More deception by Bitwise co-founders alleged in court papers. Here’s the latest

More allegations of deception against Bitwise Industries co-founders and co-CEOs Jake Soberal and Irma Olguin Jr. surfaced this week in court filings in the company’s bankruptcy case in Delaware.

Two former members of the Bitwise board of directors, Mitchell Kapor and Paula Pretlow, asserted in their Aug. 16 filing that they were unaware of the company’s apparently dire financial situation until it completely imploded Memorial Day weekend – despite rosy outlooks consistently provided by Soberal and Olguin.

The 365 pages of documents submitted to the bankruptcy court on Wednesday on behalf of Kapor and Pretlow were filed in opposition to an effort by a collection of Fresno-area investors and creditors to move the case from Delaware to Fresno. Those creditors suggest that because Bitwise was based in Fresno, and most of its unsecured creditors are in the region, it would be a more appropriate venue.

Bitwise was founded in 2013 as a hub for training students in software coding and website design, technology services for local companies, and providing leased space to budding technology entrepreneurs and other businesses. From those beginnings, the company embarked on a program of expanding its geographic footprint across California and, in recent years, to out-of-state communities in Colorado, Illinois, New Mexico, New York, Ohio and Texas.

But the vision came crashing down on May 29, when Soberal and Olguin abruptly announced that Bitwise’s 900 employees nationwide were furloughed immediately. Olguin and Soberal were fired from their positions by the board days later.

Bitwise’s umbrella company, BW Industries, and four of its associated entities, filed for Chapter 7 bankruptcy protection on June 28.

Prior to its demise, however, Bitwise’s vision and the charisma of its co-CEOs attracted like-minded investors including Kapor, who founded Lotus Development Corp. in 1982 and designed the Lotus 1-2-3 spreadsheet software. He and his wife Freada Kapor Klein co-founded Kapor Capital, investing in startups with a goal of closing gaps in opportunities in low-income and disadvantaged communities across the U.S. The couple also co-founded the Kapor Center, a technology center in Oakland that also serves people and communities of color.

Kapor joined the Bitwise board of directors in 2019, after Kapor Capital made an initial investment in Bitwise as the company sought to raise funds to expand its operations beyond its Fresno roots.

Pretlow is a former investment executive who has served on boards of directors for various companies and nonprofit organizations including Northwestern University and the Kresge Foundation. She is described in court documents as “one of the early Black women pioneers in the financial industry” in a career that includes stints at Wells Fargo Bank, Credit Suisse, AXA Rosenberg, Barclays Global Investors, and The Capital Group.

Pretlow became a member of the Bitwise board in October 2020 upon Kapor’s recommendation.

Throughout 2018 and into 2021, “the reporting of a positive financial picture (for Bitwise) continued,” according to court documents. In November, “the company continued to present robust financials to the Board, including $67 million in cash and net income of nearly $1 million for the previous quarter.”

But at a November board meeting, Soberal told members that Citibank and Goldman Sachs, as a condition of a collective $80 million investment in Bitwise, imposed “what (Soberal) claimed were minimum cash covenants” that the company needed to maintain. Based on Soberal’s statements about the investments, Kapor and Klein loaned Bitwise $4.5 million to meet the cash requirement. “As we now know, Mr. Soberal’s representations, and others on which Mr. Kapor and the Board relied, turned out to be false,” the court filing states.

“The company’s misrepresentations, misleading statements, and material omissions to the Board continued in 2023,” Kapor and Pretlow stated in their court filing. “The financials presented to the Board were falsified, and management forged directors’ signatures on documents used to take out loans that were hidden from the Board.”

As recently as May, “Mr. Kapor and his wife hosted Mr. Soberal and Ms. Olguin at their home for a weekend to strategize about Bitwise’s growth,” court documents state. “At no point during any of these calls or meetings did Mr. Soberal or Ms. Olguin inform Mr. Kapor or Ms. Pretlow that the company was in any distress, much less that the company’s financials were falsified.”

Over the fateful Memorial Day weekend, the court filing stated that Soberal reached out to Kapor “to confess that the company was in dire financial straits and could not meet its obligations to its employees..” And at some point over the following week, “Mr. Kapor and Ms. Klein were also sent an anonymous email attaching what appears to be a recording of company management joking about committing crimes and deceiving investors.”

The filing asserts that because of the misrepresentations from Bitwise’s executives, “Mr. Kapor, Ms. Klein, and the various Kapor entities stand to lose approximately $30 million given their various investments in and loans to the company.”

Two other former board members, Joseph Prioetti and Ollen Douglass – who stepped in as interim president after Soberal and Olguin were fired – asked the bankruptcy court in July to allow them to move forward with a lawsuit against Soberal and Olguin, and Scottsdale Insurance Company, which could cover some legal bills for former Bitwise employees under an existing policy.

That filing, which has yet to be ruled on by U.S. District Bankruptcy Judge Mary F. Walrath, accused Soberal and Olguin of a “massive scope” of fraud, “to the point that they ultimately destroyed the company they were charged with running, leaving hundreds of others to suffer the consequences of their misdeeds.”

The Fresno Bee reached out to Soberal and Olguin for comment on the latest court filings, but neither responded to text messages as of Friday afternoon. Court documents filed Friday in the bankruptcy case indicate that Scottsdale Insurance, under the terms of the business insurance policy, has retained the TTE Law Group with offices in Los Angeles and Oregon to defend Soberal in a slew of civil lawsuits, while the law firm of Winget Spadafora Schwartzberg LLP has been hired to represent Olguin.

Possible causes of action against Bitwise leaders?

Typically, a bankruptcy case puts a hold on civil lawsuits by creditors against a debtor. But Proietti and Douglass want to lift that stay, asserting that Soberal and Olguin should not be entltled to bankruptcy protection from lawsuits or afforded coverage from the contested $5 million insurance policy for their legal bills.

In a response to that effort, bankruptcy trustee Jeoffrey Burtch requested on Aug. 11 that the judge put off the motion for three to four months to provide a chance for mediation of claims against the Bitwise directors and officers, potentially reducing claims under the insurance policy as a potential asset that can be liquidated to provide at least some relief to creditors.

In the meantime, Burtch and his legal counsel “have invested hundreds of hours to develop an understanding of the Bitwise Debtors’ businesses and the reasons that the … businesses failed; to identify and marshal the Bitwise Debtors’ assets, including potential causes of action against third parties and insiders; and to craft and begin to implement a strategy to liquidate assets and maximize the return to creditors in these cases.”

“While considerable work remains to be done, … it is likely that claims lie against the former officers and/or the Board of Directors for breach of fiduciary duty to the Bitwise Debtors,” Burtch stated in court documents. The trustee has issued subpoenas to Douglass, Proietti, Kapor and Pretlow for them to produce documents to advance the investigation.

On Friday, the court approved a separate request from Burtch to hire former Bitwise chief corporate development officer Landon Brokaw of Visalia as a consultant to help identify and evaluate possible Bitwise assets in the bankruptcy case. Brokaw, who worked for Bitwise from 2016 until the bankruptcy petition was filed in late June, had duties that “included evaluation and acquisition of new business lines and companies.

“Brokaw’s involvement with (Bitwise) over a seven-year period … uniquely qualifies him” to serve as consultant to the trustee, according to court documents. “Brokaw has significant background knowledge” of Bitwise assets.

While the bankruptcy cases involve allegations of fraud and misrepresentations by former Bitwise officers and directors – and federal investigations by the Securities and Exchange Commission, Department of Justice and Department of Labor, according to court documents – “the Trustee is not aware of, and has no reason to believe Brokaw was involved in, participated in, or was even aware of the wrongdoing that is alleged to have occurred” before the bankruptcy filing.

The bankruptcy trustee added in a court filing that Brokaw himself is owed more than $125,000 by Bitwise, including an unsecured loan that he made to the company for $110,000.