JPMorgan Chase announced the acquisition of college financial planning company Frank for $175 million in 2021, boasting that the firm serves more than 5 million students.
More than a year later, the nation's largest bank sued founder Frank Charlie Javis, saying he and another company executive defrauded the bank and that the company actually had fewer than 300,000 customers.
In a counterclaim alleging wrongful termination, Javis denied the allegations and called the bank's failure to adequately monitor the company "absurd."
Some experts say the failure of megabanks to adequately value startups that promise reams of valuable customer data is underscoring easy access to financing for tech companies, as low interest rates and billion-dollar success stories in recent years have attracted them. lenders and investors. .
Experts say that small, well-run businesses often have a harder time getting financing than tech startups. But some add that rising interest rates and the collapse last month of Silicon Valley Bank, considered by many to be a major lender to tech startups, could cut funding for the tech industry.
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"This has to be one of the most spectacular bankruptcies in history," Rebelle Cole, a finance professor at Florida Atlantic University who previously worked at the Federal Reserve, told ABC News about JPMorgan Chase's acquisition of Franks.
"There are two Americas when it comes to banking." Technology startups in Silicon Valley. that's all. They have a special attitude."
JPMorgan Chase declined ABC News' request for comment.
Last week, the Department of Justice announced the arrest of Javis on charges of fraud and criminal conspiracy. He pleaded not guilty and was released on $2 million bail.
"As defendant, Javis engaged in a gross fraud scheme," Damien Williams, the U.S. Attorney for the Southern District of New York, said last week. "These arrests should serve as a warning to entrepreneurs who lie to promote their business that they will be caught lying. Get to them."
Last week, the Securities and Exchange Commission also charged Javis with fraud.
In the lawsuit, the bank said Javis used a scheme to deceive officials investigating the embezzlement.
In documents filed in December, the bank said Javis instructed the company's director of engineering to "create false customer data using synthetic data techniques."
When the engineer refused, Javis turned to a data science professor who helped him create a database of fake customers, according to legal documents.
Despite the alleged fraud, JPMorgan Chase CEO Jamie Dimon said in January that the bank made mistakes in the acquisition process.
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When asked about the deal, Diman told CNBC. "There's always something to learn. We always make mistakes."
He added: "I tell our people that we are wrong, it is good, when we learn our lessons, I will tell them what they were."
Some experts say the audit failures are emblematic of the easy-money environment for tech startups in recent years.
When JPMorgan acquired Chase Frank nearly two years ago, the Fed had not yet begun an aggressive series of rate hikes to fight inflation.
In the 2010s, Fed rates rarely exceeded 2%. The Fed cut interest rates to near zero during the pandemic to stimulate the economy.
When interest rates are low, money is cheap and borrowing is relatively easy because banks offer low loan rates.
Experts say the technology sector has benefited from the low interest rate environment, noting that banks and venture capital firms can fund ambitious startups knowing that many will fail.
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An analysis by The New York Times found that venture capitalists have invested more than $22 billion in technology startups between 2010 and 2022.
Silicon Valley Bank, which specializes in tech clients in the region, helped drive investment
When some big customers withdrew money from banks last month, some were forced to sell distressed stocks to provide liquidity, scaring off other big depositors who withdrew their money and triggering a wave of bank runs.
"The Silicon Valley bank failure is a turning point," Cole said. "When it comes to lending to tech companies, it's a complete wake-up call for all other banks."
"There's definitely a double standard," Cole added. "The ease with which these businesses obtain credit is different from the credit standards that apply to small businesses."
Frank Vossen, a professor of economics and entrepreneurship at the University of Nevada, told ABC News that the uneven access to financing for technology companies and other small businesses is due to different sources of financing.
"Innovative tech startups often have options to access venture capital, especially in Silicon Valley," he said. "Small, non-innovative companies do not have this opportunity and are forced to rely more on bank loans."
The banking crisis that followed the collapse of a Silicon Valley bank has strengthened the role of big banks such as JPMorgan Chase in making important lending decisions as the financial sector weighs its approach to technology, said Cornell Law School professor Robert Hockett, who teaches banking. . ABC News: Said
A source previously familiar with the matter told ABC News that JPMorgan Chase received a huge influx of customers and deposits for hundreds of accounts and billions of dollars.
"Some big companies are taking over what's left of the financial sector," Hackett said.
Over the past year, the Fed has raised its key interest rate by 4.75 percentage points, the fastest pace since the 1980s.
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A higher base interest rate increases the cost of borrowing for businesses, which theoretically slows lending and reduces economic activity.
According to the consulting company Bain & Company, in 2022 global investment in venture capital will decrease by 36% compared to the previous year.
"The takeover of the franc and the collapse of the Silicon Valley bank are the result of excessive risk taking in an environment of ultra-low interest rates," Kairong Xiao, a professor of finance at Columbia Business School, told ABC News.
He added: "Given these scandals and, more importantly, structural changes in the interest rate environment, I would expect tighter funding conditions for tech startups, especially from regulated banks."