Never Let a Good Crisis Go to Waste

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2020 Issue Two
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Never Let a Good Crisis Go to Waste

By: Alex More and Evan Kirkham

COVID-19 is an ideal crisis for the fraudster. A unique blend of panic, fear, misinformation, unpredictability, and trust (thanks #inthistogether) has created enticing opportunities for dishonest actors to sell snake oil and inflate future financial positions. The following highlight a few of the most recent COVID-19 related fraud cases, regulatory guidelines, and stock suspensions, shedding light on common patterns and schemes and identifying warning signs that might just clue consumers and investors into future crisis related frauds.

As the Financial Crimes Enforcement Network noted in a recent press-release, fraudulent activity leveraging the current pandemic is “similar to those that occur in the wake of natural disasters,” including investment and consumer-facing scams related to medical breakthroughs, government relief efforts, and obfuscation of actual financial conditions.

To be sure, each type of fraud has already been perpetrated during the present crisis. And, we can expect increased prosecution once the hysteria dies down and the public gets wise to the hoaxes.

Fraud in connection with COVID-19 cures, treatments, and personal protective equipment

Consumer fraud in connection with COVID-19 cures, treatment, and personal protective equipment is rampant. To name a few recent cases: A doctor practicing outside of Detroit was charged with billing vitamin C infusions as a COVID-19 treatment; An actor in Southern California was charged with soliciting funds for a company that claimed it had developed a COVID-19 cure; A man in Georgia was charged with false advertising for making statements claiming he had secured large orders of personal protective equipment that were not in his possession.

Perhaps the most egregious, and frankly, boneheaded fraud was perpetrated by a San Diego doctor who claimed to be selling a “miracle cure” that was “100%” effective and would give patients “immun[ity] for at least 6 weeks.” The doctor had been sending out promotional emails advertising “COVID-19 family resistance packs,” and a “concierge medicine experience,” priced at a cool $4,000 for a family of four. The packs included the now-infamous anti-malarial medication hydroxychloroquine and “anti-anxiety treatments to help you avoid panic and help you sleep.” The “anti-anxiety” treatments turned out to be Xanax, a Schedule IV controlled substance that requires a prescription.

Federal charges were filed against the doctor after an undercover agent acting as a prospective customer emailed the doctor to set up a phone call and recorded the doctor describing his medication as a “magic bullet.” Even the doctor admitted that the miracle cure was “hard to believe, it’s almost too good to be true. But it’s a remarkable clinical phenomenon.” When the FBI received their very own resistance pack, they found it contained generic Xanax and Viagra in bottles, hydroxychloroquine in small brown envelopes, and chloroquine in small, clear plastic bags, along with a “fact sheet” and some business cards.

After filing a complaint against the doctor, U.S. Attorney Robert S. Brewer stated that his office would “not tolerate COVID-19 fraudsters who try to profit and take advantage of the pandemic fear to cheat, steal and harm others” and that “those who engage in this despicable conduct will find themselves in the crosshairs of federal prosecutors.”

For consumers, thorough research and legitimate customer reviews should always be relied on before making any purchases of any untested drugs or PPE. If “it’s almost too good to be true,” it likely is too good to be true.

Fraud in connection with government financial relief efforts

Consumer-facing frauds are certainly the most wide-spread, but small businesses must be on high alert for fraudsters as well—especially as it relates to the misappropriation of federal financial relief.

In Rhode Island, two fraudsters lied on bank applications to obtain relief loans from the Payment Protection Program—enacted by Congress to keep businesses afloat during the pandemic. Prosecutors allege the fraudsters sought more than $500,000 in relief to pay employees at businesses that were either completely fictitious, closed, or owned by other people. One of the fraudsters posed as his brother when applying for PPP loans for two restaurants that had been closed since 2018. The other fraudster posed as an owner of Top of the Bay, a restaurant he had no connection to, and certainly was not entitled to seek federal relief on behalf of.

In reaction to the case, Brian Benczkowski, chief of the Department of Justice’s criminal division, stated this his division is working with other law enforcement agencies to go after fraud targeting the funds Congress allocated for pandemic relief. Benczkowski’s comment is spot on: “Every dollar stolen from the Paycheck Protection Program comes at the expense of employees and small business owners who are working hard to make it through these difficult times.” Even if a business is not directly defrauded, it may still suffer the effects of fraud when the PPP fund runs dry.

But, these two PPP fraudsters are likely just the tip of the iceberg. At the beginning of May, the government watchdog organization responsible for investigation the Small Business Administration informed lawmakers that it was investigating the COVID-19 rescue programs for fraud and illegitimate routing of funds. The White House is equally concerned—announcing plans to scrutinize loans worth more than $2 million. President Trump reiterated that “[i]t is imperative that limited taxpayer dollars go to help legitimate small businesses.”

No doubt the government has been consistently defrauded since its inception, but nothing is likely to motivate fraudsters more than a multi-hundred-billion-dollar pot of interest-free money. Businesses that have yet to claim federal financial aid should contact their bank to make sure a loan has not been requested on their behalf and businesses that have claimed federal financial aid must take special care to deploy the capital as prescribed by Congress.

Fraud in connection with current and prospective corporate financial health

Finally, in the confusion of the pandemic, many public companies are wrestling with corporate disclosure, namely, how to disclose the current and prospective impacts of COVID-19 on their balance sheets. Fortunately, the Securities and Exchange Commission has provided guidance. In a Public Statement issued by the SEC, Chairman Jay Clayton and Division of Corporate Finance Director William Hinman urged public companies to include corporate disclosures related to the effects of COVID-19 in their “quarterly earnings releases and analyst calls, as well as in subsequent communications to the marketplace.” The SEC requested that corporate disclosures address: “(1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as [ ] efforts to fight COVID-19 progress.” Suggested disclosures include, “[d]etailed discussions of current liquidity positions,” “expected financial resource needs,” “efforts to protect worker health and well-being and customer safety,” and “financial assistance received under the CARES Act or other similar COVID-19 related federal and state programs.”

And while, at the time of publication, no public company has come under fire for improper accounting in their first-quarter reporting, the SEC has suspended trading for a number of public companies due to COVID-19 related concerns. For example, trading of Aethlon Medical, Inc.’s stock was suspended in early February because of “(i) concerns regarding the accuracy and adequacy of information in the marketplace since at least January 22, 2020, that appears to be disseminated by third-party promotors that are, purportedly, not affiliated with AEMD about, among other things, the viability of the company’s product to treat the coronavirus, and (ii) questions regarding recent and unusual market activity since at least January 22, 2020.”

Similarly, trading of Sandy Steele Unlimited, Inc.’s stock was suspended due to “promotional activity, including e-mail stock promotions from unknown sources directed to investors, which claim that Sandy Steele is an operational garment manufacturer producing various clothing items and that it has the ability to produce protective masks that are in high demand due to the COVID-19 crisis. . . There are also questions about recent trading activity in the securities of Sandy Steele including substantial concentrated selling of Sandy Steele’s stock by offshore accounts.”

Just because a company is public does not mean it is any less tempted to make fraudulent claims about its ability to profit off of the current crisis or any more capable of estimating the crisis’ effect on its long term financial health. Investors should be wary of investing in any company that has made claims about new products related to COVID-19, just the same as they should be wary of companies not reporting on current and prospective financial effects of the pandemic.

For all the pain and loss resulting from COVID-19, we are constantly reminded of the power of community and shared experiences. When it’s over, the crisis might actually be seen as the opportunity Americans were longing to reconnect with their neighbors and pull together as a society. But for the fraudster, this crisis is too good of an opportunity to waste. Consumer fraud is rampant, PPP fraud is growing, and public financial reporting fraud is close behind. Maybe, just as much as washing hands and covering your face, protecting yourself in this crisis means doing a little extra research before buying a pill, a mask, or a stock, and being proactive about guarding your business interests.

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