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Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

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Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#51

Post by FireBeyond »

firefoxd wrote: post #24

At an investor event, a desperate journalist was running around the room asking people their age. He ended up at our table, with a drink in hand, and a defeated look on his face. He had given up. We talked a bit, and he asked me, "are you under 30?" I answered "No. But this guy is." I pointed at the 28 year old cofounder of the start up I was part off. Before the evening was over, my colleague made it to the list of…

Being on the 30 under 30 list only means you are more likely to scam people out of money than make it:

> The Forbes 30 Under 30 have collectively raised $5.3B in funding. They’ve also been arrested for frauds and scams worth over $18.5B. Incredible track record.

Some of the more notable: Martin Shkreli, Elizabeth Holmes, Charlie Javice, SBF, Caroline Ellison, Nate Paul.

Fun fact, filter for Stanford in those numbers and the disparity grows starker still.

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#52

Post by chatmasta »

TuringNYC wrote: post #12

>> A prosecutor, Micah Fergenson, though, said JPMorgan “didn’t get a functioning business” in exchange for its investment. “They acquired a crime scene.” I do not understand how an acquisition this big got thru due diligence without noticing all the fake users. Anyone in corporate M&A know if it is normal to spend this much money without inspecting the goods? Seems like the most basic of OLAP queries and two days of…

If you read the details in some of the earlier articles about this, they avoided plenty of due diligence. But she also went to great lengths to prevent them from completing that due diligence. And for the minimal due diligence she did permit them to undertake, she only ever sent them fraudulent data and documentation.

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#53

Post by Aurornis »

wkoszek wrote: post #46

It's interesting how nobody talks about due-diligence being completely broken. We raised $$$ from many VCs and the DD for some of them was crazy: line item by line item with calls to customers etc. Tech folks were on phone with me and had to explain them stuff step by step, revealing a lot of confidential recipes. Also did this for bigger customers. And the $175M deal.. isn't there an earnout? Like $10M cash now, 1/4…

> It's interesting how nobody talks about due-diligence being completely broken.

The majority of the talk around this case has been about the due diligence failures. The judge even called it out.

Consumer businesses are harder to vet. It's not like a B2B with a dozen top customers where you can call them all and confirm that sales are happening. Non-response and customer churn is expected to be a high and changing number. From what I read she also invoked various privacy law excuses to give them the run-around while they were pressured to close the deal.

But JPMorgan's failures don't excuse the criminal actions. If someone enters your house and steals your computer, it doesn't matter if you negligently left the door unlocked. A crime is a crime.

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#54

Post by ajross »

jlarocco wrote: post #14
TuringNYC wrote: post #12

>> A prosecutor, Micah Fergenson, though, said JPMorgan “didn’t get a functioning business” in exchange for its investment. “They acquired a crime scene.” I do not understand how an acquisition this big got thru due diligence without noticing all the fake users. Anyone in corporate M&A know if it is normal to spend this much money without inspecting the goods? Seems like the most basic of OLAP queries and two days of…

The article says the judge called them out for not doing enough due dilligence. The fact that they didn't do enough research doesn't mean it's okay to scam them, though.

Right, it doesn't change the direction of criminality. But nonetheless JPM is out that money regardless (maybe some will get clawed back, but probably most of it was spent). "I got scammed and the perp is going to jail" isn't a good excuse to tell your boss about you lost $175M, either.

Lessons abound here. Slow down on the tech habit folks, especially if you're an investment bank and not a VC incubator.

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#55

Post by bryanlarsen »

mothballed wrote: post #42
bryanlarsen wrote: post #37

Earlier quoted context omitted.

There are lots of examples of people going to jail despite investors getting their money back, like SBF and Shkreli. Even Madoff investors got 94% of their investments back.

Shkreli is the only one of those 3 that fully paid back his investors, and it took him pissing off virtually every politician and a bunch of wealthy insurance executives/administrators to get enough resources mobilized to get a conviction (and being one of the most uncharismatic people on earth, which didn't help him at trial). I think you are definitely in a much worse place for a fraud conviction if you lose money.

News stories said SBF investors were going to get 118% of their money back. Did that not happen?

https://techcrunch.com/2024/05/08/ftx-crypto-fraud-victims-t...

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#56

Post by notmyjob »

mothballed wrote: post #27
potato3732842 wrote: post #20

Earlier quoted context omitted.

> (unless you're Shkreli, don't think his investors lost money, but he pissed off some politicians because he said the quiet parts out loud about how the pharma industry works) What's the TL;DR? His wikipedia page doesn't make it obvious.

Shkreli's schtick was to buy out or control pharma companies that had a monopoly and jack the everliving fuck out of the prices. He had some programs for uninsured people, but he would milk the insurance companies absolutely dry, which gave him some wild profits. This made a bunch of powerful people absolutely enraged, as he was basically publicly bragging about jacking the ever living fuck out of the prices. Pharma…

Victims not wanting prosecution doesn’t absolve the perpetrator as wife beaters learn all the time. I also think Skhreli’s biggest mistake was threatening Hillary Clinton.

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#57

Post by CodeWriter23 »

jlarocco wrote: post #14
TuringNYC wrote: post #12

>> A prosecutor, Micah Fergenson, though, said JPMorgan “didn’t get a functioning business” in exchange for its investment. “They acquired a crime scene.” I do not understand how an acquisition this big got thru due diligence without noticing all the fake users. Anyone in corporate M&A know if it is normal to spend this much money without inspecting the goods? Seems like the most basic of OLAP queries and two days of…

The article says the judge called them out for not doing enough due dilligence. The fact that they didn't do enough research doesn't mean it's okay to scam them, though.

> The fact that they didn't do enough research doesn't mean it's okay to scam them, though.

True, if one does not mind risking the Orange Jumpsuit scenario

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#58

Post by jedimastert »

wkoszek wrote: post #46

It's interesting how nobody talks about due-diligence being completely broken. We raised $$$ from many VCs and the DD for some of them was crazy: line item by line item with calls to customers etc. Tech folks were on phone with me and had to explain them stuff step by step, revealing a lot of confidential recipes. Also did this for bigger customers. And the $175M deal.. isn't there an earnout? Like $10M cash now, 1/4…

Oh don't worry, the judge absolutely LIT UP JPMorgan in the judgement. This is only a taste

> Still, the judge criticized the bank, saying “they have a lot to blame themselves” for after failing to do adequate due diligence. He quickly added, though, that he was “punishing her conduct and not JPMorgan’s stupidity."

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#59

Post by chatmasta »

vjvjvjvjghv wrote: post #17
upupupandaway wrote: post #13

Earlier quoted context omitted.

One previous company I was CTO of got acquired by Amazon and they spent 60 days going through everything, including every line of code. I doubt a fraud of this caliber would have gone unnoticed with that kind of due diligence.

Sometimes I wonder if there is a lot of scrutiny in small things but when things get large and complex they basically give up and wave it through. I see a similar thing at my work in medical devices. In theory we have to validate all libraries we are using. So if you want to share some code you have to create a ton of documents. But when we use something like nodejs with hundreds of dependencies the whole process bas…

I wouldn’t be surprised if they waved it through because “who would be dumb enough to provide us a fraudulent list of customers?” She was always going to be discovered once they tried to market to the list. So I could see them speedrunning due diligence under the assumption that, if it’s totally fraudulent, it will be obvious eventually and then we’ll sue her. The deal is not large enough to affect our bottom line, and the obvious risk of defrauding us makes it unlikely she’s defrauding us.

Re: Founder sentenced to seven years in prison for fraudulent sale to JPMorgan

#60

Post by jerf »

brandall10 wrote: post #23
TuringNYC wrote: post #12

>> A prosecutor, Micah Fergenson, though, said JPMorgan “didn’t get a functioning business” in exchange for its investment. “They acquired a crime scene.” I do not understand how an acquisition this big got thru due diligence without noticing all the fake users. Anyone in corporate M&A know if it is normal to spend this much money without inspecting the goods? Seems like the most basic of OLAP queries and two days of…

She pushed back on any direct vetting of the list using privacy laws as a shield and JPMorgan didn't challenge it due to competitive pressure to get the deal done ASAP. Clearly, if only 10% of the list was real, it would be pretty easy to validate that with a small random sample.

The way that due diligence would have discovered this was not to take the list and start doing spot checks on it.

The way due diligence should have found this is that it should have been written all over the financials. What do you mean you have 4 million customers and a support staff of 20? What do you mean you have 4 million customers but your revenue is {clearly too low}? What do you mean you have 4 million customers but your website spend is {clearly too low}?

It's over an order of magnitude. It should be written all over the company. Experienced DD should have smelled a rat within about 2-3 hours, although nailing it down could take much longer. The logical conclusion I draw is that there was no experienced DD done. In isolation this would a tough claim, however, I look around and I see a lot of Wall Street activity on this time frame that shows no evidence of Due Diligence being done and it seems to be part of a pattern.

(The question of why there was no DD is a separate one.)

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