Summary: Charlie Javice & Frank
Charlie Javice was considered a wunderkind in 2017. That’s the year she founded Frank – a startup hailed for simplifying the college financial aid labyrinth students and parents must navigate. When it was time to sell, JPMorgan Chase came calling, buying the company for $175M. What JPMorgan didn’t catch was that Javice and her chief growth officer – both retained as employees of the bank – had dramatically inflated their number of customers by creating fake clients from a list of real names they bought from data brokers. Javice and her accomplice have been convicted and sentenced to several years in prison. To add insult to injury, JPMorgan’s on the hook for their astronomical legal fees, which are approaching the price they paid for Frank. And the party’s not over – Javice expects to appeal her conviction. How did an institution like JPMorgan Chase get in this mess? Here are some thoughts from our Practus partners.
Dan Barham: Fiduciary Failures on Both Sides
The Charlie Javice case is a masterclass in corporate governance failures. It also involves likely breaches of fiduciary duties on both sides.
Charlie Javice’s Fraud
When founders inflate user data to sell their company for $175 million, they plainly breach their fiduciary duty to the firm and its investors. When that breach includes fraud, compensatory and punitive damages may be awarded.
JPMorgan Chase’s Rush Job
Simultaneously, JP Morgan Chase’s actions in rushing a multi-million-dollar acquisition with little to no proper verification, leading to massive financial losses and a legal fees bill that continues to grow, seem to have clearly breached obvious fiduciary duties. For example, under the Delaware case of Smith v. Van Gorkom (Del. 1985) directors may be held personally liable when they breach their affirmative duty to act on an “informed basis”. JPMorgan Chase shareholders are likely examining potential claims against their own officers for a staggering failure of due care.
Tiffany Christianson: Inflation isn’t just about the Economy
This story is unbelievable on both sides. You have a founder who lied about a fact that she had to know would become obvious post-closing. Meanwhile, on the buyer side, JPM failed in its diligence so spectacularly in verifying the primary fact that determines value: number of users. On the buyer side, this is a lesson against assumptions. On the seller’s side, it is a lesson against inflating the facts (lying).
Maxi Lyons: Five Clauses that Could have Prevented JPM’s Frank Fiasco
Despite the reportedly large legal team from JPMorgan tasked with review, negotiation and consummation of the Frank acquisition, there appear to be multiple failures on multiple fronts resulting in JPM’s legal and financial woes. Let’s count the failures.
1. No Third Party Audit
The first failure was not conducting a third-party audit to validate user records during due diligence, which potentially could have saved them additional transaction costs, payment of the full purchase price and now, extraordinary legal fees.
2. Where were the Robust Reps & Warranties on Data Accuracy and Legal Compliance?
It is beyond comprehension that JPM’s legal team would not have included a robust representation and warranty that the user data was, at a minimum: (i) valid, accurate, and complete; and (ii) compiled and collected in compliance with law.
3. Buyer’s Right to Conduct Forensic Audits of User Data
The validation of user data representation and warranty should have granted JPM a right, as the buyer, to conduct a forensic audit to confirm the validity of the user records and data.
4. Indemnity & Advancement of Legal Fees Carve-outs for Fraud
JPMorgan’s legal team should have secured clear indemnification rights for any misrepresentation by the seller. These rights should have explicitly excluded coverage for fraud, ensuring that JPMorgan would not bear liability for deceptive conduct.
And “also and a but” from Ryan Cuthbertson
Additionally, they should have addressed advancement of legal fees provisions in governing documents and transaction agreements. Delaware law treats advancement as a distinct contractual right from indemnification, and Delaware courts have a well-established policy favoring advancement for officers and directors. As the Javice case demonstrates, a fraud conviction may defeat ultimate indemnification but won’t eliminate the obligation to advance defense costs through trial and appeals.
An Expensive Reminder
This oversight is a solemn reminder to explicitly limit advancement rights in governing documents and transaction agreements, specifying that advancement excludes defense costs for claims involving fraud, willful misconduct, or bad faith conduct.
5. Where was the Holdback?
There should have been a holdback or escrow of a portion of the purchase price together with a post-closing true-up mechanism tied to the forensic audit rights discussed above to confirm that user data was not only accurate at the time of closing but that a significant portion of the user base would be retained post-closing.
Conclusion: JPMorgan’s $175M Mistake
JPMorgan’s $175M Frank acquisition wasn’t just a case of startup fraud. It was a legal structuring, due diligence, and document failure. JPM missed the basics, like verifying Frank’s user data, despite deploying a 350-person diligence team. A few well-crafted provisions could have saved millions in legal fees and reputational damage. Don’t be Charlie Javice’d. Reach out to us if you are drafting or negotiating tech M&A deals, and need assistance with clauses for data validation.
