as modified by IFR #9
and IFR #13 § 1; SBA FAQ Question 31, as modified by SBA FAQ Question 43 and SBA FAQ
Question 47.
225. In addition, the SBA has stated that: “Any borrower that, together with its
affiliates, received PPP loans with an original principal amount of less than $2 million will be
deemed to have made the required certification concerning the necessity of the loan request in
good faith.” Affiliation for this purpose is determined based on the rules that apply for
determining eligibility for a PPP loan. See SBA FAQ Question 46.
226. However, repaying the loan pursuant to FAQ 46 does not shield the borrower
from all potential liability. FAQ 46 merely states that SBA will not pursue additional action
based on a determination that the borrower lacked an adequate basis for the certification of need.
A borrower is still liable if there are other violations of the PPP statute or implementing
regulations, such as falsely certifying compliance with the PPP size and affiliation rules.
227. Neither Ocean State, Blueprint Test Prep nor Fyzical Holdings repaid the PPP
loan funds it received but for which it was not eligible.
228. Further, because the loans received by Ocean State, Blueprint Test Prep, and
Fyzical Holdings are at least $2 million, they are not deemed to have made the necessity
certification in good faith and are subject to a full review by the SBA to ensure eligibility and
compliance with PPP program requirements.
229. Ocean State knowingly avoided and/or concealed its obligation to return money
back to the Government.
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230. Additionally, based on the foregoing, New Harbor Capital’s other portfolio
companies—Blueprint Test Prep and Fyzical Holdings—also knowingly avoided and/or
concealed their obligation to return money back to the Government.
231. As alleged, New Harbor Capital directed and oversaw Ocean State, Blueprint Test
Prep, and Fyzical Holdings’ retention and use of the illegitimate PPP loan funds. In the least,
New Harbor Capital had knowledge of Ocean State, Blueprint Test Prep, and Fyzical Holdings’
retention and use of the illegitimate PPP loan funds. As a result, New Harbor Capital may be
held liable for the retention and use of the illegitimate PPP loan funds by its portfolio companies.
(See ¶ 146 supra.)
E. The United States Suffered Damages
232. As described above, based on information provided by PPP borrowers, PPP
lenders submit PPP borrower loan forgiveness applications to the SBA, requesting payment of
the forgiveness amount by the SBA.
233. The SBA will, subject to any SBA review of the loan or loan application, remit
the appropriate forgiveness amount to the lender, plus any interest accrued through the date of
payment.
234. As described above, Ocean State received PPP loan funds of $3,159,800 in April
2020.
235. On or about June 15, 2021, Ocean State’s PPP loan was forgiven and paid by the
SBA in the amount of $3,197,279 including accrued interest. Notably, as described above, at the
time Ocean State’s PPP loan was forgiven, New Harbor Capital had already exited its investment
in Ocean State in March 2021 when it sold off Ocean State to VillageMD.
236. As described above, Blueprint Test Prep received PPP loan funds of $1,267,200
in April 2020.
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237. Upon information and belief, Blueprint Test Prep’s PPP loan was forgiven and
paid by the SBA in an amount no less than the principal amount of its PPP loan.
238. As described above, Fyzical Holdings received PPP loan funds of $3,076,600 in
April 2020.
239. On or about June 11, 2021, Fyzical Holdings’ PPP loan was forgiven and paid by
the SBA in the amount of $3,110,822 including accrued interest.
240. Accordingly, based on the above, the Government has paid out approximately
$7,575,301 for PPP loan funds for which Ocean State, Blueprint Test Prep and Fyzical Holdings
were not eligible or entitled to receive.
COUNT I
Violation of the False Claims Act
(31 U.S.C. § 3729(a)(1)(A))
241. Relator repeats and realleges the foregoing paragraphs as if fully set forth herein.
242. Defendants violated the False Claims Act, 31 U.S.C. § 3729(a)(1)(A), by
knowingly presenting and causing to be presented to the SBA false and/or fraudulent claims for
payment or approval.
243. Upon information and belief, the United States paid or approved the false and/or
fraudulent claims because of Defendants’ acts that would not have been paid or approved but for
Defendants’ unlawful conduct and incurred damages as a result.
244. By reason of the foregoing, the United States suffered actual damages in an
amount to be determined at trial, and therefore is entitled under the False Claims Act to treble
damages plus a civil penalty for each false or fraudulent claim.
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COUNT II
Violation of the False Claims Act
(31 U.S.C. § 3729(a)(1)(B))
245. Relator repeats and realleges the foregoing paragraphs as if fully set forth herein.
246. Defendants violated the provisions of the False Claims Act, 31 U.S.C. §
3729(a)(1)(B), by knowingly making, using, or causing to be made or used, false records, or
statements: (i) material to false or fraudulent claims for payment to the SBA; and/or (ii) in order
to get false or fraudulent claims paid or approved; (iii) which claims the United States did pay or
approve; and (iv) payment of the false or fraudulent claims was a reasonable and foreseeable
consequence of the Defendants’ statements and actions.
247. Said false records and statements were made, used, or caused to be made or used,
with actual knowledge of their falsity, or with reckless disregard or deliberate ignorance of
whether or not they were false.
248. Upon information and belief, the United States paid or approved the false and/or
fraudulent claims because of Defendants’ acts that would not have been paid or approved but for
Defendants’ unlawful conduct and incurred damages as a result.
249. By reason of the foregoing, the United States suffered actual damages in an
amount to be determined at trial, and therefore is entitled under the False Claims Act to treble
damages plus a civil penalty for each false or fraudulent claim.
COUNT III
Violation of the False Claims Act
(31 U.S.C. § 3729(a)(1)(G))
250. Relator repeats and realleges the foregoing paragraphs as if fully set forth herein.
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251. Defendants violated the so-called “reverse false claim” provision of the False
Claims Act, 31 U.S.C. § 3729(a)(1)(G), by knowingly making or using a false record or
statement for the purpose of avoiding or decreasing an obligation owed to the United States.
252. Defendants retained overpayments or avoided an obligation to repay money to the
United States and the United States incurred damages as a result.
253. By reason of the foregoing, the United States suffered actual damages in an
amount to be determined at trial, and therefore is entitled under the False Claims Act to treble
damages plus a civil penalty for each false or fraudulent claim.
RELIEF REQUESTED
WHEREFORE, Relator, acting on behalf of and in the name of the United States, and on
his own behalf, demands and prays that judgment be entered against defendants as follows:
A. Defendants cease and desist from violating the False Claims Act, 31 U.S.C. §§ 3729
et seq.;
B. Defendants pay an amount equal to three times the amount of damages the United
States has sustained because of Defendants’ actions, plus civil penalties as are
required by law in the amount of not less than $11,665 and not more than $23,331 per
violation of the False Claims Act, post-judgment interest, costs, and such other relief
as may be necessary and proper;
C. Relator be awarded the maximum amount allowed pursuant to 31 U.S.C. § 3730(d);
D. Relator be awarded all costs of this action, including attorneys’ fees, expenses, and
costs pursuant to 31 U.S.C. § 3730(d); and
E. The United States and Relator be granted such other and further relief as the Court
deems just and appropriate.
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RELATOR HEREBY DEMANDS A TRIAL BY JURY FOR ALL ISSUES SO TRIABLE
Respectfully submitted,
Plaintiff,
UNITED STATES OF AMERICA ex rel
JAMES R. BERKLEY
By His attorneys,
/s/ Eric E. Renner
Eric E. Renner (#7481)
Duffy & Sweeney, LTD
321 South Main Street, Suite 400
Providence, RI 02903
Phone: 401-457-1803
Fax: 401-457-0701
erenner@duffysweeney.com
Date: October 28, 2022
CERTIFICATE OF SERVICE
I hereby certify that on the 28th day of October, 2022 I served a true copy of this
document upon each party appearing pro se and the attorney of record for each other party via
the electronic filing system.
/s/ Eric E. Renner
55
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