After unprecedented exposure and celebration of entrepreneurs, the dust is finally settling down. The number of incidents related to corporate misgovernance, financial irregularities, and misleading investors and acquirers by startup entrepreneurs is at an all-time high. In the latest case, the female founder of Frank, a popular startup offering student loan assistance, has been thrown behind bars for duping J.P. Morgan Chase, which acquired Frank for $175 million two years ago. She is accused of deceiving the financial giant by inflating the customers her startups claimed to be serving at the time of acquisition.
Charlie Javice (31), of Miami Beach, Florida, was arrested Monday night in New Jersey for conspiracy, wire, and bank fraud.
According to the case document submitted to Manhattan Federal Court, she intentionally falsely claimed that her startup had more than four million users. In reality, her startup had no more than 300,000 customers.
Authorities have accused Javice, featured in Forbes 2019’s “30 Under 30“ list, of pocketing $45 million from the fraud.
Javice and her lawyer refused to comment, leaving the court after signing a $2 million bail. But that’s not all; she is also subject to a curfew and possibly electronic monitoring, if necessary. Javice is also barred from contacting key figures in the case, including investors, except her mother and her boyfriend.
U.S. Attorney Damian Williams blamed Javice for being “engaged in a brazen scheme” to dupe JP Morgan, the acquiring financial company, by cooking up books to support false claims she made to balloon the valuation of her startup.
He also said his decision must be seen as a warning and lesson to all other startup entrepreneurs and stakeholders who employ strategies to put their business in the limelight or advance it.
A criminal complaint states that Javice founded TAPD Inc. in 2017. It operated under the name Frank. The goal was to create an online platform to simplify filling out the Free Application for Federal Student Aid. This is a federal government form that students can use to apply for financial aid to get college and graduate school admission.
According to the complaint, Javice tried to exit by selling her startup as its chief executive in 2021 to JP Morgan Chase (JPMC), a large financial institution. She made tall claims related to the market share and customer base to attract the interest of JPMC.
During the due-diligence process, JPMC wanted to verify Javice’s claim of Frank having 4.25 million customers. She then asked her director of engineering to create artificially generated data sets, which the individual turned down.
She then hired an external data scientist to create the synthetic dataset that she bought on the open market for accurate information of more than 4.25 million students for $105,000. Frank, however, didn’t sanitize the dataset she bought and had a lot of missing pieces of information vital for JPMC to evaluate the authenticity of the data.
The Securities and Exchange Commission filed a civil complaint alleging that Javice misrepresented Frank’s millions of users to get JPMC to acquire the now-defunct Frank.
Rather than helping students, Javice was engaged in old-school fraud. She misrepresented the growth of Frank by making false claims of helping millions of students navigate college financial aid. She cooked up the data set to support her claim and then used the fake information to incentivize JPMC to enter a $175 million acquisition deal.
Javice: Not the first one
Javice is not the first startup entrepreneur who is making headlines for all the wrong reasons. Instead, it’s a long list of startup entrepreneurs who have been either accused or acquainted in the last few years.
The case of Theranos, Inc. founder Elizabeth Holmes who is sentenced to 11 years in prison for defrauding investors and cooking up her books, is quite fresh in people’s memory. During her peak, she was compared to Steve Jobs.
The story of Singapore-based startup Zilingo is no different either. Ankiti Bose, the co-founder of Zilingo, is accused of being the mastermind behind the financial irregularities found in her startup.
A startup unicorn in India, BharatPe, shook the whole startup and investment community when its co-founder Ashneer Grover and her wifey were accused of cheating investors and the startup. A sea of fake invoices, financial irregularities and corporate governance was unearthed during the forensic audits, which led to an ongoing legal battle.
In the recent past, Sam Bankman-Fried, who was once touted to be the next Warren Buffett, got arrested in the Bahamas after prosecutors in the United States filed criminal charges.
Interestingly, most of these people were featured and celebrated by Forbes. The repeated incidents have questioned the creditability of Forbes and brought it under fire.