Pair Is Arrested on First Fraud Charges Tied to Small-Business Loan Program

WASHINGTON — Two New England men were arrested on Tuesday on charges of attempting to defraud the government’s small-business lending program, marking the first federal fraud charges related to the $660 billion program that was aimed at helping businesses hurt by the coronavirus pandemic but has been riddled with problems.

The case against the men, David Staveley of Andover, Mass., and David Butziger of Warwick, R.I., is part of the Justice Department’s broad effort to fight coronavirus-related crimes, including health care fraud, hoarding, price gouging and scams devised to steal money both from people and from federal economic assistance programs for businesses in need of aid.

“Across the Justice Department, anything coronavirus related is a top priority,” Brian Benczkowski, the head of the department’s criminal division, said in an interview. “The strategy is to make cases in each of those areas as fast as possible to make sure that criminals understand we’re looking at this.”

Mr. Staveley and Mr. Butziger were accused of trying to steal money from the Paycheck Protection Program, the newly created federal relief program that provides low-interest loans to small businesses. The loans are forgiven if proprietors meet certain criteria, like using three-quarters of the loan for payroll and spending it within eight weeks of receiving the funding.

The men emailed each other about possibly creating fake loan applications and falsifying documents to support their requests, the U.S. attorney’s office in Rhode Island said.

Mr. Staveley ultimately filed bank loan applications falsely claiming that he needed nearly half a million dollars in government assistance to pay dozens of employees who worked at three struggling restaurants, according to prosecutors.

But the employees did not exist. Two of the three restaurants on the applications had closed before the coronavirus pandemic shuttered restaurants nationwide. One closed in 2018, and a federal investigator found it boarded up. Mr. Staveley had no relationship with the third restaurant on the application, prosecutors said.

Mr. Butziger separately applied for a $105,381 loan, claiming that he owned a company named Dock Wireless. He told an undercover F.B.I. agent posing as a bank compliance officer that Dock Wireless had seven full-time employees, including himself, who were laid off at the end of March and had worked without pay in April. He said he planned to use his loan to rehire and pay them. But the people he named as workers told investigators that they never worked for Mr. Butziger or Dock Wireless.

Neither man was granted a loan.

Mr. Staveley and Mr. Butziger were charged with conspiracy to make a false statement to influence the Small Business Administration and with conspiracy to commit bank fraud. Mr. Staveley was charged with aggravated identity theft. Mr. Butziger was charged with bank fraud. Lawyers for the men could not be found.

Lawmakers crafted the Paycheck Protection Program to help small businesses weather the stay-at-home orders that forced them to close and destroyed consumer demand, but officials struggled to define what types of businesses were small enough to be eligible. Some large companies took the loans and some small businesses were unable or hesitant to secure them.

Even as Congress was hashing out the details of the economic rescue package, Justice Department officials anticipated that the program would also be a magnet for fraudsters. They had seen criminals prey on rescue aid distributed after the 2008 financial collapse.

“Before the ink was even dry and the votes were cast, we were thinking about what kinds of fraud we were likely to see in conjunction with the P.P.P., the economic stabilization fund and, to a lesser degree, the loans to air carriers and national security businesses,” Mr. Benczkowski said.

“We focused immediately on the P.P.P. because it involved individuals and small businesses, and it seemed obvious to us that we would see people file for businesses that didn’t exist, inflate the value of their payrolls or even steal the identities of legitimate businesses in an attempt to get their loans,” he said.

The charges revealed Tuesday had all of those elements. They were the result of a tip given to the local police, who shared it with the F.B.I. and the U.S. attorney’s office in Rhode Island. But most cases will probably be harder to find.

The department is working with banks, the Small Business Administration, the Treasury Department and others to gather and analyze data from the loan applications for red flags.

“We’re bringing the same approach to bear that we bring in the health care fraud context and opioid-related prosecutions,” Mr. Benczkowski said. “You can never prosecute cases based solely on data, but the data can tell you where to look more quickly than if you had to wait for a witness.”

Mr. Benczkowski said that it was too early to tell how many loan applications were fraudulent or whether any patterns of fraudulent behavior have emerged, but that he expected to see both of those over time.

He said the coronavirus has slowed law enforcement work that requires grand juries and trials and had also made it harder to conduct in-person interviews with witnesses and subjects. He hopes that those aspects of investigations ramp back up soon, he said.

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