20 Investors Defrauded of $70 Million
Not even institutional investors are immune from financial investment fraud shenanigans when it comes to a company such as Bitwise. No, not Bitcoin. Jake Soberal a 37-year-old intellectual property attorney and 42-year-old Irma Olguin who was involved in multiple start-ups, founded Bitwise in 2013.
Bitwise’s mission statement attracted a particular segment of investors. The company was revitalizing “underdog cities” by supporting development of technology industries. Bitwise pursued revitalization with a three-prong approach. They employed tech apprentices, developed and implemented project-based software as “enterprise solutions” and developed and managed a “community based” real estate portfolio. SEC Complaint. Although Bitwise was headquartered in Fresno, it was expanding its focus to cities in Bakersfield, Merced, Toledo, Buffalo and El Paso.
In order to expand the business, Bitwise sought an infusion of capital from external investors in 2022 through a Series B-2 offering. Given the company’s mission, they were able to attract social impact funds and institutional investors, along with individuals. However, not only did Bitwise fail to register the offering, but it also generated fake financials and audit reports to lure investors to the table. Some of the lies and misrepresentations alleged in the SEC’s complaint include:
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Exaggerated Revenue
While the defendants alleged revenue of $59 million in 2021, along with growth of almost $12 million the following year, when the income statement was prepared according to GAAP, the numbers were considerably less. One reason for the change is defendants included proposals that were not inked contracts in their revenue column.
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Overstated Gross Margin
Soberal and Olguin claimed to have a 47% gross margin in 2021, when in fact they lost money that year.
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Misrepresented Cash Balances
Defendants provided a few different versions of financials with falsified cash balances. Bitwise had cashflow issues, unable to pay operating expenses at various times without a cash infusion. However, they claimed that the minimum cash balance dating back to 2020’s first quarter never fell beneath $9.4 million. According to Monique Winkler of the SEC, “Soberal and Olguin resorted to blatant fraud, including the creation of fake financial documents, to deceive investors and raise money. . . In one instance, the defendants allegedly conspired to send a purported screenshot to investors of a company bank account showing a cash balance of $23.4 million. In actuality, the account had only $325,100 in it. That’s not a bank error—that’s fraud, . . .”
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Lied about Audited Financials
Bitwise executives lied multiple times about audited financials. In one instance, they claimed audited financials were still in process months after the audit report was completed. When one investor invested only half the amount originally agreed upon due to unaudited financials, the duo falsified the audited financials to get another $5 million from an investor.
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Adding insult to injury, the defendants profited individually by making undisclosed high-interest loans to the company. For example, in April 2023, Olguin loaned Bitwise $220,000. The following day, Bitwise wired her $247,000. That’s a $27,000 profit for a one-day loan that was repaid with investor funds. The payday loan industry would be jealous.
The final blow, in 2023, the financial scammers knew they were in trouble. They took out over $20 million in loans secured by real estate supposedly owned by Bitwise. Defendants forged the Board’s signatures on the loan documents, and failed to inform the Board of the loan. Despite this loan, they were unable to make payroll on May 28, 2023, disclosing to the Board the private loan. On May 29, they furloughed the entire workforce and warned that paychecks might bounce. The Board terminated Olguin and Soberal, and filed Chapter 7 bankruptcy.
Even though Bitwise was not a Ponzi scheme, it did illustrate several ways investment scammers lie to get financial investors. Their board of directors was seemingly not part of the scheme, but you have to wonder if investors will try to take legal action against the board members.
What could investors have done to avoid this financial fraud?
- Research whether the security was registered at the state or federal level. Since it was not registered, that would have provided a sign that something might be wrong.
- Push harder for an audit report before investing. It appears as if many investors handed over money without reviewing an external auditors’ report.
- Meet with the financial team. The financial team does not appear to have been part of the fraud. It is not unusual in small investment opportunities to have the CFO present financials. Often the CFO’s resume is part of the package used to attract investors.
Ponzi schemes and straight financial investment fraud remain a profitable business for crooks. Do your research before investing. We hope all your real estate, commodities, foreign exchange, cryptocurrency and oil and gas investments are safe and profitable. But if you find yourself searching for an experienced investment fraud attorney, oil and gas litigator or a commercial litigation lawyer, Mark A. Alexander, P.C. is here to help.
