Financial Crimes in Business

As the Chairman of the Board of CBIC, I am thrilled to announce our first in-person CBIC Tech Night Takeover since the start of the pandemic. This event will be a unique opportunity for our community to learn from top experts in the field of financial crimes, and to hear real-life case studies that will help us better understand the threats that face our businesses today.

Recent headlines involving persons such as Trevor Milton, Elizabeth Holmes, and Sam Bankman-Fried have brought to light the importance of proper checks and balances in preventing fraud in the startup and innovative business space. In all three of these examples, lack of proper checks and balances led to criminal charges/convictions and the downfall of these companies (though Nikola is still on life support as of the date of this post).

In my opinion, Trevor Milton, for instance, with Nikola, was exposed as a pathological liar on the podcast “This Week in Startups E1090” back in July of 2020, specifically starting here. Despite his company likely having nothing more than non-binding reservation orders or letters of intent, Milton skirted around this reality and instead pivoted to all the theoretical profits that Nikola would make from these non-binding reservations or LOIs. Mr. Milton made such pivot without any acknowledgement that these types of agreements may not pan out 100% as represented. If I were a betting man, I would have shorted Nikola back in 2020 after listening to this podcast back when it originally aired. You simply cannot tie future profits so closely to something that is more “two birds in the bush” than “a bird in the hand” by nature, especially for a company that at the time was substantively “pre-revenue.” Mr. Milton needed someone or multiple people to realistically check his representations; unfortunately, this was not done and Mr. Milton has been convicted of fraud.

Elizabeth Holmes and Theranos were similarly doomed by the lack of proper checks and balances within the company. This allowed the fraud to go undetected for far too long, as detailed in the book “Bad Blood.” While this book gives an accurate account in my opinion, after reading the book I was left with the impression of how difficult it would have been for Ms. Holmes to self-correct her deceptive ways; she was a “paper-Billionaire.” previously an inspiration to women technology enthusiasts everywhere, and previously had the reputation that she would become the female version of Steve Jobs. I do believe that the misrepresentations made by her to the public about the accuracy of her blood testing technology were likely similar to representations made by other entrepreneurs seeking to raise capital, preserve company valuations, and  enhance company prestige. I believe Ms. Holmes wanted the tech to catch up to her prior false or misleading representations, to become factually true later. Ms. Holmes’ greatest downfall in the end is that certain patients and users of the tech likely relied on these Theranos blood testing reports, and because of this consumer health reliance, I think this is where the heart of her fault lies. If Theranos could have gotten the technology caught up with Ms. Holmes’ representations before any harm was done, then her punishment would have likely been less severe, but (1) there was no way Ms. Holmes could guarantee that it ever would and (2) such a plan should never have been implemented in the first place when she was providing a consumer health product on which patients were relying. If Theranos had proper checks and balances, then I believe it would not have allowed actual consumers to use its inherently flawed blood testing product. Ms. Holmes was also recently convicted of fraud.

Sam Bankman-Fried and FTX also suffered from a lack of proper checks and balances, making it easier for the fraud to occur. As of the date of this publication, approximately $5 billion of an originally missing $8 billion has been recovered by various authorities. As the FTX fraud continues to unravel, and more is learned, Sam Bankman-Fried and others were able to easily accomplish inappropriate acts on behalf of FTX without much (if any) push back, checks or balances. For an interesting history of the FTX/SBF downfall, click here.

The above three examples highlight the realities of business fraud. I genuinely believe that most perpetrators of business fraud do not begin their work with such thoughts in mind. Rather, instances of fraud grow when little to no checks and balances exist and those in control begin to ask the following types of questions to themselves: