Federal prosecutors filed fraud charges against the leader of a financial firm that received funding from a company affiliated with basketball legend Earvin “Magic” Johnson to issue loans through the government’s Paycheck Protection Program.

The federal government alleges that Rafael Martinez, chief executive officer of MBE Capital Partners, used fraudulent financial statements to gain approval from the Small Business Administration to issue loans to small companies through the Paycheck Protection Program. Under the program,...

Federal prosecutors filed fraud charges against the leader of a financial firm that received funding from a company affiliated with basketball legend Earvin “Magic” Johnson to issue loans through the government’s Paycheck Protection Program.

The federal government alleges that Rafael Martinez, chief executive officer of MBE Capital Partners, used fraudulent financial statements to gain approval from the Small Business Administration to issue loans to small companies through the Paycheck Protection Program. Under the program, government-approved lenders provided Covid-19 aid to small businesses in the form of forgivable loans backed by the SBA.

The charges were filed last week in a federal district court in New York. In its complaint, the Justice Department alleged that Mr. Martinez used the fees his company collected for processing the pandemic loans to buy a villa in the Dominican Republic and several luxury vehicles, including a 2018 Porsche 911 Turbo and a 2017 Ferrari 488 Spider.

Lawyers representing Mr. Martinez contest the charges.

Mr. Martinez “did exactly what he was supposed to do as a PPP lender. He worked enormously hard to get government assistance into underserved communities where it was needed most,” said a statement from Telemachus Kasulis, an attorney at the law firm Morvillo Abramowitz Grand Iason & Anello in New York, and other attorneys representing Mr. Martinez.

Mr. Martinez declined to comment when reached via email. Representatives of MBE Capital couldn’t be reached for comment.

MBE Capital in 2020 received $100 million in capital from EquiTrust Life Insurance Co., which is majority owned by Magic Johnson Enterprises, to bolster the lender’s efforts to issue PPP loans targeted at small businesses owned by women and minorities. The government’s complaint didn’t mention EquiTrust or Mr. Johnson by name, nor allege the company or the former Los Angeles Lakers star engaged in any wrongdoing.

Mr. Johnson is the chairman and chief executive officer of Magic Johnson Enterprises, which makes investments in firms across several industries, according to the company’s website.

EquiTrust CEO Eric Holoman said in a statement provided through a representative that the allegations against Mr. Martinez “have no financial impact on EquiTrust nor its policyholders.”

“We are disappointed and surprised if true as these actions are concerning and inconsistent with our values,” he said.

A 2009 photo of Magic Johnson Enterprises in Los Angeles.

Photo: Noah Graham/NBAE/Getty Images

The EquiTrust representative said Mr. Johnson was unavailable to comment. Magic Johnson Enterprises didn’t respond to requests for comment and to make Mr. Johnson available.

The funding EquiTrust provided to Mr. Martinez’s company was the subject of a May 2020 article in The Wall Street Journal. Mr. Martinez said then that the funding would support MBE Capital’s ability to provide PPP loans. In an interview for that article, Mr. Johnson said he wanted EquiTrust to provide the funding to MBE Capital because many small, minority-owned businesses had reported difficulties accessing the PPP initially.

“What we’re launching here now is so important because we’re going to save a lot of small, minority businesses because they can’t just walk into the bank and get that loan,” Mr. Johnson said at the time.

According to the Justice Department, Mr. Martinez allegedly used fraudulent financial statements to seek a funding line with a life-insurance company, which then provided MBE Capital with $100 million to fund PPP loans. The Justice Department in its complaint also alleges that Mr. Martinez was then able to use the loans as collateral to borrow additional capital through a Federal Reserve facility that provided lenders liquidity to help them make PPP loans.

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The department didn’t name the life insurance company in the complaint against Mr. Martinez. The funding amount was the same as the amount EquiTrust officials said, in May 2020, was provided to MBE Capital.

The PPP’s structure relied on banks and other lenders to make the loans, which received a government guarantee. The federal government paid PPP lenders fees for facilitating the loans. At its close last May, the PPP had approved roughly 11.8 million loans worth about $800 billion, according to SBA data.

Mr. Martinez, through MBE Capital, issued approximately $823 million in PPP loans to roughly 36,600 businesses and received about $71 million in fees, the Justice Department said.

The SBA declined to comment on or provide more details about the loans MBE issued. An agency spokesman said SBA is working on the sound administration of pandemic-relief programs and “to identify and address any and all areas of concern, and any potential fraud we identify through these checks is referred to the Inspector General.”

The Justice Department also alleges that Mr. Martinez in April 2020 used fraudulent and doctored tax records to apply for a roughly $284,000 PPP loan that MBE Capital received.

Mr. Martinez faces charges including one count of bank fraud, two counts of wire fraud and one count of making false statements to a bank, the Justice Department said. Each of those charges carries a maximum of 30 years in prison upon conviction, according to the agency.

“These charges are false and Mr. Martinez looks forward to being vindicated in court,” the attorneys for Mr. Martinez said.

The case against Mr. Martinez is an example of the federal government’s efforts to pursue those who are alleged to have abused pandemic programs, including small business, unemployment insurance and healthcare programs. President Biden during last Tuesday’s State of the Union address said the Justice Department would soon name a chief prosecutor for pandemic fraud.

President Biden said in the State of the Union address last week that a to-be-named chief prosecutor would go after those alleged to have abused pandemic programs.

Photo: Julia Nikhinson - Pool via CNP/Zuma Press

“We’re going after the criminals who stole billions of relief money meant for small business and millions of Americans,” Mr. Biden said. The Justice Department has already brought hundreds of cases related to pandemic fraud.

Several Republican senators last Wednesday sent a letter to Mr. Biden asking his administration to provide detailed accounting of how the federal government has spent Covid-19 relief funding appropriated so far.

Attorney General Merrick Garland said Thursday that the Justice Department’s chief prosecutor for pandemic fraud will build on the work of a task force he stood up in May 2021 to bring federal agencies together to crack down on schemes related to the pandemic.

—Sadie Gurman contributed to this article.

Write to Amara Omeokwe at amara.omeokwe@wsj.com