David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.

In last week’s blog, I discussed the threat of technology startup fraud and how it occurs.  Additionally, I introduced Theranos and Mozido as two recent examples of technology startup fraud.  This week, I’ll discuss some red flags that could point to technology startup fraud.

The following common issues/red flags pervade these types of frauds:

• Charismatic but narcissistic personality of the founder – The technology startup is led by a smart, charming person with natural sales ability and a compelling backstory (Elizabeth Holmes founded Theranos at age 19, and dropped out of Stanford to pursue her dream; Michael Liberty of Mozido grew up poor, and was essentially abandoned by his parents at an early age), but that person spends the whole time talking about how great he/she is and how much he/she has accomplished instead of providing specifics of how the technology works. Additionally, when their veracity is challenged, the person turns to bullying (Theranos went after the Wall Street Journal and Tyler Shultz).
• The company surrounds itself with well-known personalities who possess little, if any, relevant technical expertise – Theranos’s Board of Directors included such well-known names as George Shultz (former US Secretary of State), Henry Kissinger (former US Secretary of State), William Perry (former US Secretary of Defense), James Mattis (General, USMC and future US Secretary of Defense), and Sam Nunn (former US Senator). The Board had been criticized for consisting mainly of directors with diplomatic or military backgrounds.  Mozido’s Board of Directors featured Randi Zuckerberg (Mark Zuckerberg’s sister), the former CEOs of Priceline, First Data, Interpublic. and MasterCard, and, Shaukat Aziz (former Pakistani prime minister who, Mozido later admitted, never actually joined the Board).  Furthermore, in 2014, Mozido hosted a huge charity event that featured such speakers as James Mattis and Vincente Fox (former Mexican president).
• The company releases little, if any, detailed information about its finances and/or its technical developments – Theranos had to scrap a multi-million advertising campaign after it couldn’t even provide its own ad agency with adequate proof of its claims. Mozido claimed to have signed more than 20 sales deals in July 2016 and to have brought in more than $100 million in revenues between August 2015 and August 2016 but declined to name any of the companies with whom it made sales deals or to provide documentation of its revenue claims. Furthermore, Mozido touted that its customers had approximately 1.5 billion people who could use its mobile payment app but couldn’t say how many used it.  Additionally, neither Mozido or Theranos released detailed financials, leaving it up to the financial press to “guess” as to the companies’ values based upon announced capital raises.
• The company resorts to “alternative” methods to show the success of its products – Theranos, instead of using its own machines for blood testing, arranged to have blood samples flown to its headquarters by FedEx and tested the blood on machines it purchased from Siemens (all the while claiming that the blood tests were performed onsite using its own machines). Hampton Creek, a vegan-food company that touted itself like a tech company, had its employees and contractors covertly purchase its products from grocery stores in order to boost sales (although the company claimed that the purchases were for quality control testing).  Zenefits, a human resources software startup, created an in-house computer program to help its employees cheat on mandatory compliance training.
• The company raises huge amounts of capital and spends too lavishly – Mozido raised over $300 million in 2014 and spent it on such things as the charity event and the costly purchase of other technology companies. Yet by 2016, Mozido was missing payroll dates, had stretched out payments to vendors and failed to pay 2015 end-of-year bonuses to its employees (Michael Liberty was accused of diverting funds for his personal use). Skully, maker of a “smart” motorcycle helmet, closed its doors after it was discovered that the founders had diverted funds for personal use instead of for business operations.

Information on fighting and preventing fraud is available from a Certified Fraud Examiner working with an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting, and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.