Published by Herskovits PLLC

SEC Suit Targets Fintech Startup Scam

SEC Suit Targets Fintech Startup Scam

The SEC has filed a complaint accusing Mozido's founder, Michael Liberty, and four of his associates of defrauding investors out of over $48 million. The mobile payments startup allegedly used funds from investor accounts to sustain its managers' luxurious lifestyles.  

The company’s CEO and his co-defendants allegedly advertised lucrative investments in shell companies possessing interests in Austin-based Mozido, a venture-backed company with an estimated value of at least $1 billion. This type of company is commonly known as a “unicorn.” According to the SEC, investors were lured by the prospect of making seminal investments in a promising financial technology startup.

The SEC alleges that instead of using investments to grow Mozido, the defendants used them to settle another SEC lawsuit against Liberty, to purchase luxury real estate and vehicles, produce a motion picture, and hire private jets.

According to the lawsuit, Liberty and his co-conspirators misrepresented the valuation of Mozido to investors, initially saying it was worth $80 million when it was barely valuated at $16 million. In early 2012, prospective investors were told the company’s value was $100 billion, when according the the previous fiscal year’s report, its total assets were about $2 million, with $8 million in long-term debt.

To lure investors, Liberty also misrepresented the amount of his personal investments in the company, which he claimed would fuel its growth. The defendants listed in the lawsuit include his wife Brittany Liberty and his cousin Richard Liberty.

The SEC found evidence that the shell companies used to capture investments in fact did not own any interest in Mozido or owned shares that could not be sold. In a cover-up maneuver, the defendants allegedly diluted the investors interests and convinced them to trade some of the securities they owned for others worth about ten times less.

Created in 2008, Mozido once attracted multi-million dollar investments from the likes of Google’s Eric Schmidt and hedge fund billionaire Julian Robertson. But as it was included in world’s  top-unicorn lists, it defaulted on $45 million in loans in 2016, and that is when its more serious troubles began.

For the SEC’s Paul Levenson, investors must be vigilant when considering this type of investments: “The prospect of investing in a nonpublic, startup company may hold considerable allure, but buyers need to understand what they are buying. Unscrupulous operators make it difficult for ordinary investors to assess such investment opportunities.”

Not all of Mozido’s executives were in on the scheme. As early as 2013, the startup’s executive chairman warned one of its attorneys about Liberty’s misrepresentations to investors and refused to participate. The SEC complaint cites the following communication between the chairman and the attorney:

"For Michael [Liberty] to be out on his own, talking with investors and representing the value of his [personal] guarantee, while at the same time not disclosing that he is being sued... for the failure of that guarantee is beyond major… Were all the facts out, Michael could get in real trouble for that." 

The SEC is looking to bar the defendants from further violations, while simultaneously seeking a disgorgement of their fraudulent gains, plus interest.

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Related topics: Securities Exchange Commission (22)


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