Fraud and Abuse in the PPP? Evidence from Investment Advisory Firms
24 Pages Posted: 10 Jul 2020
Date Written: July 9, 2020
This study investigates instances of potential fraud and abuse in the Paycheck Protection Program (PPP or the Program) by analyzing 1,104 large PPP loans made to investment advisory firms registered with the U.S. Securities and Exchange Commission (SEC). We first estimate a model for PPP loan allocations based on economic need using operational data disclosed on each firm’s Form ADV regulatory filings. We next examine loans in which the amount the firm received was far from the model prediction (abnormal loans). Abnormal loan allocations appear to be asymmetric in nature, i.e., smaller firms were more likely to procure outsized loan amounts rather than large firms gaining undue access to the PPP at the expense of smaller firms. We next test several explanations for abnormal loan allocations. Our results suggest investment advisors did not use affiliated banking relationships to gain greater access to the Program, but may have used political connections. The results are also consistent with misbehavior or potential fraud. We find that abnormal loan amounts are significantly related to overstated job loss impact by advisors on loan applications. We also show that several known predictors of investment manager fraud (i.e., Dimmock and Gerken 2012) are associated with the receipt of abnormal loan amounts. Of particular note, we find that firms receiving abnormal loan allocations are more likely to have a history of past legal and/or regulatory infractions.
Keywords: Paycheck Protection Program, investment advisors, fraud, COVID
JEL Classification: E61, E65, G21, G23, G38, H32, H81
Suggested Citation: Suggested Citation