Dive Brief:

• Starboard Group, which operates 101 Wendy’s restaurants in seven states, has been accused of defrauding the federal Paycheck Protection Program, according to QSR Magazine.
• Sandi Adler, former VP of legal affairs and HR at Starboard Group, filed a lawsuit against the franchisee alleging its CEO ordered her to contact landlords, suppliers, vendors and creditors claiming the company was unable to meet its payment obligations because it didn’t receive PPP funds. However, Starboard received approximately $9 million in PPP loans, Adler claims. 
• The former executive further claims that about $1 million of that $9 million loan was used by CEO Andrew Levy to finance a house. 

Dive Insight:

This isn't the first time a restaurant company has been accused of PPP fraud. In early May, a Massachusetts man claimed he employed dozens of workers at three restaurants, but those establishments were not open prior to the start of the pandemic when the application was submitted. 

At that time, Kristina O’Connell, the special agent in charge of the IRS-Criminal Investigation, called the actions “criminally reprehensible,” adding: “Defrauding a government program designed to provide financial assistance to small business owners during the coronavirus pandemic is tantamount to taking money directly out of the pockets of those who need it most.”

In May, the Justice Department vowed to crack down on such abuse, but more recent data shows that it is rather widespread. Last week, Entrepreneur reported that there could be more than $1 billion worth of fraud within the PPP program. The Government Accountability Office attributes this to “the number of loans approved, the speed with which they were processed and the limited safeguards.”

These issues may be tough to correct. In a separate report, the GAO stated that streamlining of the approval process for PPP loans to small businesses has created a “significant” risk of fraud.

PPP issues are certainly not new. The program experienced plenty of criticism after its first round, with major chains like Shake Shack returning funds after public outcry. 

At the center of this controversy is the notion that major, relatively well-capitalized companies could pull funding away from smaller, less-capitalized concepts that don’t have as big a safety net to fall back on. Shake Shack, for example, is a public company that made $594.5 million in revenue in fiscal 2019. Conversely, the Independent Restaurant Coalition has predicted that as many as 85% of independent restaurants could permanently close by the end of the year without sufficient aid. 

This dynamic has driven numerous calls for continued federal support of the restaurant industry. Despite this sentiment, however, large restaurant chains like TGI Fridays and P.F. Chang’s received funding from the program. If it’s found to have committed fraud, Starboard’s $9 million could have gone a long way as well, particularly for small or independent operators.