Professor Anthony M. Sabino, J.D., Explains How Forfeiture and Restitution Work in Fraud Cases

https://www.newsday.com/covid-fraud-restitution-forfeiture-sqa67sr4

By James T. Madore
james.madore@newsday.com

The hunt is still on to recover nearly $100 million in pandemic relief funds that were stolen by Long Islanders.

Law enforcement has racked up 11 convictions so far but only recouped 19% of the restitution ordered in the resolved cases — plus a small amount gained by selling seized property, a Newsday analysis found.

The chances of retrieving all the funds are slim, experts said.

"It's very hard to find and get anything close to a substantial amount of the money back," said Michael E. Horowitz, chairman of the Pandemic Response Accountability Committee. 

The Washington-based group was established by Congress five years ago to help investigate and prosecute those who ripped off the Paycheck Protection Program loans, COVID-19 Economic Injury Disaster Loans and other pandemic relief programs.

“Most defendants aren’t sitting with the money in their bank account two or three years later," Horowitz said. "They bought things with the money. … We have cases where the defendant bought a fancy car and then got into an accident. What value is it to the taxpayers to take back a car that’s been totaled?”

Many of the accused spent the COVID aid on vacation homes, jewelry, cryptocurrency, entertainment and credit card bills.

Even if the property can be seized and resold, it’s worth far less than the purchase price. The federal government got $58,000 from the 2023 sale of three Rolex watches and one Cartier watch after they were forfeited by a Glen Cove doctor who paid a total of $140,000 for the items using stolen pandemic loans, according to federal court filings in Central Islip.

Another problem: most defendants lack the means to repay what they stole.

What’s at stake is more than just lost tax dollars. The Long Island cases are a microcosm of a national problem.

"It's very hard to find and get anything close to a substantial amount of the money back," said Michael E. Horowitz, chairman of the Pandemic Response Accountability Committee.

Horowitz, who also serves as the U.S. Department of Justice’s independent inspector general, said more than $1 billion in stolen pandemic-relief funds has been recovered to date — or less than 1% of the more than $200 billion that was pilfered from just two programs: PPP and COVID EIDL, based on an estimate from the U.S. Small Business Administration’s inspector general.

Prosecutors and investigators said they hope the recovery rate will improve with time, but convictions and prison sentences are key deterrents to future crime.

They also said they seek to punish those who deprived small businesses and their employees of aid that could have helped them to survive the economic shutdown in 2020 and 2021, which was meant to slow the coronavirus' spread. 

The difficulty in recouping stolen money isn't restricted to COVID fraud cases.

The Justice Department gets back less than 10% of the restitution ordered in all criminal cases, according to a Government Accountability Office report of the collection efforts for sentences handed down in the 2014-16 fiscal years. Of the $110 billion owed, $100 billion was found to be uncollectible because the defendants didn’t have ability to pay, the 2018 report states.

David B. Smith is a white-collar defense attorney based in Alexandria, Virginia, who has written books and testified before Congress about restitution and forfeiture. He said some defendants eventually “get back on their feet and make a lot of money but hide it by having their wife or another family member own their business. They know the government can only collect from the defendant, so they make sure not to have a lot of assets in their name that can be seized,” he said.

Smith, who has represented a couple of defendants in COVID fraud cases, stressed that the pandemic relief programs were easy to rip off because the first Trump administration and Congress prioritized getting money to struggling employers over scrutinizing the truthfulness of their loan applications.

“There was no system to catch obvious fraud," Smith said. "And now most of the money cannot be recovered.”

31 charged with COVID fraud

On Long Island, 11 defendants have been sentenced out of 31 who’ve been charged with bilking the programs that were designed to help employers and employees survive the worst of the pandemic, according to the Newsday analysis of court filings in the metropolitan area. The group has been accused of stealing more than $93 million.

The convicted include Dr. Konstantinos Zarkadas, of Glen Cove, who practiced medicine in Manhattan and stole $3.8 million in PPP loans and COVID EIDL grants and loans in 2020. He used some of the money to make a down payment on a yacht for his brother-in-law, leases on BMW and Maserati automobiles and four luxury watches, the filings show. Zarkadas' attorney declined to comment for this story.

Two other defendants, Arthur Cornwall, of West Babylon, and Sean Williams, of Valley Stream, both government employees, illegally obtained more than $770,000 in PPP and COVID EIDL funds, which they used to buy cryptocurrency, pay personal credit-card debt and other personal expenditures, according to the filings. Their attorney did not respond to a request for comment.

Together, the 11 defendants from Nassau and Suffolk counties were ordered to pay a total of $19.1 million in restitution. More than $3.6 million, or 19%, has been received to date, the Newsday analysis shows.

The amounts will increase as more cases are resolved, prosecutors and investigators said.

Most of the recovered funds to date came from Donald Finley, owner of the popular Bayville Adventure Park in Bayville and several restaurants.

Finley paid full restitution of $3.2 million to the SBA prior to his April 2024 sentencing to 2 years in prison, 2 years of probation and a fine of $15,000. The Locust Valley resident had faced up to 30 years in prison and a fine of up to $1.25 million, according to the court documents. 

Finley pleaded guilty to disaster relief fraud and wire fraud for receiving $3.2 million in PPP loans and COVID EIDL grants and loans by submitting at least 29 false applications in 2020 and 2021. Prosecutors said he used the money to pay personal expenses and to buy personal assets, such as a vacation home in Nantucket, Massachusetts, in February 2021. Finley challenged the latter claim saying the house wasn’t purchased with pandemic aid, the documents show.

“I put those funds into my businesses where they remained,” he wrote in a letter to the judge before his sentencing hearing. “Therefore, I have been able to make full restitution for the loans I illegitimately received. If I had squandered the money on homes and lavish personal expenditures, I would not be in the position to do so."

Finley's said he paid restitution "as part of trying to make amends for my conduct."

His attorney did not respond to a request for comment.

Forfeiture is meant to deter crime

Most defendants take years, even decades, to fulfill their restitution obligation, which a judge determines without considering the defendant’s ability to pay. Restitution orders remain in effect for 20 years in federal criminal cases. 

Anthony Michael Sabino, a partner in the Mineola law firm of Sabino & Sabino, said forfeiture is meant to deter the defendant from committing future crimes.

The restitution amount should equal the amount of money that was stolen. It's not meant to penalize the defendant like forfeiture does, said Anthony Michael Sabino, a partner in the Mineola law firm of Sabino & Sabino who specializes in securities, creditors' rights and business law.

He and others said forfeiture, which comes on top of restitution, is meant to deter the defendant and their associates from committing future crimes.

"The judge's calculation of forfeiture must be reasonable under the law, ... It's intended to make sure you don't do this again and that other people don't follow your example," said Sabino, who also teaches in the business and law schools of St. John's University in Queens.

Only two of the 11 Long Islanders sentenced in COVID fraud cases have received forfeiture judgments, according to the Newsday analysis.

Yolanda Ratcliff, of Inwood, must forfeit $70,000 to the federal government. The amount equals the $60,000 COVID EIDL loan that she illegally obtained in 2020 for a non-existent hair salon, plus the $10,000 she received for recruiting others to the scheme.

Ratcliff, a former 911 operator for the New York City Police Department, also must pay restitution of $59,000 individually and a portion of $391,500 in restitution owed by her and six co-defendants. She pleaded guilty to conspiracy to commit wire fraud, court documents show.

“I apologize for obtaining a loan I wasn’t entitled to while other deserving businesses suffered as a result,” Ratcliff wrote in a letter to the judge before being sentenced to 4 years of probation in December 2023.

Her attorney Donna R. Newman, at the sentencing, said Ratcliff had repaid $1,000 of the loan by selling her car. She used the stolen funds to start a party planning and catering business.

“I’m sure [Ratcliff] is doing her best to meet her obligations,” Newman told Newsday last month.

Preventing future fraud

The pandemic and the relief programs designed to lessen its impact are in the rearview mirror for most people. But prosecutors and investigators said they continue to pursue leads, especially for tax credit programs that came after the loans and grants.

"We're still in the thick of it," said Kristen A. Valencia, a supervisory special agent with the Internal Revenue Service's criminal investigation division in Holtsville. "We need to investigate the fraud and get the money back for the American people."

She and others said the lessons learned from pursuing fraud in the PPP and COVID EIDL programs are now being applied to crimes involving pandemic tax-credit programs, including the Employee Retention Credit. For example, all the programs involved submitting applications, some of which contained false information about whether a business was operating during the pandemic, how many people where employed and the payroll size.

The GAO, in a report released last month, advised federal agencies to confirm the eligibility and identity of those receiving assistance by looking at wage and tax data.

“By examining fraudsters and fraud schemes that emerged during the pandemic, agencies can identify fraud mitigation controls that can be implemented in emergency environments and during normal operations,” the GAO report states.

For Horowitz, head of the accountability committee, the key lesson learned is that government agencies can review funding applications for fraud while also distributing the money rapidly if they employ computerized screening techniques.

"We can tighten up programs, improve integrity and stop fraud upfront," he said. "Preventing fraud is so much more effective than chasing it later on."

Horowitz said the accountability committee is using data analysis to investigate COVID fraud. The committee has over a billion data points, including 127,000 known fraud cases, over 15 million compromised internet addresses, Social Security numbers, Employee Identification Numbers and other data related to suspected fraud schemes.

He said the committee’s data program will end Sept. 30 unless it's reauthorized by Congress.

“We now have a lot of information about fraudsters, and we can use it to prevent fraud in other government programs,” Horowitz said. “It’s a false choice to say, ‘We’ve got to pay out the money quickly or take time to vet the applications.’ You can do both."