“Collusion and Fraud to Attract Business Investors”

Summary of issue:
Arxis Financial was retained to quantify the effect of an alleged fraud and breach of contract. The organizers of a new business made multiple and extensive representations about intellectual property that was owned by the business and the prospects of converting that ownership into rather healthy cash flows in the future. Our client was persuaded to invest hundreds of thousands of dollars in stock and then, in subsequent years, over a million more dollars in the form of loans. The loans were convertible to equity.

In the course of attracting investors, the defendants presented an image of success and a high profile celebrity presence. A valuation firm was even retained that opined in writing that the business was worth more than $20,000,000. All of this masked the reality that the business never made a profit. In fact most, if not all, of the revenue was simply business diverted from another business controlled by one of the defendants. The intellectual property that was the basis for the entire business venture was owned by some of the defendants – but not the business that was issuing stock and borrowing money.

Arxis work:
Our initial involvement was to re-create accounting records and attempt to identify a pattern of transactions that would suggest or support a case of collusion and fraud. Because of the financial constraints our work was very targeted and limited. Our work was used to support and assist the work of the team of lawyers in depositions, interrogatories, and other discovery. Our work was also useful in identifying the realizable value of the funds loaned to the business. We also calculated the value of the business for purposes of determining the value of the equity investments of the plaintiffs. Needless to say, the value of the debt and equity was zero.

Result:
A jury trial was held. Arxis Financial presented testimony at trial that was focused mostly on the valuation of a business and, more specifically, intellectual property. The trial lasted several days and the jury came back with verdicts for the plaintiffs.