[HN Gopher] CEO of Cyber Fraud Startup NS8 Arrested by FBI, Faci...
___________________________________________________________________
CEO of Cyber Fraud Startup NS8 Arrested by FBI, Facing Fraud
Charges
Author : prostoalex
Score : 200 points
Date : 2020-09-18 15:34 UTC (7 hours ago)
(HTM) web link (www.forbes.com)
(TXT) w3m dump (www.forbes.com)
| tdons wrote:
| An auditor was fooled while he was _in the room watching_ while
| the ceo downloaded bank account statements (pages 10 /11 of
| https://www.justice.gov/usao-sdny/press-release/file/1317641...):
| d. As part of its due diligence process, the Audit Firm
| had an employee (the "Auditor") conduct a physical site
| visit at NS8's offices in Las Vegas, Nevada. The
| Auditor was directed by a more senior Audit Firm employee to have
| someone from NS8 log in to the online portal for each NS8 bank
| account, display the current account balance, and
| download monthly bank statements for fiscal year 2019.
| e. Based on my interview with a member of the NS8
| finance department ("Finance Employee-1"), I have
| learned, among other things, that on or about March 11,
| 2020, Finance Employee-1 and ROGAS met with the Auditor in
| ROGAS's office. The purpose of that meeting was for
| ROGAS and Finance Employee-1 each to log into the online
| portals for the bank accounts to which they had access
| (for ROGAS, the Revenue Bank Account) and download monthly
| account statements for the Auditor. During that
| meeting, Finance Employee-1 logged into the online
| portal for the Expense Bank Account -- to which Finance
| Employee-1 had access -- and downloaded monthly
| account statements. Finance Employee-1 understood that
| ROGAS was doing the same for the Revenue Bank Account during the
| meeting. f. Late in the evening on or about March
| 11, 2020, the Auditor emailed another employee as
| follows: "Attached please find the bank statements and
| screenshots that I observed [Finance Employee-1] and Adam [ROGAS]
| download this afternoon." Attached to that email,
| among other things, were the Fraudulent Bank
| Statements for the Revenue Bank Account for the period from
| January 2019 through February 2020.
| pge wrote:
| Thanks for the link - interesting reading. It looks like he
| modified the PDFs from the bank which is pretty sneaky, since
| most people assume PDFs are inviolable (this topic has come up
| on HN before). In my experience, auto-generated PDFs from
| reporting systems are fairly easy to manipulate (for the
| record, I have only done so for automated data extraction, not
| to change the document!).
| garysahota93 wrote:
| This irony is what exactly what I needed on a Friday.
| codegeek wrote:
| Innocent before proven Guilty but I have to say seeing all these
| CEOs being charged with Fraud is why there has been so much noise
| against Capitalism as a whole and CEOs get a bad rep by default.
| There are so many of us (working our butts off in the background
| without public stunts/investors etc) and then these idiots spoil
| it. Being a small bootstrapped CEO myself, I am always concerned
| about being as honest as possible with our customers and then you
| have guys that are doing crazy shit. Funny thing is they mostly
| get away with it too. Sad world.
| legerdemain wrote:
| Interesting. They reached out to me on TripleByte last year:
| remote position, rather high cash comp for a startup, and no
| coding or whiteboarding as part of the onsite!
| drchickensalad wrote:
| Yeah I saw them super active on triplebyte and angel.co a-list.
| I got pretty far into the interview; lucky I dodged a huge
| bullet!
| whycombagator wrote:
| They were on SO (Stack Overflow) jobs too, one of the postings
| was for up to $250k remote IIRC. It was for a principal
| engineer position with experience in java & k8s. Their lower
| engineering titles on SO jobs were decent salaries too (mid-
| late 100s I think).
| donor20 wrote:
| This is a bit of an interesting and somewhat unusual situation.
|
| In most cases, your finance team (internally) will be the one to
| pick up on the fact that stuff doesn't make sense.
|
| They won't be able to tie the invoices to subsequent payment to
| get an accounts receivable schedule to show who still owes what.
|
| They won't be able to get the stripe reports / merchant clearing
| disbursement reports to agree to the GL clearing accounts.
|
| It's also rare for the CEO to have the only access to bank
| statements. Fraud risks are often higher in finance team, as they
| are the ones who catch problems elsewhere, but can be hard to
| catch problems with them.
|
| This make me wonder how experienced the startups accounting team
| was.
| neallindsay wrote:
| Ah-it was supposed to be an anti-fraud startup, not a fraud
| startup.
| redisman wrote:
| Common mistake
| throwawayYeah wrote:
| TNot surprising. he co-lead on this deal was the company I work
| for (insurance). This doesn t surprised me as our VC arm sometime
| is ego driven. Being a strategic VC they have to follow the gut
| feeling of board member with limited due diligence. We often
| worry with teamates about the VC arm investment (Serie B into Iot
| backed in blockchain jewelery kind of deal). The team also like
| to take famous SV investor content and republish it internally as
| own. this bit us a few time when a C suit tweet a congratulating
| message on great content from our firm like 'software is eating
| the world'. The irony here is that we are an insurance company,
| we should know how to prevent fraud...
| pstoica wrote:
| Ex-employee here. Adam Rogas is a pathological liar and sociopath
| who dragged this out for years. I don't know how multiple audits
| failed to raise red flags over multiple $999,999.99 fake Stripe
| payouts. He literally inserted millions every few lines that
| didn't match up with the data around it. They never asked anyone
| else to produce the same report. Everyone involved should never
| be responsible for this amount of money again (looking at you,
| Lightspeed).
|
| If your CEO is actively siloing all financial and customer
| information, your entire company needs to speak up and get on the
| same page. Don't let this happen to you.
| pstoica wrote:
| Anyway folx, don't invest in a "hot startup" you've never heard
| of.
| elliekelly wrote:
| Do you know when the company/Rogas first came under
| investigation?
| pstoica wrote:
| The SEC tried investigating since December 2019, possibly
| earlier. Again, public information.
| wakeywakeywakey wrote:
| Why did you choose not to blow the whistle?
| pstoica wrote:
| I didn't have all the information that's coming out now.
| People tried. Read the article. The last investment was
| finalized days after someone raised concerns after realizing
| we didn't contact 70% of our customers.
| wakeywakeywakey wrote:
| The details of your post go beyond those mentioned in the
| article. Could you provide additional links?
| pstoica wrote:
| I was someone at the bottom of the totem pole who tried
| to do my job and ask what questions I could. I certainly
| noticed a lack of analytics or basic
| traffic/revenue/customer data. Retroactively, it was
| obvious that this was essentially a fake job, but I
| couldn't piece this together and there wasn't enough
| company-wide transparency.
|
| The fake financial statements were publicly released:
| https://www.justice.gov/usao-sdny/press-
| release/file/1317641...
| edm0nd wrote:
| How much were you being paid a year to do basically
| nothing?
| pstoica wrote:
| Decent salary, but that's not the point. I'm distraught
| to realize I spent 5 months on nothing, and it's not
| something I'm proud to have or explain on my CV. It's
| cruel how much money these people throw away, but we were
| misled into thinking it was real. I wouldn't have taken
| this position to support such a scumbag.
| edm0nd wrote:
| Man/Gal, that sucks! Keep your head up <3
| CatShitTodd wrote:
| What is cruel is I am having to file bankruptcy because
| of this.
| lmeyerov wrote:
| That is super tough and stressing, sorry!
|
| FWIW, I would wait on returning _any_ money (or saying
| anything at all, really) + talk to a lawyer with
| experience in bankruptcy (their 's + yours).
|
| My guess is you can keep all/most of the $. They were
| fraudulent to you + the company is now evaporating.
| Sounds like you still need to pivot, but at least you can
| do so with $ in the bank and no black marks.
| NationalPark wrote:
| Were you an investor?
| CatShitTodd wrote:
| No, not an investor. Without giving a way too much, we
| are a company in the technology space. They paid us a fee
| per user. They paid us fees based on these fake numbers
| of users that they submitted to their investors. Which
| means they essentially over paid us what is a lot of
| money for our small company. We made business decisions
| around that money in the past and for the future. Now it
| looks like that not only will we get no more money, but
| they also want like 90% of what they paid us back.
| [deleted]
| caymanjim wrote:
| Not sure if you're being serious, but if you were an
| early investor, isn't it on you to make sure the business
| is legit? Anyone can be misled by a fraudster, but some
| responsibility lies with the VCs and angel investors
| throwing money at these companies and enabling this sort
| of thing to happen.
| CatShitTodd wrote:
| No, not an investor. Without giving a way too much, we
| are a company in the technology space. They paid us a fee
| per user. They paid us fees based on these fake numbers
| of users that they submitted to their investors. Which
| means they essentially over paid us what is a lot of
| money for our small company. We made business decisions
| around that money in the past and for the future. Now it
| looks like that not only will we get no more money, but
| they also want like 90% of what they paid us back.
| phyalow wrote:
| Sorry to hear that. I dont know what the contract says,
| but I would be inclined to lawyer up and tell them to get
| stuffed RE the repayments.
| pjc50 wrote:
| Why would you? Even if you've got all your ducks in a row
| you've made yourself a target for media attention and
| lawsuits.
| libria wrote:
| Why not? Anonymously demanding moral action from others
| makes me righteous and costs me nothing. =)
| tomashertus wrote:
| And how was the quality of product? Was it something
| breathtaking that it attracted $157.9M in funding?
| pstoica wrote:
| Hell no, a $400 million valuation made no sense, but he kept
| feeding us these lies.
| dboreham wrote:
| Hmm. The bank statements seen by the finance dept. came from the
| CEO??? How do the "finance dept" not know that's an indication of
| fraud??
| threetimesy wrote:
| Same thing the former CEO of HeadSpin has reportedly done.
| joering2 wrote:
| Sounds like a witch hunt. Big corpo tries to get rid of
| competitor. And once again government destroyed someones life.
| Now that he cannot do his part anymore its so easy to proof he
| deceived investors because well he doesn't have any numbers to
| show si yeah he was lying. And besides, who didn't flex a slide
| or two to show future numbers how they hoped it will look instead
| of honest truth. If thats the case then DOJ has to come and knock
| at door of every Hacker News user, or any IT person in that
| matter.
| JumpCrisscross wrote:
| > _its so easy to proof he deceived investors because well he
| doesn't have any numbers to show_
|
| There is a _huge_ difference between saying "we're killing it"
| while you're hustling, highlighting bookings because your
| revenues suck, sending invoices early to bring up revenue, on
| one hand, and forging bank statements. The former move from
| almost expected to borderline behaviour. The last is simply
| fraud.
| pstoica wrote:
| This is simply not the case. Adam lied to everyone's face for
| years. Read the documents and financial statements if you think
| this is just a little "flex" every couple of slides.
| teej wrote:
| Citation(s) needed
| caust1c wrote:
| Take your libertarian dreams to international waters.
| Regulation exists to create opportunity, not destroy it. Unless
| you have facts to back up your claims, don't spread
| misinformation.
| servercobra wrote:
| I don't think every startup CEO is falsifying bank statements
| to show millions more in income to their own finance department
| and investors than they actually have.
| joering2 wrote:
| We simply don't know that. That's what DOJ accuses him of -
| now we need to wait to hear his side of the story (and his
| lawyers), unless of course you believe in USA everyone is
| guilty without being proven of committing said crime?
| ViViDboarder wrote:
| A court has an obligation to do that, a random person on
| the internet has no such obligation.
|
| Eventually it will be decided by a handful of random
| people's opinions based on the evidence put forth. For
| clint wrote:
| Most people would call that "lying", "unethical", and probably
| "stupid."
| liability wrote:
| > _And besides, who didn't flex a slide or two to show future
| numbers how they hoped it will look instead of honest truth. If
| thats the case then DOJ has to come and knock at door of every
| Hacker News user, or any IT person in that matter._
|
| Unethical people commonly state their belief that everybody
| else does as they do. This is self-delusion meant to assuage
| feelings of guilt.
|
| Hence the proverb (which I understand to exist in numerous
| languages): A thief thinks every man steals.
| dyeje wrote:
| Huh, I interviewed with these folks a few years ago. The
| interview process was quite odd, guess I dodged a bullet.
| bredren wrote:
| How was it odd?
| tehwebguy wrote:
| Now do WeWork
| jedberg wrote:
| > It seems ironic that the co-founder of a company designed to
| prevent online fraud would engage in fraudulent activity himself
|
| I don't find that ironic at all. Having worked in the security
| space for a long time, it seems like the best people in the
| business are the ones who would be great at committing the crimes
| if not for their own morality.
|
| Someone with a weak sense of morals could easily turn to evil.
| sloshnmosh wrote:
| Agreed.
|
| It reminds me of all those bogus security/antivirus apps on the
| Google Play store that harvest more user data than any virus
| ever could.
| heartbeats wrote:
| Well, it _is_ a cyber fraud startup. They didn 't lie about
| that.
| jessaustin wrote:
| Reminiscent of Jesse's advice to Walt about a " _criminal_
| lawyer ".
| dane-pgp wrote:
| Also reminiscent of the aptly named company "Fraud
| Guarantee":
|
| https://www.law360.com/articles/1311477/giuliani-allies-
| char...
| mhh__ wrote:
| Frank Abagnale has worked for the FBI for 40 years now. He
| still has an Ego, but he has turned down several offers of
| pardons for his past crimes and is now very much on the light
| side of the force.
|
| https://youtu.be/vsMydMDi3rI
| qaq wrote:
| "Having worked in the security space for a long time, it seems
| like the best people in the business are the ones who would be
| great at committing the crimes if not for their own morality."
| Well and truth be told none would know so maybe they are doing
| it ?
| alchemism wrote:
| One of Terry Pratchett's Discworld novels features a thief
| being deliberately put in charge of the Royal Mint.
|
| https://en.wikipedia.org/wiki/Making_Money
| AdmiralAsshat wrote:
| I feel sorry for any CEO who actually steps down to spend more
| time with his/her family. That explanation has now more or less
| been completely co-opted by "Our CEO got caught in an
| embarrassing scandal and they need to fade from the public eye
| for a bit." I now assume that anyone who gives that reason on
| their way out must have done something terrible that is yet or
| about to come to light.
| heavyset_go wrote:
| The reason that euphemism flies is because of the truth behind
| it: people regularly make life changes to prioritize family
| life. The other 99.9% of people who cite this reason for change
| will drown out the minority that use it as a euphemism for
| getting caught doing bad things.
| WrtCdEvrydy wrote:
| LOL, if I ever make it at that level, my explanation for
| wanting to spend more time with my family will be "wanting to
| spend time with hookers"
| pengaru wrote:
| Most of the value hookers bring to the table is not having to
| spend time with them to get what you want.
|
| Your comment makes little to no sense.
| mandelbrotwurst wrote:
| When you've invested that much into something you're not very
| likely to suddenly decide to make that sort of strategic
| blunder for giggles.
| odshoifsdhfs wrote:
| You must really not know me (or a lot of people).
| marcinzm wrote:
| The people who would say something like that are also
| unlikely to not say something long enough to get to such
| a position.
| draw_down wrote:
| I never feel sorry for CEOs.
| gkoberger wrote:
| A lot of CEOs step down with no drama! I think most people only
| think "scandal" when there's already a related scandal... I
| can't think of any CEOs/execs who have stepped down with
| suspicion without any other indicators of a scandal.
| jedberg wrote:
| This recently came up when Kellyanne Conway stepped down. She
| said it was to spend more time with her family, no one believed
| her, but all evidence points to it really truly being the case.
| Her husband also stepped down from his job and her daughter
| stopped tweeting about how much she hates her parents.
| gameswithgo wrote:
| I am not sure she ever liked working for trump. It is weird
| that she chose to anyway.
| pfraze wrote:
| That's a bit of a unique case; they had very publicly visible
| family issues.
| jedberg wrote:
| Exactly, that's the only reason anyone believes her at all.
| If not for their very public issues, I don't think anyone
| would have believed her.
| paxys wrote:
| If the issues hadn't been made pubic she wouldn't have
| stepped down at all.
| pfraze wrote:
| It's like Thiel's point about how monopolies always talk about
| the open market and small fish talk about being a monopoly. In
| this case, if you're actually stepping down to spend time with
| family, you say "I'm looking for my next challenge."
| csours wrote:
| Our company recently had two executives leave to "pursue
| other opportunities". I saw an announcement from another
| company about one of them, but not the other one. I wonder if
| they are "spending more time with their family"
| billyhoffman wrote:
| Being an executive at a (substantially smaller) SaaS startup I
| have no idea how having up to 90% of your revenue be fabricated
| could happen without others knowing:
|
| - where are the contracts corresponding to revenue? Yeah they are
| SaaS focused on SMB but this is a financial product, there will
| be contracts, NDAs, etc
|
| - if the majority of the customers are fake there is such little
| load on the system. How does engineering not figure that out?
|
| - How does no one see an insanely low COGs when paying the cloud
| services bills, or the lack of allocated resources when looking
| in the management interfaces?
|
| - Even saas Products with supposedly a no touch sales process
| still have sales people and sales engineers for key accounts.
| What are all the sales people doing if they're not running
| trials?
|
| - let's say he hid all of this by having tens of thousands of $10
| a month customers. How does your VP of sales not get totally
| freaked out that the overwhelming majority of revenue is coming
| from no touch sales? If that's the case that radically changes
| your growth and go to market strategies. The entire go-to- market
| team should be wondering what is going on? Same with product
| management. Your roadmap would be completely different with a
| long tail of extremely low revenue customers.
|
| - how does sales/client success not notice that no one is
| expanding? How they aren't talking to small customers about
| expansions?
|
| - How does no one notice a complete lack of analytics or actions
| being generated by all the supposed customers?
|
| - product management is going to want to get feedback from all of
| these customers. They're going to be looking in analytics tools
| or session replay tools like fullstory. They're going to look at
| the accounts and users and do outreach to emails asking for
| meetings. Aren't they going to notice all of those people are
| fake?
|
| - support/client success is going to have insanely high customer
| to support person ratios. Where are all the support tickets for
| that many customers?
|
| - Managing cash flow would be very hard. Finance is going to see
| all this revenue coming in and want to scale. The VCs are going
| to want to see money being spent on marketing activities etc. to
| further the growth. If there's no corresponding revenue being
| spent to acquire customers but tons of revenue coming in that's a
| giant red flag
| WrtCdEvrydy wrote:
| Because the larger startups are driven by people who know
| financial engineering... this guy got caught because the money
| stopped (due to layoffs).
|
| Noone gives a shit when they're getting paid.
| squashua667 wrote:
| Nope. He got caught when it was discovered that the "customer
| revenue" bank account was being manipulated to look like tens
| of millions were in there when it was more like tens of
| thousands.
|
| The other bank account had tens of millions in there thanks
| to the investment money.
|
| The layoffs came once the board faced the truth of the matter
| and Adam Rogas suddenly resigned.
| WrtCdEvrydy wrote:
| Okay, if that's the order, then yeah, someone should have
| said something.
| solumos wrote:
| My guess is that anyone who ended up "saying something"
| to the CEO was either quieted by lies or forced out of
| the business.
| CatShitTodd wrote:
| > How does no one see an insanely low COGs when paying the
| cloud services bills, or the lack of allocated resources when
| looking in the management interfaces?
|
| Big data and a flawed system. They sell a service that is based
| off of using integrations. If you stop paying for the
| integrations, you should stop receiving the service. That in
| turn hurts their level of service offerings.
|
| To be of any value, they have to monitor a ton of transnational
| data. So even if you quit paying, they still monitored your
| data and their modules were flawed that is still showed their
| acceptance score if you stopped paying.
| pge wrote:
| Where was the board during this whole time? I have trouble
| understanding how a board allows a management team to operate
| in such a way that controls aren't in place (eg basic
| segregation of duties in finance) that would prevent or at
| minimum reveal this kind of behavior. The board should be
| seeing enough information that most of the flags you highlight
| should be visible to them. Not to mention, clearly the company
| was never audited. Regular audits should be standard practice
| for any company of that size. In any case, it will be
| interesting to see what consequences there are for board
| members that appear to have failed in their basic
| responsibilities.
| lancewiggs wrote:
| Yes - this is the directors' fault. As a director you have n
| obligation to ensure everything is ok, and for issues of this
| magnitude it's clear that the directors were bamboozled. at
| our firm we insist on access to the financial system (e.g.
| Xero) whenever we have a directorship. It's hard to fake
| results, at least to this level, when we can see down to the
| level of individual invoices.
| solumos wrote:
| > Regular audits should be standard practice for any company
| of that size.
|
| The company was audited twice, but the auditors tied the
| fraudulent bank statements to the fraudulent financial
| statements (woops).
|
| > In any case, it will be interesting to see what
| consequences there are for board members that appear to have
| failed in their basic responsibilities.
|
| Full cooperation with the SEC can get you a long way,
| especially if you're one of the victims of fraud.
| pge wrote:
| Are you sure they were audited? I havent seen that in the
| material released so far, only that an auditor was engaged
| for due diligence, which was fairly cursory, not anywhere
| near an actual audit. Typically an audit would involve a
| direct verification of bank balances from the bank. In
| addition, an audit would typically directly verify customer
| contracts and make sure big deposits tied out to contracts
| and invoices. An audit would also have flagged the lack of
| segregation of duties as a major risk factor (though that
| should have been obvious to any board member). As a side
| note, I also wonder if Rogas was fastidious enough to
| ensure the GAAP financial statements all tied out with the
| fraudulent numbers.
|
| I guess if an audit couldn't catch this, you have the wrong
| auditor. This is exactly what audits are for.
| [deleted]
| solumos wrote:
| You're correct, my understanding of "full audit" vs "due
| diligence" was off.
| billyhoffman wrote:
| Read the DOJ filing, linked in a comment below. The
| auditor physically sent a person on site whose job was to
| watch the financial people log into the banks web
| interface, verify the balance, and print bank statements
| for the last 12 months, all in front of the auditor. The
| passage doesn't make it clear why the auditor didn't
| watch the ceo pull the records for the accounts
| receivables account
|
| Update: filing Is here: https://www.justice.gov/usao-
| sdny/press-release/file/1317641...
|
| Relevant Passage: "As part of its due diligence process,
| the Audit Firm had an employee (the "Auditor") conduct a
| physical site visit at NS8's offices in Las Vegas,
| Nevada. The Auditor was directed by a more senior Audit
| Firm employee to have someone from NS8 log in to the
| online portal for each NS8 bank account, display the
| current account balance, and download monthly bank
| statements for fiscal year 2019."
|
| "Based on my interview with a member of the NS8 finance
| department ("Finance Employee-1"), I have learned, among
| other things, that on or about March 11, 2020, Finance
| Employee-1 and ROGAS met with the Auditor in ROGAS's
| office. The purpose of that meeting was for ROGAS and
| Finance Employee-1 each to log into the online portals
| for the bank accounts to which they had access (for
| ROGAS, the Revenue Bank Account) and download monthly
| account statements for the Auditor. During that meeting,
| Finance Employee- 1 logged into the online portal for the
| Expense Bank Account -- to which Finance Employee-1 had
| access -- and downloaded monthly account statements.
| Finance Employee-1 understood that ROGAS was doing the
| same for the Revenue Bank Account during the meeting"
| dustingetz wrote:
| _It is difficult to get a man to understand something when his
| salary depends upon his not understanding it._
| PragmaticPulp wrote:
| None of it makes sense in the context of a well-run business
| with proper executives in place. That's because these frauds
| don't operate like a well-run business.
|
| Usually, the upper management teams are extremely lean. The
| business is broken up into different silos such that few people
| can see the big picture. Each is led to believe they are a tiny
| fraction of the overall revenue, giving them the impression
| that the bulk of the company's revenue must come from another
| department where they have no visibility. As a bonus, this
| motivates siloed teams to feel like they need to catchup to the
| rest of the company, when in reality they might be the main
| driver of it. It helps to have separate offices and a culture
| of secrecy to prevent people from comparing notes.
|
| The CEO positions himself as a controlling, micromanaging
| individual at the center of everything. This makes it possible
| for the CEO to intercept financials and other crucial numbers
| en route to people who might catch on.
|
| The rest of the management staff might be filled with people
| too inexperienced to recognize that something is wrong. They
| might think the CEO is doing them a favor by giving them a
| golden opportunity to advance their career into an executive
| position at a rocket ship startup. They don't know what they're
| doing, but they think it's okay because the CEO has taken them
| under his wing.
|
| At scale it becomes difficult to do this without at least a few
| people being complicit, though. A fraudster usually has several
| close associates who can be trusted to be in on the fraud or at
| least look the other way for a while.
| Uhhrrr wrote:
| Fun thought experiment: are there businesses where this
| structure is beneficial, or is it always a red flag?
| smabie wrote:
| In the past, traders were siloed and no individual trader
| would have access to the total positions of all the traders
| on the floor. Some firms still operate this way, though
| it's more common for trading operations to be broken up
| into "pods" or teams of traders and analysts.
|
| The industry has largely moved away from this structure for
| a variety of reasons. One of the problems is that traders
| start to try and undermine each other, since the only thing
| that matters is your personal pnl. Another problem is that
| traders can unknowingly all pile into the same investments,
| resulting in massive risk. This is part of the reason why
| the Great Recession was so bad.
| csours wrote:
| This reminds me of why traders are required to take vacation
| - it may be the only time their scams are unraveled.
|
| https://www.newsday.com/business/columnists/help-wanted-
| carr...
| nvr219 wrote:
| When done right the vacation is sprung on them without
| notice. In reality they usually know when their vacation is
| coming so they can alert their cohorts.
| dmurray wrote:
| The idea is everyone must take vacation (sometimes X+
| consecutive days each year), not just the people you
| suspect of running scams.
|
| Giving all of your employees two weeks unannounced
| vacation at random times is a disruptive way to run a
| company. It's certainly innovative but I wouldn't say
| it's HR "done right".
| ghaff wrote:
| You have to take at least half you annual vacation
| starting tomorrow. Have fun!
|
| Yeah. That doesn't work. Forcing the same thing in a
| scheduled way may be a bit of an imposition but isn't
| unreasonable in general.
| hn_throwaway_21 wrote:
| Bingo! I worked in the upper management team of an early
| stage startup where the CEO was lying through his teeth to
| investors as well as employees. There were only three people
| at the top level. He was a super charismatic guy and a great
| story teller. No one thought he was lying until it came time
| to raise the next round and the lead investor from seed round
| ran due diligence to find booked revenue was no where close
| to what CEO had been claiming.
| HappyDreamer wrote:
| > No one thought he was lying until ...
|
| I wonder what happened after that? Could he continue
| working as if nothing special, just failing to raise money?
| [deleted]
| liability wrote:
| Sometimes tribal/"team sport" group dynamics keep employees
| inline too. Executives can foster an _" us against the
| world"_ mentality that blinds workers to that which is
| obvious to everybody else. When in this mindset, people have
| the ability to ignore even the most damning evidence.
|
| Here's an example: When Enron's CEO verbally attacked wall
| street analyst Richard Grubman for questioning Enron's
| accounting practices, Enron employees thought this was
| hilarious and adopted the insult as a sort of inside joke.
| They didn't consider Richard Grubman's position, they just
| took delight in 'their team' dunking on 'opposing team.'
| rapnie wrote:
| This is massively scalable. There are examples, but I do
| not want to get political.
| amorroxic wrote:
| Agree, this being a cyber-fraud company I believe one could
| keep a team busy for a long time focusing on building secure
| systems rather than operating them to the point where no-one
| gets to see what's actually being stored within. The paper
| trail though I'm still puzzled about, he couldn't have acted
| alone.
| tempsy wrote:
| Have you seen $GSX, a publicly traded $20B stock on Nasdaq that
| claims it's growing faster than early Google or Facebook and
| has been the subject of 5-6 short seller reports and an ongoing
| SEC investigation?
| dmix wrote:
| Seems like the main research company that exposed GSX has
| made a business out of exposing Chinese public companies
|
| https://grizzlyreports.com/research/
|
| Some interesting stuff here.
|
| The company of course refuted the research with some vague
| stuff about APIs having encryption so the data would be
| wrong. This was back in June and the stock seems to be still
| going along strong...
| http://gsx.investorroom.com/2020-06-03-GSX-Refutes-
| Grizzly-R...
| fakedang wrote:
| Muddy Waters got a report on GSX too.
| anoraca wrote:
| PE ratio of over 500... oof
| squashua667 wrote:
| - where are the contracts corresponding to revenue? Yeah they
| are an SMB SaaS but this is financial, there will be contracts,
| NDAs, etc
|
| SMB, especially the small end of SMB, does not often have
| contracts. It's more subscription based. That said, there were
| 2 versions of the software running at NS8. One was the original
| software that Adam Rogas and a co-founder created early on.
| That version was rather "opaque" and reported growing customer
| numbers every month. The newer version of the software was
| controlled by the product dev team but still reliant on the
| original software in some key areas. Basically, everything was
| obfuscated well enough to confuse everyone to the point where
| answers of, "it's a limitation of the original software" were
| taken at face value.
|
| - if the customers are fake there is no load on the system. How
| does engineering not figure that out?
|
| There were real customers and the customer growth was
| happening, especially in 2020. The problem is that the customer
| base and growth was nowhere near what Adam Rogas was cooking up
| on the backend.
|
| - How does no one see an insanely low COGs when paying the
| cloud services bills, or the lack of allocated resources when
| looking in the management interfaces?
|
| COGs and other bills were kept relatively high. It's also why
| the company hired 200+ people, to make the story all the more
| believable.
|
| - How does no one notice a complete lack of analytics or
| actions being generated by all the supposed customers?
|
| Again, real numbers were difficult to gather for excuses given
| repeatedly by Adam Rogas and others charged with providing
| those numbers. I'm not saying that others were complicit in the
| scam, but that they were (at least) being fed the same excuses
| the rest were. Investments were never made to bring visibility
| to the customer metrics. Was this a red flag? Yes, but then why
| are investors giving NS8 so much money? It's hindsight 20/20.
|
| - Managing cash flow would be very hard. Finance is going to
| see all this revenue coming in and want to scale. The VCs are
| going to want to see money being spent on marketing activities
| etc. to further the growth. If there's no corresponding revenue
| being spent to acquire customers but tons of revenue coming in
| that's a giant red flag
|
| Right, so plenty of money was being spent across the board.
| There were 2 bank accounts according to the DOJ and SEC
| complaints. The account for "customer revenue" was solely
| controlled by Adam Rogas. The other account held the investment
| funds that paid all the bills. Is this super shady? Yep. And it
| seems there was an NS8 whistleblower who kicked off the initial
| SEC investigation and then the FBI getting involved as well.
| acruns wrote:
| "if the customers are fake there is no load on the system.
| How does engineering not figure that out?
|
| There were real customers and the customer growth was
| happening, especially in 2020. The problem is that the
| customer base and growth was nowhere near what Adam Rogas was
| cooking up on the backend."
|
| This doesn't really answer the question. The article states
| 40-90% of customers were fictional, as a cloud architect I
| would have to design based on the number of customers ++ and
| of course I would setup monitoring and alerting with auto
| scaling and it would be blatantly obvious that my utilization
| was not going up and that would turn into an engineering
| investigation.
|
| Would it leed me to the idea that most of our customers were
| fake? probably not. They might not even request additional
| capacity, but as a architect that would lead me to ask
| questions. For example after an announcement or company
| meeting where they announce the number of new customers, I
| would wonder wtf? How is it that we haven't added any more
| capacity for all these new customers?
|
| I would see some red flags and I would like to think I would
| be smart enough to start looking for something new but I
| haven't been in such a situation thankfully.
|
| It's difficult to read about 200 ppl being laid off and the
| impact on them and thier family all bc of one stupid, greedy
| person.
| solumos wrote:
| > For example after an announcement or company meeting
| where they announce the number of new customers
|
| Nothing like this ever happened, AFAICT
|
| > I would see some red flags and I would like to think I
| would be smart enough to start looking for something new
| but I haven't been in such a situation thankfully.
|
| "Brazen fraud" is not where Occam's Razor leads in this
| case. "Transparency growing pains" seems much more likely.
| Specifically - if working for this company I would raise
| concerns that there aren't KPIs being regularly tracked
| across all functions. I'm sure it's possible that some of
| the newly hired senior management was working on this.
| billyhoffman wrote:
| Obviously something terribly shady is going on here. I'm not
| disagreeing with you, I just don't understand how any
| director level position, let alone an executive, wouldn't be
| able to see serious irregularities if such a significant
| percentage of revenue was phony. There are just way too many
| knock-on effects when the overwhelming majority of your
| customers aren't real, aren't paying you, and aren't putting
| any load or impact on any of your other systems (technical or
| otherwise). That is some bullshit clown shoes management
| across the entire company right there
|
| And the CEO or others saying "oh yeah you can't see all those
| customers and growth because they're in this old legacy
| system that doesn't report it" is an insane excuse to buy.
| Holy shit you mean to tell us that the majority of our most
| important revenue is coming from a legacy systems that we
| have zero insight into? And it's continuing to grow? Why
| aren't those people on the new system?
|
| > "customer revenue" account controlled solely by the CEO
|
| I cannot fathom a VP of Finance, let alone an outside
| accounting firm, that would be OK with this arrangement of
| accounts.
|
| Edit: To be clear I'm not trying to blame the victims. This
| is a terrible loss to all the employees who have been pouring
| so much of their efforts into the company. I just am having a
| hard time understanding how such a thing could happen. Maybe
| I've just been blessed to work in extremely transparent
| organizations.
| squashua667 wrote:
| >> "customer revenue" account controlled solely by the CEO
|
| > I cannot fathom a VP of Finance, let alone an outside
| accounting firm, that would be OK with this arrangement of
| accounts.
|
| Right? Then again, EY audited everything and gave those
| fake bank statements the "thumbs up" as part of the last
| round of funding and due diligence on the part of the
| investors. Crazy.
| toomuchtodo wrote:
| Wasn't EY also the firm who audited Wirecard? Why is
| anyone taking their audits seriously?
|
| https://markets.businessinsider.com/news/stocks/ey-
| chairman-...
| ev1 wrote:
| EY were also the ones that audited and passed WoSign and
| StartCom SSL CA's that were fraudulently issuing bad
| certs and violating CAB regulations.
| pstoica wrote:
| We can't fathom it either!
| letstryagain2 wrote:
| You can fake everything. And most people don't expect this.
|
| Wirecard opened a fake Bank Branch from a Philippines Bank in
| Singapore, had the EY guys walk in there and "verify" the
| Billion dollar balance on the computer screen.
| stickfigure wrote:
| How would engineering know what the CEO is telling investors?
|
| I once had a (majority-share) cofounder CEO who, when the
| company hit success, became extremely controlling with the
| books and investor relationships. There was no way for the rest
| of the cofounders - let alone engineering - to know what was
| actually going on or what the true state of health of the
| company was. I (and the other cofounders, and the senior
| engineering staff) walked away. Big life lesson.
|
| With lazy enough investors, it wouldn't surprise me that a
| CEO/owner could compartmentalize enough information that the
| employees and investors might have totally different
| understandings. The CFO would be suspect, though.
| HappyDreamer wrote:
| > I (and the other cofounders, and the senior engineering
| staff) walked away
|
| I wonder what happened after that, how did you leaving affect
| the company
| IncRnd wrote:
| People see what they expect to see. This could be accomplished
| by lying at every step of the way and by fabricating audit
| results. It lasts until it doesn't, and that's apparently what
| happened here.
| duxup wrote:
| Reminds me of DC Solar, and they claimed to make physical
| products...
|
| You'd think some folks working from there would wonder "Hey,
| does anyone KNOW anyone else working at the other factories,
| because we're only making X per day..."?
| rmason wrote:
| If you're a VC firm shouldn't the amount of due diligence you do
| increase with the amount of money you're investing? Or was their
| investigating capacity so poor that it's a miracle they weren't
| cheated before?
|
| Or are there other startups they've invested in that just haven't
| been found out yet? If I was one of their LP's I'd be asking some
| hard questions.
| heartbeats wrote:
| No, it should decrease. If you're a gazillion dollars deep,
| your best incentive is to cover up the fraud and try to dump it
| on someone else.
| rococode wrote:
| Have VCs started skimping on DD because problems come up so
| rarely? Lightspeed (who led the last round for these guys) isn't
| a no-name firm, they invested in Snap, GrubHub, Telegram, etc.
| Surely they have the experience to find out gigantic major
| problems like this? This feels like something that should've come
| up in diligence before they sent them 120 million bucks... There
| are so many places it could've shown up or at least been hidden
| in a way that should've raised some flags.
| elliekelly wrote:
| What's absolutely stunning to me is the (former) CEO quote in
| the article says the company was under SEC investigation for
| fraud as early as November of last year. And given that the DOJ
| complaint alleges the fraud occurred between January
| 2019-February 2020 I would be inclined to believe it. (Fraud
| doesn't tend to just stop of it's own accord.)
|
| So was the investigation disclosed to Lightspeed and they
| decided to invest anyway? Who on earth would invest with
| someone currently under investigation for a scheme to defraud
| investors? And if it wasn't disclosed, why not? Did that not
| come up at all during due diligence?
| teej wrote:
| I've heard this as a rumor, yes.
| WrtCdEvrydy wrote:
| This is because who pays for Due Diligence... if you are paying
| you can influence it. I'd love for there to be a firm that did
| a 50/50 escrow for DD.
| billyhoffman wrote:
| The VC firm pays for their own DD. Certainly if they are
| leading the round.
|
| Initial meeting-> NDA -> some due diligence -> letter of
| intent/term sheet (depending on the transaction) -> 30-45
| days of very deep due diligence.
| marcinzm wrote:
| Based on other comments, NS8 was audited by Ernst-Young and
| passed. So they had an expert do an audit and find no issues.
| everybodyknows wrote:
| >Ernst-Young
|
| Wirecard's long-time auditor!
| Andrew_nenakhov wrote:
| To catch a criminal, one must think like a criminal.
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