Fresno’s Bitwise under FBI criminal investigation in wake of financial collapse, sources say

Bitwise Industries, the Fresno-based technological training, technology services and real estate development company, is under federal scrutiny for potential criminal violations in the wake of the company’s financial implosion at the end of May, according to sources who are aware of the probe.

Three different sources, each of whom spoke on condition of anonymity, told The Fresno Bee that the Federal Bureau of Investigation has launched a criminal investigation into Bitwise and its leadership. But the sources were not in a position to describe the kinds of potential crimes or particular individuals that FBI agents are looking into.

One source said “several people” had been interviewed by investigators about Bitwise since last week but had been cautioned not to discuss the case.

Federal authorities “do not confirm or deny any investigation as a policy,” said Lauren Horwood, a spokesperson for the U.S. Department of Justice / U.S. Attorney’s Office in Sacramento, in response to a query from The Fresno Bee earlier this month. Chris Hales, another DOJ spokesperson in Sacramento, reiterated that position to The Bee last week.

Over recent weeks, former Bitwise employees have raised concerns that their contributions for the company 401(k) retirement savings plan, while deducted from their paychecks, were not forwarded to John Hancock Retirement, the plan administrator.

The U.S. Department of Labor’s Employee Benefit Security Administration “is aware of the allegations concerning the Bitwise Industries Inc. 401(k) plan,” agency spokesperson Jose Carnevali told The Fresno Bee in an email Tuesday. “While it is not our policy to disclose whether or not we have an open investigation, we can tell you that delinquent employee contributions and plan abandonment are high priority enforcement issues for EBSA.”

While Horwood declined to address questions about a federal investigation, she did refer The Bee to a pair of California cases prosecuted by the U.S. Attorney’s Office – one in Sacramento County in 2019, another in Shasta County in 2022 – that resulted in convictions for embezzlement of funds from employees’ retirement plans.

Fresno-based Bitwise Industries was founded in 2013 as a hub to provide technology training classes in software coding and website development, as well as providing support for budding technology entrepreneurs. Since that time, it expanded its interest into real estate development, taking a hand in rehabilitating aging buildings in downtown Fresno and leasing space to other businesses.

In recent years, the company embarked on an aggressive effort to develop sites or acquire other technology enterprises in Bakersfield, Merced and Oakland, as well as what former Bitwise co-CEOs Jake Soberal and Irma Olguin Jr. described as often-overlooked “underdog” cities including Greeley, Colorado; South Chicago, Illinois; Las Cruces, New Mexico; Buffalo, New York; Toledo, Ohio; and El Paso, Texas.

Bad business, or criminal conduct?

The Bitwise efforts came crashing down over the Memorial Day weekend, when Soberal and Olguin announced to employees in a May 29 video call and email that the company’s approximately 900 workers nationwide were being immediately “furloughed.” Within days, Soberal and Olguin were fired by the Bitwise board of directors, and on June 14 interim Bitwise president Ollen Douglass notified workers by email that their positions were being permanently terminated in a mass layoff.

Even before the furloughs and layoffs, however, there were signs of cracks in Bitwise’s financial foundation – unpaid property taxes, unpaid rent on three buildings it leased in downtown Fresno, bounced employee paychecks, the sale of COVID-19 employee retention tax credits owed to Bitwise to raise cash in late 2022; and an 11th-hour scramble to land operating capital from local investors even after the announcement earlier this year of an $80 million venture capital investment.

Since May 29, troubles have continued to mount. The city of Fresno revealed that Bitwise had not paid its business license taxes since September 2021 and owes about $21,000, and revelations by employees that not only had their last paychecks bounced, but payroll deductions from their checks for a 401(k) retirement savings plan had not been forwarded to the plan administrator. Two separate class-action lawsuits have been filed on behalf of Bitwise employees alleging labor law violations – one in Fresno County Superior Court, another in the U.S. District Court in Fresno – related to laying off workers without advance notice required by both federal and state law.

And Bitwise and its leaders also face at least three different civil lawsuits alleging fraud in the company’s business dealings or solicitation of loans or funds from investors.

Soberal, who is named as a defendant in several of the lawsuits, declined comment when contacted by The Bee at his Fresno home Tuesday. He added that he does not have an attorney representing him.

The Bee has been unable to contact Olguin. Douglass, the interim president and a member of the Bitwise board, has also not responded to requests for comment.

Potential criminal liability for Bitwise leadership?

Earlier this month, Fresno City Council members canceled a $1 million contract with Bitwise to provide technology services for small businesses. That contract was funded by federal COVID-19 pandemic relief funds that included several requirements for financial documentation by grantees.

In a June 1 press conference, City Councilmember Mike Karbassi expressed concern over employees’ assertions that retirement deductions were not forwarded to the plan provider. But Karbassi and City Attorney Andrew Janz sidestepped questions about potential criminal liability.

“I can’t comment on whether anyone is criminal, but I can say that Mr. Soberal is very irresponsible,” Karbassi said.

Janz declined at the press conference to comment on prospects for any prosecution related to the federal ARPA funds, instead saying those would be under the jurisdiction of federal agencies such as the DOJ or the FBI. “We’re taking a deep dive into the financial documents that they handed us,” Janz said at that time.

Janz also told The Bee on June 1 that he could not address whether there is any criminal investigation that he’s aware of, or whether the city has received any inquiries from federal law enforcement officials regarding either the alleged 401(k) irregularities or the federal ARPA funds. If the documents submitted by Bitwise for the ARPA grant indicate any problems, however, “we would forward that to the appropriate agency for prosecution,” Janz said.

On June 14, after Douglass’ termination email went out to employees, Fresno Mayor Jerry Dyer said, “I wouldn’t be a bit surprised if there wasn’t some kind of federal criminal investigation that follows as well.” He added last week that he had “not heard anything official as of yet” about a federal investigation.

Penalties for retirement contribution irregularities

When Soberal and Olguin announced the furloughs, they said the move was the result of what they called “unexpected” financial issues.

“Severe financial difficulty” for an employer is described by the U.S. Department of Labor’s Employee Benefits Security Administration as one of 10 warning signs of abuse of pension contributions.

The federal Employee Retirement Income Security Act of 1974, also known as ERISA, provides for both civil and criminal penalties for violations of retirement plan laws including embezzlement or theft from a pension plan or 401(k).

“There are a number of ways in which contributory plans can be vulnerable to criminal abuse,” the U.S. Department of Labor states in an online fact sheet. “Employers, or others with authority over plan assets, may convert employee payroll contributions for their own personal use or they may misapply employee contributions to cover business expenses.”

The Labor Department’s Employee Benefits Security Administration reports that “criminal prosecution of individuals who abuse their authority or control over contributory plans can result in severe criminal penalties, including imprisonment.”

A spokesperson for John Hancock Retirement did not respond to questions from The Bee regarding a possible investigation into Bitwise’s handling of its 401(k) plan.

In the two cases mentioned by Horwood, the DOJ spokesperson, company CEOs were found criminally liable for embezzling from their employees’ retirement funds, one in 2019 through unauthorized transfers from the retirement plan to his own personal account, the other in 2022 by withholding funds from employee paychecks and failing to forward those to the plan.

The 2019 case in Sacramento County involved the CEO of a real estate investment firm who pleaded guilty in federal court and an order to pay restitution of almost $11,000, Horwood said.

In the Shasta County case in 2022, the CEO of a now-defunct company that offered student recruiting and retention services to colleges was convicted of embezzlement after allegedly siphoning almost $125,000 in employee payroll deductions. The CEO was sentenced to 18 months in prison and ordered to pay restitution to the employees.

Both convictions were the result of investigations by the Labor Department’s Employee Benefits Security Administration.