CEO of nonbank lender arrested for PPP-related fraud

Federal prosecutors recently arrested the CEO of a Paycheck Protection Program lender who allegedly received more than $71 million in lending fees thanks to a falsified application.

Rafael Martinez, through his firm MBE Capital Partners, issued $823 million in PPP loans to approximately 36,600 businesses, according to both the U.S. Department of Justice and a partner at the law firm representing Martinez.

Where prosecutors and the defendant disagree is over allegations that Martinez falsified financial documents in the process, lied about the company’s payroll and number of employees, and forged a signature. The scheme allegedly netted MBE roughly $280,000 in its own PPP loan and approval from the Small Business Administration to administer government-subsidized loans.

Prosecutors said that in an April 5, 2020, application for a PPP loan, Martinez lied about MBE’s payroll and number of employees. Specifically, Martinez said he had 15 employees when he actually had four and that the company had an average monthly payroll of $120,000 when it actually was less than $25,000, according to prosecutors.

Martinez also doctored tax records and forged the signature of a New York City tax preparer in a PPP loan application, according to prosecutors.

The application earned him a $283,764 loan from the SBA, which prosecutors said went directly into a bank account he controlled. Martinez then used those same documents on April 9, 2020, in an application for MBE to become a PPP lender, which the SBA later approved.

An affiliation with former Los Angeles Lakers star Magic Johnson may have drawn the interest of the SBA and struggling businesses seeking loans.

Early in the pandemic, one of Johnson’s companies partnered with MBE Capital in an effort by Johnson to address problems that small, minority-owned businesses had accessing PPP funds.

According to prosecutors, Martinez also gave the fraudulent financial statements to an insurance company on April 27, 2020, before that company gave $100 million to MBE Capital.

Magic Johnson Enterprises owns a majority stake in EquiTrust Life Insurance, which provided $100 million to MBE Capital in April, according to The Wall Street Journal.

Prosecutors did not name Johnson or EquiTrust in the complaint, nor did they accuse either of wrongdoing. EquiTrust recently told the Journal the allegations against Martinez have no financial impact on it nor its clients.

Prosecutors alleged that Martinez used the capital secured from the unnamed insurance company as collateral to borrow an additional $832 million from the Federal Reserve through its Paycheck Protection Program Liquidity Facility.

All told, MBE issued $823 million in PPP loans to approximately 36,600 businesses, earning the small firm $71.3 million in fees.

“Rafael Martinez faked his way into building his company MBE Capital Partners into an almost $1 billion PPP lender,” said U.S. Attorney Damian Williams.

Telemachus Kasulis, of the firm Morvillo Abramowitz Grand Iason & Anello representing Martinez, confirmed the loan totals and number of impacted businesses but said the “charges are false.” He said Martinez “worked enormously hard to get government assistance into underserved communities where it was needed most.”

“Mr. Martinez has been a leading provider of financing solutions for minority-owned and -operated businesses for over twenty years, and he did exactly what he was supposed to do as a PPP lender,” Kasulis said.

According to the Justice Department, Martinez spent the proceeds from his issued loans on a $10 million villa in the Dominican Republic, a $3.5 mansion in New Jersey, private jet service, a Porsche, a Ferrari, a Bentley, a BMW and a Mercedes-Benz.

Prosecutors charged Martinez with one count of bank fraud, two counts of wire fraud and one count of making false statements to a bank, each of which carries a maximum sentence of 30 years in prison. He also faces two counts of making false statements, including to the SBA, and one count of aggravated identity theft.

The Government Accountability Office warned in October 2020 of a “significant risk that some fraudulent or inflated applications were approved” as a result of the mandate to streamline loan distribution.

According to a database maintained by the law firm Arnold & Porter, more than 750 people have faced charges as of late February in alleged frauds related to the CARES Act, which established the PPP.

David Weinstein, a partner at the law firm Jones Walker who works on corporate compliance, said that PPP fraud “pervaded every state” and that calling it widespread “would be an understatement.”

“Due to the relative ease of applying for a PPP loan online, the large volume of applications, the rationale behind the program" — keeping businesses alive and running during the pandemic — "and the unfortunate lack of due diligence by the program’s lenders, the PPP became an easy target for fraudsters,” Weinstein said.