SEC Is Scrutinizing Public Companies Granted Virus Relief Funds

The U.S. Securities and Exchange Commission has started an inquiry into publicly traded companies that received coronavirus stimulus funds from the federal government, scrutinizing whether representations they made in loan applications were consistent with their disclosures to investors in securities filings, according to three people familiar with the matter.

The commission’s enforcement division in recent weeks has sent letters to some companies that received funding from the Small Business Administration’s Paycheck Protection Program, asking for information about how the funds were being used and for copies of loan applications, these people said.

Revelations that large chunks of public funds intended for small businesses went instead to large corporations have stirred public outrage and prompted investigations. A range of enforcement authorities, regulators and oversight officials are seeking to ensure that the taxpayer money -- hundreds of billions of dollars intended to offset the economic devastation caused by the coronavirus pandemic -- is put to good use.

Treasury Secretary Steve Mnuchin said last month that the U.S. would audit any company that received a loan of $2 million or more from the PPP program. Almost 200 public companies received PPP funds at that level, according to a Bloomberg News analysis of corporate filings. But the SEC’s inquiry involves fewer than a dozen of those companies, one of the people said.

One of the people said investigators may be focusing on companies whose dire condition qualified them for PPP funding but whose financial disclosures prior to the outbreak didn’t reflect such vulnerability.

The SEC inquiry is similar to one being carried out by the Justice Department, which has been seeking information from major banks that processed PPP loan applications about whether any borrower applications appeared fraudulent. The two inquiries don’t appear to be related, according to people familiar with them, though under established procedures the SEC could refer cases to the Justice Department for criminal prosecution if it finds indications of fraud.

The inquiry was described as being in its initial stages. Formal enforcement actions could follow if the agency’s investigators find inconsistencies in financial reporting, said the people, who were granted anonymity to describe an inquiry that hasn’t been disclosed by the SEC. Judy Burns, an SEC spokeswoman, declined to comment.

“It’s no surprise that the SEC will want to line any such representations up against what the same companies are telling investors in SEC filings and elsewhere,” said Stephen Crimmins, a former SEC enforcement lawyer.

The SBA’s PPP program has extended nearly $600 billion in loans, some of them forgivable, to employers in two rounds, with the goal of helping companies keep their workers on the payroll and cover overhead at a time when revenue has all but vanished.

Disbursements to the almost 200 publicly traded companies receiving $2 million or more each from the PPP program totaled more than $1.1 billion, according to the Bloomberg News analysis. About 50 of those companies have said they would return the money, relenting to public pressure.

It wasn’t clear whether companies that returned the funds to the government would still be subject to the SEC query. Almost a dozen companies that received funding, including some that returned it, didn’t respond to requests for comment.

In a speech to a securities industry group this month, Steven Peikin, the SEC’s co-director of enforcement, said his division had begun to focus time and resources on coronavirus-related misconduct.

Economic downturns tend to reveal stresses on the financial condition of companies that previously remained hidden, Peikin said. He said the agency was looking for, among other things, “disclosures, impairments or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.”

The inquiry by the SEC could prove problematic for companies in multiple ways if their securities filings and prior public statements differ substantially from the representations made in their PPP applications. If a company portrayed itself as sound to investors but in dire condition on its PPP application, it could be vulnerable to charges that it failed to present a true picture of its finances -- or, conversely, that it inappropriately sought government funding.

A key focus for investigators appears to be on statements made by companies in their most recent quarterly reports prior to the pandemic outbreak and in the management discussion and analysis from the most recent round of annual reports, one of the people familiar with the matter said.

Another thorny issue may be raised by the SBA’s own after-the-fact guidance to large corporations to return the funds if possible. The guidance said companies with readily accessible sources of capital shouldn’t need PPP money.

For companies that do need the money to continue operating, the SEC may raise questions about whether they had made any “going concern” disclosures to the market -- essentially, a warning to investors that the company may not be viable in the near future -- prior to receiving a PPP loan. If not, the SEC could find that they failed to tell investors they were on thin ice.

More: Justice Department Sees Early Fraud Signs in SBA Loan Flurry

--With assistance from Greg Farrell.

To contact the reporters on this story:
Christian Berthelsen in New York at cberthelsen1@bloomberg.net;
Matt Robinson in New York at mrobinson55@bloomberg.net

To contact the editors responsible for this story:
Jeffrey D Grocott at jgrocott2@bloomberg.net

David S. Joachim, Andrew Martin

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