Forbes Under 30, Charlie Javice to go to trial in 2024 over alleged $175 million JPMorgan fraud

When JPMorgan Chase announced two years ago that it would purchase Frank, a start-up college financial planning company, for $175 million, the global banking giant aimed to strengthen its relationship with millions of young people.

About Frank

Frank was founded in 2017 by Charlie Javice, who was 24 years old at the time, to make college more affordable for millions of Americans and help them achieve financial wellness. The Frank platform was a ClassFinder marketplace for shopping for online courses, and resources to help students navigate a variety of financial situations.

Investors

Investors in Frank include Chegg (NYSE-listed), Aleph (the U.S.-Israeli investment fund that also funded Lemonade), Silicon Valley Bank, and Marc Rowan (the co-founder and CEO of Apollo Global Management, one of the largest private equity firms in the world).

What Attracted JPMorgan to Frank?

Clearly, JPMorgan was impressed with Ms. Javice. In fact, it was willing to pay her a $20 million retention fee if she remained with the company for a certain period after the merger closed.

JPMorgan's interest lay in acquiring a pipeline of soon-to-be-educated young adults. The bank essentially valued each name at $35, equating to $175 million for five million customers. To justify this price, JPMorgan had to be confident that its marketing team could successfully convert Frank’s customers into long-term bank clients.

However, shortly after the merger closed, the bank launched a marketing campaign targeting a segment of Frank’s customer list. Out of 400,000 emails sent, only 28 percent were successfully delivered, compared to the usual 99 percent delivery rate. Moreover, just 103 recipients clicked on a link to Frank’s website.

The bank described this outcome as “disastrous” in its legal filings. An investigation followed, during which JPMorgan scrutinised Ms. Javice’s Frank email account. The bank found substantial evidence revealing that Frank’s purported millions of customers were not real. Federal authorities and JPMorgan Chase now believe that many of the students claimed to be using Frank never existed, leading to a significant fraud case against Frank's founder and former CEO, Charlie Javice.

Overview of the Fraudulent Scheme

According to the complaint filed by the Securities and Exchange Commission (SEC), Charlie Javice engaged in a "brazen scheme" to deceive JPMorgan Chase into believing that Frank had 4.25 million users. In reality, the company had data for only about 300,000 students. This misrepresentation was crucial for the acquisition deal, as JPMorgan was eager to acquire the vast customer base that Javice claimed Frank had.

Fabrication of Data

Charlie Javice and a high-ranking executive at Frank undertook multiple fraudulent actions to support their false claims:

Hiring a Data Scientist: Javice paid a data science professor to create fake data representing 4.25 million customers.

Purchasing Data: They paid $105,000 to a third-party data compiler for in-college student data and another $75,000 to augment this list with additional email and phone number data.

Synthetic Data Creation: When the director of engineering at Frank refused to generate synthetic data, Javice sought external help to create a fake list of customers.

Specific Allegations and Charges

The SEC and federal prosecutors have outlined several violations and charges against Javice, based on various sections of U.S. law. Here are the specific charges and relevant statutes:

1. Bank Fraud:

Violation: Section 1344 of Title 18, United States Code.
Details: Engaging in a scheme to defraud JPMorgan Chase by fabricating data and misrepresenting the number of users.
Date of Charge: Filed on April 4, 2023.

2. Securities Fraud:

Violation: Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
Details: Making false statements and omissions of material facts necessary to make the statements not misleading, in connection with the purchase or sale of securities.
Date of Charge: Filed on April 4, 2023.

3. Wire Fraud Affecting a Financial Institution:

Violation: Section 1343 of Title 18, United States Code.
Details: Using wire communications to execute a scheme to defraud JPMorgan Chase.
Date of Charge: Filed on April 4, 2023.

4. Conspiracy to Commit Bank and Wire Fraud:

Violation: Section 1349 of Title 18, United States Code.
Details: Conspiring with others to commit bank fraud and wire fraud.
Date of Charge: Filed on April 4, 2023.

The SEC's Civil Complaint

In addition to the criminal charges, the SEC filed a civil complaint seeking various remedies:

Disgorgement of Ill-Gotten Gains: The SEC seeks to recover all ill-gotten gains Javice received directly or indirectly, with prejudgment interest.

Civil Penalties: The SEC requests civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].

Officer and Director Bar: The SEC seeks to permanently prohibit Javice from acting as an officer or director of a public company.

Timeline of Events

July 2021: Initial presentations to JPMorgan Chase, falsely claiming 4.25 million users.
August 2021: Efforts to fabricate data and validate the fake user list through a third-party validator.
September 14, 2021: Closing of the acquisition, where JPMorgan Chase paid $175 million.
January 2022: JPMorgan Chase begins to uncover the fraud during marketing efforts.
July 2022: Internal investigation by JPMorgan Chase reveals the fraudulent scheme.
April 4, 2023: SEC files the complaint and criminal charges are unsealed.

What is happening now ?

Charlie Javicer is scheduled for trial in October. U.S. District Judge Alvin Hellerstein set the 2024 trial date in an order filed in New York. Javice has pleaded not guilty and is currently out on a $2 million bond.

The Importance of Due Diligence in M&A Transactions

Despite the case of Charlie Javice and JPMorgan Chase under trial now, this event underscores the critical importance of thorough due diligence in mergers and acquisitions (M&A). Due diligence is the process of thoroughly investigating a business before a transaction, to identify any potential risks or liabilities. It ensures that all material facts are verified, helping to prevent fraudulent schemes and ensuring informed decision-making.

LEGAL ANALYSIS BY: Sarvesh Saxena, Barrister, Bar of England & Wales. Authorised to conduct unreserved legal services. No Rights of Audience.

Sources: SEC Complaint I Case 1:23-cv-02795, JP Morgan , The New York Times

How Ace Forensic Can Help?

Ace Forensic's one of specialisation is in providing comprehensive due diligence services to safeguard investments and ensure the integrity of M&A transactions. In today’s dynamic market, businesses face both new opportunities and risks, with increasing regulatory demands and complex corporate structures. To help you identify and manage critical relationships and minimise risks, Ace Forensic offers customised Investigative Due Diligence services.

Here’s how Ace Forensic can assist:

Forensic Audits: Conducting detailed financial audits to verify the accuracy of financial statements and uncover hidden liabilities in multiple jurisdictions.
Legal Assessments: Ensuring compliance with relevant laws and regulations, identifying potential legal issues. We also help in finding ownership structures of companies, carry out extensive background checks, criminal records check, and verification of assets.
Operational Reviews: Evaluating the efficiency and effectiveness of operations, identifying operational risks.
Documentation Check: Thoroughly check documentation authenticity and audit trail.
Physical Audit: We conduct comprehensive site audits for the target company's facilities, plants, and customer locations. Our detailed analysis is provided in a confidential report, designed to identify and mitigate potential risks and exposures.

By leveraging ACE Forensic's expertise, businesses can mitigate risks, avoid costly mistakes, and make informed decisions in their M&A activities. The JP Morgan and Charlie Javice case serves as a compelling reminder of the need for rigorous due diligence to protect against fraud and ensure the success of business transactions.

Get in touch with us for Due Diligence Services

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Legal Disclaimer:

This article is intended for general informational purposes only and does not constitute legal advice. It may not reflect the most current legal developments and is not guaranteed to be accurate or complete. No attorney-client relationship is established by this article. Readers are advised to seek professional legal counsel from a qualified attorney in their jurisdiction before making any legal decisions.

The author disclaims all liability for any actions taken based on the content of this article. Any views or opinions expressed are those of the author and do not necessarily reflect the official policy or position of any other agency, organisation, employer, or company.

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