Charlie Javice sold her financial aid startup Frank to JPMorgan Chase for $175 million. But soon after the ink on the deal was dry, the bank discovered that their new acquisition was not at all what it seemed. WSJ’s Alexander Saeedy explains how a trial about fraud committed against JPMorgan resulted in the bank feeling the heat. Kate Linebaugh hosts. Sign up for WSJ’s free What’s News newsletter. Further Listening: - A $175 Million ‘Huge Mistake’ - JP Morgan CEO Jamie Dimon on What’s Next for the Economy Learn more about your ad choices. Visit megaphone.fm/adchoices
Chapter 1: Who is Charlie Javis and what is Frank?
At a federal courthouse in Manhattan, a witness was called to the stand. He was testifying for the prosecution. The witness, Patrick Vuvor, had been the chief software engineer at a financial aid startup called Frank. On the stand, he recounted a story from back in 2021. Frank's founder, a woman named Charlie Javis, was on the precipice of selling her business to JPMorgan Chase.
It would be a big, life-changing deal. And this witness testified that Javis had an unusual request.
Chapter 2: What was the unusual request Charlie Javis made?
She tells him, I need you to create a synthetic database of containing four million profiles, essentially artificial data.
That's our colleague Alexander Saidi. So how does this engineer testify that he responded to this request?
Well, at first he says, is this even legal? And he then says he refused to do it. because he wasn't sure it was even legal, what was being asked of him. In reply, Charlie said to him, don't worry, I don't want to end up in an orange jumpsuit. It was when the jumpsuit comment happened that it was like, this is a real trial about real crimes.
There are 12 real people sitting here listening and deciding whether or not you're going to really go to jail or not. And when he said it in front of the jury, you could feel it in the room that the stakes just got a lot higher. And I'm not trying to be dramatic. It really did feel that way.
This trial, which concluded Friday, exposed not just the actions of Charlie Javis. It also revealed ignored warnings and lax due diligence at J.P. Morgan on a deal that CEO Jamie Dimon has called a, quote, huge mistake. Why was this trial worth paying attention to?
It was worth paying attention to because it offered a pretty unprecedented insight into how the sausage gets made at arguably the most powerful bank in the world. The big question was, well, how did this happen at the biggest bank in the country that's supposed to be an expert in deal-making?
And did you get the answers?
I would say I did get the answers.
Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Wednesday, April 2nd. Coming up on the show, how a fraud trial exposed embarrassing details about J.P. Morgan.
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Chapter 3: Why did JP Morgan acquire Frank?
Hi, my name is Charlie Javis, and I'm the founder and CEO of Frank. Thank you so much for joining us today.
What you're hearing is Exhibit 1.8 in the case of the United States of America v. Charlie Javis. This video is from an archived webinar where Javis is introducing her financial aid business, Frank.
To date, we've helped close to 1 million students get access to financial aid. We're so proud of our work.
Javis graduated from the Wharton School of Business. She was a high-achieving wunderkind with a gift for marketing herself. When she was in her 20s, she started Frank. Why did she name it Frank?
That's a good question. She named it Frank, according to a TV interview that I saw. It means I'm forthright with you.
And so Frank kind of represented that as a name because it just meant honest.
So that's why it was called Frank.
Frank was a tool that was meant to make it easier for students applying for financial aid for college or graduate school. At the core of the trial was the 2021 sale of Frank to JP Morgan for $175 million. JP Morgan had bought Frank, in large part, for its millions of young users.
The bank says that what they felt that they were buying was a list of customers, a highly vetted and high-quality list of customers.
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Chapter 4: When did JP Morgan realize there was an issue with Frank's data?
So that means that the email addresses in the data file were not legit and likely did not have anything to do with the names of the people who were in the data file.
And that led to the total meltdown of the relationship.
Correct. She was put on administrative leave. The bank ran an internal investigation into the matter. And then they fired Charlie as a result and denied her the remainder of her $20 million retention bonus that she was given as part of the purchase agreement when the bank bought her startup.
This was the data that Javis had asked her chief software engineer to fake. And remember, he testified that when he refused, Javis made that comment that she didn't want to end up in an orange jumpsuit. So Javis looked for someone else. She found a math professor at Queens College and paid that professor $18,000.
She told him, this is the whole synthetic data thing, we have this seed data set of 300,000 profiles. We want you to create a larger data file with 4 million profiles, but whose characteristics are identical to the seed file. So he just thought he was doing a, you know, consulting project outside of his normal tasks as a professor.
What did he say on the stand?
He said, the names are fake. The names are made up. And he said, it would have been pretty obvious if you had done some basic due diligence.
And at the trial, it became clear that JP Morgan hadn't done that basic due diligence. That's next. At the trial, Charlie Chavis' defense took an interesting approach. Instead of focusing on the actions of their client, they put the spotlight on J.P. Morgan.
The key argument for them was that this wasn't fraud. What we're seeing is actually buyer's remorse. J.P. Morgan, they actually just made a bad investment, and they're really mad about that.
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Chapter 5: How did the synthetic data scandal unfold in court?
Her top two defense attorneys making this argument are very experienced.
Charlie's two top attorneys are Jose Baez and Ronald Sullivan. They're kind of a team that have worked on a lot of cases together, most recently including the Harvey Weinstein trials. They were co-attorneys for Harvey as a defendant in those cases. So they know how to play things for a jury because it's the jury who's deciding everything here.
In this trial, that strategy was on display after the former software engineering chief testified about Javisa's orange jumpsuit comment. Immediately, one of her attorneys sprung into action.
Like before the judges even like passed the mic to him, he like jumps out of his seat and he's like, you wanted to date Ms. Chavis, didn't you? You sent her flowers. You sent her messages saying you have a terrifically fit body. He's like ranting and raving at this guy on the witness stand. You know, the judge is like, can you please move to the podium?
He like knocks over like a computer monitor on his way. He's like kind of out of breath. Like it was very embellished behavior.
Beyond trying to discredit the prosecution's witnesses, the defense tried to make the case that JP Morgan didn't thoroughly vet Frank's business. They called a former lower-level JP Morgan employee to the stand.
There was a younger person in their, I think, early 30s who was called to testify, who was essentially a bit of a mid-level employee. She was responsible for, like, taking notes during meetings and building PowerPoints. You know, she wasn't a decision maker, but she was helping the decision makers. And there was a Skype message that Charlie's defense attorneys pulled up.
that this young woman had sent to her boss saying, you know, Charlie's startup, they barely make any revenue. So how can we even know that she's got these customers? And her boss sent back to her, well, it'll all come out in confirmatory due diligence. Don't worry about it.
And now with hindsight, it's like, wow, she was actually asking the exact right question and nobody was really taking it that seriously.
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Chapter 6: What was the defense strategy for Charlie Javis at the trial?
Javisa's lawyers cross-examined another JPMorgan employee, the executive who led the deal to buy Frank. The defense lawyers pulled up some of this executive's text messages. And in one text, she referred to an annual shareholder letter written by J.P. Morgan CEO Jamie Dimon.
And she had underlined segments of that letter and sent it to the whole team working on the Frank deal. And in that annual letter, he actually had a section about due diligence. And he said in one part of it, you know, sometimes you don't need to do analysis. to know if a deal is a good deal. Sometimes you just know. You know, that's me paraphrasing what he said.
And Chavis' attorney said, isn't this proof that you guys were willing to rush your work to move ahead on this deal? And she said, it was a joke to my team. I didn't really mean it. But the point was made to the jury, which was that some people knew that things were moving really fast inside of J.P. Morgan. And nobody necessarily pumped the brakes enough to double-check all the work.
J.P. Morgan did do some due diligence. They hired a third-party company to examine and validate the more than 4 million users that Frank said it had.
Now, what this firm really seemed to do was to take the synthetic data file that Charlie had created, essentially go and count the number of rows and how many rows had information in it. So it didn't actually validate that the people were real, but they sort of took an Excel spreadsheet and said, okay, there seem to be 4 million people with first names and last names.
At the trial, another J.P. Morgan executive said that he expected this third-party company had been doing more than just counting rows in a spreadsheet. In testimony, a representative from the third-party company said it actually offered to do more validation work on the data file, but that J.P. Morgan didn't express interest in doing that.
So the defense just tried to paint a picture saying the bank either you know, didn't care about how many customers there really were, or, you know, they rushed their work to, you know, get this deal done and missed key details in the process.
In closing arguments, the prosecution told the jury this was a clear case of fraud. The defense said it was buyer's remorse. And after five weeks of testimony, it was up to the 12 people on the jury to decide. Last Thursday, they started their deliberations. And on Friday, they were still deliberating.
And then around 2.30, a note was sent to one of the clerks running the court that said the jury has reached a verdict.
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