Statement of Undisputed Facts — United States ex rel. James R. Berkley v. Ocean State, LLC (Dkt. 68, D.R.I.)
Summary
The relator's statement of undisputed material facts under LR Cv 56(a) in support of his motion for partial summary judgment, C.A. No. 1:20-cv-00538-JJM-PAS, in the U.S. District Court for the District of Rhode Island, dated January 6, 2025 and filed as Dkt. 68. It states that NHC Fund I and its affiliates owned 84% of Ocean State Holdings, LLC, whose board gave three New Harbor Representatives, Ed. Lhee, Tom Formolo and John Pircon, three votes each. It states that Ocean State's CEO was John Roselli, an Operating Partner at New Harbor Capital, and that the New Harbor Representatives were ensured a controlling vote on the Fyzical Holdings board. The closing paragraphs state that the MSJ Defendants did not identify a single source of alleged public disclosure in their interrogatory answers. It is signed /s/ by Eric E. Renner.
Summary drafted by a model from the text of the original file linked on this page and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“Statement of Undisputed Facts — United States ex rel. James R. Berkley v. Ocean State, LLC (Dkt. 68, D.R.I.).”
Original at archive.org. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/statement-of-undisputed-facts-united-states-ex-rel-james-r-berkley-v-o-ddb71efec3/
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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
UNITED STATES OF AMERICA ex rel.
JAMES R. BERKLEY,
Plaintiff,
vs. C.A. No. 1:20-cv-00538-JJM-PAS
OCEAN STATE, LLC,
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.
RELATOR’S STATEMENT OF UNDISPUTED MATERIAL FACTS
IN SUPPORT OF HIS MOTION FOR PARTIAL SUMMARY JUDGMENT
Pursuant to LR Cv 56(a), plaintiff-relator, James R. Berkley (“Relator”), submits the
following statement of undisputed material facts in support of his motion for partial summary
judgment against defendants, Ocean State, LLC (“Ocean State”), New Harbor Capital Fund LP
(“NHC Fund I”), New Harbor Capital Fund II LP (“NHC Fund II”), New Harbor Capital
Management LP (“NHC Management” and collectively with NHC Fund I and NHC Fund II, “New
Harbor Capital”) and Fyzical Acquisition Holdings, LLC (“Fyzical Holdings”) (collectively, the
“MSJ Defendants”).
The documents referred to herein, denoted “Ex. #”, are attached to the accompanying
Declaration of Eric E. Renner in Support of Relator’s Motion for Partial Summary Judgment.
1
I. New Harbor Capital’s Ownership, Direction and Control of Ocean State and Fyzical
Holdings
A. New Harbor Capital
1. At all relevant times, defendant NHC Fund I was a private equity fund and was
managed, controlled and directed by defendant NHC Management and non-parties New Harbor
Capital Fund GP, LP and New Harbor Capital Management LLC. Ex. 1; Ex. 2.
2. At all relevant times, defendant NHC Fund II was a private equity fund and was
managed, controlled and directed by defendant NHC Management and non-parties New Harbor
Capital Fund II GP, LP and New Harbor Capital Management II LLC. Ex. 3; Ex. 4.
3. At all relevant times, New Harbor Capital Fund GP, LP was the General Partner of
NHC Fund I and owned a controlling stake in NHC Fund I and managed, controlled, and directed
the conduct and affairs of NHC Fund I on behalf of itself and NHC Fund I’s investors. Ex. 1; Ex.
2.
4. NHC Fund I’s General Partner is an agent of NHC Fund I and NHC Fund I’s
Amended and Restated Agreement of Limited Partnership (“NHC Fund I Limited Partnership
Agreement”) gives the General Partner exclusive authority to act on behalf of NHC Fund I to
effectuate its purposes. Ex. 1; Ex. 2.
5. At all relevant times, New Harbor Capital Fund GP, LP was a party to a
Management Agreement with NHC Management pursuant to which New Harbor Capital Fund
GP, LP appointed NHC Management to manage, control, and direct the conduct and affairs of
NHC Fund I. Ex. 1; Ex. 2.
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6. At all relevant times, New Harbor Capital Fund GP, LP’s conduct and affairs were
ultimately managed, controlled, and directed by its general partner, New Harbor Capital
Management LLC. Ex. 1; Ex. 2.
7. At all relevant times, New Harbor Capital Fund II GP, LP was the General Partner
of NHC Fund II. Ex. 3; Ex. 4.
8. At all relevant times, New Harbor Capital Fund II GP, LP was the General Partner
of NHC Fund II and owned a controlling stake in NHC Fund II and managed, controlled, and
directed the conduct and affairs of NHC Fund II on behalf of itself and NHC Fund II’s investors.
Ex. 3; Ex. 4.
9. NHC Fund II’s General Partner is an agent of NHC Fund II and NHC Fund II’s
Amended and Restated Agreement of Limited Partnership (“NHC Fund II Limited Partnership
Agreement”) gives the General Partner exclusive authority to act on behalf of NHC Fund II to
effectuate its purposes. Ex. 3; Ex. 4.
10. At all relevant times, New Harbor Capital Fund II GP, LP was a party to a
Management Agreement with NHC Management pursuant to which New Harbor Capital Fund II
GP, LP appointed NHC Management to manage, control, and direct the conduct and affairs of
NHC Fund II. Ex. 3; Ex. 4.
11. At all relevant times, New Harbor Capital Fund II GP, LP’s conduct and affairs
were ultimately managed, controlled, and directed by its general partner, New Harbor Capital
Management II LLC. Ex. 3; Ex. 4. .
12. At all relevant times, New Harbor Capital Management LLC was the general
partner of New Harbor Capital Fund GP, LP and the Ultimate General Partner of NHC Fund I.
Ex. 1; Ex. 2.
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13. In its capacity as the Ultimate General Parter, New Harbor Capital Management
LLC ultimately managed, controlled, and directed the conduct and affairs of NHC Management,
New Harbor Capital Fund GP, LP, NHC Fund I and Ocean State. Ex. 1; Ex. 2.
14. At all relevant times, New Harbor Capital Management II LLC was the general
partner of New Harbor Capital Fund II GP, LP and the Ultimate General Partner of NHC Fund II.
Ex. 3; Ex. 4.
15. In its capacity as the Ultimate General Parter, New Harbor Capital Management II
LLC ultimately managed, controlled, and directed the conduct and affairs of NHC Management,
New Harbor Capital Fund II GP, LP, NHC Fund II and Fyzical Holdings. Ex. 3; Ex. 4.
B. Ocean State
16. At all relevant times, Ocean State was a portfolio company that was majority owned
and controlled by NHC Fund I and NHC Management and their affiliates. Ex. 5; Ex. 6; Ex. 7; Ex.
8, No. 3, 6.
17. As of January 1, 2020, Ocean State was 100% owned by its sole member, Ocean
State, Buyer, LLC. Ex. 5; Ex. 9.
18. Ocean State Buyer, LLC was 100% owned by its sole member, Ocean State
Holdings, LLC. Ex. 5; Ex. 10.
19. NHC Fund I and its affiliates owned 84% of Ocean State Holdings, LLC. Ex. 8,
No. 3; Ex. 11; Ex. 12
20. Sections 6.1 and 6.2 of Ocean State’s Amended and Restated LLC Agreement
permit its sole Member, Ocean State Buyer, LLC, to make capital contributions to and issue
membership interests in Ocean State. Ex. 9.
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21. Section 10 of Ocean State’s Amended and Restated LLC Agreement gives Ocean
State Buyer, LLC full and complete power to manage and control Ocean State’s business and
affairs. Ex. 9.
22. Likewise, Sections 6.1 and 6.2 of Ocean State Buyer, LLC’s Amended and Restated
LLC Agreement permit its sole member, Ocean State Holdings, LLC, to make capital contributions
to and issue membership interests in Ocean State Buyer, LLC. Ex. 10.
23. Section 10 of Ocean State Buyer, LLC’s Amended and Restated LLC Agreement
gives Ocean State Holdings, LLC full and complete power to manage and control Ocean State
Buyer, LLC’s business and affairs. Ex. 10.
24. Section 2.2 of Ocean State Holdings, LLC’s Second Amended and Restated LLC
Agreement permits the Board to authorize capital contributions to and to issue Units in Ocean
State Holdings, LLC. Ex. 11.
25. Section 4.1 of Ocean State Holdings, LLC’s Second Amended and Restated LLC
Agreement gives its Board full and complete power to manage and control Ocean State Holdings,
LLC’s business and affairs. Ex. 11.
26. Per Section 4.2, Ocean State Holdings, LLC’s Board was comprised of 7
Representatives, consisting of: three New Harbor Representatives (Ed. Lhee (“Mr. Lhee”), Tom
Formolo (“Mr. Formolo”) and John Pircon (“Mr. Pircon”)); two Executive Representatives; and
two Independent Representatives. Ex. 11.
27. Per Section 4.4(b), each New Harbor Representative had three votes and each
Executive Representative and Independent Representative had one vote. Ex. 11.
28. New Harbor Capital held voting control over Ocean State Holdings, LLC’s Board
and by extension held control over Ocean State Buyer, LLC and Ocean State. Ex. 11.
5
29. Mr. Lhee served as President of Ocean State Holdings, LLC and Ocean State Buyer,
LLC and Vice President of Ocean State. Ex. 9; Ex. 10.
30. Mr. Formolo and Mr. Pircon each served as a Vice President of Ocean State
Holdings, LLC, Ocean State Buyer, LLC and Ocean State. Ex. 9; Ex. 10; Ex. 11.
31. At all relevant times, Mr. Lhee and Mr. Formolo were NHC Fund I’s investment
committee members and under the terms of the NHC Fund I Limited Partnership Agreement had
sole discretion to make all decisions about how Fund I money is used—including providing
funding to portfolio companies—and New Harbor Capital Fund GP, LP (as the General Partner
and an agent of NHC Fund I) had the sole discretion over management decisions of NHC Fund I,
including use of NHC Fund I money and supporting investments (i.e., portfolio companies).
Ex. 1; Ex. 13, p. 94:12-22, 97:6-8, 99:17-22; Ex. 14, p. 13:24-14:1-18, 15:14-19.
32. And in practice, Mr. Lhee was solely responsible for use of NHC Fund I money in
connection with Ocean State because he was the New Harbor Capital partner in charge of
managing the Ocean State investment. Ex. 14, p. 78:23-79:10; Ex. 15, p. 5:16-18, 23:14-24:11,
27:24-28:3.
33. The NHC Fund I Limited Partnership Agreement gave the General Partner, New
Harbor Capital Fund GP, LP—and Mr. Formolo and Mr. Lhee in particular—the exclusive
authority to act on behalf of the Partnership (i.e., NHC Fund I) to effectuate its purposes. Ex. 1.
34. These purposes included managing and supervising investments in portfolio
companies, as well as engaging in such other activities incidental or ancillary thereto as deemed
advisable by the General Partner. Ex. 1.
35. Specifically, Section 1.3 of the NHC Fund I Limited Partnership Agreement states
that: “[t]he Partnership is organized for the principal purposes of (a) making investments of the
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kind and nature described in the Partnership's confidential Private Placement Memorandum dated
May 2013, as supplemented or amended prior to the date hereof, (b) managing, supervising and
disposing of such investments and (c) engaging in such other activities-incidental or ancillary
thereto as the General Partner deems necessary or advisable.” Ex. 1.
36. Section 6.1 gives the General Partner (New Harbor Capital Fund GP, LP) the
exclusive management over the business and assets of the Partnership (i.e., the portfolio
companies) and the sole discretion to manage the Partnership. Ex. 1.
37. Conversely, Section 7.2 says the Limited Partners (i.e., the Fund I investors) shall
not participate in the management of the Partnership. Ex. 1.
38. New Harbor Capital Fund GP, LP was a party to a Professional Services Agreement
with Ocean State pursuant to which New Harbor Capital Fund GP, LP managed, controlled, and
directed the conduct and affairs of Ocean State. Ex. 7; Ex. 8, No. 3, 6.
39. Ocean State’s CEO was John Roselli (“Mr. Roselli”), an Operating Partner at New
Harbor Capital. Ex. 8, No.4; Ex. 16, p. 9:21-10:11, 15:14-16:22.
40. The structure and management of NHC Fund I and its affiliates shows that New
Harbor Capital is deeply involved in the management and operation of the companies in which it
invests, including Ocean State. Ex. 1; Ex. 17 (describing that New Harbor Capital’s investment
strategy is to closely partner with portfolio company management and engage in active investment
management and that New Harbor Capital focuses primarily on making control equity
investments).
41. This involvement includes the authority to make decisions and determinations
relating to decisions about Investments, Investment Contributions, Investment Proceeds,
Partnership Expenses (including all costs, expenses, liabilities and obligations relating to the
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Partnership’s and/or its subsidiaries’ activities, investments and business (to the extent not borne
or reimbursed by a Portfolio Company), Affiliates (including Portfolio Companies and subsidiaries
thereof) (as those terms are defined). Ex. 1.
42. NHC Fund I’s controlling stake in Ocean State placed NHC Fund I and NHC Fund
I’s affiliated entities in a position where they were intimately involved in the management and
operation of Ocean State, well beyond that of a passive investor or shareholder. Ex. 1.
43. NHC Fund I’s investment approach is distinguishable from mere stock holding or
mutual fund investments and NHC Fund I’s investment strategy could only be achieved by active
management through an agent, since NCH Fund I itself had no employees. Ex. 17.
44. New Harbor Capital directed and controlled Ocean State through a combination of
management (e.g., through the Professional Services Agreement and installing Mr. Roselli as
Ocean State’s CEO and Mr. Lhee, Mr. Formolo and Mr. Pircon as officers of Ocean State
Holdings, LLC, Ocean State Buyer, LLC and Ocean State), operational influence (e.g., voting and
governance control through control of the Boards), and financial control (e.g., through the
controlling stake in Ocean State). Ex. 1; Ex. 2; Ex. 5; Ex. 7; Ex. 8, No. 3, 6; Ex. 9; Ex. 10; Ex.
11; Ex. 16, p. 9:21-10:11, 15:14-16:22; Ex. 18; Ex. 19; Ex. 20.
C. Fyzical Holdings
45. At all relevant times, Fyzical Holdings was a portfolio company that was majority
owned and controlled by NHC Fund II and NHC Management and their affiliates. Ex. 21; Ex. 22;
Ex. 23.
46. As of January 1, 2020, NHC Fund II and its affiliates owned a controlling stake in
Fyzical Holdings. Ex. 21; Ex. 23; Ex. 24; Ex. 25; Ex. 26; Ex. 27, No. 3, 6.
8
47. Section 2.2 of Fyzical Holdings’ Second Amended and Restated LLC Agreement
permits its Board to authorize capital contributions to and to issue Units in Fyzical Holdings. Ex.
28.
48. Section 4.1 of Fyzical Holdings’ Second Amended and Restated LLC Agreement
gives its Board full and complete power to manage and control Fyzical Holdings’ business and
affairs. Ex. 28.
49. Per Section 4.2, Fyzical Holdings’ Board was comprised of 7 Representatives,
consisting of: the Executive Representative (i.e., Fyzical Holdings’ CEO); three New Harbor
Representatives (Mr. Lhee, Mr. Formolo and Mr. Pircon); and three Independent Representatives.
Ex. 28.
50. Per Section 4.4(b), the New Harbor Representatives were ensured a majority and
controlling vote on all matters submitted to the Board or any committee thereof. Ex. 28.
51. Thus, New Harbor Capital held voting control over Fyzical Holdings’ Board and
any committee thereof. Ex. 28.
52. At all relevant times, Mr. Lhee and Mr. Formolo were NHC Fund II’s investment
committee members and under the terms of NHC Fund II’s Amended and Restated Agreement of
Limited Partnership (“NHC Fund II Limited Partnership Agreement”) had sole discretion to make
all decisions about how NHC Fund II money was used—including providing funding to portfolio
companies—and New Harbor Capital Fund II GP, LP (as the General Partner and an agent of NHC
Fund II) has the sole discretion over management decisions of NHC Fund II, including use of NHC
Fund II money and supporting investments (i.e., portfolio companies). Ex. 3; Ex. 13, p. 94:12-22,
98:6-8, 99:17-22; Ex. 14, p. 13:24-14:18; Ex. 15, p. 23:14-24:11, 58:1-7.
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53. And in practice, Mr. Formolo was solely responsible for use of NHC Fund II money
in connection with Fyzical Holdings because he was the New Harbor Capital partner in charge of
managing the Fyzical Holding investment. Ex. 14, p. 81:2-6.
54. The NHC Fund II Limited Partnership Agreement gave the General Partner, New
Harbor Capital Fund II GP, LP—and Mr. Formolo and Mr. Lhee in particular—the exclusive
authority to act on behalf of the Partnership (i.e., NHC Fund II) to effectuate its purposes. Ex. 3.
55. These purposes included managing and supervising investments in portfolio
companies, as well as engaging in such other activities incidental or ancillary thereto as deemed
advisable by the General Partner. Ex. 3.
56. Specifically, Section 1.3 of the NHC Fund II Limited Partnership Agreement states
that: “[t]he Partnership is organized for the principal purposes of (a) making investments of the
kind and nature described in the Partnership's confidential Private Placement Memorandum dated
May 2013, as supplemented or amended prior to the date hereof, (b) managing, supervising and
disposing of such investments and (c) engaging in such other activities-incidental or ancillary
thereto as the General Partner deems necessary or advisable.” Ex. 3.
57. Section 6.1 gives the General Partner (New Harbor Capital Fund II GP, LP) the
exclusive management over the business and assets of the Partnership (i.e., the portfolio
companies) and the sole discretion to manage the Partnership. Ex. 3.
58. Conversely, Section 7.2 says the Limited Partners (i.e., the NHC Fund II investors)
shall not participate in the management of the Partnership. Ex. 3.
59. Pursuant to Section 5.1, New Harbor Capital Fund II GP, LP was a party to a
Management Agreement with NHC Management pursuant to which New Harbor Capital Fund II
10
GP, LP appointed NHC Management to manage, control, and direct the conduct and affairs of
NHC Fund II. Ex. 3.
60. At all relevant times, New Harbor Capital Fund II GP, LP was also a party to a
Professional Services Agreement with Fyzical Holdings’ subsidiary, Fyzical Buyer, LLC, pursuant
to which New Harbor Capital Fund II GP, LP managed, controlled, and directed the conduct and
affairs of Fyzical Holdings and its direct and indirect subsidiaries. Ex. 27, No. 6; Ex. 21; Ex. 22.
61. New Harbor Capital Fund II GP, LP’s conduct and affairs were ultimately
managed, controlled, and directed by its general partner, New Harbor Capital Management II LLC.
Ex. 3; Ex. 4.
62. The structure and management of NHC Fund II and its affiliates shows that New
Harbor Capital is deeply involved in the management and operation of the companies in which it
invests, including Fyzical Holdings. Ex. 3; Ex. 17.
63. This involvement includes the authority to make decisions and determinations
relating to decisions about Investments, Investment Contributions, Investment Proceeds,
Partnership Expenses (including all costs, expenses, liabilities and obligations relating to the
Partnership’s and/or its subsidiaries’ activities, investments and business (to the extent not borne
or reimbursed by a Portfolio Company), Affiliates (including Portfolio Companies and subsidiaries
thereof) (as those terms are defined). Ex. 3.
64. NCH Fund II’s General Partner is an agent of NCH Fund II and the NCH Fund II
Limited Partnership Agreement gives the General Partner exclusive authority to act on behalf of
Fund II to effectuate its purposes. Ex. 3.
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65. NCH Fund II’s controlling stake in Fyzical Holdings placed NCH Fund II and NCH
Fund II’s affiliated entities in a position where they were intimately involved in the management
and operation of Fyzical Holdings, well beyond that of a passive investor or shareholder. Ex. 3.
66. As with NCH Fund I, NCH Fund II’s investment approach is distinguishable from
mere stock holding or mutual fund investments, and its investment strategy could only be achieved
by active management through an agent, since Fund II itself had no employees. Ex. 17.
67. New Harbor Capital directed and controlled Fyzical Holdings through a
combination of management (e.g., through the Professional Services Agreement), operational
influence (e.g., voting and governance control through control of the Board), and financial control
(e.g., through the controlling stake in Fyzical Holdings). Ex. 3; Ex. 18; Ex. 19; Ex. 20; Ex. 22.
III. Ocean State—With New Harbor Capital’s Oversight, Direction and Control—Falsely
and Knowingly Certified Its Compliance with the PPP Size and Affiliation Rules and
Eligibility to Receive Its PPP Loan and Then Falsely and Knowingly Certified that
the Loan Funds Were Used to Pay Costs that were Eligible for Forgiveness and
Avoided Its Obligation to Repay the PPP Funds
68.
Ex. 29.
69.
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Ex. 29.
70. On March 27, 2020, a New Harbor Capital principal, Justin Marquardt (“Mr.
Marquardt”), sent an internal email to others at New Harbor Capital stating that: “To the extent
we’re eligible for CARES act funds (
from what I’m hearing we’ll
need to access the funds through a 7a lender. It’s still going to take some time for the funds to be
available, but we should try to get to the front of the line where possible.” Ex. 29.
71. On March 29, 2020, Mr. Lhee sent an email stating that: “Let’s make sure to
coordinate efforts with Deerpath for NYKC, Ocean State, Certica, and Blueprint” and “I think we
should get the lenders who already deal with the SBA to help us.” Ex. 30.
72. On March 29, 2020, Mr. Roselli sent an email stating that: “It may be helpful to
designate a New Harbor point Person regarding this program so we can coordinate efforts with
portfolio companies.” Ex. 30.
73. In a March 30, 2020, Mr. Marquardt stated in an email to Ocean State, Fyzical
Holdings and other New Harbor Capital portfolio companies stating that “I wanted to reach out on
behalf of NHC to help coordinate efforts re: SBA funding from the CARES Act.” Ex. 31.
74.
Ex. 32.
75.
13
Ex. 32 (emphasis added).
76.
14
Ex. 32.
77. On April 3, 2020, Ocean State applied for a first draw PPP loan through Freedom
National Bank (“Freedom National”) in the amount of $3,159,800, which loan was approved by
Freedom National. Ex. 12; Ex. 33, ¶¶ 6-7.
78. In doing so, Ocean State claimed 277 employees
and certified that it fell below the 500-employee
threshold. Ex. 12.
79.
Ex. 12.
80.
Ex. 12.
81. Ocean State checked the “No” box in its PPP application in response to the question
whether any of Ocean State’s owners was an owner of any other business, or had common
management with, any other business, and failed to identify all such businesses and describe the
relationship in an addendum A. Ex. 12.
82. Ocean State certified in its PPP borrower application form 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 [SBA] and the Department of the Treasury (Treasury) implementing the
Paycheck Protection Program …” Ex. 12.
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83. Ocean State certified in its PPP borrower application form that together with its
affiliates (if applicable), it “employ[ed] not more than the greater of” 500 employees or a size
standard set by the SBA for the business's industry. Ex. 12.
84. Ocean State certified in its PPP borrower application form that “[a]ll loan proceeds
will be used only for business-related purposes as specified in the loan application and consistent
with the Paycheck Protection Program Rules.” Ex. 12.
85. Ocean State certified in its PPP borrower application form “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.” Ex. 12.
86. On April 10, 2020, Mr. Lhee, on behalf of Ocean State Buyer, as the sole member
of Ocean State, executed a written consent approving Ocean State’s PPP loan application. Ex. 34.
87.
Ex. 34.
88.
Ex. 34.
89.
Ex. 35.
16
90.
Ex.
35.
91.
Ex. 36.
92.
Ex. 36.
93.
Ex. 36.
94.
Ex. 36.
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95. On May 7, 2020, Mr. Roselli and Ocean State’s nominal CFO, Sarah Charette (“Ms.
Charette”), created a document entitled “PPP Business Case”, which they then sent to New Harbor
Capital for review. Ex. 8, No. 4, 7; Ex. 37.
96.
Ex. 37.
97.
Ex. 38.
98.
Ex. 38.
99.
Ex. 39.
100.
Ex. 39.
101.
Ex. 40.
102.
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Ex. 40.
103.
Ex. 40.
104.
Ex. 41.
105. In November 2020, Ocean State applied for loan forgiveness, this time certifying
that it used the loan exclusively for its own payroll costs to retain employees and that it accurately
verified the payments for the eligible payroll costs. Ex. 33, ¶ 8; Ex. 42.
106. In June 2021, the SBA forgave Ocean State’s PPP loan in the amount of
$3,159,800. Ex. 33, ¶ 11.
107. Ocean State did not repay its PPP loan and neither Ocean State nor New Harbor
Capital ever considered repaying the PPP money in light of the SBA guidance. Ex. 15, p. 46:18-
47:15; Ex. 16, p. 137:6-17.
108. The SBA did not conduct a manual review of Ocean State’s PPP loan forgiveness
application. Ex. 33, ¶ 12.
109. Together with its affiliates, Ocean State had more than 500 employees and it did
not meet the SBA employee-based or revenue-based size standard. Ex. 2; Ex. 5; Ex. 12; Ex. 16,
p. 54:15-57:5; Ex. 21; Ex. 22; Ex. 25; Ex. 43; Ex. 44; Ex. 45; Ex. 46.
110. Absent waiver of the affiliation rules, Ocean State was not eligible for a PPP loan.
Ex. 1; Ex. 2; Ex. 5; Ex. 7; Ex. 9; Ex. 10; Ex. 11; Ex. 16, p. 54:15-57:5; Ex. 18; Ex. 19; Ex. 34;
Ex. 38; Ex. 40.
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111. The MSJ Defendants claim that Ocean State qualified for a waiver of the affiliation
rules and thus did not need to consider affiliates with respect to its PPP loan application because
it received financial assistance from SBIC-approved lender Deerpath Funding Advantage IV, LP
(“Deerpath”) during the covered period. Ex. 47, No. 9, 10.
112. Ocean State was the MSO that provided non-medical administrative and
management services to the 23 separate and legally distinct PC’s (“Ocean State Companies”) that
were 100% owned by Dr. Crausman (not Ocean State) and for whom most of the employees
claimed in Ocean State’s PPP borrower application form worked. Ex. 5; Ex. 6; Ex. 48; Ex. 49.
113. Ocean State entered into a Management Services Agreement (“MSA”) with each
of the 23 Ocean State Companies. Ex. 5; Ex. 16, p.72:15-21, 74:1-4.
114. As the MSO, Ocean State merely “facilitated” payment of payroll costs incurred by
the 23 separate Ocean State Companies and managed the business and non-medical tasks for the
Ocean State Companies . Ex. 5; Ex. 16, p. 21:4-23:21, 24:11-14, 25:16-22, 27:8-28:21, 34:10-15,
64:20-65:6, 67:15-72:21.
115. Ocean State itself had only about a dozen employees; the rest of the 277
“employees” included in Ocean State’s PPP loan application worked in the medical operations at
the 23 Ocean State Companies. Ex. 12; Ex. 16, p. 28:2-21; Ex. 43; Ex. 48; Ex. 50; Ex. 51;
Ex. 52.
116. As Ocean State and New Harbor Capital knew or should have known by virtue of
being parties to the Deerpath loan documents, none of the 23 Ocean State Companies (each a
separate “business concern”) were parties to those loan documents, and thus did not qualify for the
SBIC waiver of the affiliation rule and were ineligible for PPP loans given the affiliation rules.
Ex. 40; Ex. 53; Ex. 54; Ex. 55; Ex. 56.
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117. The MSJ Defendants assert that they “diligently investigated the applicable laws
and regulations in order to ensure the lawfulness of their conduct” and that “[t]he boards of each
company reviewed applicable regulations and supporting documentation prior to determining
whether to approve the PPP loans and reached the same conclusion that the applications were
lawful—including any New Harbor Capital employees or agents serving as board members of
Ocean State, Fyzical, or [Blueprint Test Preparation, LLC].” Ex. 8, No. 11; Ex. 47, No. 10, 17,
18; Ex. 57, No. 13, 14.
118. Ocean State and New Harbor Capital delegated authority for analyzing whether it
was appropriate to aggregate the Ocean State Companies’ employees to Ocean State’s nominal
CFO, Ms. Charette. Ex. 8, No. 7, 13; Ex. 14, p. 87:2-10; Ex. 16, p. 74:5-21; Ex. 58, p. 26:24-
27:3, 31:18-23; Ex. 59, p.12:13-15:11.
119. Ms. Charette, who was not qualified to handle the task, testified that she came up
with the 277 employees included in Ocean State’s PPP borrower application form by simply
looking at Ocean State’s payroll reports (which included the employees of the 23 Ocean State
Companies for which Ocean State facilitated payroll payment). Ex. 58, p. 26:24-27:3, 75:1-3.
120. Ocean State and New Harbor Capital then relied on a one-page generic form letter
from Ocean State’s lender, Deerpath, to claim that Ocean State qualified for the SBIC affiliation
waiver without conducting (or at least identifying in this litigation) any further investigation or
analysis of their own. Ex. 60.
121. The letter was addressed to Ocean State’s PPP lender and simply said that the
“Applicant” has received financial assistance from Deerpath; the letter says nothing specific about
Ocean State or about the separate 23 Ocean State Companies receiving financial assistance from
Deerpath (which they did not) or about the legality of Ocean State aggregating the employees of
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the 23 Ocean State Companies for purposes of determining Ocean State’s eligibility for and the
amount of the PPP loan. Ex. 16, p. 161:23-162:18; Ex. 59, p. 15:3-11; Ex. 60, p. 30:24-31:7, 32:4-
10, 36:21-22, 38:16-39:8, 105:16-20.
122. New Harbor Capital and Ocean State designed a complex ownership structure to
create a legal separateness between themselves and between Ocean State and the 23 Ocean State
Companies to both comply with Corporate Practice of Medicine (“CPOM”) laws and to limit
liability. Ex. 2; Ex. 5; Ex. 6; Ex. 16, p. 67:15-72:21.
123. With Ocean State’s PPP loan application, however, Ocean State disregarded the
legal separateness of the 23 Ocean State Companies, claimed payroll costs for the 277 employees
included in its PPP borrower application form, and claimed that it qualified for the SBIC affiliation
waiver and was an “eligible recipient” for the “covered loan” it applied for and received. Ex. 12.
124. This contrasts with another of New Harbor Capital’s portfolio companies,
Blueprint: unlike Ocean State, the Blueprint-entity that applied for the PPP loan was Blueprint
Test Prep, LLC, which was the business concern that the employees worked for and that paid
payroll costs. Ex. 44; Ex. 45; Ex. 46.
125. Unlike the 23 Ocean State Companies, Blueprint Test Prep, LLC was a party to the
loan documents with SBIC lender Deerpath and thus received financial assistance from a SBIC
lender. Ex. 61.
126. Ocean State did not produce a copy of its MSAs with the 23 Ocean State
Companies in this litigation; however, to comply with Rhode Island CPOM laws, those MSAs
necessarily must provide for Ocean State’s independent corporate existence and affairs and
disclaim any ownership or employer-employee relationship between Ocean State and the 23 Ocean
State Companies. See, e.g., R.I. Gen. Laws § 7-5.1-3 (mandating that every officer, director and
22
shareholder of a professional services corporation must be an individual authorized to practice
such profession and be employed by the corporation in such practice). Ex. 5; Ex. 16, p. 67:15-
72:21.
C. Fyzical Holdings—With New Harbor Capital’s Oversight, Direction and Control—
Falsely and Knowingly Certified Its Compliance with the PPP Size and Affiliation
Rules and Eligibility to Receive Its PPP Loan and Then Falsely and Knowingly
Certified that the Loan Funds Were Used to Pay Costs that were Eligible for
Forgiveness and Avoided Its Obligation to Repay the PPP Funds
127. On April 3, 2020, Fyzical Holdings applied for a First Draw PPP loan through
Webster Bank, NA (“Webster Bank”) in the amount of $3,076,600, which loan was approved by
Webster Bank. Ex. 25; Ex. 33, ¶¶ 14-15.
128. In doing so, Fyzical Holdings claimed 226 employees and certified that it fell below
the 500-employee threshold. Ex. 25.
129.
Ex. 25.
130.
Ex. 25.
131. Fyzical Holdings checked the “No” box in its PPP application in response to the
question whether any of Fyzical Holdings’ owners was an owner of any other business, or had
common management with, any other business, and failed to identify all such businesses and
describe the relationship in an addendum A. Ex. 25.
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132. Additionally, Fyzical Holdings checked the “Yes” box in its PPP application in
response to the question whether it is a franchise that is listed in the SBA’s Franchise Directory.
Ex. 25.
133. Fyzical Holdings certified in its PPP borrower application form 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 [SBA] and the Department of the Treasury (Treasury)
implementing the Paycheck Protection Program …” Ex. 25.
134. Fyzical Holdings certified in its PPP borrower application form that together with
its affiliates (if applicable), it “employ[ed] not more than the greater of” 500 employees or a size
standard set by the SBA for the business's industry. Ex. 25.
135. Fyzical Holdings certified in its PPP borrower application form that “[a]ll loan
proceeds will be used only for business-related purposes as specified in the loan application and
consistent with the Paycheck Protection Program Rules.” Ex. 25.
136. Fyzical Holdings certified “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.” Ex. 25.
137.
Ex. 35.
138.
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Ex. 35.
139.
Ex. 35.
140.
Ex. 62.
141.
Ex. 63, p. 9:23-25; 69:6-25.
142.
25
Ex. 62 (emphasis added).
143.
Ex. 62.
144. On May 13, 2020, Mr. Thompson emailed the Fyzical Holdings board members
regarding a “Board Resolution for Accepting PPP Funds.” Ex. 64.
145.
Ex. 64.
146.
Ex. 64.
147. That same day, Fyzical Holdings’ Board—inclusive of Mr. Formolo, Mr. Lhee and
Mr. Pircon—voted to authorize Fyzical Holdings to file an application to obtain a PPP loan, which,
or course, Fyzical Holdings had already done on April 3, 2020. Ex. 65.
148.
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Ex. 65.
149. In January 2021, Fyzical Holdings applied for loan forgiveness, this time certifying
that it used the loan exclusively for its own payroll costs to retain employees and that it accurately
verified the payments for the eligible payroll costs. Ex. 33, ¶ 16; Ex. 66.
150. In June 2021, the SBA forgave Fyzical Holdings’ PPP loan in the amount of
$3,076,600. Ex. 33, ¶ 19.
151. Fyzical Holdings did not repay its PPP loan and neither Fyzical Holdings nor New
Harbor Capital ever considered repaying the PPP money in light of the SBA guidance. Ex. 15, p.
48:15-22; Ex. 63, p. 144:5-7.
152. The SBA did not conduct a manual review of Fyzical Holdings’ PPP loan
forgiveness application. Ex. 33, ¶ 20.
153. Fyzical Holdings—a holding company—is a passive business primarily involved
in investment or speculation. Ex. 21; Ex. 63, p. 25:5-16; 28:3-10; 44:13-18; 75:18-76:8; Ex. 67
(“Fyzical Acquisition Holdings, LLC was formed as a holding company for investment in its
subsidiaries.”); Ex. 68.
154. Again, the MSJ Defendants assert that they diligently investigated and were aware
of the rules and requirements of the PPP loan program, including those contained in the PPP
27
statute, in the SBA regulations, and in the relevant guidance from the SBA, including the SBA
FAQ’s, the IFRs and the Consolidated IFR. Ex. 27, No. 9, 11; Ex. 57, No. 13, 14; Ex. 69, No. 17,
18.
155. Fyzical Holdings had more than 500 employees and it did not meet the SBA
employee-based or revenue-based size standard. Ex. 4; Ex. 5; Ex. 12; Ex. 25; Ex. 44; Ex. 45.
156. Absent waiver of the affiliation rules, Fyzical Holdings was not eligible for a PPP
loan for the additional reason that it had more than 500 employees and it did not meet the SBA
employee-based or revenue-based size standard. Ex. 3; Ex. 4; Ex. 18; Ex. 19; Ex. 21; Ex. 22; Ex.
23; Ex. 26; Ex. 28; Ex. 62; Ex. 63, p. 91:9-92:5; Ex. 65.
157. Fyzical Holdings and New Harbor Capital claim that Fyzical Holdings qualified for
a waiver of the affiliation rules and thus did not need to consider affiliates with respect to its PPP
loan application because Fyzical Holdings “was a ‘business operating as a franchise’ within the
meaning of the CARES Act because it was parent of the Fyzical franchise brand and its employees
directly participated in running the franchise system, including in the operation of company-run
clinics.” Ex. 27, No. 9, 11; Ex. 69, No. 10, 17, 18.
158. Each Fyzical-entity in the so-called Fyzical “franchise-system” that Defendants
refer to, including the “company-run clinics”, is a separate and distinct legal entity. Ex. 24; Ex.
63, p. 25:5-16; 28:3-10; 44:13-18; 75:18-76:8, 78:9-18; Ex. 67; Ex. 68.
159. Fyzical Holdings is (and was) merely a holding company that has no operations of
its own and has maybe around 10 employees of its own. Ex. 24; Ex. 63, p. 25:5-16, 28:3-10,
44:13-18; 76:8, 78:9-18; Ex. 67; Ex. 68; Ex. 70.
160. There were roughly 200 “Fyzical” franchisees. Ex. 63, p. 66:4-22.
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161. These franchisees operated under a franchise agreement with another “Fyzical”
entity, Fyzical, LLC. Ex. 63, p. 48:5-7, 55:24-56:3, 78:3-8; 80:12-17.
162. The “company-run clinics” are not franchisees but rather are 100% owned by
Fyzical Buyer, LLC. Ex. 63, p. 66:14-67:25; 78:13-79:25.
163. Fyzical Holdings itself did not sell any goods or services or operate under a
franchise agreement. Ex. 63, p. 66:14-67:25; 78:13-79:25; Ex. 67; Ex. 68.
164. The non-franchisee “company-run clinics” were managed by New Harbor Capital
Fund II GP, LP—not Fyzical Holdings—pursuant to a Professional Services Agreement between
New Harbor Capital Fund II GP, LP and Fyzical Buyer, LLC. See PPPLITDEFS_00047987.
165. Fyzical Holdings claimed its PPP loan for its indirectly owned, non-franchisee
“company-run clinics.” Ex. 69, No. 10.
166. The majority of the roughly 200 “Fyzical” franchisees (as opposed to the
“company-run clinics” that Fyzical Holdings indirectly owned) applied for their own PPP loans.
Ex. 63, p. 78:3-8; 80:12-17; Ex. 68.
167. Fyzical Holdings is not the Fyzical entity that enters into franchise agreements with
its franchisees. Fyzical, LLC is the franchisor. Ex. 63, p. 28:11-21, 48:5-7, 55:24-56:3, 79:12-18;
Ex. 68.
168. The individual “company-run clinics” incurred the payroll for their own employees
and then other Fyzical entities—Fyzical, LLC and FyzBiz, LLC—paid the payroll on behalf of
those clinics, not Fyzical Holdings. Ex. 63, p. 27:6-12; 34:1-14; 35:3-8; 61:4-62:22.
169. Fyzical Holdings operated under a management agreement with a third-party, New
Harbor Capital, who is affiliated with the franchisor. Ex. 22; Ex 63, p. 114:3-18; Ex. 71.
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170. The MSJ Defendants assert that Fyzical Holdings claimed payroll costs for the 226
employees included in its PPP borrower application form based on its status as the “franchise
brand” that is the tertiary parent for the company-run clinics that “owns all of the money
underneath it.” Ex. 21; Ex. 24; Ex. 63, p. 30:16-25, 32:12-20, 34:11-14, 34:22-25, 36:2-7, 61:4-
63:20, 64:23-25, 67:20-21, 75:18-76:8.
171. As with Ocean State, New Harbor Capital and Fyzical Holdings designed a
complex ownership structure to create a legal separateness between themselves and between
Fyzical Holdings and the “company-run clinics” to both comply with CPOM laws and to limit
liability. Ex. 4; Ex. 21; Ex. 23.
172. With Fyzical Holdings’ PPP loan, however, Fyzical Holdings disregarded the legal
separateness of the company-run clinics, falsely and knowingly claimed payroll costs for the 226
employees included in its PPP borrower application form, and falsely and knowingly claimed that
it qualified for the franchise affiliation waiver and was an “eligible recipient” for the “covered
loan” it applied for and received. Ex. 25.
173. In September 2023, the US Department of Justice (“DOJ”) reached a settlement in
a False Claims Act action filed in the United States District Court for the Middle District of Florida
captioned United States ex rel. David Jones v. Victory Automotive Group, LLC, Case No. 8:21-cv-
1742-CEH-CPT (“Victory Automotive Action”). Ex. 72.
174. In the Victory Automotive Action, the United States alleged that Victory
Automotive Group, LLC (“VAG”) provides management services to approximately 42 car
dealerships (“Affiliates”) located throughout the United States and that VAG obtained a PPP loan
for $6,282,362 on or about April 3, 2020 (which coincidentally is the same day as Fyzical
Holdings’ PPP application). Ex. 72.
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175. In the September 2023 Settlement Agreement, VAG agreed that it was ineligible
for the PPP loan because it was not a “small business concern” due to its size after inclusion of
VAG’s Affiliates. Ex. 72.
176. The affiliation rules applied to VAG as it was not operating as a franchise with a
franchise identifier code from SBA because VAG does not sell cars and does not operate under a
franchise agreement. Ex. 72.
177. Notwithstanding the size of VAG after inclusion of its Affiliates, VAG certified in
its PPP loan application that the company was “eligible to receive a loan under the rules in effect
at the time [the] application [was] submitted.” Ex. 72.
178. VAG agreed to pay $9 million plus $80,000 in attorney’s fees to settle the Victory
Automotive Action. Ex. 72.
IV. The MSJ Defendants’ Public Disclosure Bar Defense
179. Relator propounded interrogatories to the MSJ Defendants that asked them to “State
the basis for Your Second Affirmative Defense that “The False Claims Act’s public disclosure bar
bars Relator’s claim in whole or in part.” Ex. 47, No. 16; Ex. 57, No. 12; Ex. 69, No 16.
180. In response, the MSJ Defendants did not identify a single source of alleged public
disclosure concerning the allegations or transactions alleged by Relator concerning Ocean State
and Fyzical Holdings’ false certifications of compliance with the PPP size and affiliation or
forgiveness rules or repayment avoidance. Ex. 47, No. 16; Ex. 57, No. 12; Ex. 69, No 16.
181. Nor dd the MSJ Defendants identify a single source of alleged public disclosure
concerning the allegations or transactions alleged by Relator concerning New Harbor Capital’s
direction and control of Ocean State and Fyzical Holdings’ PPP applications or loans. Ex. 47, No.
16; Ex. 57, No. 12; Ex. 69, No 16.
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Respectfully submitted,
/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
Attorneys for Plaintiff-Relator,
United States of America ex rel James R. Berkley
Date: January 6, 2025
CERTIFICATE OF SERVICE
I hereby certify that on the 6th day of January, 2025, a true copy of the foregoing document
was filed through the ECF system and will be sent electronically to the registered participants as
identified on the Notice of Electronic Filing (NEF) and copies will be mailed to those indicated as
non-registered participants.
/s/ Eric E. Renner
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