JPMorgan Gets Pantsed by Frank
In a perverse development this week, the cohort of high profile venture investors whose gross negligence in due-diligencing their respective investments in FTX resulted in embarrassing write-downs, received some dubious validation as they added the good company of Wall Street giant JPMorgan to their “we got pantsed in the 2021 bubble” club. The story hitting the newscycle came from a lawsuit filed in December at a Delaware federal court – JPMorgan Chase Bank v. Javice, 22-cv-01621, US District Court, District of Delaware (Wilmington) – where JPMorgan alleges it was defrauded by the CEO of its 2021 acquisition target Frank to the tune of $175 million. Though a cursory read of the complaint suggests the lawsuit has merit, the utter failure of the bank to properly effectuate what by any account was a basic due diligence task – a random Know Your Customer assessment – now leaves a dark cloud of ignominy on the esteemed financial institution, and its failure worthy of the opprobrium of its CEO and the ridicule of the public.
The transaction in question was JPMorgan’s acquisition of college financial planning platform Frank in September 2021. The strategic rationale for the acquisition was strong as Frank’s user base – mostly college students – is an extremely valuable target demographic for JPMorgan’s consumer banking business line, just as it is for a myriad of other new JPMorgan competitors – fintechs and neobanks – whose proliferation and market share accelerated through the tail-end of the pandemic. The purported 5 million Frank users made the deal a no-brainer for JPMorgan as it offered a highly monetizable cross-sell opportunity to this highly sought after demo.
The lawsuit was triggered when JPMorgan discovered that Frank’s platform actually served less than 10% of the users that it originally claimed. JPMorgan was led to this conclusion after they executed a post-transaction campaign to market additional products and services to alleged Frank users and got response rates that were well below historical performance thresholds – so far below low that it was as if the emails were sent to users who didn’t exist!
And the lawsuit seems to have merit.
JPMorgan alleges that it uncovered evidence that Frank CEO, Charlie Javice, another Millennial wunderkind turned-out by one of the world’s most estimable business programs – University of Penn’s The Wharton School – paid a data science professor $18,000 to contrive a list of more than 4 million fake student names in order to convince JPM that its valuation was worth the $175 million price tag.
There’s much to extrapolate from the JPMorgan/Frank transaction. Perhaps the most important being that it serves as yet one more data point in support of the notion that even the most highly learned and experienced financial minds are susceptible to gaping blindspots in the frenzied, speculative environment attendant with the peak of a boom in a “boom-bust cycle”, which upon reflection, we were clearly in during late 2021.
Forgetting about the venture capital “royalty” who got gulled by FTX for a moment – royalty who also happened to invest the bulk of their money in 2021 – even within the limited scope of the JPMorgan/Frank deal, JPMorgan wasn’t the only high profile financial investor to get pantsed. Apollo Global Management CEO, Marc Rowan was one of Frank’s primary early investors.
The bottom line remains that JPMorgan was grossly negligent in its due diligence of Frank, just like its venture capital brothers and sisters were with FTX. The rubbish that’s been bandied about recently in the wake of the FTX fallout from financial sponsors about having to “tighten up” diligence procedures is ridiculous. Diligence denotes carefulness and that’s how it should always be conducted.
The seeds of bad transaction outcomes are sewn in low-scrutiny environments. And no one – Jamie Dimon, no entity – JPMorgan, is immune, regardless of reputation or past experience.
In the pantsing of JPMorgan, it should have taken care to tighten its belt.