Reposting an article I found online because it speaks to the need for pre-acquisition DD. What can we learn from this and what could have been done differently to prevent missing the fraud?
——————————(from Linkedin)—————- Forbes 30 Under 30 is the biggest scam in the media while this has to be the craziest fraud in FinTech after FTX
Financial Technology startup Frank was founded in 2016 as a financial platform that helps college students manage their financial aid and student debt. Frank founder Charlie Javice had a lofty goal to build the startup into “an Amazon for higher education”.
A proud member of the Forbes 30 Under 30 list, Javice once said that her biggest challenge at Frank was scale. So she made it up!
She first asked a top engineer at Frank to create the fake customer list. When he refused, Javice approached a data science professor to help. Using data from some individuals who'd already started using Frank, he created 4 million fake customer accounts-for which Javice paid him $18,000.
This looked like a rocketiship, so banking giant JPMorgan Chase & Co. rushed to acquire it. Turns out, they paid $175 million for a lie.
The bank first noticed irregularities with the list when a JPM employee observed that the list contained exactly 1,048,576 rows, the maximum allowed by Microsoft Excel.
But they really found out the customers were manufactured after the bank spammed the 4 million fake accounts with cross-marketing opportunities and nearly all bounced back.
JPMorgan Chase is now shutting the site down and suing the 30-year-old founder of Frank.
Does anyone remember when due diligence was still a thing?
This is crazy.
This is hilarious
We know why JPM waived due diligence...
We? I have no idea…
I’m blanking on the exact detail, but I think some college kid made the 30 under 30 list claiming he turned $7k into $7m. Zero due diligence was done and he began appearing on yahoo finance and cnbc with hosts chomping at the bit for his secret. Finally Scottrade chimed up saying, “We have no relationship, account, or involvement with this individual and his secret investing strategy.”
Why did he do it? Wanted to snag a hot college girl and made up the investment whiz kid fable.
Wasn't this the kid who said he did trades from his phone at lunch? I think he video conferenced in from his phone, it may have "cut out" once they started asking him non-puff questions. I remember there were a couple like that in succession of each other.
I honestly don't remember the details other than it was clear no one did any diligence on the kid and he was getting interviewed on Yahoo Finance. I think CNBC cancelled the interview once Scottrade made a statement.
Later I read a comment he only did it to have a shot at college hotties who otherwise ignored him.
As they say, women are often at the root of dumb male decisions.
I saw some comments above stating JPM should have paid externals to DD the company better. I think that misses the point.
PE investors / acquirers cannot simply depends on externals. Tiger Global hired Bain to DD FTX. How well did that work out?
"He boss sorry I lost a billion dollars, but Bain said it was kosher, so we good. I'll be at my desk. Call me if you need me."
Fuck that. Consultants have limited scope of work, bill $80k per week for 3-5 person DD team, and wash their hands once they email you the deck.
I'm sorry, but from doing PE in China I learned to assume that EVERYTHING we were being told was a lie. We did all kinds of sleuthing to figure things out.
Being China, no company was ever squeaky clean, but at least we could detail out the problems, conflicts of interests, risks, etc. for the investment committee.
My question remains what SPECIFICALLY could JPM have done to prevent this shameful disaster?
To answer your question. I manage a deal team and deal with small business deals constantly. I could care less these days what the business owner has in their accounting system or even what their audited statements say, it’s a lie. These sole proprietors are the worst running personal expenses through the business. Some monkey on WSO is going to chime up, “Yea, isn’t that illegal? We should do something to ensure they pay their fare share in taxes.” Yea, it would be like ensuring no one J Walks. Too much effort to chase down too few dollars. We’ve had to bow out of an LOI when it became clear a business was hiding way too much and the owner wanted us to agree to stay hush hush. Not worth it.
We perform diligence and spot check material accounts while also demanding backup for income statement items so we can make our own pro forma. On one occasion we were defrauded in a similar way JPM appears to be and hired a forensic accountant to help us build a case. It was amazing working with this gentlemen. He had this trusted snake oil salesmen aura to him and had the ability to build say, 80% what we needed for our case. Then he drew the remaining 20% out in a sly fashion with the dishonest business seller. Great guy to work with and it was pretty amazing to see the subscription services he had to which he used to chase down information. In his words, “you can’t run and you can’t hide. You think you can leave the country and avoid a white collar arrest, you can’t. Far to easy to track people down these days.”
I wanna meet this guy and see him operate. That's what I'm talkin' about.
I mean, when you hire a big consulting firm they’re typically doing market work, not real DD.
I’m sure Bain came in and told them the TAM of FTX was like a trillion dollars and customers love the product (which is both probably true) but that isn’t meant to be fulsome DD.
Even when I’ve worked on crappy $100M deals for some port co add on or a LMM PE firm the buyers always do financial diligence (I.e big 4 firm takes a magnifying glass to the books and find every $100 dollar that doesn’t tie), tech DD where they scan code, customer calls to verify customers, legal DD that find every single missing period in contracts, etc etc.
Every banker who has ever been on a sell-side process on here can verify how much this entire thing sucks, but it happens on every PE deal I’ve ever seen.
Clearly Tiger and co (and I guess JPM too?) are willing to waive this when it’s a flashy startup and they need to “play ball” to be competitive in a process, but that’s 100% on the buyer for not doing standard DD items and I blame them entirely.
I agree. And I think it's really sad. If the consulting firms aren't doing real DD why even bother to hire them?
Maybe Alvarez and Marsell or some forensic firm would have been better. Or maybe Tiger just needs to learn to actually DD companies.
Holmes, SBF, this one. There's a lack of integrity in startupland.
True. But I'm getting the sense that the dishonesty is becoming quite prevalent across business. I was scammed - and have had to now file my first lawsuit. Can't trust anyone these days.
Sorry to hear that, it can’t be easy. None of my business on what happened, but it’s a big deal if you are actually filing a lawsuit. I’ve been wronged and had a case with merit where I could have likely won. However, I got a lesson in “is the juice worth the squeeze?” from my attorney (good guy who is now a judge, I’m SOL for personal legal matters now). For many peoples legal matters, it’s not. Civil litigation is very very expensive!
I bet the deal model was pristine though and that’s what really matters.
lots of businesses are BS, I paid this music marketing company like $250 to market one of my songs, the only reason I did it was because on their website it said LOOK WE WORK WITH THESE TOP COMPANIES LIKE UNIVERSAL MUSIC then I just got literally only like 300 plays on a song from a playlist that they put me on and most of the listeners were from Indonesia and all it did was mess up my Spotify profile because now everything on my radio is BS indie music when it's a metal project and I used to have metal music on my radio before this BS. oh yeah and they are in the clear because it's NO REFUNDS AFTER THE CAMPAIGN HAS ALREADY BEEN STARTED. lol. I even emailed them and I was like hey guys this doesn't seem to work and they were like NO IT'S WORKING. lol.
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