Founder Sentenced to Seven Years in Prison for Fraudulent Sale to Jpmorgan
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Charlie Javice, founder of Frank, was sentenced to 7 years in prison for defrauding JPMorgan during the sale of her company, sparking discussions about due diligence, startup culture, and the consequences of fraud.
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If you turn a profit no one cares (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), if you lose it's fraud.
When all the winners are doing it, hard to compete otherwise... not that it makes it right.
Outside of Bribery and ?SarBox? (Whichever regulation handles kickbacks, etc), I can't think of anything.
If you get investor money or get a loan on the basis of funding logistics investments, bet it on roulette red, and go bankrupt, I would expect you'd be looking at hard jail time for fraud.
So I'm thinking the crime would be nothing, because he was a winner, and the optics totally changed, and fraud relies on very subjective opinions of a jury.
I think you are definitely in a much worse place for a fraud conviction if you lose money.
https://techcrunch.com/2024/05/08/ftx-crypto-fraud-victims-t...
If you want an accurate reflection, note how much of the crypto deposited went in, and then how much came back out after SBF lost it.
This would be like me depositing USD, someone stealing some of it, then you bragging the value went up because I have a larger quantity as measured in Venezuelan Bolivars. What actually happened is their % they recouped was less than 100 until you artificially change to an entirely different currency.
If I stole 1000 bucks from you 3 years ago and repaid 1080 back now, sure, you got some interest, but you still be pretty unhappy with not having access to that money. For some, lack of access to that money could have been extremely damaging.
What's the TL;DR? His wikipedia page doesn't make it obvious.
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 companies do this but Shkreli would publicly say it and tell the truth that basically the other companies were doing it while pretending to be good people, and he was only being honest about it. Poor people were pissed because they were told they couldn't get their drugs (I'm unaware if the program that allowed uninsured people to get them for cheap was real or not), and the rich insurance people pissed because he was basically he was bilking them.
So they went back and discovered one or some of his other early enterprises weren't profitable, but that he had used money he made off his later pharma enterprises to pay back his earlier investors.
In trial, his investors testified they were happy with the situation, lost no money, and would invest with him again. But they still convicted him for fraud, even despite the 'victims' themselves did not believe they were defrauded. It didn't help that Shkreli is probably one of the most profoundly unlikeable people you can possible listen to, unless you're not bothered to hear a hyper-capitalist be honest about how they do business.
In this case the wife never called the cops, and then when the cops showed up she claimed she wasn't beat, and not only that she has no visible marks or bruises or anything.
And none of this is justifying any of it. Just showing how far outside of what we commonly see in fraud cases that actually get convicted.
He would paint himself as a working man's hero, "I'm making insurers pay more so you can get your drugs cheaper", always avoiding the awkward questions of where the insurer's money came from and why premiums kept rising (note that I'm also not siding with insurers here, especially those who have implemented PBMs to leech money into their pockets). He basically treated the public as useful idiots who thought that insurance was paying more for their drugs out of ... charity? Goodwill? The money fairy?
Then there was also the fact that at least once (and to a slightly lesser extent, twice), he went to the FDA to block the approval of a new drug, arguing it shouldn't be on the market. Why?
Not because it was less effective than the market options - it had better results.
Not because it had more/worse side effects, complications and interactions - it had better results there too.
Not because it was prohibitive, or patenting or anything stifling to the market.
No, it was because Shkreli had recently purchased a manufacturer of one of those existing drugs and their portfolio, and had been in the process of ramping up his price gouging on that drug, i.e. "The FDA should block approval of this better drug because it limits my ability to profit from my 'worse' drug."
While she committed fraud, I feel sorry for her because of her naivety. It must've been a sick moment when they asked to examine the data during due diligence. If she'd known that would be used for marketing integration so quickly, maybe she would have backed out of the deal.
She's not naive. She was told this was illegal and then did it still. She knew this was fraud.
It made me wonder what she was thinking when her $30M share landed in her bank account. "Whee, I got away with it", "it's their problem now"?
I don't think I would commit fraud, but if I did it for that amount, I would be on a flight to Malaysia or some other place with no extradition with the US!
That was FedEx’s founder, Fred Smith. It wasn’t UPS
He only had $5,000 of funds remaining, which he gambled playing blackjack, so the potential loss to investors was small. He’d already lost almost all their investments through operating FeDex
At that point he had been stiffing his pilots on wages for weeks or months, and with many also paying fuel bills on their personal credit cards/checks, since many fuelers had canceled FedEx's accounts.
Yeah, $5K isn't a whole lot, but if I'm a pilot struggling to put food on my family's table, and the CEO takes company money to Vegas, I'm not thinking "Oh, but the investors" or "Sure, it's not that much money anyway".
I don't see why people (not saying you, in particular) see this as some heroic founder "risking it all". He wasn't. He was risking the company's "all", after asking the employees to suck up his mismanagement.
I agree. He was asking employees not to cash their paychecks sometimes. $5000 is inconsequential compared to that forced investment from employees and business partners
You just don't hear about them as much because someone going to jail for stealing $60K from a couple families from their church in a fake real estate scheme isn't as exciting as a massive fraud against JP Morgan.
I knew one local HVAC company where the office manager skimmed off six figures over something like 20 years before she got caught. Just slow and steady, never taking enough to be obvious, I guess. It happens more than people would think.
"She".
The name is "Charlie," but it's a young woman.
And, like another young woman, she stole from the rich, and got jailed.
She'll probably get a federal minimum-security prison (no fences and a golf course).
They aren't quite "Camp Cupcake," but they are a far cry from places like Leavenworth (I've known folks that have done time in both).
Right from the article
> Addressing the court before she was sentenced, Javice,
"she was" ...
The title even:
> Charlie Javice sentenced to seven years in prison for fraudulent sale of her startup
"her startup" ...
Kind of curious, how did you determine their gender? Guessing, saw the title on HN only without clicking on the link assumed it must be a "him"?
...alongside other scrupulous business luminaries like Sam Bankman Fried, Shkreli and Holmes.
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 effort would reveal very suspicious userbase.
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 basically gets handwaved away because validating everything would be too much work.
She pushed back against access to the customer list claiming privacy laws as a shield. JPMorgan was overly eager and didn't want to blow up the deal by challenging her.
The fact that they didn't do enough research doesn't mean it's okay to scam them, though.
Lessons abound here. Slow down on the tech habit folks, especially if you're an investment bank and not a VC incubator.
an MBA entrepreneur who starts a business and sells it to you for $175 million through normal channels is not likely to spend the money. this wasn't a fund wiring scam.
How does this work for the VCs? Does JPMorgan claw back money from the VCs? What if the VCs distributed to their LPs...does money get clawed back from the LPs?
It is absolutely, 100% morally OK to scam investment bankers. It's just not legal.
True, if one does not mind risking the Orange Jumpsuit scenario
Clearly, if only 10% of the list was real, it would be pretty easy to validate that with a small random sample.
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.)
Beyond that, JPMorgan didn’t want to push too hard and risk blowing up the deal as there was competitive pressure. Calling out “these numbers seem odd” could have spooked Jauvice, and they figured the reps & warranties in the contract gave them enough protection if things went south.
This isnt about inactive data, they had an outside data scientist create an artificially generated usage dataset!
JPMorgan thought they were getting legitimate users of the product at some point in time - they didn't care whether or not they were currently active, hence vetting ops didn't really matter much.
Not far off from "you can't inspect the business you're buying too hard, or the deal is off." And just like with individual scams, that should be a sign that it's shady and you should bail out.
You can of course hold to a particular standard, but if a competitor is willing to relax that standard, you lose a distinct advantage.
if the scam is not going to hurt the agent (in this case, the CEO responsible for the buy out), and the success is going to reward the agent, then the incentives are not completely aligned between the agent and the principle.
So signing the deal with less due diligence, then correcting it later (if needed) seems more profitable to the agent, while the principle takes all of the losses (if any).
Risky decisions happen all the time in business, as long as the risk is outweighed by the perceived reward.
To be fair, Jamie Dimon also fits this description.
This entire case can be explained thusly: “JPM had FOMO during ZIRP and agreed to a stupid deal without doing proper due diligence.”
This deal would’ve never happened if rates had not been cut to 0%.
Sure to the rest, but: Whatsapp had 55 employees and 450 million users when it was acquired. It's at least conceivable to tell a story (lie) that's two orders of magnitude smaller. (And the real number was "only" off by one zero.)
Also, more obviously, people you knew were using it every day. 450M is different than 4M, and way different than 300K. If Whatsapp were lying and saying they had 4.5B users, I'd expect JP Morgan to catch that within a few hours, too.
Sure. But the point is, Whatsapp had 0.5 total employees per 4 million users, and Frank had 20 support employees per 4 million supposed users.
Even if you think Whatsapp has a massive advantage, those numbers don't make it look like Frank is the one that's lacking in staff.
> Also, more obviously, people you knew were using it every day. 450M is different than 4M, and way different than 300K. If Whatsapp were lying and saying they had 4.5B users, I'd expect JP Morgan to catch that within a few hours, too.
For these reasons it would be much harder for Whatsapp to lie that way.
The corollary of that is it would be much easier for Frank to do it.
JPM regularly acquires businesses that do not look like WhatsApp and look more like Frank. For 99% of the acquirers out there, seeing a business with $450m in ARR with 55 employees definitely makes your eyes bulge.
WeWork had the opposite problem. A lot of employees and expenses and not enough paying users. Having lots of employees and lots of expenses by itself doesn't mean much. WeWork still got billions in funding. Due diligence was an issue there as well.
Apparently they also had some kind of service to submit an aid appeal letter to the student's financial aid office. This is also a ridiculous service for low-income students to pay for because I can almost guarantee that Frank wouldn't have the context necessary to actually convince a college's financial aid administrators to give more money to one of their users.
It's almost as if the people considering the deal might have been focusing more on the financial education aspects of Frank instead of how they actually would interface with the FAFSA.
DD guy here.
This is more common then people think. M&A deal dynamics are funny and this is usually a tactic that investment bankers who represent sellers use. According to my cursory research she didn't use an investment banker. For someone fresh out of biz school with no M&A/banking experience that's umm...BOLD.
What would those queries look like?
https://www.highereddive.com/news/jpmorgan-chase-alleges-ed-...
To be a fly on the wall during due diligence meetings between Philips engineers and management.
https://lowendbox.com/blog/the-man-who-was-paid-e113000-for-...
Long story short, the whole project got shut down and about 200 people working on project lost their jobs. Myself included. Luckily I quickly landed at a better place working on more meaningful things.
If people are happy with the results of the libavcodec, you could rebrand it as "libavcodec-ai" and now you have a more effective codec that might be bigger, but is now palatable to users :-)
I believe lumost is referring to the actual video being used for testing being embedded in the codec. That is not a valid move; it compresses just that one exact video arbitrarily small (honestly anything above zero bytes is just sandbagging, you can always map the empty file to your test video, for INFINITE COMPRESSIONS!!!1!) but nothing else.
Good for you for reporting the threat. But I'm a little surprised that they let the messenger get killed along with all the other innocents.
I knew someone who whistleblew to C-suite, about misrepresentations they realized, on something that was then an existential threat to one of the top companies in its market. A series of layoffs and (IIUC) some M&A later, most of the employees were gone, but that one middle-aged engineer who warned C-suite (averting an even worse fate for the company) escaped all the layoffs, and was still there.
There was bad blood between the managers. My immediate manager bypassed his immediate manager and went above a few levels. Top management lost all confidence in the team and decided to can the project. We were all treated as peasants and told to find other jobs inside or outside the company.
What did you find? Low bitrates? Smaller resolutions? Enquiring minds want to know.
It was just an MPEG wrapper.
It was not all that dissimilar from what Nikola Motors did when they pushed a non-working Hydrogen truck down a hill and filmed it and said look, the truck is working great. They too were caught. And eventually got an Italian company to produce a truck and put their name on it. And then eventually went bankrupt. But not before the officers, including the founder made bank on the entire scam. CEO was convicted of fraud. But he paid/donated $1m to Trump and was swiftly pardoned.
I think the 'inventor' (loose use of the term, nothing really got invented) was a true believer, he basically thought that if only he could get his hands on some capital that he would be able to make it work. He simply did not have the background required to see that it could never work in the way that he proposed. Nicely faked demo though :)
I would do a write-up if I didn't think the case was more of a sad one than of someone trying to rip off investors, Jan Sloot just wasn't that kind of guy from my interaction with him. Maybe he did invent something: "Fake it before you make it".
There's no upside to a job doing DD on a scam.
Wouldnt the non-confrontational approach here be to agree with everyone on a benchmark, build up the benchmark, and showcase results?
Some people might be able to make this kind of business work but I don't have the patience or the political skills for it.
https://nl.wikipedia.org/wiki/Jan_Sloot
https://www.youtube.com/watch?v=eYdLGz3XBE8
It was beautiful in its simplicity. Take 5 bytes, compute a 4-byte checksum, and just store the checksum. After all the chances of a checksum collision is miniscule.
When decompressing just iterate over all 5-byte values until you get the correct checksum.
The fantastic feature was of course that you could apply this recursively if you needed higher compression ratios.
Took me a good hour or so before I caught up with reality.
Unfortunately, while the idea works for some input sequences, most numbers aren't rational, and most sequences would require numerators/denominators that would be larger than the input. So not practically feasible.
The idea (not mine) is that you can think of data as "very large numbers". So a 4096 bit number is just a big number.
Well, we have a short way to generate big numbers. x^y. So given a big number (say 800 000 bits) we could generate a (Hopefully short) expression of the form a^b + (or minus) c^d + ... etc.
Unfortunately the "factorizing" (and indeed ecpansion) of a large number in this way can't (currently) be done quickly.
But in concept enormously large binary files could be compressed to tiny strings.
And if that’s not convincing, then consider that any perfect compression scheme would be able to compress its own output even smaller, until you end up with a single bit output for any possible input.
So no, that wouldn’t work in general. Some specific values may compress well, but most others can’t. It’s not a matter of difficulty of finding the right answers, as much as you probably can’t do it.
The pattern that factorization targets are numbers that factor well. I doubt this is a pattern you’d find in any file worth compressing, it doesn’t have a clear relationship to file data.
High compression rate schemes that actually work compress high likelihood inputs and expand low likelihood inputs by accounting for the characteristics that make inputs high likelihood--e.g., redundant highly patterned texts. Schemes that are agnostic about the input, like the one described here, are as likely to expand any given input as they are to compress it.
So I spent a good hour to type in a page of impossible to follow C code with obscure numbers in lookup tables and all it did when I ran the program was to print out "April 1., April 1.".
I mean, take a 100 minute movie, sliced into 1-second clips. 8kB is not even enough to store all possible orders you could put those clips in. I would hate to think so ill of any of my friends or colleagues to think that they could believe such an obvious fraud.
On a second thought, the compression alone would destroy information. NVM.
https://sound.stackexchange.com/questions/45719/perceptual-n...
Using a low hurdle to show it still failing is a good rhetorical technique, but you lowered your hurdle too far here. Yes technically specifying the order of 6000 segments takes more than 8KB. Because it takes 8.14KB. That's a rounding error. What could have been a useful argument is now a nitpick. And what if the movie was only 98 minutes, now it fits? What a mixed message.
It's a good reference point, but I'd replace "is not even enough" with "would only be enough".
I was working at Andersen Consulting at the time, offshoot of Arthur Andersen. The Arthur Andersen that signed off on Enron (AC had before then become Accenture and separated from the audit partnership).
I chuckled to myself a few years later when the NBA draft lottery was signed off on/audited/witnessed by another Big6 firm. Yeah, give them enough money and they'll "audit" anything within some degree of plausible deniability.
they still have the domain lol broadcast.com
A similar scam was being demonstrated to transmit data wirelessly at a very high speed due to some fancy compression. The demo was between stations with a river in-between.
The investigators lifted the box and found an optical cable which was buried and went under the river.
Put yourself in the shoes of a non-fraud company where the asset is your customer set. Do you let JPM go through line by line confirming each one? No, you do not. You give redacted data or aggregate data.
In eyeballs/non-paying user businesses, this is just going to happen sometimes. In practice you don't get to do the diligence you want to do sometimes.
https://carta.com/learn/startups/equity-management/data-room...
There is no magic in buying/selling businesses, just put yourself in the shoes of the seller. JPM promise not to ever use that customer list you put in the data room should the deal fall over? How would you ever know if they did? You wouldn't trust a potential buyer and in practice companies do not. They'll put information in the data room, but not customer level details unless anonymized at which point you are back where you started as far as validating users.
So you are left with various legal/contractual solutions - things like "representations and warranties" (ask chatgpt about them), escrow agreements etc etc. And when it all goes to hell you go to court with your contract and attempt to get the money back. Such is life.
The fact that the acquirer is large is somewhat immaterial, the teams 'under the tent' doing the investigation are going to be relatively small on both sides, including folks from the business trying to close the sale, internal/external counsel and singular SMEs from relevant domains.
It is fairly common for the people initiating the acquisition to really want to close it in a hurry, and they do due diligence only as a check mark in someone's list. As someone else here mentioned, there is enormous pressure to close, and any red flags are often redirected, reworded, or even occasionally just squashed.
The further away a company is from something like private equity, who does acquisitions like we eat breakfast every day, the more likely you are to see rushed and potentially botched due diligence. Someone like a big bank may well have the main proponent not know anything at all about acquisitions or due diligence, and just wants to "get 'er done".
It is also very common for people to come in after-the-fact and do a second diligence, and while doing that diligence to hear one or more people opening the conversation with "I warned them about this before the acquisition...".
At the end of the day, particularly in a big public corp, people are focused on their bonuses and total comp, and people like that aren't going into a due diligence looking for red flags and "no's".
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