‘Unsustainable Ponzi scheme.’ Feds detail fraud allegation against Bitwise founders

Bitwise Industries founders and former co-CEOs surrendered to federal authorities Thursday on a wire fraud charge related to what an agent described “an unsustainable Ponzi scheme” that came crashing down over the Memorial Day weekend.

The U.S. Attorney’s Office charged Jake Soberal and Irma Olguin Jr. with the federal crime and accused the two of bilking investors out of $100 million after they knew the business, founded in 2013, already was in deep trouble.

U.S. Attorney Phillip Talbert said at a press conference Thursday that by January 2022, Soberal and Olguin began conspiring to commit wire fraud, “lying to board members, investors, lenders and others about Bitwise’s financial condition to obtain investment money and loans.”

By the end of 2021, Talbert said Bitwise had raised more than $70 million from investments, growing to hundreds of employees and apprentices in California and others states. “However, Bitwise’s business model wasn’t generating the revenue that would justify the money that had been invested,” Talbert added. “Despite the massive influx of investment money into the business, Bitwise’s financial condition worsened.”

“Instead of acknowledging that the business was failing to achieve the hoped-for returns, (Soberal and Olguin) repeatedly lied to the board of directors, investors, lenders and others about the business’s revenues and financial condition,” Talbert said. He showed enlargements of genuine bank statements for Bitwise and compared them to altered versions of the documents with highly inflated cash balances that Soberal and Olguin allegedly provided to would-be investors.

As they purportedly lied to their board and investors, Talbert said, Soberal and Olguin ““were simply unable to acknowledge to themselves, their board and their employees that the business model they had devised – a model that was paying them annual salaries of $600,000 each – wasn’t working.”

Soberal and Olguin co-founded Bitwise Industries in 2013 in Fresno as a company to provide technology training and services and to lease space to budding tech entrepreneurs. The pair presided over Bitwise’s expansion to multiple buildings in downtown and, later, to other cities across California. Over the past couple of years, Bitwise broadened its footprint to out-of-state communities in Colorado, Illinois, New Mexico, New York, Ohio and Texas.

But much of the seeming success of the company was based on what federal authorities described as a failing business model.

“The defendants could have chosen to simply admit the failure of Bitwise’s businsss model,” Talbert said in a statement issued earlier Thursday. “Instead, they used lie after lie to pull over $100 million into a dying venture through fraud.”

“The problem here is that the defendants were lying to everybody … who relied on bank statements and audit reports that they intentionally altered to hide the truth,” Talbert told reporters Thursday afternoon. “This wasn’t one simple lie. This was a series of lies backed up with false documentation in order to get all this money.”

The criminal complaint unsealed Thursday stated Soberal and Olguin, in interviews with investigators, “have admitted to significant criminal misconduct.”

In court filings, federal investigators stated that in the course of interviews in September, both Soberal and Olguin “have admitted to significant criminal misconduct” that “caused more than $100 million in losses” to investors.

The criminal complaint alleges “much of the money went toward paying Bitwise’s payroll and fringe benefits,” including $600,000-per-year salaries for Soberal and Olguin, and “on outfitting the company’s office spaces, and repaying debts owed to prior lenders,” officials said in a press statement.

The financial unraveling surfaced publicly in May when, over the Memorial Day weekend, Soberal and Olguin announced to their workforce that all 900 employees nationwide were being furloughed immediately. Following the termination of Soberal and Olguin from their CEO positions a few days later, the furloughs became permanent layoffs. Bitwise Industries and four related companies all filed for Chapter 7 bankruptcy protection in late June in a federal court in Delaware, where the company was incorporated.

The furloughs came despite prior assurances by Soberal and Olguin that Bitwise was financially sound and worth more than $500 million.

The alleged practices of Soberal and Olguin “have directly and negatively impacted over 900 families from the Fresno and Bakersfield communities,” said Mark Silva, acting special agent in charge of the IRS criminal investigation office in Oakland. “These sorts of white-collar crimes often root from greed and mismanagement and leave hard working tax paying citizens damaged in their wake.”

The criminal complaint filed Wednesday by the FBI and IRS, and unsealed Thursday, states that:

• Soberal and Olguin “repeatedly submitted materially false financial information to the Bitwise board of directors.”

• Bitwise was in dire financial condition despite Soberal and Olguin raising tens of millions of dollars in investments and proclaiming the company was strong. But by June 1, 2023, Bitwise had less than $1.5 million left in the bank.

• The co-CEOS “became desperate ater a key proposed investment fell through, and they began fabricating and altering Bitwise’s financial records to get more money.” In May 2022, one investor reportedly inked a non-binding term sheet to make a $150 million investment. That fell through a few weeks later, however, because Olguin and Soberal “refused to provide (the investor) with bank statements that showed Bitwise’s cash balance,” court records state.

• Bitwise received more than $38 million in additional investments based on misrepresentations by Soberal and Olguin.

• Bitwise sold its rights to about $6 million in federal employee retention tax credits to a New York company, repaying the advance with money that Soberal and Olguin fraudulently obtained from others.

• In the waning weeks and months prior to the Memorial Day weekend of 2023, Soberal and Olguin misled other businesses and investors to raise another $30 million.

• Interstate wire transfers were used by investors to provide money into Bitwise’s bank account in Fresno, including more than $57.5 million between July 2022 and April 2023.

Brackett said that during the course of their investigation, the FBI, IRS and SEC “uncovered overwhelming evidence that (Soberal and Olguin) orchestrated a multifaceted scheme which involved over $100 million in fraud.”

“The result of their actions was the inevitable collapse of what was an unsustainable Ponzi scheme,” Brackett added.

Neither Talbert nor Brackett would comment on whether more charges may be lodged against additional defendants, or where else the money may have gone besides payroll and trying to keep the company afloat.

“I can say we’re looking at financial assets” of Soberal and Olguin, Talbert said. “Obviously a big part of our criminal case is in taking the profit out of crime, and so we will be looking at all potential assets and other materials for both forfeiture and/or restitution.”