Our group was recently recruited to contribute to a start-up technology organization in a rapidly developing market sector. According to their narrative, they were sitting on a war chest of $1B in venture funding, and in the process of building strategic partnerships to accelerate growth rather than face delays developing expertise in-house. In our realm they were seeking assistance with system architecture specification and testing to implement their novel, multi-layered, distributed approach to a high-intensity compute paradigm. Their proposal promised an elegant, optimized approach showing great potential for being a disruptive force in the industry. The concept was simple; don’t just toss more memory and processing power at the problem, build a system that offloads different types of jobs to specific processor architectures, each ideally suited to the task at hand. Building the communication structure to handle this task would be no mean feat. Our team has participated in the design and construction of multiple large cluster systems over the years, delivered to various “Three Letter Agencies” of the proverbial “We could tell you, but we’d have to kill you” variety and other systems used in massive international construction projects – so we have a catalog of experience in the design of unique systems.
The start-up deployed significant lobbying and provided strong encouragement to sign-on one of our group as an employee, but that didn’t align with our long-range vision, and would have needlessly complicated our internal accounting while creating taxation issues. Maintaining a simple consulting relationship between business entities was much cleaner, allowed for internal distribution on the basis of contribution, and avoided over-complicating taxation issues. Imagine the nightmare if one person were employed and received compensation that then needed to be redirected to another in consideration for their work. A simple consultancy agreement mitigated everything.
A Consultancy agreement was negotiated and executed, reflecting a considerable discount on our standard rates in consideration for other non-cash benefits, such as shared marketing and promotional opportunities. The agreement was based on a flat daily rate with a framework covering the commitment of resources to the project. We could plan our schedule, and they could manage their cash flow; a beneficial arrangement for both parties. Our work began upon execution of the agreement. In the first month we hit the limits as we got up to speed on the abstraction layers and developing conceptual outlines for workload segregation, routing, and aggregation. As the month progressed, they invited a member of our group to join their C-level team in an advisory capacity. This relationship was agreed, so long as any direct compensation remain directed through the existing agreement. Having an industry authority listed among their leadership would certainly benefit the organization and, by proxy, our group. A rising tide does lift all boats, after all.
Per the terms of the consulting agreement, we submitted an invoice at the end of the month for our work, with the balance due upon receipt and payable via wire transfer. Two days later we were still waiting, with no commitment for when we should anticipate payment. As the delay continued, we deepened our investigation and discovered some startling information.
- Employees were granted contracts from a non-existent corporate entity.
- No one had received a paycheck. (Remember the claim of a $1B investment raise.)
- There was no corporate structure, only an LLC – with $1B invested?
- Fraud charges against a principle settled with the government.
- We were directed to build out a sandbox for testing the distributed framework that was abstracted in our initial round of development, only to discover that the hardware required for construction was not even on order. The lead-time for the hardware exceeded the deadline for initial validation. (Perhaps an attempt to manufacture a claim of failure to perform and extract damages from us?)
Our spidey-senses started tingling, and the organization was instructed to scrub any reference to our team from their website and/or promotional material. We requested an update on invoice payment and were met with various iterations of “we’re working on it.” ($1B in the bank and they’re having to “work on” paying an invoice that is a small fraction of the daily interest that $1B should earn.) We informed the organization that we intended to terminate the consulting agreement under the cancellation provisions due to non-payment of the invoice.
Several conference calls followed, with assurances that we were merely victims of “growing pains” and things should flow much smoother in future as processes were developed and implemented. With these assurances we withdrew our intent to cancel the agreement, but we remained vigilant. Over the next few days we were met with more news of payment delays. We redoubled our investigation, which revealed even greater irregularities.
- There were over 100 LLCs associated with the organization. Each LLC represented a different physical location.
- Investments were actively solicited in units of $5000 or less.
- Those considering larger investments were encouraged to diversify across multiple locations. (i.e. invest $5000 ten times instead of $50,000 once.)
- Projections of ~25% returns on your investment.
- Multiple lawsuits and settlements pertaining to prior executive behavior.
- Unauthorized, and rather abusive, use of our platforms to promote the organization, resulting in measurable financial losses.
- Claims of strategic partnerships with LARGE network hardware manufacturers were pure vapor, as confirmed by first-person contacts at these manufacturers with direct knowledge of these types of relationships.
With the discovery of these troubling patterns, we redoubled our collection efforts and turned up the pressure. We were shuffled from one person to the next, with the promise at every transfer that “this” person had the authority to resolve the problem and have payment issued. After a day of playing “hot potato” we ended up back on the CEO’s desk, because apparently not even the CFO could pay an invoice (even with a billion dollars in the bank…)
Then came the coup de grace.
The organization was conducting virtual meetings/conference calls with an operating systems company that we have deep ties to. Some of us have known each other for decades, and relationships go far beyond the professional. Spouses and families are known on a first-name basis, vacations and holidays are common topics of discussion. To say these are friendships would be an understatement.
In the moments leading to one of these teleconferences our friends were waiting on an open, recorded, line. The CEO of the organization and his spouse were also connected, and others were scheduled to attend.
Our friends overheard the CEO making plans to avoid paying our invoice.
It was recorded.
When their teleconference completed our phones rang.
Our friends let us know what they overheard, and that the conversation was recorded.
With the smoking gun on the table, we finally had the leverage needed to bring everything to a conclusion. When we presented the evidence to the other parties suffice it to say they were a bit rattled. They offered us less than 10% of the balance due to go away.
We laughed.
An agreement was finally reached granting us legal damages for their breach of the consulting agreement. We were sent photos of computer screens confirming a wire transfer from personal accounts (not a business account with over $1B – shocking.)
By our best estimate, even our generous concessions placed a significant burden on the personal finances of the CEO, since the massive venture funding contribution was non-existent the entire time.
The funds were transmitted by wire transfer and confirmed safe in our account.
In the weeks since we've received confirmation that the nominal CEO of the organization was boasting to his remaining Board of Directors that he ripped us off for dimes on the dollar. A direct violation of the agreement, and exposing them to greater liability.
We're assessing available options now, and will likely seek additional compensation.
And that’s how we managed to profit from a Ponzi scheme, legally.
