A USC player accessed benefits program caught up in fraud probes. What's the fallout?

When USC wide receiver Munir McClain decided to seek newly available unemployment benefits after his sneaker-resale business dried up amid the pandemic, little did he know he was stepping into a morass.

The Pandemic Unemployment Assistance program he accessed that was established under the $2-trillion federal stimulus has so far provided more than $37 billion alone to Californians who typically aren't eligible for such aid, including business owners, gig workers and even college students.

Amid historic unemployment in the state, however, the California Employment Development Department has struggled to rapidly disburse benefits under that and other programs to millions of workers, while swindlers ranging from international criminal rings to local fraudsters have jumped at the chance to get a piece of the action — prompting an aggressive law enforcement response.

"Ordinarily, the policing of fraud is way overemphasized in unemployment insurance to the detriment of paying out benefits in a timely manner," said Michele Evermore, a senior policy analyst at the National Employment Law Project, a New York-based advocacy group. "But fraud is a serious problem now. It's bad people taking money away from a program to help people and to help our economy recover from the recession."

A fraud ring dubbed Scattered Canary that security experts believe originates in West Africa and utilizes data from corporate security breaches has targeted unemployment programs across the nation, including California. Locally, the Beverly Hills Police Department last month said it had arrested 44 people and confiscated 129 EDD debit cards possibly containing more than $2.5 million in fraudulently obtained benefits.

Investigators said people were using stolen identities to obtain the cards, and the city's police met with law enforcement officials from other local, state and federal agencies, including the U.S. Dept. of Labor, to work out a coordinated response to the ongoing fraud.

The EDD added it was making "aggressive efforts" to root out fraud and expected more arrests. The agency said it became aware there might be a problem when PUA claims more than doubled to 524,000 between mid-August and the first week of September — far surpassing levels when the new federal program first launched in April.

Suspicions were first raised at USC when McClain was called by USC's vice president of professionalism and ethics on Sept. 16. Over two phone calls, Michael Blanton asked McClain several questions related to his PUA claim and unemployment benefits in general. Two days later, coach Clay Helton suspended him from the team until further notice, and earlier this month two federal investigators visited his dorm room while subpoenas were issued to other USC players in an apparent widening of the probe.

One of the agents was from the Office of Investigations-Labor Racketeering and Fraud, a unit of the U.S. Dept. of Labor's Office of the Inspector General that specifically looks into fraud and abuse in Labor Dept. programs.

The Inspector General's office has repeatedly declined to comment on the USC probe, so it's unclear exactly what is being investigated. Mark Hathaway, an attorney hired by the McClain family, told The Times on Friday he still wasn’t sure how the USC sophomore had come under federal suspicion.

Prior to the pandemic McClain would likely not have qualified for unemployment benefits since he did not draw a paycheck from an employer and was a college student, who typically did not clock enough hours or have a work-study job considered financial aid.

However, the PUA carved out exceptions to extend benefits to more people, including for the self-employed, business owners and for college students who work part time. But an individual's specific eligibility for the program can be complicated.

For example, college students who had a summer job lined up that was canceled because of COVID-19 may be eligible, but those who were simply unable to look for a summer job are not unless they meet other criteria, according to guidance published by the EDD.

At the same time, all applicants must attest that they lost income due to a specific COVID-19 criteria established by the federal government. That includes the closure of a place of employment, not being able to get to work or perhaps the need to self-quarantine because of a COVID-19 diagnosis, according to federal Dept. of Labor guidance.

McClain has told The Times that he applied for the benefit when income from his high-end sneaker resale business dried up as the pandemic wore on.

Last Sunday, at a news conference demanding his reinstatement at USC, McClain explained that he finished his PUA claim with the help of an EDD employee.

“I believe that I did everything right,” he said.

Andrew Stettner, a senior fellow at the Century Foundation, a progressive New York think tank, said that McClain would somehow have to tie the loss of business specifically to the pandemic — for example that his business relied on person-to-person sales that could no longer take place.

"He has to demonstrate if he is investigated that he has done that kind of work, so he would need to provide some receipts etc.," Stettner said. "If he's telling the truth then he should qualify as long as he can establish that the reason he wasn't doing business anymore was because of the pandemic."

It's possible an aid recipient, based on an online application, may qualify for aid but upon further investigation the EDD decides it either overpaid benefits or none was deserved. That can be due to several reasons, including an applicant's mistake in filling out the application or the agency's own incorrect decision to disburse the aid — but that is different from fraud, which might involve intentionally submitting false information.

A strike team appointed by Gov. Gavin Newsom in July to investigate failures at the EDD that have currently bogged down about 1.1 million claims for multiple programs noted one big cause of the delay was that 40% of applications are manually processed to verify the identity of claimants and guard against fraud. 

Evermore, the National Employment Law Project analyst, said that the report also showed the EDD process was not very good at rooting out criminal fraud.

"It was flagging a bunch of people making rookie [application] mistakes," she said.

She noted there has been a history of penalization of unemployment benefit mistakes, pointing out a scandal in Michigan earlier this decade that used a software program without human intervention to root out alleged fraud. More than 40,000 recipients were accused of fraud, but a state audit later found 93% of the cases were erroneously flagged for fraud.

However, in the case of McClain, there appears nothing automated about the process, with federal agents on the USC campus attempting to interview members of the football team.

The Inspector General's office has long been active both locally and nationwide in targeting unemployment benefits fraud, announcing this week the indictment of a Michigan man for allegedly stealing identities so he could access program benefits. In March, the Los Angeles Region office was involved in uncovering a pre-pandemic scam run by a former EDD worker to illegally obtain nearly $900,000 in unemployment benefits.

Just two weeks ago, Fontrell Antonio Baines, a rapper who performs under the stage name Nuke Bizzle, was arrested on three felony counts for his role in a plan to use stolen identities to fraudulently obtain PUA benefits. In a music video for a song titled “EDD,” posted on YouTube a month prior to his arrest, Baines bragged openly about “getting rich off EDD.”

An investigation by the U.S. Dept. of Labor’s Office of the Inspector General later found at least 92 debit cards were loaded with $1.2 million in benefits and mailed to Los Angeles area addresses to which Baines had access.

The same office, known for high-profile fraud cases, arrived on USC’s campus last weekend to speak with USC football players, though McClain is the only one so far publicly known to have received benefits. Evermore said that she was bewildered by the events on the ground.

"This is all sounds very strange. I've never heard of people being tracked by federal agents for applying for a benefit that they might not qualify for unless it was part of a big ring or something," she said. "If it's an honest mistake that's not fraud and shouldn't be treated as such."

She said that if McClain was telling other USC football players about how the program benefited him and that they might want to apply themselves, that is not a criminal act in itself.

"Otherwise, they are going to have to lock me up. I am telling people all over the United States you should apply for PUA," she said.

Times staff writer Patrick McGreevy contributed to this story.

This story originally appeared in Los Angeles Times.