Frank
What happened, according to JPMorgan’s own complaint — which you are invited to read at your leisure — and studded with unintentionally amusing quotes from senior people at JPMorgan who are paid to know better:
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Chez Guevara — Dining in style at the Disaster Café™
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The start-up
In 2017, Charlie Javice, a photogenic — JPMorgan’s complaint does not specifically allege that Javice was photogenic but she was, so we are going with this — 24 year-old founded “Frank”, an online tool to help students apply for federal student aid. It is not clear how Frank proposed to make money from this, but okay. By early 2021 Frank was publicly claiming to have helped millions of students obtain billion dollars of loans.
In July 2021, Javice tried to flog the business to JPMorgan, claiming to have 4.25 million “users”, each of whom had created an account on Frank’s website with a first and last name, email address and phone number. This appears to have been a bare-faced lie. JPMorgan called her bluff.
As part of its “critical confirmatory due diligence”, on 1 August 2021 JPM asked to see Frank’s account data. Frank engaged an as-yet unnamed data science professor, whom we will call the “dodgy data science professor” for reasons that will become obvious, to make up some plausible-sounding data, using “synthetic data techniques”.
Memorable quote from JPMorgan:
“Synthetic data, in plain English, is fake information.”
Frank paid the dodgy data science professor $18,000 for his trouble, first unilaterally doubling his hourly rate, then adding $4,500 to his bill to persuade him to be discrete on his invoice about what he had actually done.
Frank’s “Chief Growth Officer” Olivier Amar simultaneously bought a list of 4.5m email addresses of actual high school students, college students and young people off the dark web from a marketing firm for $105,000.
On Thursday 5 August 2021, Frank agreed to share some data (but, citing “privacy compliance”) with email and physical addresses substituted for unique identifiers) with a third-party vendor to validate it.
Another memorable JPMorgan quote from the complaint:
“The Fake Customer List had no value as diligence information. It did not tell JPMorgan anything about Frank, its business, or the students who supposedly started filling out FAFSAs”.
Therefore, since, on its own sworn testimony, JPMorgan knew nothing about Frank, its business or its customers, and given JPMorgan’s hundred-year reputation for prudence and sophistication the financial markets, JPMorgan terminated discussions and that was the last we would hear of it. Right?
Wrong.
The deal closes
Yet, JPMorgan went ahead all the same. On Sunday, August 8, JPMorgan acquired Frank for $175m, hiring Javice, Amar and other Frank staff as employees to run the business. The deal closed in September 2021.
In January 2022, someone at JPMorgan had the bright idea of testing the quality of Frank’s customer list, to see how much business it might be worth. JPMorgan asked Javice to send the list to its client outreach team. Javice knocked up an ad hoc list from the dodgy dossier and the emails it got from the marketing firm and sent this across, hoping JPMorgan might not notice.
They hoped in vain. JPMorgan contacted a random sample of about 400,000 emails on Frank’s list. Of these, only 28% of the emails were delivered, 0.3% were opened.
Another memorable quote from JPMorgan:
The marketing campaign was a disaster.
In June 2022 JPMorgan investigated, found emails attesting to all the above from their now employees, fired them and shut down Frank.
Blaze of lawsuits
And there might it have ended, had Javice not sued JPMorgan, in December 2022, alleging the bank used its investigation into Frank as an excuse to fire her from her job with the company. Rather than stoically, and quietly, defending this patently frivolous action, JPMorgan countersued for its acquisition cost, and as a result the world’s media with an embarrassing take of witlessness, all around, for what is in JPMorgan’s scheme of things a paltry sum.
So Frank earns its place in our financial disasters roll of honour, despite being a fifth of the usual size to qualify for entry.
It is — ought to be — instructive for the sheer scale of the pig’s ear JPMorgan made out of what should have been a simple “pass”. What the hell happened here? What kind of witchery did young Javice cast to dim the gimlet-eyes of JPMorgan’s due-dilly police and BS detection squads?
Javice, a millennial, has great hair, sparkly blue eyes and (so JC is told) Instagrams well. But this is not normally enough to fox the House of Morgan. But she had made it to the Forbes “30 under 30 list” — you know what JC thinks about awards dished out by magazines, and these days Forbes barely counts even as that, being basically a blogging platform. And Crains’ 40 under 40:
Javice has done her homework. [A pity JPMorgan didn’t. — Ed.] Frank doesn’t focus on the Ivy League borrower, as many loan-refinance startups do. Indeed, many users are lower income, and some have spent time in prison. Javice supports online education, which is largely used by minority and lower-income students and, she says, unfairly demonized.
And because women hold a disproportionate amount of student loan debt in this country, Frank is “not as masculine around money,” Javice said.
We wonder whether being “masculine around money” involves asking for it back at some stage?
JPMorgan can bellyache, but none of the material Frank submitted indicated at any point how it was proposing to make money out of its clients — who were not just your usual run-of-the-mill skint students, but especially impoverished ones, ex-prisoners, so it is somewhat moot how many customers it had. Probably the less the better.
And Frank had previous for “grandiosity”, having been ticked off previously for over-stating its connections with the Department of Education[1] and making misleading claims about COVID relief.[2]
Seriously?
But in the main, this comes down to plain old crumby policework by JPMorgan.
They said it themselves:
“The Fake Customer List had no value as diligence information. It did not tell JMPC anything about Frank, its business, or the students who supposedly started filling out FAFSAs”.
That being the case, why go ahead with the acquisition? How did they come up with the USD125m valuation? And having made themselves look like such a much of, well, Charlies, what on Earth were they thinking taking this sorry mess to court?
A final choice quote, this one from JPMorgan CEO Jamie Dimon, on a conference call to discuss the Bank’s fourth-quarter 2022 earnings:
“I’ll tell you the lessons learned here when this thing is out of litigation.”
Free lessons while-u-wait
While we wait, the JC offers two learnings we can all take from this:
One: conduct your due diligence before acquiring a company, not four months afterwards.
Two: if your corporate acquisition people were gulled by a 25 yo with great hair and an iffy Forbes profile into dropping two hundred large on a lemon, quietly fire them and move on. For Pete’s sake don’t launch an embarrassing public lawsuit about it. It is only a couple of hundred million, and it isn’t like Javice will be able to pay it back anyhow.
But, whoops:
Charlie Javice, who is accused of defrauding JPMorgan into buying her now-shuttered college financial aid company, Frank, will go to trial in October 2024