The mastermind of a fraud scheme that diverted COVID relief money meant for struggling businesses to phantom companies was sentenced Wednesday to nearly five years in prison and ordered to repay nearly $1 million.
Thomas Smith, 47, of Pewaukee, involved seven other people, including his brother, in a scheme to obtain more than $1.2 million in Paycheck Protection Program funds last year for businesses that weren’t in actual operation.
“I guess I was just greedy,” Smith told his lawyer, Michael Steinle, according to Steinle’s remarks at sentencing.
It was honest, Steinle said, because there was no other explanation for why someone like Smith would do it. Smith wasn’t desperate or facing addiction issues. He’s a father of five, married 23 years, who started two successful businesses. He is considered a mentor and “go-to guy” at his longtime church.
U.S. District Judge Brett Ludwig told Smith he hoped his 57-month prison sentence and two years of supervision would let him get back on track as a contributing member of society.
Ludwig also ordered Smith to pay $960,000 restitution, the full amount of PPP money that was obtained by all the participants. Ludwig allowed Smith to report to federal prison at a later date.
Steinle said the real loss is more like $200,000 since most of the loan proceeds and the kickbacks to Smith were frozen before they were spent. Steinle suggested a year to 18 months was a sufficient prison sentence for Smith.
As part of the plea agreement, prosecutors recommended a sentence within the guidelines range of 57 to 71 months, and Ludwig opted for the shortest guideline sentence.
“You took advantage of our nation’s generosity,” Ludwig said, and undercut public trust in government.
All the PPP applications, their proceeds and kickbacks to Smith ran through his bank, which got suspicious last summer and froze several accounts. Federal prosecutors declined to name the bank, headquartered in Green Bay.
The PPP loans were forgivable if used for payroll, rent, utilities and other specified expenses to keep small businesses afloat during last year’s pandemic restrictions.
“The federal government should be able to provide emergency funds like PPP loans to the deserving public without having to feel constrained by possible fraudsters who seek to profit from the national disaster,” federal fraud prosecutors wrote in a sentencing memo.
“It is important to impose a significant sentence on someone who did not just misrepresent himself in a loan program in the wake of a national disaster, but who acted brazenly, getting loan after loan, and recruiting others into his fraudulent scheme.”
All eight defendants were charged last year and entered guilty pleas to either bank fraud or making false statements. The remaining defendants are scheduled for sentencing in the coming days and weeks.
Smith is the first person convicted of PPP fraud to be sentenced in Wisconsin, and among the first few in the country.
According to records in his case, Smith first got PPP money in early April 2020 for his two businesses, an assisted living home and a towing service, that employed 39 people.
His brother, Stephen Smith, asked for help applying for his business, CFA Auto Transport. But CFA didn’t have any real business, or employees, so the Smiths faked payroll and tax records to apply.
And they got money just as easily. That’s when prosecutors say Thomas Smith started reaching out to friends, family and acquaintances with existing LLCs to seek more PPP money.
Smith said Wednesday that the other people came to him once word got around he was familiar with the PPP program. “I didn’t make them do anything they didn’t want to,” he said.
“The Defendant filled out the loan applications and created the fake documents to support them; he only required the applicant that he recruited to sign his name,” according to prosecutors.
“The fact that his own businesses had already been taken care of at the time make clear that this was not money that he needed – this offense was motivated purely by greed,” they wrote.
Smith would take huge chunks of the proceeds as his fee, anywhere from $30,000 to $115,000. But all the payments to him raised suspicions at his bank; the same one processed all the PPP applications. Then Smith worked with the others to concoct stories and paperwork to make the payments appear to be rent, for equipment sales or investments in other businesses.
More cases in connection
Indicted along with Smith in October were Stephen Smith, 42, of Milwaukee, and Robert Hamilton, 59, of Milwaukee, registered agent for Glory Transportation, and two Chicago men, Samuel Davis and Jonathan Henley.
Three other men who let Smith use their names or companies to seek PPP loans were charged separately — Marvin Fitzgerald, Tarone Woods and Deon Petty.
According to court records, Stephen Smith asked Fitzgerald, 30, to become the registered agent of Smith’s defunct company, New Beginnings Family Services, which was then reinstated. Fitzgerald opened a bank account for New Beginnings, and Stephen Smith prepared the PPP loan application for Fitzgerald to sign.
Stephen Smith also asked Fitzgerald if he knew others with LLCs, or limited liability corporations. Fitzgerald referred his roommate, Deon Petty, who owned Rebels Paris, a clothing company without any employees.
After Smith submitted a successful PPP application for Rebels Paris, Petty gave Fitzgerald $20,000. He got another $10,000 through an Economic Injury Disaster loan set up in his name after Petty shared Fitzgerald’s personal information with someone else who used it to apply. Fitzgerald didn’t see the loan application or submit it.
But when investigators asked questions, Fitzgerald lied, saying he’d backed out of the New Beginnings thing, didn’t open its bank account and said someone other than Smith had approached him.
“It is clear that the Defendant was looking for easy money in the pandemic, and he did not ask the right – or for that fact any – questions about where this money was coming from and why he was entitled to it.”
Prosecutors are recommending probation for Fitzgerald, who faces sentencing Thursday, and restitution of $20,000.
Davis, 40, told investigators he trusted Thomas Smith because Stephen Smith had been Davis’ college roommate. After Davis’ out-of-business youth sports league and mentoring group got $177,000 in PPP funds, he gave Thomas Smith $75,000 of it and referred a friend, Jonathan Henley.
An application for $212,500 for Henley’s company, Premier Logistic Solutions, was not accepted, nor was a $230,000 application in the name of New Beginnings Family Services, Stephen Smith’s old company with Fitzgerald as the nominal new owner.
Prosecutors are recommending two years of supervision and restitution of $102,500 for Davis at his sentencing Friday.
According to prosecutors, only a few PPP fraud cases have gone to sentencing around the country, involving bigger losses and long sentences. A 29-year-old Florida man infamously spent some of the $3.9 million he scammed on $318,000 Lamborghini sports car. He was sentenced to 6½ years in prison.
A 41-year-old Arkansas woman got a 41-month prison sentence for a $1.9 million PPP fraud.