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Sounds very clearly that JPMC was defrauded, and at the same time did a very poor job of due diligence in a 9 figure acquisition. How did a financial audit not

Sounds very clearly that JPMC was defrauded, and at the same time did a very poor job of due diligence in a 9 figure acquisition. How did a financial audit not uncover the dramatic mismatch in actual vs. purported activity? How does a transaction value of $41 per user (x 4.25M users) not translate to an auditable revenue stream? This doesn't look good on either party.

loandbehold 3y ago
Javice interfered in due diligence in a very sophisticated way. JPMC tried to verify user data but Javice claimed they couldn't provide user personal information "due to privacy concerns". In the end Javice was able to convince due diligence team by engaging in multiple layers of fraud. Sure due diligence team could've done a better job, but Javice was a sophisticated adversary. It's not like due diligence team didn't have any concerns. But they wanted to balance their concerns against possibility of passing a good deal due to formality.
- mbesto 3y ago
  > JPMC tried to verify user data but Javice claimed they couldn't provide user personal information "due to privacy concerns". DD guy here. This is the most plausible explanation. When you're under LOI there is a lot of back and forth, which ultimately guide how the purchase agreement gets formulated. So if this was the case, then they would have made the trade off of "ok she's not letting us see the list, but we'll make sure the SPA is ironclad about this". Ultimately deals then get some money locked into escrow or RWI to soften the blow of the cost implication. At the end of the day, let's say you're JPMC and the company that you acquired did exactly what Javice did. You have an SPA that binds you legally (meaning, if they caught lying post close, they'll get sued), how on earth would you think someone was dumb enough to try to get through diligence, then operate the company post close, and NOT expect to be found committing fraud.
  - symlinkk 3y ago
    [flagged]
    - deleted 3y ago
      [deleted]
    - HFguy 3y ago
      I think the author is just talking like they normally do. There is generally a lot of jargon and acronyms used here. All the time. Just that most of it is regarding programming/development, so people don't notice it. Also, even if they were spelled out, you'd still need to google the term to understand what it means. I.e., LOI and "Letter of Intent" are still just tokens that represent a concept.
    - maxbond 3y ago
      Why presume the worst instead of presuming they are acting in good faith and simply didn't think to expand their acronyms?
    - mbesto 3y ago
      Why not politely ask me what they are and maybe I'll answer. DD = due diligence LOI = letter of intent SPA = stock purchase agreement RWI = reps & warranties insurance
  - jononomo 3y ago
    What is a DD guy? and what does LOI stand for?
    - styren 3y ago
      They are both pretty household terms that you could've easily Google.
      - dd82 3y ago
        for you, maybe. but not me. DD - disk destructor, double-down (a tire sidewall specification) SPA - single page application, specific purchase agreement, etc and the list goes on.
      - Incipient 3y ago
        DD was guessed within context. But the others were niche acronyms that were critical to a very insightful comment - definitely worth explaining.
    - tzs 3y ago
      In a comment you won't see unless you have "show dead" enabled, he says: DD = due diligence LOI = letter of intent SPA = stock purchase agreement RWI = reps & warranties insurance That was in answer to someone earlier asking about those acronyms, but in a rude way that got their comment flagged to death, which also hides replies. I tried vouching for it to revive it so people could see the reply with that explained the acronyms, but it did not help.
    - deltarholamda 3y ago
      Due Diligence, and Letter Of Intent.
- rqtwteye 3y ago
  “ Javice claimed they couldn't provide user personal information "due to privacy concerns”” That’s pretty much what Theranos did. The due diligence people walked away and threw a few hundred million more at Theranos. That’s compares to the due diligence we went through when I worked at a small startup years ago. It was only for a few million but they made us go through hell with all their information request. Seems if you want to commit fraud it’s best to go really big. The bigger you are the less scrutiny and less consequences.
  - swores 3y ago
    Isn't it more likely that it's just the bigger the fraud the more likely we are to hear about it, whereas even if 50% of deals the size you went through turned out fraudulent most of them wouldn't make the news and the ones that did might still not make the front page of HN?
  - fatnoah 3y ago
    > That’s compares to the due diligence we went through when I worked at a small startup years ago. It was only for a few million but they made us go through hell with all their information request. I went through this as an exec at a startup for a deal in the "few 10's of millions" range and the level of effort for the due diligence process was astounding. I'm pretty sure that by the end of the process, the acquiring company knew more about us than we did ourselves.
altacc 3y ago
I listened to a documentary about the Crazy Eddie electronic chain, which was fraudulent to the core but passed audits. The ex-CFO made an interesting comment: when large accounting firms do an audit, they're checking what the business has recorded on its accounts adds up, they're not checking if the reality behind the accounts are correct. As long as your books balance, you look healthy.
- dannylandau 3y ago
  what the documentary called and where can you stream it?
  - altacc 3y ago
    Going back through my history, it's actually an episode of the Criminal podcast: https://thisiscriminal.com/episode-211-crazy-eddie-3-17-2023/ https://thisiscriminal.com/episode-211-crazy-eddie-3-17-2023...
- caminante 3y ago
  Yeah, audit can mean many things and the scope matters. Typically, it's just compliance. Diligence usually means talking to top customers, but deals get rushed, access is a negotiation point, and liars are hard to detect.
- mbesto 3y ago
  > they're checking what the business has recorded on its accounts adds up, they're not checking if the reality behind the accounts are correct. Not necessarily true. Depending on the type of audit, part of the audit is to cherry pick (or randomly pick) recorded accounts and confirm whether they are backed up by various documents. For example - anyone can put in a receipt for a plane ticket and then have that plane ticket hit the P&L as a journal entry. But an auditor may look at the plan ticket receipt and check for the date, name of person on it, what date they were flying, what was their origin an destination, etc. etc. Source - currently under audit, and auditors are asking for confirmed records that support what is in an accounting system.
paxys 3y ago
A lot of such deals in the last 5-10 years closed with minimal due diligence because of FOMO.
chadash 3y ago
A 9-figure acquisition sounds like a lot, but consider that this is less than 0.05% of JP Morgan's market cap. Their market cap is down $6 billion today, and it's not even a particularly notable day. And it's not like that money is completely gone. JPM will sue and probably recover a very large chunk of it. Say that of the $175 million, they get back $150M, so they are out $25M. It's just not that much money to them. Sure, someone didn't do their job and will probably get fired over this, but Jamie Dimon and the executive suite don't really think about $25M losses.
- cldellow 3y ago
  > JPM will sue and probably recover a very large chunk of it Who are they going to sue? Javice's stake in the company was only worth $21M. If the rest is held by shareholders who weren't involved in the running of the company, good luck getting it back from them.
  - chadash 3y ago
    Fair point, although it was a private company with 8 investors, so it wouldn't be that crazy to file 8 lawsuits.
  - PeterisP 3y ago
    It seems quite plausible that most of the money paid for the company was placed in escrow for some time, exactly to cover scenarios like this where the seller misrepresents something material about the company.
    - deleted 3y ago
      [deleted]
- jjgoldman 3y ago
  > A 9-figure acquisition sounds like a lot, but consider that this is less than 0.05% of JP Morgan's market cap. It's far less about the percentage of JPMC's market cap, and more about the fact that a competent due diligence effort would cost less than $250k, which is insignificant against the cost of the acquisition.
spaceman_2020 3y ago
I'd reckon all that money slushing around didn't help either. The company was acquired in Sep 2021, right near the peak of the insanity unfolding across markets.
WheelsAtLarge 3y ago
Deals between 2 parties are usually entered with the idea that both parties are acting in good faith. It sounds naive after a fraud has been uncovered but we usually expect good things if we enter into a deal. Frank looked like a great aquacition from the outside so the audit was a formality that they had to "endure." Well, this time it was a complete fraud. Which Frank was able to cover up. I bet no one expected it to be so big. Bottom line it's human to trust. It will always be very hard to uncover deceit when it's part of your business to make sure it continues and work hard to cover it up. Looks to me like the auditors never had a chance. I'm surprised that the founder didn't just grab the money and moved to a country where there's no extradition. Last I read she was still claiming that the business was 100% legitimate.

loandbehold 3y ago

Javice interfered in due diligence in a very sophisticated way. JPMC tried to verify user data but Javice claimed they couldn't provide user personal information "due to privacy concerns". In the end Javice was able to convince due diligence team by engaging in multiple layers of fraud. Sure due diligence team could've done a better job, but Javice was a sophisticated adversary. It's not like due diligence team didn't have any concerns. But they wanted to balance their concerns against possibility of passing a good deal due to formality.

mbesto 3y ago
> JPMC tried to verify user data but Javice claimed they couldn't provide user personal information "due to privacy concerns". DD guy here. This is the most plausible explanation. When you're under LOI there is a lot of back and forth, which ultimately guide how the purchase agreement gets formulated. So if this was the case, then they would have made the trade off of "ok she's not letting us see the list, but we'll make sure the SPA is ironclad about this". Ultimately deals then get some money locked into escrow or RWI to soften the blow of the cost implication. At the end of the day, let's say you're JPMC and the company that you acquired did exactly what Javice did. You have an SPA that binds you legally (meaning, if they caught lying post close, they'll get sued), how on earth would you think someone was dumb enough to try to get through diligence, then operate the company post close, and NOT expect to be found committing fraud.
- symlinkk 3y ago
  [flagged]
  - deleted 3y ago
    [deleted]
  - HFguy 3y ago
    I think the author is just talking like they normally do. There is generally a lot of jargon and acronyms used here. All the time. Just that most of it is regarding programming/development, so people don't notice it. Also, even if they were spelled out, you'd still need to google the term to understand what it means. I.e., LOI and "Letter of Intent" are still just tokens that represent a concept.
  - maxbond 3y ago
    Why presume the worst instead of presuming they are acting in good faith and simply didn't think to expand their acronyms?
  - mbesto 3y ago
    Why not politely ask me what they are and maybe I'll answer. DD = due diligence LOI = letter of intent SPA = stock purchase agreement RWI = reps & warranties insurance
- jononomo 3y ago
  What is a DD guy? and what does LOI stand for?
  - styren 3y ago
    They are both pretty household terms that you could've easily Google.
    - dd82 3y ago
      for you, maybe. but not me. DD - disk destructor, double-down (a tire sidewall specification) SPA - single page application, specific purchase agreement, etc and the list goes on.
    - Incipient 3y ago
      DD was guessed within context. But the others were niche acronyms that were critical to a very insightful comment - definitely worth explaining.
  - tzs 3y ago
    In a comment you won't see unless you have "show dead" enabled, he says: DD = due diligence LOI = letter of intent SPA = stock purchase agreement RWI = reps & warranties insurance That was in answer to someone earlier asking about those acronyms, but in a rude way that got their comment flagged to death, which also hides replies. I tried vouching for it to revive it so people could see the reply with that explained the acronyms, but it did not help.
  - deltarholamda 3y ago
    Due Diligence, and Letter Of Intent.
rqtwteye 3y ago
“ Javice claimed they couldn't provide user personal information "due to privacy concerns”” That’s pretty much what Theranos did. The due diligence people walked away and threw a few hundred million more at Theranos. That’s compares to the due diligence we went through when I worked at a small startup years ago. It was only for a few million but they made us go through hell with all their information request. Seems if you want to commit fraud it’s best to go really big. The bigger you are the less scrutiny and less consequences.
- swores 3y ago
  Isn't it more likely that it's just the bigger the fraud the more likely we are to hear about it, whereas even if 50% of deals the size you went through turned out fraudulent most of them wouldn't make the news and the ones that did might still not make the front page of HN?
- fatnoah 3y ago
  > That’s compares to the due diligence we went through when I worked at a small startup years ago. It was only for a few million but they made us go through hell with all their information request. I went through this as an exec at a startup for a deal in the "few 10's of millions" range and the level of effort for the due diligence process was astounding. I'm pretty sure that by the end of the process, the acquiring company knew more about us than we did ourselves.

altacc 3y ago

I listened to a documentary about the Crazy Eddie electronic chain, which was fraudulent to the core but passed audits. The ex-CFO made an interesting comment: when large accounting firms do an audit, they're checking what the business has recorded on its accounts adds up, they're not checking if the reality behind the accounts are correct. As long as your books balance, you look healthy.

dannylandau 3y ago
what the documentary called and where can you stream it?
- altacc 3y ago
  Going back through my history, it's actually an episode of the Criminal podcast: https://thisiscriminal.com/episode-211-crazy-eddie-3-17-2023/ https://thisiscriminal.com/episode-211-crazy-eddie-3-17-2023...
caminante 3y ago
Yeah, audit can mean many things and the scope matters. Typically, it's just compliance. Diligence usually means talking to top customers, but deals get rushed, access is a negotiation point, and liars are hard to detect.
mbesto 3y ago
> they're checking what the business has recorded on its accounts adds up, they're not checking if the reality behind the accounts are correct. Not necessarily true. Depending on the type of audit, part of the audit is to cherry pick (or randomly pick) recorded accounts and confirm whether they are backed up by various documents. For example - anyone can put in a receipt for a plane ticket and then have that plane ticket hit the P&L as a journal entry. But an auditor may look at the plan ticket receipt and check for the date, name of person on it, what date they were flying, what was their origin an destination, etc. etc. Source - currently under audit, and auditors are asking for confirmed records that support what is in an accounting system.

paxys 3y ago

A lot of such deals in the last 5-10 years closed with minimal due diligence because of FOMO.

chadash 3y ago

A 9-figure acquisition sounds like a lot, but consider that this is less than 0.05% of JP Morgan's market cap. Their market cap is down $6 billion today, and it's not even a particularly notable day. And it's not like that money is completely gone. JPM will sue and probably recover a very large chunk of it. Say that of the $175 million, they get back $150M, so they are out $25M. It's just not that much money to them. Sure, someone didn't do their job and will probably get fired over this, but Jamie Dimon and the executive suite don't really think about $25M losses.

cldellow 3y ago
> JPM will sue and probably recover a very large chunk of it Who are they going to sue? Javice's stake in the company was only worth $21M. If the rest is held by shareholders who weren't involved in the running of the company, good luck getting it back from them.
- chadash 3y ago
  Fair point, although it was a private company with 8 investors, so it wouldn't be that crazy to file 8 lawsuits.
- PeterisP 3y ago
  It seems quite plausible that most of the money paid for the company was placed in escrow for some time, exactly to cover scenarios like this where the seller misrepresents something material about the company.
  - deleted 3y ago
    [deleted]
jjgoldman 3y ago
> A 9-figure acquisition sounds like a lot, but consider that this is less than 0.05% of JP Morgan's market cap. It's far less about the percentage of JPMC's market cap, and more about the fact that a competent due diligence effort would cost less than $250k, which is insignificant against the cost of the acquisition.

spaceman_2020 3y ago

I'd reckon all that money slushing around didn't help either. The company was acquired in Sep 2021, right near the peak of the insanity unfolding across markets.

WheelsAtLarge 3y ago

Deals between 2 parties are usually entered with the idea that both parties are acting in good faith. It sounds naive after a fraud has been uncovered but we usually expect good things if we enter into a deal. Frank looked like a great aquacition from the outside so the audit was a formality that they had to "endure." Well, this time it was a complete fraud. Which Frank was able to cover up. I bet no one expected it to be so big. Bottom line it's human to trust. It will always be very hard to uncover deceit when it's part of your business to make sure it continues and work hard to cover it up. Looks to me like the auditors never had a chance. I'm surprised that the founder didn't just grab the money and moved to a country where there's no extradition. Last I read she was still claiming that the business was 100% legitimate.