Bitwise Industries was supposed to change the world; its founders lost the plot
So many of these companies - FTX, Theranos, Ozy Media to name a few — promise the world and count on quirky charisma to counter incompetence and a woeful lack of integrity.
Editors Note: This is a guest article from Teri Buhl, a veteran investigative journalist I have known a very long time who has reported for major newspapers to independent online news publications. Teri has covered the world of high and low finance around the world. She earned her breaking news chops reporting during the financial crisis in 2008 for the Sunday edition of the New York Post where she was first to expose the fraud at IndyMac and where she called out the big banks for accounting failures that misled the public about about the level of distressed assets on their books. Her original reporting has led to over half a dozen criminal arrest and SEC securities fraud charges. In 2010 Frontline made a film, The Untouchables, about Teri’s reporting on Bear Stearns RMBS double dipping scheme that led to government enforcement actions against JP Morgan and billions in fines. For the last two years Teri was a staff reporter covering corporate distressed debt financing for LevfinInsights-CreditSights investigating creditor-on-creditor violence and pre-petition bankruptcy fraud. She is a proud USC Trojan alum from Marshall School of Business with a degree in Accounting and lives in New York City.
The Securities and Exchange Commission has entered a partial settlement with the founders of Fresno-based Bitwise Industries, who were also charged criminally by the Department of Justice last week for wire fraud. The charges are tied to over $100 million of equity and debt fund raises using altered bank statements, altered financial statements and altered audit reports.
The SEC’s case centered on a 2022 $70 million preferred share raise led by Goldman Sachs, Citibank, and Lotus 1-2-3 founder Mitch Kapor’s venture capital firm Kapor Capital. Bitwise Industries founders and co-CEOs Jake Soberal and Irma Olguin agreed to an officers and directors bar, to not commit securities fraud ever again, and have no involvement with securities offerings.
The company filed for Chapter 7 bankruptcy in Delaware District Court on June 28, a month after Soberal and Olguin were fired by the board of directors. Court filings show the U.S. Trustee assigned to the case is still trying to figure out what assets the company actually owns and what might have been fraudulently transferred out of the company or away from secured lenders.
In addition to being accused of showing investors false financials, the government says that during the six months they were marketing the offering, Soberal and Olguin lied to investors, claiming they did not have a completed audit by a large international audit firm. The government complaints detail how the founders brazenly doctored the audit opinion they already had to eventually show investors once the money was raised.
In 2020 Bitwise Industries had finally hired Mike Rodriquez, its first CFO with pre-IPO experience. Rodriguez commissioned Grant Thornton to do an audit for Bitwise. The Dig confirmed the Miami office of Grant Thornton delivered a completed audit for the fiscal year 2020. It is not known why Grant Thornton did only a “one and done” engagement for Bitwise Industries.
According to court documents, the company delayed providing information needed to complete the audit so it wasn’t finished until April 2022, a few months before the Series B-2 offering was marketed. The GT auditors significantly reduced the reported Bitwise revenue because non-GAAP accounting, which inflated revenue, had been used in the previous unaudited financial statements prepared under the direction of the founders.
Rodriquez, who is identified as “CFO One” in the DOJ complaint, told the FBI he adjusted the 2020 financials to be GAAP compliant once he got on board. That move reduced 2020 revenue from $30 million to $9 million and the first quarter 2021 revenue from $10 million to $1 million. Both government investigations say hiding the already completed audit — one that did not do Bitwise any revenue favors — helped Soberal and Olguin secure double-digit millions in cash investments that allowed them to keep alleged lies about the health of the company going and pay off other early investors or secured loans.
What is not explained in either complaint is who saw the Rodriquez GAAP financials besides the co-founders. The CFO, who lives in the Miami area, attended only two board meeting where he didn’t talk about financials according to the FBI. Rodriquez told the FBI that the co-leaders desire to use managerial financials instead of GAAP compliant numbers became a recurring problem with Olguin and Soberal. This caused him a great deal of stress and that's was why he left Bitwise, according to the DOJ complaint. Rodriquez left in 2021 before the GT audit was completed. Emails to Rodriquez for comment were not returned.
A representative of Grant Thornton told The Dig they wouldn’t know if the Bitwise Industries board ever saw the final audit. Bitwise was a private company that isn’t required to have a Board audit committee or audited financials. A source familiar with the situation said the audit firm was unaware a doctored audit was being passed around until the SEC informed the firm.
It took the co-founders 14 months before they hired another experienced CFO in January 2023, Caryn Nightingale. In the meantime, long time employees with accounting degrees, Kelly Taylor and Lizette Carranz, a local Fresno resident who worked for Taylor acted as controllers and were the main point of contact for subsidiaries bought by Bitwise Industries. Those subs kept their own set of books to report up financials, according to sources. Both women were also involved in reviewing cash balances and told the FBI the company was consistently under a cash crunch that, at times, affected the ability to make payroll. The DOJ complaint lists Taylor as “Employee Three” and Carranza as “Employee Four” who both at times had to work under the direction of Olquin and Soberal’s demands to make the numbers look good.
Nightingale, who was only at the company five months, told the FBI she only took the job after Soberal showed her a presentation showing the company had robust operating income. Once she got her hands on the books, however, the numbers didn’t add up. In fact, she told the FBI the books hadn’t been properly balanced in a year, which would have been when Taylor or Carranza were in charge, according to sources. Nightingale told the FBI she attended board meetings, but the short time she was in charge wasn’t enough to figure out what was really going on.
The SEC disclosed in its securities fraud complaint that Bitwise co-founders Soberal and Olguin were repeatedly warned by finance department staff that the revenue recognition they were sharing with the board and investors was not GAAP compliant. One reason was because the co-founders were recognizing revenue from contracts that was not yet earned, according to court documents. “In spite of these warnings, Defendants continued to prepare and provide investors with non-GAAP revenue numbers throughout the Series B-2 Period. Defendants prepared Bitwise’s externally-reported financials themselves rather than rely on the company’s finance department.”
The DOJ complaint and FBI testimony paint an even darker picture. They showed the women, in their roles as controllers, had asked others at the company to help massage the numbers when Soberal and Olguin needed something to show the board or investors. One employee even told the FBI they didn’t think Carranza was smart enough or qualified to do the job. In fact, company figurehead Bethany Mily, a former school teacher who had the title of President, told the FBI Soberal had expressed that she and Olguin should do what they could to keep the new CFO in the dark about cash flow issues.
New trouble was coming for Soberal and Olguin even before their arrest last week. Court documents now show their SEC partial plea deals were signed in late October. Motions they both made in the bankruptcy filing asked the court for money from the D&O insurance for legal defense related to the government investigations. The amount of SEC disgorgement and fines typically won’t be determined till the defendants criminal case is complete. In the meantime they are not allowed to deny the accusations in the SEC complaint.
On Thursday, November 9, 2023, both co-founders pled not guilty to the criminal charges and pledged their family homes to post bail. The SEC says its investigation is ongoing. Both Kelly Taylor-Meza and Lizette Carranza were asked for comment on whether they expect criminal charges to be filed against them or if they have sealed indictments against them but did not respond. Soberal and Olguin bail conditions state they can’t have any contact with the former Bitwise controllers Taylor-Meza and Carranza. Bitwise President Bethany Mily said in court documents in the chapter 7 bankruptcy this summer she could be subject to federal or state government charges. Mily’s attorney would not respond this week if his client still expected charges.
Meanwhile the trustee in the chapter 7 bankruptcy issued subpoenas demanding board members turn over communications related to the legal battle over use of the $5 million of D&O insurance to defend an employee class action suit against the company where they are named individual defendants. When a company files for bankruptcy civil lawsuits are stayed but suits against individuals can continue. Board members can use D&O insurance but typically not if they were involved or knew of the fraud. Bitwise board members included Mitch Kapor, Paula Pretlow, former big four auditor Ollen Douglass, a head of investments for Motley Fool Ventures, and a member of the Walton family Joesph Proietti.
An independent local Fresno attorney who has run for local office said on a public radio interview after the co-founders arrest that he plans to hold the board members accountable who were also investors in the company with deep experience in raising debt and equity. Attorney Roger Bonakdar told the radio station it didn’t add up that the Bitwise board wasn’t asking for more verification of bank accounts or to see a proper audit of the financials.
Bonakdar said the board would have had to certify financials before they were presented to investors. But New York based attorney David Feldman who has written books on pre-IPO fund raising and securities offerings told The Dig that isn’t exactly true. Bitwise Industries was always a private company as a result the board doesn’t have to stamp their names on the accuracy of financials and the SEC complaint says it was Irma Olguin who signed the last stock purchase agreements that raised around $70 million in 2022. Feldman said for Bonakdar to go after the boards deep personal pockets “it depends if there's an argument that the falsity was intentional”. Meaning if the board knowingly kept themselves in the dark to keep the company raising money so they could exit their millions in investments.
In the case of seasoned venture capitalist Mitch Kapor court records show he was paid off $5 million at the end of the company’s life via a hail-mary investment from the Walton family, who put money in after the cofounders were fired. Mitch Kapor and Ollen Douglass, who was made interim CEO for a month before the company filed bankruptcy, would not respond to questions from The Dig on if they had ever seen the final Grant Thornton audit showing a very different financial situation than the co-founders had been presenting for years. Board members have said in court filings they were in the dark about the true health of the company including revenue, cash flow and issues with payroll.
Editor’s Postscript: It’s always best for me not to jump when the question of who is the auditor seems to be answered. While I was looking for clues to give Teri to follow-up, I ran across this podcast interview by Marcum LLP of Bitwise Industries’ Irma Olguin. She looks a lot different than she does now, but I must say she was very smooth and inspiring. (Teri later sourced Grant Thornton’s name and got the confirmation and extensive comment from them.)
© Francine McKenna, The Digging Company LLC, 2023