The craziest FinTech fraud since FTX gets to the SEC 😳; FinTech M&A is heating up as Acorns buys GoHenry 💸; Is Dutch neobank bunq making their biggest mistake ever? 🤔
FinTech is Eating the World, 4 April
Hey Everyone,
Good morning! Today’s issue is coming out slightly late but it’s on purpose, and it’s especially hot🔥 We’re looking at the craziest FinTech fraud since FTX that now has the SEC’s attention (it’s really wild!), the FinTech M&A which is heating up as Acorns buys GoHenry (why it makes sense + 5 more bonus reads), and question whether the Dutch neobank bunq is making their biggest mistake ever (haven’t they learned anything from Monzo, Revolut or N26?). Let’s jump straight into the hot stuff 🌶
The craziest FinTech fraud since FTX gets to the SEC 😳
Payback time 👏 The founder of Frank, a now-shuttered college financial planning platform that was sold to JPMorgan Chase JPM 0.00%↑ for a whopping $175 million, has been charged by the SEC with fraud.
Back in January, I wrote that JP Morgan, a top bank globally, paid over $170M for a buzzy FinTech startup called Frank (who names startups like that?! 🤔). Turns out, the founder created 4 million fake customer accounts just before completing the sale 🤷♂️
A recap ♻️ Let’s briefly recap the story because it’s really wild:
Financial Technology startup Frank was founded in 2016 as a financial platform that helps college students manage their financial aid and student debt. Frank founder Charlie Javice had a lofty goal to build the startup into “an Amazon for higher education”.
A proud member of the Forbes 30 Under 30 list, Javice once said that her biggest challenge at Frank was scale. So she made it up!
She first asked a top engineer at Frank to create the fake customer list. When he refused, Javice approached a data science professor to help. Using data from some individuals who'd already started using Frank, he created 4 million fake customer accounts-for which Javice paid him $18,000.
This looked like a rocket ship, so banking giant JPMorgan Chase & Co. rushed to acquire it. Turns out, they paid $175 million for a lie.
The bank first noticed irregularities with the list when a JPM employee observed that the list contained exactly 1,048,576 rows, the maximum allowed by Microsoft Excel.
But they really found out the customers were manufactured after the bank spammed the 4 million fake accounts with cross-marketing opportunities and nearly all bounced back.
JPMorgan Chase shut the site down and sued the 30-year-old founder of Frank.
What’s happening now? 🤔 The new SEC’s complaint alleges that Frank founder and CEO Charlie Javice orchestrated a scheme to deceive JPM into believing that Frank had access to valuable data on 4.25M students who used Frank’s service when in reality the number was less than 300,000.
Furthermore, the SEC’s investigation shows that, as a result of the eventual $175M acquisition of Frank, Javice received $9.7M directly in stock proceeds, millions more indirectly through trusts, and a contract entitling her to a $20M retention bonus as a new employee of JPM.
✈️ THE TAKEAWAY
What should we learn? 🤔 First and foremost, Forbes 30 Under 30 is the biggest scam in the media (it’s Pay for Play). In fact, Forbes is the Jim Cramer of Media:
When it comes to Frank, this has to be the craziest fraud in FinTech after FTX. Period. Zooming out, we have to talk about due diligence here. Although JPMorgan actually tried to do proper due diligence, it failed and it obviously has backfired. Yet, the core problem was that Frank explicitly gave them falsified information to debase their DD process so the acquisition would be completed. Hence, the fundamental issue here is not the lack of DD per se (though it’s still a huge one) - it's fraud. More importantly, given it happened to such a bank as JPM, it can happen to almost anyone. In the context of current events and vulnerabilities in the global financial system, this is especially worrying.