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.
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.
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.
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.
DD - disk destructor, double-down (a tire sidewall specification) SPA - single page application, specific purchase agreement, etc
and the list goes on.
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.
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.
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.
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.
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.
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.
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.