The story behind this week’s criminal fraud charges against Charlie Javice for allegedly fabricating data to induce JPMorgan Chase to buy her start-up for $175mn follows a by-now familiar pattern.
A charismatic young founder charmed a series of blue-chip establishment figures who provided advice, lent prestige and chipped in funding until the company failed to live up to its promises, and lawsuits and criminal charges followed.
Javice founded Frank to help students apply for college financial aid in 2017 when she was just 24 years old and drew early backing from Apollo’s Marc Rowan as well as Israeli venture capital firm Aleph. Aleph did not respond to a request for comment.
By 2019, she had been named in Forbes’ 30 under 30 list, and was attending exclusive networking sessions at the Code Conference in Arizona. There, she struck up a conversation with an investment banker from the boutique firm LionTree who found her to be bright, ambitious and eager to get Frank to its next stage of growth.
She was also relentlessly upbeat, a fact she acknowledged in a 2021 interview with the Planet Economics podcast. “There were definitely times where I painted a rosier picture than things truly were,” she said.
When Frank hired LionTree in 2021 to run a sale process, it brought Javice to the attention of JPMorgan Chase and its chief executive Jamie Dimon, who championed an acquisition, according to court documents.
But the $175mn deal imploded spectacularly. Javice has been sued by JPMorgan and was charged on April 3 with criminal conspiracy to commit bank, wire and securities fraud. Prosecutors allege Javice represented to JPMorgan that Frank had 4.25mn customers when it had only 300,000.
Lawyers for Javice did not respond to requests for comment. In a countersuit against JPMorgan, Javice has denied the bank’s allegations that she falsified user data. She has put up her Miami Beach apartment to secure a $2mn bond imposed by the court in exchange for her release from custody.
A spokesman for JPMorgan, whose lawsuit also targets another former Frank employee, said the dispute will be resolved through the legal process. LionTree declined to comment.
Legal and business experts say that the nature of start-ups, which require founders to constantly seek additional backing, creates a risk of exaggerated claims.
“When seeking to be acquired or go public, a founder has a lot to lose if their failures are discovered,” said David Hess, a professor of management at the University of Michigan. “A natural tendency towards risk-seeking to avoid a loss combined with the founders’ confidence . . .[can] cause them to continue down a path that can cross the line and becomes fraud.”
Javice first met Rowan through a social impact investor, and the private equity titan put his own money into Frank in 2017. The two spoke frequently, according to people familiar with the matter. Both were graduates of the Wharton School at the University of Pennsylvania where Rowan serves as the chair of the board of advisers. Rowan declined to comment.
JPMorgan’s lawsuit and the criminal complaint focus on the process that led to the $175mn sale. LionTree served as Frank’s bankers while Sidley Austin acted as Frank’s legal counsel. LionTree declined to comment and Sidley Austin did not respond.
The advisers began with a target list of nearly 100 potential buyers, including Chegg, the publicly traded educational technology company which was also a Frank investor, people familiar with the process said. Chegg did not respond to a request for comment.
Most were unwilling to pursue the company given its limited operating results. Virginia-based CapitalOne bank also showed serious interest in acquiring Frank, people with knowledge of the negotiations said. CapitalOne said it does not comment on deal speculation.
JPMorgan contends in its civil lawsuit that LionTree had in one instance pressed Javice to correct information on user metrics that had been shared with another bidder. After she did so, that party dropped out of the sale process, according to the JPM complaint.
Donna Hitscherich, a former banker and lawyer who teaches at Columbia Business School, said that bankers’ duties are governed by the terms of their engagement letters with clients. These do not typically include signing off on the accuracy of operating or financial data provided by company executives.
“If you hired someone to paint your house, a painter wouldn’t be expected to mow the lawn too,” Hitscherich said.
“Due diligence is not a costless exercise for the buyer or the seller. It’s often a function of what particular feature of a target a buyer is looking for and just how material a transaction is, both of which can affect how much effort is put in,” she added.
For JPMorgan, the September 2021 Frank deal was part of an acquisition spree that came after Dimon told investors that the bank intended to be “more aggressive in acquisitions across the board”.
The bank made 45 strategic investments and acquisitions in 2021, the most in more than a decade, according to Dealogic data. These included buyouts of food blog The Infatuation and luxury travel agent Frosch, and the purchases of a controlling stake in Volkswagen’s payments arm as well as a minority stake in the Brazilian digital bank C6.
The flurry of deals drew regulatory scrutiny, prompting the Office of the Comptroller of the Currency to launch an audit of JPMorgan’s due diligence process.
The bank bought Frank as part of its Chase retail banking division with the aim of getting access to younger customers. Javice, who joined JPMorgan as a managing director after the purchase, stood to make $45mn personally from the deal, prosecutors have said.
Dimon personally advocated for the transaction, according to Javice’s countersuit. It quotes him telling Javice in July 2021 that he thought JPMorgan should “get the deal done”.
When discussing the acquisition with her new colleagues at the bank, Javice said that Dimon had told her that she was the future of JPMorgan, according to one person who heard her make the remarks.
Problems emerged months after the deal closed. JPMorgan found that the delivery and open rates for its emails to Frank customers were far lower than expected. It launched an internal investigation that uncovered what US authorities now allege was a months-long scheme to fabricate the user data.