Investors Haven’t Learned A Thing From Theranos

Aron Solomon
Photo byJPMorgan Chase Building - Flickr - pinemikey.jpg

Quick quiz: What do Elizabeth Holmes and Charlie Javice have in common?

They were both Forbes 30 Under 30, and both may be felons, leading some on social media to suggest that Forbes should change the program name to “30 Under 30 Years to Life.”

Charlie Javice is a financial technology entrepreneur and the founder of Frank, a student loan startup that provides a platform for student loan refinancing and repayment. Frank was acquired by JP Morgan in 2021 for $175 million. Meanwhile, Javice is now facing a civil lawsuit and will almost certainly face serious criminal charges.

As first reported in December, JPMorgan Chase filed a securities fraud lawsuit against Charlie Javice, Frank’s chief growth officer Olivier Amar, and other defendants in Delaware District Court presided over by Judge Maryellen Noreika. The lawsuit accused Javice and her co-defendants of falsifying the number of users - in other words, the actual number of students who had accounts with Frank, the brand name of the platform run by TAPD Inc.

JP Morgan, which should absolutely not be let off the hook here, shut down the Frank platform last week.

What JP Morgan never did when they negotiated to acquire Frank was to verify whether users on the platform were real. It wouldn’t have taken a massive amount of due diligence to learn that Javice was pulling off a simple yet legendary tale of startup founder crime.

After allegedly ordering her own Frank team of developers to falsify 3.9 million of the startup’s claimed 4.2 million users, the dev team refused. So Javice, again allegedly, paid a data scientist $18,000 to write a script to generate close to four million nonexistent user records, which Javice then leveraged as proof of traction necessary to sell the company to JPMorgan for $175 million.

Again. For emphasis. JP MORGAN, who (let’s sing the chorus together) should have known better.

David Gelman, a New Jersey criminal defense attorney, observes that:

“There is absolutely no excuse for any party in an acquisition - especially one that is close to a $200 million transaction - not to do proper, thorough due diligence. It’s a must-have in an acquisition, not a nice-to-have.”

While the Theranos investors defrauded by Elizabeth Holmes, a 19-year-old Stanford dropout, were among “the most sophisticated in the world,” Javice defrauded JP Morgan, one of the most established investment and banking houses that have ever existed, while still in her 20s.

So, to the central question, is falsifying your user base as Javice did actually a crime?

The answer is, almost certainly, yes.

Falsifying the number of users a startup has by creating fake users could potentially be considered fraud, which is a crime. Additionally, if the startup is publicly traded, it could also be considered securities fraud. It is always important to note that the legal definition of fraud and securities fraud varies depending on the jurisdiction.

Fraud is a broad term that refers to any intentional deception or misrepresentation made for personal gain or to cause harm to another person. In the context of a startup falsifying the number of users it has, this would almost certainly be considered fraud because the company is deceiving its investors and stakeholders about the true performance and value of the company by creating fake users.

Refreshing our collective memories of Theranos, Elizabeth Holmes was sentenced to 11.5 years in prison for having defrauded her investors. She was found guilty on three counts of wire fraud and one count of conspiracy.

In Fortune, I wrote about what the Holmes verdict would mean for startup culture. Given that the prosecution’s case against Holmes was built on the foundation of her having attracted investors in part by making false statements to the media that she knew would be communicated, this would surely be a message to all founders to re-evaluate the startup culture’s fake-it-till-you-make-it ethos.

No. In fact, as we recently saw with Sam Bankman-Fried and now with Charlie Javice, there is a mindset among some founders that the Elizabeth Holmeses of the world were just not smart enough to avoid getting caught. This disconnect with reality led SBF last week to launch a Substack newsletter which I can assure you, looking at it through a legal lens, is just a way for him to self-incriminate in a way that will forever be memorialized on the Internet.

Meanwhile, startup watchers continue to feed into the hype by lionizing these founders. We place high-profile startup founders on a pedestal because they are seen as risk-takers and innovators who are able to create something new and successful from scratch. They are also often viewed as visionaries who are able to spot and capitalize on new opportunities. Their success stories and the rapid growth of their companies can be inspiring to others.

But when we idolize them, we create unrealistic and often unattainable ideas of what it’s like to build a sustainable company - one that can create actual value instead of an inflated cap table. And when investors, in turn, are so obsessed with the next big win that their fear of missing out drives them to not even look for yellow and red flags, the end result is Theranos, FTX, Frank, and wherever else comes next because - trust me - much more is coming. FOMO is a disease that far too many investors suffer from.

It makes sense that in 2021 Javice and some of her team “migrated to Miami,” the new startup capital that just feels like a breeding ground for crypto schemes and other less-than-savory ideas. Perhaps those who watch Javice’s Wharton career chat (she graduated from the Wharton School at Penn in 2013) should add comments such as Google’s famed “Don’t be evil,” which seems to have eluded too many startup founders over the past few years.

As a side note but certainly relevant here, I have always advised investors to look to places such as Buffalo, Cleveland, and Minneapolis rather than simply Silicon Valley, Miami, and Austin for down-to-earth, whipsmart founders. It doesn’t have to be framed as an either/or, but in my couple decades of experience working with founders and startups, when an investor puts in the time in some of these less well-known startup cities, the results can be promising.

For now, Javice’s stewardship of Frank won’t be a cautionary tale for the founders who need to learn from it because they aren’t receptive to any lesson that distracts from the big win. It will be another tale of how derelict the processes are with some of the world’s top investors and a challenge to the next founder without a moral compass to give this bizarre wheel of fortune a spin.

About Aron Solomon

A Pulitzer Prize-nominated writer, Aron Solomon, JD, is the Chief Legal Analyst for Esquire Digital and the Editor-in-Chief for Today’s Esquire. He has taught entrepreneurship at McGill University and the University of Pennsylvania, and was elected to Fastcase 50, recognizing the top 50 legal innovators in the world. Aron has been featured in Forbes, CBS News, CNBC, USA Today, ESPN, TechCrunch, The Hill, BuzzFeed, Fortune, Venture Beat, The Independent, Fortune China, Yahoo!, ABA Journal,, The Boston Globe, YouTube, NewsBreak, and many other leading publications.

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Aron Solomon, JD, is the Chief Legal Analyst for Esquire Digital, who has taught entrepreneurship at McGill University and the University of Pennsylvania, and was elected to Fastcase 50, recognizing the top 50 legal innovators in the world.


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