As an ethics keynote speaker, I have long told my audiences that anyone is capable of defrauding others, that there is no “type.” Fraud transcends race, religion, sexual orientation, or geography. For the most part, my business ethics and business consulting clients understand that remark.
However, the appreciation of that fact does not always carry over to profession or industry. The perception of an industry as being ethical, does not always hold true. These past few years have revealed major frauds in finance, pharmaceuticals, healthcare and bitcoin. What about companies posing as cyber-security firms? It turns out that even they can be out to steal investor money.
$50 million and counting
The CFO of email security company Giga Media Access, has just faced the judgement of the courts for the Southern District of New York.
CFO Nihat Cardak, has just pled guilty in regard to a fraud in regard to banks and investors through making false claims of the financial well-being of the cyber-security company. The CFO and other executives falsified bank statements and audit reports. They did so, in part, by impersonating the auditors backed by fabricating the legal opinions of the “Giga Trust legal team.”
Why did the security company lie? They did so, to keep the company afloat for as long as they could fake keeping the company afloat. Despite their best efforts at fabrication, the organization had no choice but to declare bankruptcy in 2019. In doing so, investors lost tens of millions of dollars.
According to the Department of Justice, GigaTrust:
“Purported to be a market-leading provider of cloud-based content security solutions…the defendants devised a scheme to defraud investors and lenders…”
The top executives had a certain division of fraudulent activities; one sent faked documents to an investment banking firm and two others faked bank statements and fictitious audit reports to banks. As part of the scheme (according to the DOJ), the security company went so far as to forge a letter from their lawyers.
The CFO pled guilty in August 2022, and will now face charges relating to committing securities fraud. The CFO could potentially face five years in prison. He will be sentenced on May 16, 2023.
Creating a smokescreen
Fraud generally requires that unethical activities occur in the absence of observation or oversight. What the executives at this company did, much like Theranos in the medical diagnostics area, was to create a smokescreen. There were lies on top of lies, faked documents, legal opinions that were never stated, and a presence of validity in what they were attempting to do.
Theranos seemed legitimate as the company kept faking reports and producing documentation supposedly endorsed by experts. Giga Media Access attempted to do the same thing. Both companies needed ever-increasing amounts of cash to stay ahead of their creditors and to lend an air of legitimacy.
In the end, both organizations cost investors and lenders millions of dollars that probably can’t be reclaimed. It makes scant difference that the principals of both companies are going to jail; the executives have ruined lives.
The way around any smokescreen is due-diligence. With thorough investigation as to the technology or leadership or even status within their industries, the companies might have run into enough skepticism to avoid investment.
CFO Nihat Cardak might have rationalized his behavior that if he could fake success long enough, he might have turned the company around. While the rationalization could have make sense to an extent, the gamble was that the CFO was playing with other people’s money and never his own. In order to make his reasoning work, he had to fake the credentials of an audit firm and a lawyer. He was prepared to bring everyone down around him.
How secure was this security company? It never was, it was a scam set up around an industry with an impressive enough looking wall around the truth.
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