Under the Small Business Administration rules, a PPP loan could be used only to meet payroll and pay mortgage interest, leases or utility bills. PPP loan recipients weren’t prohibited from paying investors with other funds, as long as the PPP funds were kept separate.
Still, some advocacy groups believe companies that had enough cash on hand to pay millions in dividends and stock purchases were unlikely to qualify for the PPP program, which was designed to assist troubled companies in keeping employees on the payroll during weeks when they were unable to do business because of pandemic-related lockdowns.
“The Trump administration wrote the PPP rules and sent billions of dollars to the well-resourced and well-connected rather than actual small businesses struggling during this public health and economic crisis,” said Kyle Herrig, president of an advocacy group called Accountable.US. “The fact that there was little transparency or accountability under this program amounted to an invitation for large companies to misuse tax dollars to their benefit.”
An SBA spokesman did not respond to an emailed request for comment. The Treasury Department declined to comment on the record for this story.
The issue of whether some undeserving businesses received PPP loans has arisen previously when it became known that scores of publicly traded companies received millions of dollars in loans, even though they had access to other sources of capital. The SBA’s initial rules allowed for businesses to self-certify that “current economic uncertainty” made the loan “necessary to support the ongoing operations of the applicant.”
But in late April, after the news broke that many publicly traded companies had received loans, the SBA said firms with access to capital elsewhere were “unlikely” to qualify and asked that the loans be returned. Some returned the money, but many did not (SBA and Treasury officials have declined to say exactly how many did so).
How dividend payments might factor into that conflict remains to be seen. Loans of $2 million or more are to be audited, the SBA has said, and large corporate expenditures could come under close scrutiny as the government evaluates whether a company’s qualified for a PPP loan.
Amanda Farahany, a partner focused on employment law at the Atlanta-based law firm Barrett & Farahany, pointed out that a publicly traded company “obviously has more ways of accessing money than a small company.”
Franklin Turner, a government contracts attorney with the D.C.-based law firm McCarter & English, said buybacks and dividends “would certainly be something that any government regulator would likely consider.”
“The requirement was not that companies be flat broke when they apply … the requirement was ‘can you make a reasonable good faith determination that you need this,’ ” Turner added.
CRH Medical Corporation, a Canadian medical supply company with U.S. subsidiaries, received a $2.9 million PPP loan on April 15 to support 124 U.S.-based employees.
Constantine Davides, a CRH spokesman, said the funds were needed to see the company through severe economic uncertainty in the early days of the pandemic, in which the company suddenly lost 90 percent of its operating volumes. Thanks to the PPP loan, Davides said, the company was able to retain all of its employees through the crisis.
“Given the economic uncertainties that CRH and the healthcare industry were facing in March and April when CRH’s loan was applied for and used, these funds were necessary to support the ongoing operations of CRH, to retain or rehire its employees as contemplated by the loan program,” Davides said.
The company has concluded five acquisitions since it accessed the PPP funds, according to company news releases. And the company has spent money buying back its own stock, a tactic that businesses often use to boost share prices. Between April 1 and June 30, the company purchased $228,559 worth of its own shares.
Davides, the CRH spokesman, said the stock buybacks were part of a previously-planned automatic stock purchase that was curtailed in the early weeks of the pandemic. The resources used to acquire companies only became available after the PPP funds were requested and used, Davides said.
Dividends — payments companies make to stockholders — could come under scrutiny for companies like RCI Hospitality Holdings, which operates restaurants and strip clubs in nine major cities.
The pandemic posed a clear threat to RCI-owned establishments like Miami-based Tootsie’s Cabaret, described on the company’s website as “the country’s largest adult nightclub,” as well as a chain of military-themed sports bars called Bombshells. RCI boasts on its website that the celebrity television personality Anna Nicole Smith “met her oil billionaire husband” while dancing at one of its clubs.
But the company’s need for a loan could be called into question by $273,000 in recent dividend payments. RCI’s $4.2 million PPP loan was distributed among 10 of its restaurants and two other businesses; none of its strip clubs received money.
Steve Anreder, an RCI spokesman, said the company followed all the rules.
“RCI believes that it has followed all rules and guidance provided by the Small Business Administration regarding the Paycheck Protection Program,” Anreder said. “Of RCI’s businesses, only subsidiaries in its restaurant division, shared service entity and lounge received loans under the Paycheck Protection Program, and all such funds were used toward employee payroll and other eligible expenses in those entities.”
Others may have been legally required to pay the dividends.
Whitestone Real Estate Investment Trust, a Houston-based company that owns 54 shopping centers in Texas and Arizona, acted quickly to free up cash when the stock market entered its deep dive in mid-March. It drew down the full amount of a $30 million line of credit and stopped acquiring new properties. It also reduced its usual stock dividend by about two-thirds, a move that saved another $30 million. The company also availed itself of a $1.7 million PPP loan to support 91 employees, according to SBA and SEC records.
Throughout it all, the company was required by law to keep paying dividends to Wall Street. Whitestone spokesperson Amy Feng said real estate investment trusts like Whitestone are required to put 90 percent of their income toward dividends.
The company has continued to pay dividends as commerce has returned to its shopping centers; it declared on June 16 that it would pay out another $4.5 million in dividends, with separate payouts in July, August and September.
Feng said the PPP funds were walled off from other funds in a separate bank account and spent to pay employees.
“In applying for the PPP funds, Whitestone fully complied with all requirements, including by demonstrating that economic uncertainty made the loan necessary to support ongoing operations, and by using the funds to retain workers and maintain payroll,” Feng said in a statement.
In some cases, a company’s need for federal help may have been eclipsed by a broader improvement in business conditions. Crown Crafts, a Louisiana-based manufacturer of children’s products, received a $1.9 million PPP loan on April 19. Months later, on Aug. 12, it announced it would resume stock dividends due to its “strong performance and financial position.”
For some observers, such a scenario indicates the PPP program was a success.
“Everybody needs to remember how scary it was when all these shutdown orders happened,” said Scott Pearson, a corporate financial services lawyer with the Los Angeles-based firm Manatt, Phelps and Phillips. “I don’t think doing a stock buyback necessarily indicates they’ve done something wrong. It probably just means things turned out better down the road than they thought it would.”