By Ting Cheung, John McKnight, and Savannah Shepherd
The Forbes 30 Under 30 Pipeline: A Path to Success or a Precursor to Prosecution?
The startup world is often portrayed as a glamorous landscape of innovation, disruption, and rapid growth. But beneath this veneer of success lies a darker reality: fraud.
The prestigious Forbes 30 Under 30 list is an annual compilation of young entrepreneurs, leaders, and stars, spanning industries such as technology, finance, healthcare, and entertainment. While undoubtedly highlighting genuine talent and innovation in various industries, the 30 Under 30 list has seen its share of honorees face legal repercussions for fraud, raising questions about the “fake it till you make it” culture that pervades the startup world.
Most recently, Joanna Smith-Griffith, the CEO of the artificial intelligence education startup AllHere, was charged with defrauding investors. Smith-Griffith founded AllHere while at Harvard University and made Forbes’ list in 2021. In 2023, Forbes published its Hall of Shame and named “the 10 most dubious people ever to make” its 30 Under 30 list, including FTX founder Sam Bankman-Fried (Class of 2021), who was convicted of fraud and conspiracy in 2022.
When Regulators Step in: The Government’s Role in Combating Startup Fraud
Federal government regulators typically step in when a startup’s fraudulent activities start to become a national or topical concern. For example, when a publicly traded company owns a substantial stake in the startup, then fraud at the startup concerns federally protected investment dollars and may be imputed onto the parent company. On the other hand, if the startup made fraudulent representations to the government, it will likely be a direct fraud upon the entity enforcing the law governing such representations. This would be a violation of the False Claims Act, and it will almost always be of topical concern to the government.
The following examples from recent years illustrate the various triggers for regulatory intervention.
- Executives of Done Global Inc. were charged for purported illegal distribution of Adderall and other controlled substances via telemedicine, and billing fraud against Medicaid, Medicare, and commercial insurers.
- Founder of Joonko Diversity, Inc. was charged with securities fraud for allegedly obtaining $27 million in investments from venture capital firms and other investors through misrepresentations.
- Former executives of Outcome Health were convicted for defrauding clients, lenders, and investors of approximately $1 billion. Outcome Health’s investors include Goldman Sachs Investment Partners and Alphabet’s growth equity investment fund.
- Founder of Frank was charged with allegedly making false claims and submitting false data to J.P. Morgan Chase in an acquisition fraud, gaining over $45 million from the fraud.
- Elizabeth Holmes, CEO of Theranos, and executive Ramesh Balwani were sentenced for defrauding investors of hundreds of millions of dollars. Theranos’ investors included prominent public figures such as Rupert Murdoch, founder of the Fox Corporation, Oracle co-founder Larry Ellison, and former Secretary of State Henry Kissinger.
Who the Regulators Are: from Investigation to Enforcement
The nature of the fraudulent activity dictates the specific charges and government bodies involved in the investigation and enforcement action. In general, criminal investigation and enforcement at the federal level call for efforts from the Department of Justice (DOJ) and Federal Bureau of Investigation (FBI). Securities fraud falls under the purview of the Securities and Exchange Commission (SEC), while mail fraud is under the United States Postal Inspection Service (USPIS). Fraud involving banks may gain traction from the Federal Deposit Insurance Corporation Office of Inspector General (FDIC-OIG), whereas healthcare-related fraud may draw attention from the Department of Health and Human Services (HHS).
Conclusion: the Price of Deception
The fast-paced, high-pressure environment of many startups can inadvertently create an environment conducive to fraud. The goal of a startup is to break even, become profitable and scale quickly with limited resources. A lack of established internal controls, coupled with a culture that prioritizes growth at all costs, creates a hotbed of potential unethical and illegal practices for cutting corners. However, government regulators’ stance is clear: They intervene whenever the impact is significant and there is strong evidence corroborating details of the fraud. Whistleblowers, like the one at Theranos, often play a crucial role in exposing fraud within startups.
Fraud in the startup world is not a victimless crime. It erodes investor confidence, stifles genuine innovation, and can have devastating consequences for employees, customers, and the broader economy. Transparency, ethical leadership, and a commitment to compliance are essential to fostering a healthy and sustainable startup ecosystem. Ignoring these principles comes at a steep price, as evidenced by some of the very figures who have made the 30 Under 30 list.
If you have questions regarding your potential whistleblower claims and qui tam actions, please fill out our online intake form to contact a whistleblower attorney at Sanford Heisler Sharp McKnight today. Our attorneys understand the complexities of fraud and what may draw regulators’ attention in the startup space.