The U.S. Department of Justice has intervened in a lawsuit against three former executives of Kabbage Inc., a now-bankrupt financial technology company, accusing them of violating the False Claims Act. The executives—Robert Frohwein, Kathryn Petralia, and Spencer Robinson—are alleged to have knowingly submitted false claims to the Small Business Administration (SBA) for loan forgiveness, loan guarantees, and processing fees in connection with the company’s participation in the Paycheck Protection Program (PPP).
Kabbage is a financial technology firm that provides innovative cash flow management solutions tailored for small businesses. This company is at the forefront of automating the process for small enterprises to secure working capital. By transforming the traditional, cumbersome application process into a fully online and automated experience, Kabbage allows businesses to leverage their own data for quick applications. Instead of enduring lengthy waits and filling out multiple forms typical of conventional lending, businesses can receive decisions in just minutes. They can also tap into flexible lines of credit that go up to $250,000.
Alleged False Claims and Systemic Errors
The U.S. government claims that between April and October 2020, Frohwein, Petralia, and Robinson caused or directly submitted false claims related to tens of thousands of PPP loans approved by Kabbage. The company, approved as a PPP lender in 2020, processed more than $7 billion in loans, earning over $217 million in processing fees. However, the government alleges that Kabbage inflated the loan amounts due to calculation errors and improperly submitted claims for processing fees linked to loans that lacked appropriate fraud controls.
Key allegations in the government’s complaint include:
- Double-counting state and local taxes paid by employees when calculating payroll costs.
- Failure to exclude salaries above $100,000 per employee from payroll cost calculations, as required by the PPP guidelines.
- Failure to implement necessary fraud controls before processing loans, resulting in the approval of loans to ineligible borrowers.
The Justice Department asserts that the former executives ignored these errors and continued to submit claims for processing fees to maximize profits before Kabbage sold off the majority of its assets in October 2020, shortly before the company filed for bankruptcy.
Kabbage’s Bankruptcy and Prior Settlement
Following the 2020 asset sale, Kabbage filed for bankruptcy and is now winding down under the name KServicing Wind Down Corp. The company previously reached a settlement with the U.S. government regarding its role in submitting false claims, agreeing to a general unsecured claim of up to $120 million in the bankruptcy proceeding. Additionally, Kabbage returned $12.5 million to the SBA during the investigation.
Although Kabbage resolved its own involvement, the government’s intervention in the lawsuit focuses on holding the individual executives accountable for their alleged role in defrauding the government.
Principal Deputy Assistant Attorney General Brian M. Boynton emphasized the government’s commitment to ensuring that companies and executives involved in the misuse of PPP funds are held accountable. “The PPP was intended to provide critical assistance to eligible businesses during the economic uncertainty caused by the pandemic,” Boynton said. “We are committed to ensuring that those who took advantage of the program for their own financial gain are held accountable.”
U.S. Attorney Damien M. Diggs for the Eastern District of Texas also expressed strong condemnation of the executives’ actions. “Some unscrupulous lenders and executives took advantage of that situation by lining their pockets with ill-gotten payments from processing PPP loans despite not performing even the most basic fraud checks,” Diggs said. “This lawsuit demonstrates our commitment to holding all parties responsible for causing the submission of false claims.”
The lawsuit was initially filed under the qui tam provisions of the False Claims Act by Paul Pietschner, a former collections analyst at Kabbage. These provisions allow private citizens to file suit on behalf of the U.S. government and share in any recovery. The U.S. government intervened in the case, which could result in significant penalties if the court finds the defendants guilty. Violations of the False Claims Act can result in liabilities of up to three times the government’s losses, plus additional penalties.
The U.S. government has been ramping up efforts to investigate and prevent pandemic-related fraud. In 2021, Attorney General Merrick B. Garland established the COVID-19 Fraud Enforcement Task Force to enhance the government’s response to fraud and misconduct related to COVID-19 relief programs. The Task Force works across multiple agencies to investigate fraud, including civil and criminal actions, and is focused on holding individuals and companies accountable for defrauding federal relief programs such as PPP.
For more information on the U.S. Department of Justice’s response to COVID-19-related fraud, visit www.justice.gov/coronavirus.
