The world’s largest publicly traded bank is suing the 30-year-old founder of a college student financial aid platform it bought for $175 million, alleging that the startup manufactured close to 4 million fake customer accounts.
JP Morgan Chase has been on a startup buying spree since 2020 when CEO Jamie Dimon announced he wanted to acquire more financial technology firms focused on sustainable investing and tax issues.
The largest U.S. bank, JP Morgan bought the startup Frank in September 2021 to help it strengthen relationships with a key demographic — college students, according to a Chase executive. Chase said at the time the deal gave it the “fastest-growing college financial planning platform” used by more than 5 million students at 6,000 institutions. Startup founder Charlie Javice joined Chase as part of the acquisition.
When JP Morgan asked for proof during due diligence, Javice lied to the bank about her startup’s scale, the bank alleged. She produced a huge roster of “fake customers – a list of names, addresses, dates of birth, and other personal information for 4.265 million ‘students’ who did not actually exist,” the suit said. However, there were less than 300,000 real users.
This lawsuit is an embarrassing episode for JPMorgan and its CEO, Hugh Son wrote for CNBC.
Once the deal was finalized, JP Morgan asked Frank for its customer list so the bank could start marketing its products and services to those students, according to a lawsuit filed in late 2022 in U.S. District Court in Delaware.
When JP Morgan sent test marketing emails to what it thought were 400,000 Frank customers, the results “were disastrous,” it claims. Only about a quarter of the emails were delivered, and of those, just 1 percent were opened, the suit alleges. “The evidence shows that time and again she layered fraud upon fraud to deceive JPMC,” the suit claims.
Javice filed a separate lawsuit against JPMorgan in Delaware state court days before the bank sued her, saying she was owed millions of dollars for expenses incurred to defend herself against “groundless” internal investigations that began in the spring. She was fired from the bank in November, according to that suit.
Javice alleges that the bank “manufactured a for-cause termination in bad faith.” It was avoiding $28 million in payments due to her on the deal.
Alex Spiro, an attorney representing Javice, described JPMorgan’s lawsuit as “nothing but a cover.”
“After JPM rushed to acquire Charlie’s rocketship business, JPM realized they couldn’t work around existing student privacy laws, committed misconduct and then tried to retrade the deal. Charlie blew the whistle and then sued,” Spiro said. A JPMorgan spokesman said Javice “was not and is not a whistleblower.”
JP Morgan has a market cap of $409.56 billion, making it the world’s 14th most valuable company by market cap. Specializing in securities, investments and retail banking, it is one of the largest publicly traded companies in the world.
Eghosa Omoigui, who describes himself in his Twitter bio as a “stage-agnostic tech VC investor,” had questions for JP Morgan: What about due diligence? What about its board of directors? Where were they?
The main job of a public company’s board of directors is to look out for the shareholders’ interests.
“The fact that a young founder in an industry known for shaky metrics and a ‘fake it ’til you make it’ ethos managed to dupe JPMorgan calls into question how stringent the bank’s due diligence process is,” Son wrote for CNBC.
Derek Gallimore predicted in late 2021 that a massive wave of startup fraud was looming. “The startup market is awash with cash. There are more VCs than ever, and they are all competing over the same limited pool of quality startups,” he wrote in an article published on LinkedIn.
Investors are “throwing unreal sums of money at startups, based on short conversations with very little due diligence (DD),” Gallimore added. “Equally, thousands of Angel, Seed and A-round investors are competing to offer quicker deal turnaround times are forgoing sensible diligence.”
Gallimore is the founder of Outsource Accelerator — a fully bootstrapped, and thriving, B2B marketplace for the offshore outsourcing sector.
JPMorgan Chase shut down the Frank website on Jan. 12. “Frank is no longer available” it states. “To file your Free Application for Federal Student Aid (FAFSA), visit StudentAid.gov.”