January 27, 2021 • 47 mins
The world of startups is already a risky one, but it gets even worse when the "move fast and break things" philosophy extends to the law. We cover some examples of startups and VC firms that made headlines for all the wrong reasons.
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Episode Transcript
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Speaker 1 (00:04):
Welcome to Tech Stuff, a production from I Heart Radio.
Hey there, and welcome to tech Stuff. I'm your host,
Jonathan Strickland. I'm an executive producer with I Heart Radio
and I love all things tech. And in a recent episode,
I talked about funzy schemes and how you know that's
(00:25):
an old scam that gets refreshed by enterprising con artists
every so often, with recent examples centering on cryptocurrency, and
that actually got me to thinking about startup culture and
how some startups appear to be sincere, but maybe they're
too ambitious to really work in the real world, and
(00:47):
some seem like maybe they were just smoking mirrors the
entire time. So today I thought we'd go through some
of those types of startups and talk about the world
of startups in technology and why it can be so
risky to invest in them. Now. There are a lot
of common elements among startups in general, not just in tech,
(01:07):
and a lot of what we see frustrates me because
you would think that by now people would learn their
lesson when it comes to hype machines. Right, we should
all be pretty familiar with the hype cycle, and you
would think with familiarity we would be more resistant to it,
and yet we're not. And I include myself, and that
I get caught up in hype too, even as I
(01:30):
recognize that there's a pattern here that just doesn't hold up.
But I guess we have enough long shots that do
payoff that keep people figuratively and literally invested. I mean,
what if the next opportunity pays off and you didn't
get in on the ground floor, you just missed a
(01:50):
huge payout. So I guess I can understand the tendency,
but it also reinforces the general truth that humans as
a rule are really bad at stuff like risk assessment
and understanding the odds, which, hey, you really you just
have to look at the fact that you know lotteries
are a thing to know that that is true. There's
(02:12):
a general philosophy amongst startups that goes something like move
quickly and break things. That taking big chances is encouraged
because you know, while you're more likely going to fail,
you'll learn a lot in the process, and that means
you'll actually have a better chance at success next time.
We learn a lot through failure, or you might find
(02:33):
that quote unquote breaking what was previously considered to be
a best practice leads to you finding an even better
way to do things, but it can also create the
perfect climate for someone to engage in a little snake
oil peddling, because in a world where seemingly anything is possible,
there's no such thing as impossible, and that means you
(02:54):
can get money for stuff that just plane don't work.
The current reigning champion of that model is Theopos, which
I have covered extensively in the past, but for a
quick overview, Elizabeth Holmes, Stanford dropout and a big fan
of Silicon Valley leaders like Steve Jobs, set out to
create a company centered on a new kind of blood
(03:15):
analysis device, and the idea is alluring. Imagine a machine
about the size of a desktop printer that could analyze
the tiniest drop of blood and run more than a
hundred fifty tests on that sample. The machine presents a
comprehensive but easy to understand report on that sample and
thus gives the administrator insight into the patient's current state
(03:39):
of health and also pointing out any indicators that you
know might suggest the patients should be on the lookout
for future complications. It could help patients be more proactive
and choose new lifestyle routines to live their healthiest lives. Heck,
once the cost of making the devices declined enough, it
could potentially be something the average can shumer purchases for
(04:00):
their own home, and thus informing the average person about
their own health before they go to say their annual
check up, people would make more informed decisions about their health.
They would be able to have better conversations with healthcare providers.
It would really democratize healthcare. And that is a heck
of a sales pitch, and from the business side, it's
(04:22):
easy to see how it could be a freaking gold
mine because the healthcare industry is already a multi trillion
dollar market. Holmes was confident and she was convincing. And
over the past two decades, we've seen technology do stuff
that you know, three decades ago would seem impossible. The
Internet alone was a huge revelation, and now we can
(04:44):
carry de vice in our pockets that less access at
wherever we are. So it's mundane today, it's it's commonplace.
But thirty years ago it would have seemed bonkers. And
so it's not really surprising that investors rushed in to
get in on the ground floor. Of homes this enterprise,
the return on investment would be unbelievable. It could be
(05:05):
as if you were able to travel back to the
mid nineties when Apple Stock was trading below five dollars
a share, and you bought up a ton of it
because you know how much it's going to grow in
the future when Steve Jobs comes back. It helped that
most investors had little, if any understanding about the technology
involved in blood analysis. That's something that you'll remember is
(05:26):
a red flag when it comes to stuff like Ponzi schemes.
In this case, Farness wasn't so much a Ponzi scheme
as it was a company centered around an idea that
was just not really realistic. More knowledgeable experts in the
area of blood analysis had warned that Holmes's goal was unattainable,
that the technology just, you know, it's not there to
(05:49):
do something as comprehensive as what Holmes had in mind.
But the investments just kept pouring in, and if it
had just failed, the company had just ultimately had to say,
you know what, we tried, it didn't work, We're sorry.
Our story would really just be about how a lot
of people got excited about an idea, but the idea
just didn't pan out. But of course it gets worse,
(06:11):
and that's because over at Therapness there were a lot
of shady things going on. There were teams legitimately trying
to get the technology to work, but in the meantime,
the company was playing a kind of a shell game
with investors and v i p s. So, according to reports,
when such a person came in for a tour of
the facility, they would get their finger pricked and submit
(06:33):
a tiny blood sample in this little bitty capsule and
that would be fed into a Theonos machine. But the
analysis would take a couple of hours. So instead of
just you know, waiting around, the v i p would
go on a tour, maybe they'd grab lunch with Theoroness
executives or something. Meanwhile, other staff would rush in retrieve
the blood sample from the Theonis device diluted and then
(06:56):
submit that diluted sample to a traditional blood analysis machine
that had been bought from an established company. In other words,
they were relying on devices that were not built by
Saronis to do the actual analysis. Then they would rush
the completed analysis back to the meeting room, and then
the team would behave as if the Tharonis device had
(07:16):
done all the work the entire time. It was a
particularly flashy version of the old Turk automaton chess player.
You know, the thing you're looking at is not the
actual thing that's doing the work. Sarais eventually crumbled after
insiders began leaking what was going on to others and
journalists began publishing expose s about the company. Holmes is
(07:39):
one of the executives who happens to be waiting trial
for multiple charges of fraud, and the name Sarah Knows
is forever associated with words like hoax and scam. Now,
just to be clear, I don't know if it was
a scam from the beginning. I suspect that, you know,
in the very earliest days, Holmes was sincere in her
(08:01):
belief that she can make this work, and her engineers
certainly tried to get the technology to measure up to
the vision. But somewhere along the way people started to
fudge results or rely on alternative methods to make it
seem like things were working way better than they really were,
and once they went down that path, they were committed. Now,
(08:22):
other companies are legit, but the people running them might
not be and that also is a big problem. So
that seemed to be the case with a company that
once upon a time was called Mozito, but for some
reasons that will soon become a parent now calls itself definitive.
So let's talk about what this company's purpose is beyond
(08:44):
making its founder a whole lot of money. The original
focus of Mozito was to do something pretty great. I
think so many of us have used mobile devices to
pay for stuff. You have some sort of digital wallet
that's tied to either a credit card or a bank
account or some mothers stash of cash. In a transaction,
the mobile device interacts with a merchant's point of sale
(09:05):
and the data zings back and forth, and soon the
appropriate amount of money goes from your stash to the
merchant stash, which is, you know, pretty simple idea. But
there's an enormous population of people who don't have bank accounts.
Mozito estimated that two and a half billion people have
access to cellular technology, but they do not have an
(09:26):
account with a bank or a credit union. So mobile payments,
while incredibly useful, are not within the grasp of everyone.
And so the company saw a space that it could
potentially fill creating a technology that would allow people who
are unbanked or underbanked to use mobile payments, which is
a pretty noble goal giving people a lot more options
(09:47):
when it comes to making transactions, and that attracted a
lot of investors. And that brings us to the company's founder.
So the founder of Mozito was a guy named Michael Liberty,
whose name is pretty fitting we're gonna see. He first
established the company in two thousand seven in Dallas, Texas.
The fact that Mozito traces its history to two thousand
(10:08):
seven is already pretty impressive because that's the same year
that Apple launched the iPhone, So it was a pretty
visionary move. Liberty was able to get a lot of
investors for his company, raising money in multiple rounds of
investment funding. The company relocated from Dallas to Austin, Texas
in two thousand twelve, and by two thousand seventeen, Liberty
(10:28):
himself would step down from the company and relocate to Florida. Essentially,
he had grown the business. He was not leading it.
He was he had founded it, but he had other
executives in charge of running the thing, and he kind
of said all right, my work year is done, and
stepped away and went to Florida. However, investigators with the
Securities and Exchange Commission or SEC were interested in some
(10:52):
of those investments that were supposed to be going to
Mozito because the numbers didn't seem to add up, and
the investigation indicated that Mr Liberty had taken the liberty
of moving some of that cash around so that would
ultimately fill his own pockets rather than go to funding
the company. With most of the shenanigans taking place between
(11:14):
and there were signs of the shell companies all designed
to obfus skate where the money was going. There was
a practice of money laundering, which is when you mix
illegally obtained cash with cash from legitimate businesses in an
effort to hide the fact that you've got filthy lucre
on your hands. Ultimately, Liberty was charged with fraud, with
(11:35):
prosecutors saying he had stolen more than fifty million dollars
to fund his own millionaire lifestyle, complete with mansions and
private jets. He also served a prison sentence for a
different infraction. He pled guilty to charges that he had
violated campaign finance law in two thousand eleven and was
sentenced to four months in prison and a fine for
one hundred thousand dollars in seventeen. And there were other
(11:58):
SEC investigations into activities beyond the ones I just described.
Now the company Mozito wasn't included in these charges. It
appeared as though everything at the company was pretty legit,
but there was a lot of turnover in the executive
suite of leadership, which probably didn't look too good to investors.
(12:19):
In Scott Sandlin stepped down as the CEO, and for
more than a year, Mike Love served as interim CEO, So,
in other words, this company went for more than a
year without a permanent CEO. In fact, it was thirteen
months before the company had a new official CEO with
Todd Bradley, but then Bradley quit in seventeen along with
(12:41):
chief financial officer Scott Ellison. The Forbes reported that Mosito's
website kept both of those men listed on their executive
leadership websit page, you know, for a few months afterward,
which seems more than a bit sus So that probably
didn't look too good from the outside, and that might
explain and why the leaders of Mozito decided to reincorporate
(13:02):
and change the name of the company definitive. You don't
want to be another therapist after all. While the company
may not be a scam, that doesn't mean it's a
viable business either. There have been numerous articles written about
how the company, throughout its history had found itself scrabbling
to keep things going, mostly through additional rounds of investment. Now, personally,
(13:23):
I hope that the company is able to get its
feet on the ground because I think the service is
valuable for all those populations who don't have access to
bank accounts. It's just unfortunate that this appears to be
a very difficult service that can be done profitably. When
you think about it, it kind of makes sense. Most
of the transactions you would imagine would be pretty small,
(13:43):
and so any transaction fee you would take would be
pennies on the dollar, So you would need a lot
of them in order to make a profit. You would
have to really be operating at our huge scale, and
getting that huge scale is tough. As for Liberty, he
was awaiting trial for those charges I mentioned when on
(14:03):
January nine one, we learned that he was one of
those lucky individuals to receive a presidential pardon from outgoing
President Donald Trump. Interestingly, reporters have sometimes referred to Liberty
as Trump but with a main accent. That's main as
in the state in the northeastern United States. Now, it's
(14:24):
possible we could put Mozito infinitive in the same general
category as thereins, in the sense that it may be
that the actual central idea for the business could be untenable.
Now I don't know if that's true. I'm no financial expert.
Perhaps if you could get the operations up to scale,
maybe it would all work fine. I don't know. I mean, granted, pennies,
(14:47):
if you've got enough of them, do amount to dollars.
So there is that. Well, we're gonna take a quick break,
and when we come back, we'll talk about some more
startups that have had big problems. But first let's take
that break. Similar in some ways to the Mozito story
(15:12):
we listen to just before the break is that of
bow tie, which is actually spelled b O u X
t I E. And just to be clear, this is
not the current bow tie by that spelling, which based
on what I'm looking at at my screen right now,
that's some sort of company that sells TikTok views and
(15:32):
video shares in order to artificially boost the performance of
TikTok videos, which is just plain lame. It's straight up
there with companies that used to sell Twitter Twitter followers, right, Like,
that's something that's fallen out of favor over at Twitter
because Twitter has done multiple cullings of bought accounts, so
those have largely been white clear of the platform. But
(15:53):
we're seeing that same sort of practice spread to platforms
like TikTok. If you're an influencer and you're trying to
sell your you know, big following to various sponsors, maybe
you're engaging in some of these uh, unethical activities in
order to convince those sponsors. Hey, a lot of people
watch my stuff. But no, no, no, I'm talking about
(16:15):
a different bow Tie It was a company founded by
an entrepreneur named Renato Libric. The idea was to create
a digital platform for gift cards and loyalty cards. Librics
bow Tie company offered users the ability to purchase digital
gift cards to all sorts of major merchants and then
customize them with graphics and messages before sending them off
(16:37):
to family and friends. So it was a neat way
to create a sort of personalized experience, which I think
helps take some of the stigma out of, you know,
the whole gift card thing. And being digital, it should
be relatively easy to redeem those gift cards with online accounts,
making it less likely that they would go unused. I mean,
just a year ago, c NBC reported that American possessed
(17:00):
more than twenty one billion with a b dollars worth
of unused gift cards in store credit. By the way,
that's kind of why merchants love gift cards. There's a
good chance they'll never have to redeem them, and the
profit margin is ridiculous. Now, with bow Tie, it doesn't
sound like Librick was trying to funnel cash to himself,
which sets him apart from folks like Michael Liberty. But
(17:23):
he did forge signatures and produce false documents to make
it seem as though bow Tie was worth far more
than its true value in an effort to convince more
investors to pour money into the venture. So in that respect,
I guess that bow Tie is kind of similar to
the bow tie of today. So the bow tie of
today is all about inflating TikTok numbers, and Libric was
(17:46):
all about inflating the apparent value of bow tie. So
there's more going on there than I originally thought. Well,
perhaps Libric was just desperately trying to get some momentum
going with the hope that once things were really moving,
he'd be able to stick to the straight and narrow.
But he was caught out. Towards the end of ten
(18:07):
Librick was found guilty of wire fraud and sentenced to
thirty six months in prison in order to pay out
more than one and a half million dollars in restitution.
Based on what I've read, I would say that this
is another case where someone had an idea that sounded
pretty good, proved to be harder to pull off profitably
than was first anticipated, found it difficult to get enough
(18:27):
investments to stay afloat, and then resorted to illegal means
to cover the bills. Now, one person whose name has
to come up when you're talking about grandiose start up
ideas is Elon Musk. One of the numerous ideas Musquez
championed is that of the hyper loop. So, in short,
a hyper loop system, at least on the original design
(18:48):
would involve trains traveling inside tubes, and inside those tubes
you would pump out most of the air to be
very low air pressure, almost a vacuum, and that cuts
way down on wind resist sense. In addition, the trains
would not travel with wheels on a track. Instead, they
would travel atop air bearings. Essentially, a cushion of air
(19:09):
would keep the trains afloat above the inner surface of
the tunnel. Electro Magnets would provide the propulsion to accelerate
and decelerate the trains, which, with such reduced friction, would
be able to travel at incredible speeds like essentially the
speeds that you would see aircraft travel. One startup that
formed after Musk's proposal was Hyperloop Technologies, founded by Shervin
(19:33):
Pishavar and former SpaceX engineer Brogan Bam Brogan. The story
of that company is way too long for this episode,
and it involves tons of scandals and also mergers and
name changes and some seriously ugly in fighting, and Pischavar
would step down in the wake of sexual harassment charges,
(19:54):
which he maintains was all a smear campaign. The company
is still around today. In fact, it's the one that
conducted a successful test with people aboard a hyperloop capsule
back in November of twenty but the company would change
its name from Hyperlop Technologies to Hyperloop One to Virgin
hyper Loop one, and now it's just Virgin Hyperloop. Anyway,
(20:15):
the company I wanted to cover is the one that
Brogan bam Brogan would found after leaving Hyperloop one. So
bam Brogan and a couple of other executives all left
hyper Loop one at the same time and filed a
lawsuit against their former employer. They alleged that the company
had violated numerous agreements and abandon its fiduciary responsibilities, and worse,
(20:38):
they alleged abuse and threats, and the company would file
a countersuit against those former executives, alleging that they had
attempted to rest control of the company away from the
leadership team and the board of directors, essentially that they
were planning a coup. Both parties would settle their lawsuits
out of court in sixteen, and Bam Brogan then founded
(21:00):
a competing hyper loop company called Arrivo. He and a
couple of other colleagues formed Arrival in two thousand seventeen one.
Co founder Andrew Leeu had previously worked with a construction
company called a Calm a e c o M. Another
co founder was Jaden Smith, who, like dam Brogan, had
(21:21):
previously worked with SpaceX. He had also previously worked with
the CIA. Now, the hyper loop design is an interesting
and innovative one, but it also will require a ton
of money to make it a reality. Musk was first
talking about the idea way back in and we're still
in the experimental and testing stages in one and that's
(21:43):
just get to a point where we're confident that the
technology is a viable one for the purposes of transporting
people and cargo quickly and safely. After that, you've got
the daunting task of actually securing the legal rights to
build out routes between different destinations. That includes everything from
securing permission from various local governments and environmental agencies, to
(22:06):
the actual construction and more. It's time consuming and really expensive.
Perhaps for that reason, Arrival dumped the idea of going
the hyperloop throughout entirely, so instead it would go with
a more established technology, that of magnetic levitation. Maglev trains
have been around for a while. The technology is well understood,
(22:28):
it's proven to work, we use it today. And essentially
you've got magnets of similar polarity in the tracks and
under the trains, and since similar polarities repel one another,
like when you try to push the north pole of
two different permanent magnets together, the train will hover over
the track. You no longer have to deal with the
(22:49):
friction of wheels against rails or anything like that. The magnets,
by the way, can be permanent, they can be electro magnets,
or they can be a combination of the two. On
top of that, Arrival wasn't planning on and closing its
tracks and tunnels, so there would be no low pressure
track system with Arrivo, which again would significantly cut down
(23:10):
on construction and operation costs, though it would also mean
that the trains would have encounter some air resistance when
traveling down the tracks, so these would not be able
to go at the wicked fast speeds of the proposed
hyper loop trains. The company had planned to build a
test track out in Colorado, but Arrival was having a
lot of trouble getting investors on board, perhaps the fact
(23:32):
that they were no longer pursuing the more ambitious and
inarguably more risky hyper loop design. Or maybe it was
because of the very messy and very public breakup between
the Arrival founders and hyper Loop One, maybe that had
left kind of a stain on things within the company.
Things seem to be kind of off as well. An
(23:53):
anonymous employee posted a review on glass door. That's the
website that allows employees to review their workplaces. The review
claimed that the Arrival offices were operating with little or
no direction from leadership, and the report also indicated that
a leader later implied to be Vam Brogan himself brought
(24:13):
an axe to the office and then used it to
hack chunks out of the walls and frustration, which, yeah,
I mean if my boss showed up to my office
with a tool that could be used as a lethal
weapon and then he went around hitting the walls with it,
I too would describe my office environment as quote unquote unstable.
Arrival failed to secure Series A investment funding. Jaden Smith
(24:37):
and Andrew Leeu quietly parted ways with Arrival in Not
long after that, the company furloughed employees and then laid
off about half of them. Then it shut down the
startup just failed to get any momentum, which, as I
understand it, is a bad thing if you're trying to
move people from one place to another. It's very possible
(24:58):
that the fallout from Hyperloop one doomed arrival from the start,
though the descriptions I've seen of Bam Brogan's behavior may
also have played a part in any case, this is
an example of a startup that didn't really get a
chance to start up at all. And like I said,
I'll have to do a full treatment on the story
of Virgin Hyperloop at some point, because y'all that could
(25:20):
be a soap opera. Another startup that had a more
spectacular collapse was one for dot one. That is the
numeral one f O R dot oh n E not great, right?
Actually I should say I really mean job Sonic. Wait no, no, no,
(25:41):
I'm sorry, I should mean work Riot, except it's work right,
it's w R k R I O T. Yeah. This
was a company that changed names three times very quickly
in a matter of weeks. Actually, a man named Isaac
Choi founded the company, which was a job recruiting platform,
essentially a place where companies and job seekers could find
(26:01):
a good match you could post jobs, you could seek jobs.
That kind of thing, At least that's what it was
supposed to be. Isaac Choi positioned himself as a graduate
of the Stern School of Business at New York University,
and that prior to founding work Riot, he was an
analyst at JP Morgan for four years. Both of those
claims would be disputed by the respective organizations later on,
(26:25):
indicating that Mr Choi was fabricating his resume in an
attempt to manufacture credibility. Choi claimed to have raised investment
funds for work Riot through private investors, rather than seeking
out a formal series of funding or a venture capital
firm for support. The company began hiring on employees, many
of them Chinese citizens in America on work visas, which
(26:48):
will later make this story particularly upsetting. One employee, Penny Kim,
was hired on to be the head of marketing. Kim
would later write a piece about her experiences on medium,
though at the time she changed the names of the
people and the company in an effort to quote protect
the innocent and the guilty end quote. Later she would
(27:11):
confirm that the company she was writing about was in
fact work Riot. So what the heck happened. In this case,
the business leader was defrauding his employees. Kim was told
that she would have a budget of four million dollars
to make a marketing plan, so she began to put
one together, which included the push for the new name
(27:32):
for the company, because the previous one was quote not
s e O friendly end quote. So this was when
it was still one four dot one and the name
would change to job Sonic, which Kim said was not
her choice, but one of the other business leaders pushed it.
She wrote that she would find out later that her
(27:53):
four million dollar plan was meaningless because it was dependent
upon that budget of four million dollars, and it turned
out there was no four million dollar budget to be
found for the whole company, let alone for the marketing department.
Kim wrote that the CEO that being Choi was hiring
on people who had questionable applicable experience for the job
(28:15):
at hand, especially in the leadership team, and she said
that even the job at hand itself was poorly defined.
She also wrote about going along on investor meetings, something
she was curious about because she wanted to know what
was going on with having to get investors that the
claim was that the company was already funded, so why
(28:38):
would you need to go talk to investors so early.
At those meetings, Kim witnessed Choi talking more about himself
than the company. He was really selling his own qualifications
in an effort to try and get people to buy
into him rather than to buy into an idea for
a business. He also consistently failed to provide answers to
(29:00):
important questions, you know, questions like how much are you
bringing in versus how much are you spending. Turns out
investors are very curious about the answers to questions like that.
Kim also mentioned that her first paycheck was not a
normal one. It was a cashier's check with no PA
st up. Now, apparently, leading up to her being signed
(29:21):
on as the marketing director, a DP was handling payroll,
and that was an important step because one of the
things a DP would do would be to file paperwork
that showed those in the country who were on work
visas were actually employed, so the government could say, all right,
you're on a work visa. We received the notification from
(29:43):
a DP that you were paid for that period. Everything's cool. Well,
without a DP there, that was not happening, and that
meant that the visas might not be considered valid, and
that would mean that people would be in danger of
having those visas revoked and they would be sent back home. Worse,
Kim noted that while she received a paycheck, most people didn't,
(30:06):
and this indicated that there had to be a big
cash flow problem at the company. Kim also related how
an employee in business development revealed that he had lent
fifty thousand dollars of his own money in savings, his
life savings, to the CEO of the company, something that
was absolutely a red flag. Heck, that's that's not even
(30:29):
a red flag. That's like an active, actual emergency. Later, still,
after more missed payments, Choice and out a message claiming
that payroll would be met because he included a screenshot
of a supposed Wells Fargo money transfer into the corporate accounts.
Only it wasn't legit. It was an altered image. In fact,
(30:52):
it was an altered image of one that you can
find just by doing a Google image search for a
Wells Fargo transfer. Because Kim did that it, she did
that Google image search and found the exact one that
Choi had taken and done a little tiny bit of
photo shopping to change, but he wasn't even that careful.
There were entire sections of that image that indicated that
(31:15):
it was much, you know, much older than what Roi
was saying. When there's a copyright notice that ends in
around two thousand fourteen and it's many years after two fourteen,
not a good sign. Kim would go on to file
a wage dispute claim and then Troy fired her. So
(31:35):
that wasn't the smartest thing because obviously, as an employee,
you could then pursue legal action against your employer. So
she wrote the piece in medium and that prompted an
investigation by the FBI, and by then job Sonic had
become work Riot, but the Shenanigans were still the same.
Choi would be indicted in two thousand seventeen for defrauding employees.
(31:58):
He pled guilty and twenty eight to the charges, and
he was sentenced to time served, meaning he didn't go
to prison, and a fine of less than one dollars.
The company was no more, and I do feel awful
for all those employees who were working in good faith
for a company that was no more than a facade,
(32:18):
particularly those employees who were in the country on work visas.
They were all true victims of this scam. It's one
of those cases where you know, you point to the
target of the scam and it tends to be the
employees more than the potential customers or even the investors.
That's that's not cool. All right, Well, we're gonna take
(32:38):
another quick break, and when we come back, I'll talk
about the money behind the money and how that can
be hinky as well. But first let's take this quick break.
I'll wrap up with a couple of companies that weren't
so much startups as they were a venture capital investment company. Now,
(33:02):
these were supposed to be all about funding startups, and
the first one I want to talk about was called
the Rothenberg Ventures, and it's a story that would likely
make a movie akin to something like Wolf of Wall Street.
So at the heart of this story is the founder
of the company, Mike Rothenberg. He's a young guy. He's
in his mid thirties and back in twelve he founded
(33:26):
the VC company by raising up cash from his friends,
his family, and some colleagues. He had business degrees from
Stanford and Harvard under his belt legit ones he was charismatic,
he was an effective salesman, and he was able to
get this venture capital company off the ground. This was
particularly impressive because Rothenberg himself didn't come from money, so
(33:49):
this isn't the story of a rich person calling up
all his rich friends so that they can all become
more rich. Rothenberg raised around five million dollars for his
VC firm, which was meant to provide seed money for
new startups. Just two years after launching the venture capital company,
it spun off a starter accelerator called River, which focused
(34:13):
on companies related to virtual reality. Rothenberg Ventures and River
both invested early in a lot of startups, including a
few that would see some pretty big subsequent investment rounds.
So things were going pretty well. But Rothenberg was also
getting into the habit of spending lavishly, sometimes in an
effort to attract more investors and limited partners. He famously
(34:37):
hired professional race car driver Collect Davis to appear at
various events complete with a race car, which cost a
lot of money both for her and for shipping the
car around. He secured a suite at the Super Bowl
to wine and dine prospective partners. He spent a lot
in himself too. He hired personal drivers, he hired a
(34:59):
lot of personal assistance, he flew on a private airline
of subscription airline company, and generally he spent way more
than what seemed appropriate or heck, even possible for a
VC company of such modest size as Rothenberg Ventures. In
other words, people started to say, how is this company
(35:20):
making enough money for him to be spending this much?
So in twentus sixteen, the cracks began to show. A
ton of the leadership team at Rothenberg Ventures jumped ship
in a matter of months. They included the director of finance,
the manager of the San Francisco office, the chief revenue officer,
the chief financial officer, the general manager, and more. And
(35:43):
the precipitating event that very likely led to that mass
exodus of leadership was that an employee had blown the
whistle on what appeared to be fraud. The company subsequently
fired that employee, who then sued the company. The SEC
and the U. S. Department of Justice conducted investigations and
(36:05):
found that Mike Rothenberg had been siphoning money from investors
and putting it directly into his own pockets. The SEC
brought a civil lawsuit against Rothenburg, but the d o
J brought to criminal wire fraud charges, two charges alleging
he had made false bank statements, and money laundering charges
(36:26):
against him. Rothenberg lost the sec case and was ordered
to pay thirty one million dollars, and then he also
agreed to a ban from working in the securities industry,
with the possibility of appealing that ban after five years.
The d o j's wire fraud and false statement charges
brought with them a maximum sentence of thirty years in
(36:48):
prison each and remember there were four of those charges,
plus a million dollar fine. The money laundering charges could
result in another sentence of up to ten years and
a fine twice the amount of money laundered if he
were convicted. Now, the latest I've seen about Rothenburg dates
to the summer of twenty twenty. The trial had not
(37:08):
yet taken place. Then I suspect the trial has still
not taken place. I didn't dig deep enough down into
the court system to find out when the prospective trial
is going to take place. And our final entry is
a fake venture capital firm that has been used to
steal money from investors twice. So let's talk about the
(37:29):
first time around, and m I T graduate named Albert K.
Hugh founded a group of four management companies which the SEC.
So you know, the story is not gonna go well
if the SEC is involved. The SEC collectively refers to
as the Assinqua Managers. The general name I see used
most of the time to refer to whose scam is
(37:50):
as Sinqua Ventures, who positioned the company as a group
of hedge funds that would invest in various startups and
give out huge dividends as a result, who convinced a
small group of investors to put about five million dollars
into the company, and two thousand five who said that
(38:11):
due to some weird tax and privacy reasons, he needed
to relocate his company to Singapore, which is not a
great sign. An investigation into who revealed that the money
wasn't going into hedge funds like he had claimed, but
that who had been misappropriating fund assets rather than investing
(38:32):
the money as promised. That's a direct quote from an
SEC filing. Now, essentially, he was claiming that investors were
going to see these high returns and instead he was
pocketing the money, and it kind of sounds like he
was about to pursue a Ponzi scheme, only he didn't
follow up with subsequent rounds of investments. He just kept
all the money. Investors eventually started asking for their money back,
(38:56):
and Who made himself increasingly scarce, refusing to answer demands.
He was essentially in hiding in Hong Kong when he
was arrested and then extradited to stand trial in the
United States. Who was indicted and tried on seven charges
of wire fraud, and he was found guilty on all
seven charges. Who received a sentence of twelve years in
(39:18):
prison on June twentieve. He would serve several years in
a minimum security prison. He was, however, released in ten However,
in the meantime between when he was sent to prison
in twenty twelve and when he got out in twenty nineteen,
something really strange happened in twenties sixteen asinqua ventures returned.
(39:43):
Who was not mentioned at all, which really isn't surprising
and he certainly couldn't have been directly involved. He was
in prison and he didn't have any access to the internet.
He could send emails to a previously approved list of
recipients and they had to agree to accept email from
someone who was in prison, but that was the extent
(40:04):
of it. He couldn't do any other Internet activities. However,
The company claimed to be a venture capital firm all
the same with a Northern California office address. The new
Assinqua Ventures included two businesses, one that would supposedly invest
money into quote middle market opportunities end Quote, and another
financial advisor service that could help facilitate really big corporate moves,
(40:28):
like stuff like mergers and acquisitions. The old as Sinqua
Ventures u r L came back into use, though with
a very different website from the original incarnation of a
sinqua The new Assinqua Ventures published a few press releases
and sent them down the pipeline so that they went
to pr Newswire, which carried the releases, which then got
(40:50):
picked up by various media outlets. By the way, this
is also something that we should all be aware of
that press releases don't necessarily reflect the true That's why
reporting just on press releases is a terrible idea without
doing any further investigation, because there are instances of people
releasing false documents as a press release and having that
(41:14):
get picked up by the press. Wire and thus distributed
by various media outlets. So if you do a search
for the name A sinqua Ventures, you might see a
few press releases from six and Some of the press
releases mentioned members of the senior management team, like Steven Adler,
who apparently wasn't the Steven Adler who was drummer for
(41:34):
Guns and Roses, though that joke is kind of a
stretch anyway. The Adler listed in the releases spells Stephen
with a pH, whereas the drummer at Guns and Roses
spells it with a V. But I still had to
stick a joke in there. Adler also had a LinkedIn
page which sent out connection requests to a pretty wide
net of different business leaders. One of those requests went
(41:58):
to an executive recruiter named Marty McMahon who thought something
was hinky about that profile, so he performed a reverse
image search on the profile photo, which brought up a
hit for a head shot for a totally different person,
a real estate agent in San Diego named Dan Becker,
same picture, different guy. So when contacted by McMahon, Becker
(42:24):
was astonished to find his photo had been used for
a bogus LinkedIn profile. He had no connection to it. Obviously,
strange things were afoot at the circle K. This was
reinforced when McMahon repeated the process on a LinkedIn profile
of a different supposed a Sinqua executive named Michael Reid,
not the baseball player. I get the feeling that the
(42:45):
as Sinqua scammers were just copy and pasting content from
all over the web to fill out their supposed corporate website. Anyway,
that reverse search of that head shot pulled up a
another had shot of another San Diego based real estate agent,
a guy named Will Fagan, who actually sometimes works with
(43:07):
Dan Becker, the guy whose face was being used for
Steven Adler. Fortune magazine investigated the new Assinqua and published
a great piece about it titled the Venture capital Firm
that Wasn't There. The magazine pointed out that the press
releases were filled with information that was unverifiable. Dan Primac,
(43:27):
who is the writer of that piece, wrote about contacting
the SEC to find out if this Assinqua Ventures firm
was registered with the SEC, and it wasn't. If it
were a legitimate business, it certainly should have been registered.
One press release claimed that the company had held an
Investment Series fundraising round and raised a hundred twenty five
(43:51):
million dollars. But a company of that size would absolutely
be required to register with the SEC. But nope, there
was nothing there. Furthermore, several of the executive bios listed
in the management team page of the company's website were
clearly plagiarized. One such bio for managing director Peter Arnold
turned out to be lifted from the late venture capitalist
(44:14):
and reality TV star Russell Armstrong's bio. Not exactly subtle
Prime X piece pretty much gutted a Sinqua. He detailed
how he got into email contact with the supposed employee
of the company and how he received misinformation in return.
He hypothesized that the venture might be run by one
(44:34):
of Hugh's associates in an attempt to get another scam going.
The piece published in September. Shortly afterward, the Assinqua website
was offline and emails sent to Asinqua addresses bounced back
as undeliverable. So it's quite possible that the journalistic investigation
helped shut down this particular instance of this particular scam,
(44:57):
possibly before they could actually scam anyone out of any money.
That million dollar investment round might be just pure fiction.
So I think the moral of this story is that
investors need to be careful, as do prospective employees, not
just in the startups that interest them, but also in
(45:18):
the very venture capital firms that aggregate investments. Investments are
inherently risky to some degree. You don't know if the
startup is going to succeed, and that success depends on
a lot of different factors to really fall in place,
from having the right leadership to having a solid business plan,
to offering a product that people actually want or need,
(45:41):
and more. Some of the startups will become big, though
sometimes that's due to multiple investment rounds rather than the
company is actually becoming profitable. But the various big stories
tend to feed into that fear of missing out the
old fomo and the money will often follow as or
realt It's just important to ask tough questions and to
(46:03):
be extra cautious when you're dealing with something that is
unfamiliar to you. That gap in your knowledge might be
just the thing that causes you to make a mistake.
Next thing, you know, the person you trusted with your
money is facing fraud charges in court, not a great experience,
But you know what is a great experience letting me
(46:24):
know what it is you would like me to cover next.
I've gotten some messages recently so planned to hear some
episodes coming up in the near future about things like discord.
But if you have suggestions for topics that you would
like me to cover on a future episode of tech Stuff,
you should reach out and let me know. The best
way to do that is over on Twitter. The handle
for the show is text Stuff hs W, and I'll
(46:47):
talk to you again really soon. Text Stuff is an
I Heart Radio production. For more podcasts from my Heart Radio,
visit the i Heart Radio app, Apple Podcasts, or wherever
you listen to your favorite shows. H
Welcome to Tech Stuff, a production from I Heart Radio.
Hey there, and welcome to tech Stuff. I'm your host,
Jonathan Strickland. I'm an executive producer with I Heart Radio
and I love all things tech. And in a recent episode,
I talked about funzy schemes and how you know that's
(00:25):
an old scam that gets refreshed by enterprising con artists
every so often, with recent examples centering on cryptocurrency, and
that actually got me to thinking about startup culture and
how some startups appear to be sincere, but maybe they're
too ambitious to really work in the real world, and
(00:47):
some seem like maybe they were just smoking mirrors the
entire time. So today I thought we'd go through some
of those types of startups and talk about the world
of startups in technology and why it can be so
risky to invest in them. Now. There are a lot
of common elements among startups in general, not just in tech,
(01:07):
and a lot of what we see frustrates me because
you would think that by now people would learn their
lesson when it comes to hype machines. Right, we should
all be pretty familiar with the hype cycle, and you
would think with familiarity we would be more resistant to it,
and yet we're not. And I include myself, and that
I get caught up in hype too, even as I
(01:30):
recognize that there's a pattern here that just doesn't hold up.
But I guess we have enough long shots that do
payoff that keep people figuratively and literally invested. I mean,
what if the next opportunity pays off and you didn't
get in on the ground floor, you just missed a
(01:50):
huge payout. So I guess I can understand the tendency,
but it also reinforces the general truth that humans as
a rule are really bad at stuff like risk assessment
and understanding the odds, which, hey, you really you just
have to look at the fact that you know lotteries
are a thing to know that that is true. There's
(02:12):
a general philosophy amongst startups that goes something like move
quickly and break things. That taking big chances is encouraged
because you know, while you're more likely going to fail,
you'll learn a lot in the process, and that means
you'll actually have a better chance at success next time.
We learn a lot through failure, or you might find
(02:33):
that quote unquote breaking what was previously considered to be
a best practice leads to you finding an even better
way to do things, but it can also create the
perfect climate for someone to engage in a little snake
oil peddling, because in a world where seemingly anything is possible,
there's no such thing as impossible, and that means you
(02:54):
can get money for stuff that just plane don't work.
The current reigning champion of that model is Theopos, which
I have covered extensively in the past, but for a
quick overview, Elizabeth Holmes, Stanford dropout and a big fan
of Silicon Valley leaders like Steve Jobs, set out to
create a company centered on a new kind of blood
(03:15):
analysis device, and the idea is alluring. Imagine a machine
about the size of a desktop printer that could analyze
the tiniest drop of blood and run more than a
hundred fifty tests on that sample. The machine presents a
comprehensive but easy to understand report on that sample and
thus gives the administrator insight into the patient's current state
(03:39):
of health and also pointing out any indicators that you
know might suggest the patients should be on the lookout
for future complications. It could help patients be more proactive
and choose new lifestyle routines to live their healthiest lives. Heck,
once the cost of making the devices declined enough, it
could potentially be something the average can shumer purchases for
(04:00):
their own home, and thus informing the average person about
their own health before they go to say their annual
check up, people would make more informed decisions about their health.
They would be able to have better conversations with healthcare providers.
It would really democratize healthcare. And that is a heck
of a sales pitch, and from the business side, it's
(04:22):
easy to see how it could be a freaking gold
mine because the healthcare industry is already a multi trillion
dollar market. Holmes was confident and she was convincing. And
over the past two decades, we've seen technology do stuff
that you know, three decades ago would seem impossible. The
Internet alone was a huge revelation, and now we can
(04:44):
carry de vice in our pockets that less access at
wherever we are. So it's mundane today, it's it's commonplace.
But thirty years ago it would have seemed bonkers. And
so it's not really surprising that investors rushed in to
get in on the ground floor. Of homes this enterprise,
the return on investment would be unbelievable. It could be
(05:05):
as if you were able to travel back to the
mid nineties when Apple Stock was trading below five dollars
a share, and you bought up a ton of it
because you know how much it's going to grow in
the future when Steve Jobs comes back. It helped that
most investors had little, if any understanding about the technology
involved in blood analysis. That's something that you'll remember is
(05:26):
a red flag when it comes to stuff like Ponzi schemes.
In this case, Farness wasn't so much a Ponzi scheme
as it was a company centered around an idea that
was just not really realistic. More knowledgeable experts in the
area of blood analysis had warned that Holmes's goal was unattainable,
that the technology just, you know, it's not there to
(05:49):
do something as comprehensive as what Holmes had in mind.
But the investments just kept pouring in, and if it
had just failed, the company had just ultimately had to say,
you know what, we tried, it didn't work, We're sorry.
Our story would really just be about how a lot
of people got excited about an idea, but the idea
just didn't pan out. But of course it gets worse,
(06:11):
and that's because over at Therapness there were a lot
of shady things going on. There were teams legitimately trying
to get the technology to work, but in the meantime,
the company was playing a kind of a shell game
with investors and v i p s. So, according to reports,
when such a person came in for a tour of
the facility, they would get their finger pricked and submit
(06:33):
a tiny blood sample in this little bitty capsule and
that would be fed into a Theonos machine. But the
analysis would take a couple of hours. So instead of
just you know, waiting around, the v i p would
go on a tour, maybe they'd grab lunch with Theoroness
executives or something. Meanwhile, other staff would rush in retrieve
the blood sample from the Theonis device diluted and then
(06:56):
submit that diluted sample to a traditional blood analysis machine
that had been bought from an established company. In other words,
they were relying on devices that were not built by
Saronis to do the actual analysis. Then they would rush
the completed analysis back to the meeting room, and then
the team would behave as if the Tharonis device had
(07:16):
done all the work the entire time. It was a
particularly flashy version of the old Turk automaton chess player.
You know, the thing you're looking at is not the
actual thing that's doing the work. Sarais eventually crumbled after
insiders began leaking what was going on to others and
journalists began publishing expose s about the company. Holmes is
(07:39):
one of the executives who happens to be waiting trial
for multiple charges of fraud, and the name Sarah Knows
is forever associated with words like hoax and scam. Now,
just to be clear, I don't know if it was
a scam from the beginning. I suspect that, you know,
in the very earliest days, Holmes was sincere in her
(08:01):
belief that she can make this work, and her engineers
certainly tried to get the technology to measure up to
the vision. But somewhere along the way people started to
fudge results or rely on alternative methods to make it
seem like things were working way better than they really were,
and once they went down that path, they were committed. Now,
(08:22):
other companies are legit, but the people running them might
not be and that also is a big problem. So
that seemed to be the case with a company that
once upon a time was called Mozito, but for some
reasons that will soon become a parent now calls itself definitive.
So let's talk about what this company's purpose is beyond
(08:44):
making its founder a whole lot of money. The original
focus of Mozito was to do something pretty great. I
think so many of us have used mobile devices to
pay for stuff. You have some sort of digital wallet
that's tied to either a credit card or a bank
account or some mothers stash of cash. In a transaction,
the mobile device interacts with a merchant's point of sale
(09:05):
and the data zings back and forth, and soon the
appropriate amount of money goes from your stash to the
merchant stash, which is, you know, pretty simple idea. But
there's an enormous population of people who don't have bank accounts.
Mozito estimated that two and a half billion people have
access to cellular technology, but they do not have an
(09:26):
account with a bank or a credit union. So mobile payments,
while incredibly useful, are not within the grasp of everyone.
And so the company saw a space that it could
potentially fill creating a technology that would allow people who
are unbanked or underbanked to use mobile payments, which is
a pretty noble goal giving people a lot more options
(09:47):
when it comes to making transactions, and that attracted a
lot of investors. And that brings us to the company's founder.
So the founder of Mozito was a guy named Michael Liberty,
whose name is pretty fitting we're gonna see. He first
established the company in two thousand seven in Dallas, Texas.
The fact that Mozito traces its history to two thousand
(10:08):
seven is already pretty impressive because that's the same year
that Apple launched the iPhone, So it was a pretty
visionary move. Liberty was able to get a lot of
investors for his company, raising money in multiple rounds of
investment funding. The company relocated from Dallas to Austin, Texas
in two thousand twelve, and by two thousand seventeen, Liberty
(10:28):
himself would step down from the company and relocate to Florida. Essentially,
he had grown the business. He was not leading it.
He was he had founded it, but he had other
executives in charge of running the thing, and he kind
of said all right, my work year is done, and
stepped away and went to Florida. However, investigators with the
Securities and Exchange Commission or SEC were interested in some
(10:52):
of those investments that were supposed to be going to
Mozito because the numbers didn't seem to add up, and
the investigation indicated that Mr Liberty had taken the liberty
of moving some of that cash around so that would
ultimately fill his own pockets rather than go to funding
the company. With most of the shenanigans taking place between
(11:14):
and there were signs of the shell companies all designed
to obfus skate where the money was going. There was
a practice of money laundering, which is when you mix
illegally obtained cash with cash from legitimate businesses in an
effort to hide the fact that you've got filthy lucre
on your hands. Ultimately, Liberty was charged with fraud, with
(11:35):
prosecutors saying he had stolen more than fifty million dollars
to fund his own millionaire lifestyle, complete with mansions and
private jets. He also served a prison sentence for a
different infraction. He pled guilty to charges that he had
violated campaign finance law in two thousand eleven and was
sentenced to four months in prison and a fine for
one hundred thousand dollars in seventeen. And there were other
(11:58):
SEC investigations into activities beyond the ones I just described.
Now the company Mozito wasn't included in these charges. It
appeared as though everything at the company was pretty legit,
but there was a lot of turnover in the executive
suite of leadership, which probably didn't look too good to investors.
(12:19):
In Scott Sandlin stepped down as the CEO, and for
more than a year, Mike Love served as interim CEO, So,
in other words, this company went for more than a
year without a permanent CEO. In fact, it was thirteen
months before the company had a new official CEO with
Todd Bradley, but then Bradley quit in seventeen along with
(12:41):
chief financial officer Scott Ellison. The Forbes reported that Mosito's
website kept both of those men listed on their executive
leadership websit page, you know, for a few months afterward,
which seems more than a bit sus So that probably
didn't look too good from the outside, and that might
explain and why the leaders of Mozito decided to reincorporate
(13:02):
and change the name of the company definitive. You don't
want to be another therapist after all. While the company
may not be a scam, that doesn't mean it's a
viable business either. There have been numerous articles written about
how the company, throughout its history had found itself scrabbling
to keep things going, mostly through additional rounds of investment. Now, personally,
(13:23):
I hope that the company is able to get its
feet on the ground because I think the service is
valuable for all those populations who don't have access to
bank accounts. It's just unfortunate that this appears to be
a very difficult service that can be done profitably. When
you think about it, it kind of makes sense. Most
of the transactions you would imagine would be pretty small,
(13:43):
and so any transaction fee you would take would be
pennies on the dollar, So you would need a lot
of them in order to make a profit. You would
have to really be operating at our huge scale, and
getting that huge scale is tough. As for Liberty, he
was awaiting trial for those charges I mentioned when on
(14:03):
January nine one, we learned that he was one of
those lucky individuals to receive a presidential pardon from outgoing
President Donald Trump. Interestingly, reporters have sometimes referred to Liberty
as Trump but with a main accent. That's main as
in the state in the northeastern United States. Now, it's
(14:24):
possible we could put Mozito infinitive in the same general
category as thereins, in the sense that it may be
that the actual central idea for the business could be untenable.
Now I don't know if that's true. I'm no financial expert.
Perhaps if you could get the operations up to scale,
maybe it would all work fine. I don't know. I mean, granted, pennies,
(14:47):
if you've got enough of them, do amount to dollars.
So there is that. Well, we're gonna take a quick break,
and when we come back, we'll talk about some more
startups that have had big problems. But first let's take
that break. Similar in some ways to the Mozito story
(15:12):
we listen to just before the break is that of
bow tie, which is actually spelled b O u X
t I E. And just to be clear, this is
not the current bow tie by that spelling, which based
on what I'm looking at at my screen right now,
that's some sort of company that sells TikTok views and
(15:32):
video shares in order to artificially boost the performance of
TikTok videos, which is just plain lame. It's straight up
there with companies that used to sell Twitter Twitter followers, right, Like,
that's something that's fallen out of favor over at Twitter
because Twitter has done multiple cullings of bought accounts, so
those have largely been white clear of the platform. But
(15:53):
we're seeing that same sort of practice spread to platforms
like TikTok. If you're an influencer and you're trying to
sell your you know, big following to various sponsors, maybe
you're engaging in some of these uh, unethical activities in
order to convince those sponsors. Hey, a lot of people
watch my stuff. But no, no, no, I'm talking about
(16:15):
a different bow Tie It was a company founded by
an entrepreneur named Renato Libric. The idea was to create
a digital platform for gift cards and loyalty cards. Librics
bow Tie company offered users the ability to purchase digital
gift cards to all sorts of major merchants and then
customize them with graphics and messages before sending them off
(16:37):
to family and friends. So it was a neat way
to create a sort of personalized experience, which I think
helps take some of the stigma out of, you know,
the whole gift card thing. And being digital, it should
be relatively easy to redeem those gift cards with online accounts,
making it less likely that they would go unused. I mean,
just a year ago, c NBC reported that American possessed
(17:00):
more than twenty one billion with a b dollars worth
of unused gift cards in store credit. By the way,
that's kind of why merchants love gift cards. There's a
good chance they'll never have to redeem them, and the
profit margin is ridiculous. Now, with bow Tie, it doesn't
sound like Librick was trying to funnel cash to himself,
which sets him apart from folks like Michael Liberty. But
(17:23):
he did forge signatures and produce false documents to make
it seem as though bow Tie was worth far more
than its true value in an effort to convince more
investors to pour money into the venture. So in that respect,
I guess that bow Tie is kind of similar to
the bow tie of today. So the bow tie of
today is all about inflating TikTok numbers, and Libric was
(17:46):
all about inflating the apparent value of bow tie. So
there's more going on there than I originally thought. Well,
perhaps Libric was just desperately trying to get some momentum
going with the hope that once things were really moving,
he'd be able to stick to the straight and narrow.
But he was caught out. Towards the end of ten
(18:07):
Librick was found guilty of wire fraud and sentenced to
thirty six months in prison in order to pay out
more than one and a half million dollars in restitution.
Based on what I've read, I would say that this
is another case where someone had an idea that sounded
pretty good, proved to be harder to pull off profitably
than was first anticipated, found it difficult to get enough
(18:27):
investments to stay afloat, and then resorted to illegal means
to cover the bills. Now, one person whose name has
to come up when you're talking about grandiose start up
ideas is Elon Musk. One of the numerous ideas Musquez
championed is that of the hyper loop. So, in short,
a hyper loop system, at least on the original design
(18:48):
would involve trains traveling inside tubes, and inside those tubes
you would pump out most of the air to be
very low air pressure, almost a vacuum, and that cuts
way down on wind resist sense. In addition, the trains
would not travel with wheels on a track. Instead, they
would travel atop air bearings. Essentially, a cushion of air
(19:09):
would keep the trains afloat above the inner surface of
the tunnel. Electro Magnets would provide the propulsion to accelerate
and decelerate the trains, which, with such reduced friction, would
be able to travel at incredible speeds like essentially the
speeds that you would see aircraft travel. One startup that
formed after Musk's proposal was Hyperloop Technologies, founded by Shervin
(19:33):
Pishavar and former SpaceX engineer Brogan Bam Brogan. The story
of that company is way too long for this episode,
and it involves tons of scandals and also mergers and
name changes and some seriously ugly in fighting, and Pischavar
would step down in the wake of sexual harassment charges,
(19:54):
which he maintains was all a smear campaign. The company
is still around today. In fact, it's the one that
conducted a successful test with people aboard a hyperloop capsule
back in November of twenty but the company would change
its name from Hyperlop Technologies to Hyperloop One to Virgin
hyper Loop one, and now it's just Virgin Hyperloop. Anyway,
(20:15):
the company I wanted to cover is the one that
Brogan bam Brogan would found after leaving Hyperloop one. So
bam Brogan and a couple of other executives all left
hyper Loop one at the same time and filed a
lawsuit against their former employer. They alleged that the company
had violated numerous agreements and abandon its fiduciary responsibilities, and worse,
(20:38):
they alleged abuse and threats, and the company would file
a countersuit against those former executives, alleging that they had
attempted to rest control of the company away from the
leadership team and the board of directors, essentially that they
were planning a coup. Both parties would settle their lawsuits
out of court in sixteen, and Bam Brogan then founded
(21:00):
a competing hyper loop company called Arrivo. He and a
couple of other colleagues formed Arrival in two thousand seventeen one.
Co founder Andrew Leeu had previously worked with a construction
company called a Calm a e c o M. Another
co founder was Jaden Smith, who, like dam Brogan, had
(21:21):
previously worked with SpaceX. He had also previously worked with
the CIA. Now, the hyper loop design is an interesting
and innovative one, but it also will require a ton
of money to make it a reality. Musk was first
talking about the idea way back in and we're still
in the experimental and testing stages in one and that's
(21:43):
just get to a point where we're confident that the
technology is a viable one for the purposes of transporting
people and cargo quickly and safely. After that, you've got
the daunting task of actually securing the legal rights to
build out routes between different destinations. That includes everything from
securing permission from various local governments and environmental agencies, to
(22:06):
the actual construction and more. It's time consuming and really expensive.
Perhaps for that reason, Arrival dumped the idea of going
the hyperloop throughout entirely, so instead it would go with
a more established technology, that of magnetic levitation. Maglev trains
have been around for a while. The technology is well understood,
(22:28):
it's proven to work, we use it today. And essentially
you've got magnets of similar polarity in the tracks and
under the trains, and since similar polarities repel one another,
like when you try to push the north pole of
two different permanent magnets together, the train will hover over
the track. You no longer have to deal with the
(22:49):
friction of wheels against rails or anything like that. The magnets,
by the way, can be permanent, they can be electro magnets,
or they can be a combination of the two. On
top of that, Arrival wasn't planning on and closing its
tracks and tunnels, so there would be no low pressure
track system with Arrivo, which again would significantly cut down
(23:10):
on construction and operation costs, though it would also mean
that the trains would have encounter some air resistance when
traveling down the tracks, so these would not be able
to go at the wicked fast speeds of the proposed
hyper loop trains. The company had planned to build a
test track out in Colorado, but Arrival was having a
lot of trouble getting investors on board, perhaps the fact
(23:32):
that they were no longer pursuing the more ambitious and
inarguably more risky hyper loop design. Or maybe it was
because of the very messy and very public breakup between
the Arrival founders and hyper Loop One, maybe that had
left kind of a stain on things within the company.
Things seem to be kind of off as well. An
(23:53):
anonymous employee posted a review on glass door. That's the
website that allows employees to review their workplaces. The review
claimed that the Arrival offices were operating with little or
no direction from leadership, and the report also indicated that
a leader later implied to be Vam Brogan himself brought
(24:13):
an axe to the office and then used it to
hack chunks out of the walls and frustration, which, yeah,
I mean if my boss showed up to my office
with a tool that could be used as a lethal
weapon and then he went around hitting the walls with it,
I too would describe my office environment as quote unquote unstable.
Arrival failed to secure Series A investment funding. Jaden Smith
(24:37):
and Andrew Leeu quietly parted ways with Arrival in Not
long after that, the company furloughed employees and then laid
off about half of them. Then it shut down the
startup just failed to get any momentum, which, as I
understand it, is a bad thing if you're trying to
move people from one place to another. It's very possible
(24:58):
that the fallout from Hyperloop one doomed arrival from the start,
though the descriptions I've seen of Bam Brogan's behavior may
also have played a part in any case, this is
an example of a startup that didn't really get a
chance to start up at all. And like I said,
I'll have to do a full treatment on the story
of Virgin Hyperloop at some point, because y'all that could
(25:20):
be a soap opera. Another startup that had a more
spectacular collapse was one for dot one. That is the
numeral one f O R dot oh n E not great, right?
Actually I should say I really mean job Sonic. Wait no, no, no,
(25:41):
I'm sorry, I should mean work Riot, except it's work right,
it's w R k R I O T. Yeah. This
was a company that changed names three times very quickly
in a matter of weeks. Actually, a man named Isaac
Choi founded the company, which was a job recruiting platform,
essentially a place where companies and job seekers could find
(26:01):
a good match you could post jobs, you could seek jobs.
That kind of thing, At least that's what it was
supposed to be. Isaac Choi positioned himself as a graduate
of the Stern School of Business at New York University,
and that prior to founding work Riot, he was an
analyst at JP Morgan for four years. Both of those
claims would be disputed by the respective organizations later on,
(26:25):
indicating that Mr Choi was fabricating his resume in an
attempt to manufacture credibility. Choi claimed to have raised investment
funds for work Riot through private investors, rather than seeking
out a formal series of funding or a venture capital
firm for support. The company began hiring on employees, many
of them Chinese citizens in America on work visas, which
(26:48):
will later make this story particularly upsetting. One employee, Penny Kim,
was hired on to be the head of marketing. Kim
would later write a piece about her experiences on medium,
though at the time she changed the names of the
people and the company in an effort to quote protect
the innocent and the guilty end quote. Later she would
(27:11):
confirm that the company she was writing about was in
fact work Riot. So what the heck happened. In this case,
the business leader was defrauding his employees. Kim was told
that she would have a budget of four million dollars
to make a marketing plan, so she began to put
one together, which included the push for the new name
(27:32):
for the company, because the previous one was quote not
s e O friendly end quote. So this was when
it was still one four dot one and the name
would change to job Sonic, which Kim said was not
her choice, but one of the other business leaders pushed it.
She wrote that she would find out later that her
(27:53):
four million dollar plan was meaningless because it was dependent
upon that budget of four million dollars, and it turned
out there was no four million dollar budget to be
found for the whole company, let alone for the marketing department.
Kim wrote that the CEO that being Choi was hiring
on people who had questionable applicable experience for the job
(28:15):
at hand, especially in the leadership team, and she said
that even the job at hand itself was poorly defined.
She also wrote about going along on investor meetings, something
she was curious about because she wanted to know what
was going on with having to get investors that the
claim was that the company was already funded, so why
(28:38):
would you need to go talk to investors so early.
At those meetings, Kim witnessed Choi talking more about himself
than the company. He was really selling his own qualifications
in an effort to try and get people to buy
into him rather than to buy into an idea for
a business. He also consistently failed to provide answers to
(29:00):
important questions, you know, questions like how much are you
bringing in versus how much are you spending. Turns out
investors are very curious about the answers to questions like that.
Kim also mentioned that her first paycheck was not a
normal one. It was a cashier's check with no PA
st up. Now, apparently, leading up to her being signed
(29:21):
on as the marketing director, a DP was handling payroll,
and that was an important step because one of the
things a DP would do would be to file paperwork
that showed those in the country who were on work
visas were actually employed, so the government could say, all right,
you're on a work visa. We received the notification from
(29:43):
a DP that you were paid for that period. Everything's cool. Well,
without a DP there, that was not happening, and that
meant that the visas might not be considered valid, and
that would mean that people would be in danger of
having those visas revoked and they would be sent back home. Worse,
Kim noted that while she received a paycheck, most people didn't,
(30:06):
and this indicated that there had to be a big
cash flow problem at the company. Kim also related how
an employee in business development revealed that he had lent
fifty thousand dollars of his own money in savings, his
life savings, to the CEO of the company, something that
was absolutely a red flag. Heck, that's that's not even
(30:29):
a red flag. That's like an active, actual emergency. Later, still,
after more missed payments, Choice and out a message claiming
that payroll would be met because he included a screenshot
of a supposed Wells Fargo money transfer into the corporate accounts.
Only it wasn't legit. It was an altered image. In fact,
(30:52):
it was an altered image of one that you can
find just by doing a Google image search for a
Wells Fargo transfer. Because Kim did that it, she did
that Google image search and found the exact one that
Choi had taken and done a little tiny bit of
photo shopping to change, but he wasn't even that careful.
There were entire sections of that image that indicated that
(31:15):
it was much, you know, much older than what Roi
was saying. When there's a copyright notice that ends in
around two thousand fourteen and it's many years after two fourteen,
not a good sign. Kim would go on to file
a wage dispute claim and then Troy fired her. So
(31:35):
that wasn't the smartest thing because obviously, as an employee,
you could then pursue legal action against your employer. So
she wrote the piece in medium and that prompted an
investigation by the FBI, and by then job Sonic had
become work Riot, but the Shenanigans were still the same.
Choi would be indicted in two thousand seventeen for defrauding employees.
(31:58):
He pled guilty and twenty eight to the charges, and
he was sentenced to time served, meaning he didn't go
to prison, and a fine of less than one dollars.
The company was no more, and I do feel awful
for all those employees who were working in good faith
for a company that was no more than a facade,
(32:18):
particularly those employees who were in the country on work visas.
They were all true victims of this scam. It's one
of those cases where you know, you point to the
target of the scam and it tends to be the
employees more than the potential customers or even the investors.
That's that's not cool. All right, Well, we're gonna take
(32:38):
another quick break, and when we come back, I'll talk
about the money behind the money and how that can
be hinky as well. But first let's take this quick break.
I'll wrap up with a couple of companies that weren't
so much startups as they were a venture capital investment company. Now,
(33:02):
these were supposed to be all about funding startups, and
the first one I want to talk about was called
the Rothenberg Ventures, and it's a story that would likely
make a movie akin to something like Wolf of Wall Street.
So at the heart of this story is the founder
of the company, Mike Rothenberg. He's a young guy. He's
in his mid thirties and back in twelve he founded
(33:26):
the VC company by raising up cash from his friends,
his family, and some colleagues. He had business degrees from
Stanford and Harvard under his belt legit ones he was charismatic,
he was an effective salesman, and he was able to
get this venture capital company off the ground. This was
particularly impressive because Rothenberg himself didn't come from money, so
(33:49):
this isn't the story of a rich person calling up
all his rich friends so that they can all become
more rich. Rothenberg raised around five million dollars for his
VC firm, which was meant to provide seed money for
new startups. Just two years after launching the venture capital company,
it spun off a starter accelerator called River, which focused
(34:13):
on companies related to virtual reality. Rothenberg Ventures and River
both invested early in a lot of startups, including a
few that would see some pretty big subsequent investment rounds.
So things were going pretty well. But Rothenberg was also
getting into the habit of spending lavishly, sometimes in an
effort to attract more investors and limited partners. He famously
(34:37):
hired professional race car driver Collect Davis to appear at
various events complete with a race car, which cost a
lot of money both for her and for shipping the
car around. He secured a suite at the Super Bowl
to wine and dine prospective partners. He spent a lot
in himself too. He hired personal drivers, he hired a
(34:59):
lot of personal assistance, he flew on a private airline
of subscription airline company, and generally he spent way more
than what seemed appropriate or heck, even possible for a
VC company of such modest size as Rothenberg Ventures. In
other words, people started to say, how is this company
(35:20):
making enough money for him to be spending this much?
So in twentus sixteen, the cracks began to show. A
ton of the leadership team at Rothenberg Ventures jumped ship
in a matter of months. They included the director of finance,
the manager of the San Francisco office, the chief revenue officer,
the chief financial officer, the general manager, and more. And
(35:43):
the precipitating event that very likely led to that mass
exodus of leadership was that an employee had blown the
whistle on what appeared to be fraud. The company subsequently
fired that employee, who then sued the company. The SEC
and the U. S. Department of Justice conducted investigations and
(36:05):
found that Mike Rothenberg had been siphoning money from investors
and putting it directly into his own pockets. The SEC
brought a civil lawsuit against Rothenburg, but the d o
J brought to criminal wire fraud charges, two charges alleging
he had made false bank statements, and money laundering charges
(36:26):
against him. Rothenberg lost the sec case and was ordered
to pay thirty one million dollars, and then he also
agreed to a ban from working in the securities industry,
with the possibility of appealing that ban after five years.
The d o j's wire fraud and false statement charges
brought with them a maximum sentence of thirty years in
(36:48):
prison each and remember there were four of those charges,
plus a million dollar fine. The money laundering charges could
result in another sentence of up to ten years and
a fine twice the amount of money laundered if he
were convicted. Now, the latest I've seen about Rothenburg dates
to the summer of twenty twenty. The trial had not
(37:08):
yet taken place. Then I suspect the trial has still
not taken place. I didn't dig deep enough down into
the court system to find out when the prospective trial
is going to take place. And our final entry is
a fake venture capital firm that has been used to
steal money from investors twice. So let's talk about the
(37:29):
first time around, and m I T graduate named Albert K.
Hugh founded a group of four management companies which the SEC.
So you know, the story is not gonna go well
if the SEC is involved. The SEC collectively refers to
as the Assinqua Managers. The general name I see used
most of the time to refer to whose scam is
(37:50):
as Sinqua Ventures, who positioned the company as a group
of hedge funds that would invest in various startups and
give out huge dividends as a result, who convinced a
small group of investors to put about five million dollars
into the company, and two thousand five who said that
(38:11):
due to some weird tax and privacy reasons, he needed
to relocate his company to Singapore, which is not a
great sign. An investigation into who revealed that the money
wasn't going into hedge funds like he had claimed, but
that who had been misappropriating fund assets rather than investing
(38:32):
the money as promised. That's a direct quote from an
SEC filing. Now, essentially, he was claiming that investors were
going to see these high returns and instead he was
pocketing the money, and it kind of sounds like he
was about to pursue a Ponzi scheme, only he didn't
follow up with subsequent rounds of investments. He just kept
all the money. Investors eventually started asking for their money back,
(38:56):
and Who made himself increasingly scarce, refusing to answer demands.
He was essentially in hiding in Hong Kong when he
was arrested and then extradited to stand trial in the
United States. Who was indicted and tried on seven charges
of wire fraud, and he was found guilty on all
seven charges. Who received a sentence of twelve years in
(39:18):
prison on June twentieve. He would serve several years in
a minimum security prison. He was, however, released in ten However,
in the meantime between when he was sent to prison
in twenty twelve and when he got out in twenty nineteen,
something really strange happened in twenties sixteen asinqua ventures returned.
(39:43):
Who was not mentioned at all, which really isn't surprising
and he certainly couldn't have been directly involved. He was
in prison and he didn't have any access to the internet.
He could send emails to a previously approved list of
recipients and they had to agree to accept email from
someone who was in prison, but that was the extent
(40:04):
of it. He couldn't do any other Internet activities. However,
The company claimed to be a venture capital firm all
the same with a Northern California office address. The new
Assinqua Ventures included two businesses, one that would supposedly invest
money into quote middle market opportunities end Quote, and another
financial advisor service that could help facilitate really big corporate moves,
(40:28):
like stuff like mergers and acquisitions. The old as Sinqua
Ventures u r L came back into use, though with
a very different website from the original incarnation of a
sinqua The new Assinqua Ventures published a few press releases
and sent them down the pipeline so that they went
to pr Newswire, which carried the releases, which then got
(40:50):
picked up by various media outlets. By the way, this
is also something that we should all be aware of
that press releases don't necessarily reflect the true That's why
reporting just on press releases is a terrible idea without
doing any further investigation, because there are instances of people
releasing false documents as a press release and having that
(41:14):
get picked up by the press. Wire and thus distributed
by various media outlets. So if you do a search
for the name A sinqua Ventures, you might see a
few press releases from six and Some of the press
releases mentioned members of the senior management team, like Steven Adler,
who apparently wasn't the Steven Adler who was drummer for
(41:34):
Guns and Roses, though that joke is kind of a
stretch anyway. The Adler listed in the releases spells Stephen
with a pH, whereas the drummer at Guns and Roses
spells it with a V. But I still had to
stick a joke in there. Adler also had a LinkedIn
page which sent out connection requests to a pretty wide
net of different business leaders. One of those requests went
(41:58):
to an executive recruiter named Marty McMahon who thought something
was hinky about that profile, so he performed a reverse
image search on the profile photo, which brought up a
hit for a head shot for a totally different person,
a real estate agent in San Diego named Dan Becker,
same picture, different guy. So when contacted by McMahon, Becker
(42:24):
was astonished to find his photo had been used for
a bogus LinkedIn profile. He had no connection to it. Obviously,
strange things were afoot at the circle K. This was
reinforced when McMahon repeated the process on a LinkedIn profile
of a different supposed a Sinqua executive named Michael Reid,
not the baseball player. I get the feeling that the
(42:45):
as Sinqua scammers were just copy and pasting content from
all over the web to fill out their supposed corporate website. Anyway,
that reverse search of that head shot pulled up a
another had shot of another San Diego based real estate agent,
a guy named Will Fagan, who actually sometimes works with
(43:07):
Dan Becker, the guy whose face was being used for
Steven Adler. Fortune magazine investigated the new Assinqua and published
a great piece about it titled the Venture capital Firm
that Wasn't There. The magazine pointed out that the press
releases were filled with information that was unverifiable. Dan Primac,
(43:27):
who is the writer of that piece, wrote about contacting
the SEC to find out if this Assinqua Ventures firm
was registered with the SEC, and it wasn't. If it
were a legitimate business, it certainly should have been registered.
One press release claimed that the company had held an
Investment Series fundraising round and raised a hundred twenty five
(43:51):
million dollars. But a company of that size would absolutely
be required to register with the SEC. But nope, there
was nothing there. Furthermore, several of the executive bios listed
in the management team page of the company's website were
clearly plagiarized. One such bio for managing director Peter Arnold
turned out to be lifted from the late venture capitalist
(44:14):
and reality TV star Russell Armstrong's bio. Not exactly subtle
Prime X piece pretty much gutted a Sinqua. He detailed
how he got into email contact with the supposed employee
of the company and how he received misinformation in return.
He hypothesized that the venture might be run by one
(44:34):
of Hugh's associates in an attempt to get another scam going.
The piece published in September. Shortly afterward, the Assinqua website
was offline and emails sent to Asinqua addresses bounced back
as undeliverable. So it's quite possible that the journalistic investigation
helped shut down this particular instance of this particular scam,
(44:57):
possibly before they could actually scam anyone out of any money.
That million dollar investment round might be just pure fiction.
So I think the moral of this story is that
investors need to be careful, as do prospective employees, not
just in the startups that interest them, but also in
(45:18):
the very venture capital firms that aggregate investments. Investments are
inherently risky to some degree. You don't know if the
startup is going to succeed, and that success depends on
a lot of different factors to really fall in place,
from having the right leadership to having a solid business plan,
to offering a product that people actually want or need,
(45:41):
and more. Some of the startups will become big, though
sometimes that's due to multiple investment rounds rather than the
company is actually becoming profitable. But the various big stories
tend to feed into that fear of missing out the
old fomo and the money will often follow as or
realt It's just important to ask tough questions and to
(46:03):
be extra cautious when you're dealing with something that is
unfamiliar to you. That gap in your knowledge might be
just the thing that causes you to make a mistake.
Next thing, you know, the person you trusted with your
money is facing fraud charges in court, not a great experience,
But you know what is a great experience letting me
(46:24):
know what it is you would like me to cover next.
I've gotten some messages recently so planned to hear some
episodes coming up in the near future about things like discord.
But if you have suggestions for topics that you would
like me to cover on a future episode of tech Stuff,
you should reach out and let me know. The best
way to do that is over on Twitter. The handle
for the show is text Stuff hs W, and I'll
(46:47):
talk to you again really soon. Text Stuff is an
I Heart Radio production. For more podcasts from my Heart Radio,
visit the i Heart Radio app, Apple Podcasts, or wherever
you listen to your favorite shows. H
TechStuff News
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Karah Preiss
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