Startup Scandals and the Risks of “Fake-It-Till-You-Make-It” Culture

By the Constantine Cannon Whistleblower Team

Startups and entrepreneurs should be admired. It takes courage to go out on your own, take big risks, and try to bring a new idea to market. They have an unrelenting drive to succeed. But there are very real legal risks when that drive leads to a “fake-it-till-you-make-it” culture that crosses the line. In recent years, the government has cracked down on these types of cases.

The Downfall of Theranos

Theranos is an infamous example of the dangers of this mindset. Elizabeth Holmes, the founder and CEO of Theranos, promoted its blood analyzer as revolutionary, gave investors massive revenue projections, and raised hundreds of millions of dollars from investors. At its peak, the company was valued in the billions. Holmes exuded genius and success. But the trial evidence painted a much different picture: one where Holmes was aware the analyzer failed to perform as claimed, and where she materially misrepresented projected revenues to investors. The deception ultimately led to the company’s collapse and criminal charges against its top executives. In the words of former U.S. Attorney Stephanie Hinds: “For almost a decade, Elizabeth Holmes fabricated and spread elaborate falsehoods to draw in a legion of capital investors, both big and small, and her deceit caused the loss of hundreds of millions of dollars. Her sentence reflects the audacity of her massive fraud and the staggering damage she caused.”

IRL’s Reality Check

Startup scandals are not limited to companies hawking bogus healthcare products. For instance, in 2024, the SEC charged Abraham Shafi, the founder of Get Together Inc., a privately held social media startup company known as “IRL,” with a $170 million fraud scheme in connection with a Series C private offering. Shafi allegedly defrauded investors “by making false and misleading statements about the company’s growth and concealing his and his fiancée’s extensive use of company credit cards to pay for personal expenses,” such jewelry expenses and stays at luxury hotels in Hawaii. According to the SEC’s Complaint, Shafi described IRL as an app that attracted 12 million users based on “viral popularity and organic growth,” but Shafi allegedly “boosted [IRL’s] perceived popularity by spending millions of dollars on ‘incent’ advertisements—advertisements that offered users incentives to download the app.” In other words, the users were not organic. The SEC even referenced a forensic analysis that determined that “a substantial percentage of IRL’s users were likely bots.” Shafi was removed as IRL’s CEO and is currently defending against the SEC’s civil enforcement action after a federal court denied his motion to dismiss the case.

Frank’s Failings

Another recent example involves Frank, a startup that offered a platform for student financial aid applications. Frank was founded and led by Charlie Javice, an Ivy League graduate who at age 26 appeared on a Forbes “30 Under 30” list. The DOJ charged Javice with fraud in connection with J.P. Morgan Chase’s (“JPMC”) $175 million acquisition of Frank. Prosecutors alleged that Javice represented to JPMC that Frank had 4.25 million users for whom Frank had certain categories of data when Frank actually had less than 300,000 such users. The DOJ further alleged that Javice “fabricated a data set” in furtherance of that misrepresentation. Last month, a unanimous federal jury returned a guilty verdict and Javice now faces the prospect of years behind bars.

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Each of these examples involves different people, different industries, and different alleged schemes. But the through-line is clear: “fake-it-till-you-make-it” culture can land founders and employees of startups in very real legal jeopardy.

Constantine Cannon partner Dan Vitelli commented: “Startups and entrepreneurs are a crucial part of our economy, but so too are the investors that provide much needed financial resources to bring these ideas to life. Startup founders and employees need to be aware of where the line is and must not defraud investors with material misrepresentations or omissions. It’s one thing to project optimism and confidence; it’s quite another to lie and defraud. Recent government enforcement actions against startups and their founders are important reminders of the very real consequences that can follow when the line is crossed.”

The Role of Whistleblowers and Fraud

Whistleblowers play a crucial role in bringing fraud to light. The SEC’s Whistleblower Program encourages individuals with knowledge of violations of U.S. securities laws to come forward. Under that program, eligible whistleblowers who provide the SEC with information that leads to an SEC enforcement action may receive up to 30% of the money collected.

Our Firm Helps Whistleblowers

Contact us to learn more about our work in this area or if you have information on potential securities fraud. We will connect you with an experienced member of the Constantine Cannon whistleblower team for a free and confidential consultation.