Startup Litigation Digest #4
UC Center for Business Law San Francisco | Summer 2024
About this Edition
The Startup Litigation Digest aims to shed light on the often opaque realm of litigation involving private companies. While startups might not encounter as many legal challenges as publicly traded companies, lawsuits from individuals, investors, and regulatory bodies remain a significant aspect of the legal landscape these enterprises navigate. Given the rapid expansion of private markets, we anticipate a growing focus from both regulators and private parties in these areas. However, the specifics of startup-related lawsuits tend to be less known, as these cases often appear on lesser-known legal dockets and rarely result in publicly disseminated opinions or garner significant media attention.
This is our first edition on Substack, and it marks the fourth release of the digest, published on a quarterly basis. We have imported our prior editions into Substack, and you can read the first, second, and third editions in this new format too.
As the startup ecosystem continues to evolve, understanding these cases becomes increasingly crucial for founders, investors, and legal professionals alike. Our goal is for this publication to become a valuable resource for those seeking to understand the litigation backdrop of the tech-driven economy.
Your insights help shape this digest. If you have feedback on this edition or know of litigation matters you'd like to see highlighted in future releases, please reach out directly or email us at epsteinevan@uclawsf.edu or cablea@uclawsf.edu
We gratefully acknowledge the contributions of Isaiah Zamora ‘26 for his assistance in this edition of the Startup Litigation Digest.
Sincerely,
UC Center for Business Law San Francisco
Summary of Cases
Binance & Changpeng Zhao. On April 30, 2024, Changpeng Zhao, the founder and former CEO of Binance, received a four-month prison sentence. The case highlighted regulatory and compliance failures, contrasting with Sam Bankman-Fried’s direct financial misconduct.
Terraform & Do Kwon. On June 13, 2024, the SEC announced that Terraform Labs PTE, Ltd. and Do Kwon agreed to pay more than $4.5 billion following a unanimous jury verdict holding them liable for orchestrating a years-long fraud involving crypto asset securities that led to massive investor losses when the scheme unraveled.
Joonko & Illit Raz. On June 11, 2024, Illit Raz, founder and former CEO of Joonko Diversity, Inc., a New York-based startup developing AI recruitment software, was charged by the DOJ with securities and wire fraud for falsely representing Joonko’s customer base and business aspects to secure $27 million in investments. The SEC also charged Raz with securities violations, seeking penalties and a permanent injunction.
Toptal and Taso du Val Litigation. Toptal, a company that connects businesses with freelance workers globally, raised $1.5 million in 2012 through convertible notes, granting investors approximately 15% of Toptal’s stock if the company, structured as a single-member LLC, secured additional venture funding and converted into a corporation. Employees were also offered stock under this condition, but the company never converted to a C-Corp. The company, its co-founders, and some investors and former employees, have been involved in extensive litigation in CA, FL, NV and NY courts since at least 2019.
Outcome Health & Rishi Shah, Shradha Agarwal and Brad Purdy. On July 1, 2024, Rishi Shah, Shradha Agarwal and Brad Purdy, former executives of Outcome Health, a Chicago-based health technology start-up company, were sentenced to prison for their roles in a $1B corporate fraud scheme that targeted Outcome’s clients, lenders and investors. Shah was sentenced to seven years and six months in prison. Agarwal was sentenced to three years in a half-way house. Purdy was sentenced to two years and three months in prison.
Updates on Cases from Prior Issues
HeadSpin & Manish Lachwani (Issue #1): On April 19, 2024, Manish Lachwani, the founder and former CEO of HeadSpin, a Silicon Valley-based software-as-a-service (SaaS) company that gave potential investors false financial information while raising more than $100 million, was sentenced to 18 months in prison, following his conviction on wire and securities fraud charges. The sentence was handed down by the Hon. Charles R. Breyer, Senior United States District Judge.
Ozy Media & Carlos Watson (Issue #1): On July 16, 2024, Carlos Watson, the founder and former CEO of Ozy Media (Ozy), was convicted by a federal jury in Brooklyn of conspiracy to commit securities fraud, conspiracy to commit wire fraud and aggravated identity theft in connection with a years-long scheme to defraud investors in and lenders to Ozy of tens of millions of dollars. Ozy was also convicted on both counts of the indictment. The verdict followed 8 weeks of trial before United States District Judge Eric R. Komitee.
Bitwise, Jake Soberal and Irma Olguin, Jr. (Issue #1): On July 17, 2024, Irma Olguin, Jr., and Jake Soberal, the founders of the Fresno-based start-up company, Bitwise Industries, pleaded guilty to one count of conspiring to commit wire fraud and one count of wire fraud. They admitted to defrauding investors, lenders, and others out of $115 million. Olguin and Soberal are scheduled to be sentenced on Nov. 6, 2024, by U.S. District Judge Dale A. Drozd.
Slync and Christopher Kirchner (Issue #3): On July 11, 2024, Christopher Kirchner, the founder and former CEO of Dallas-based supply chain management software company Slync, was sentenced to 20 years in federal prison for defrauding investors of tens of millions of dollars by U.S. District Judge Mark Pittman, who also ordered him to pay more than $65 million in restitution.
Stimwave Technologies and Laura Tyler Perryman (Issue #3). On June 17, 2024, Laura Perryman, the founder and former CEO of Pompano Beach-based medical device company was sentenced to 6 years in prison in connection with a health care fraud scheme. Stimwave previously entered into a Non-Prosecution Agreement with the U.S. Attorney’s Office for the Southern District of New York. Perryman was found guilty of health care fraud and conspiracy to commit health care fraud and wire fraud following a two-week trial before U.S. District Judge Denise L. Cote.
1. Binance & Changpeng Zhao
On March 27, 2023, the CFTC charged Binance, founder Changpeng Zhao, and former CCO Samuel Lim with multiple violations, including willful evasion of U.S. law and operating an illegal digital asset derivatives exchange. The complaint alleges Binance facilitated U.S. customer transactions without proper compliance, instructed evasion tactics, and failed to implement effective AML and KYC programs. The CFTC complaint sought monetary penalties, disgorgement, and permanent bans.
On June 5, 2023, the SEC charged Binance Holdings Ltd. (“Binance”), which operates the largest crypto asset trading platform in the world, Binance.com; U.S.-based affiliate, BAM Trading Services Inc. (“BAM Trading”), which, together with Binance, operates the crypto asset trading platform, Binance.US; and their founder, Changpeng Zhao, with 13 violations, including operating unregistered exchanges, broker-dealers, and clearing agencies, misleading investors about trading controls, and secretly allowing high-value U.S. customers to trade on Binance.com despite restrictions. They also allegedly commingled customer assets and manipulated trading volumes. The SEC complaint emphasized extensive deception, conflicts of interest, and evasion of U.S. securities laws.
On November 21, 2023, Binance pleaded guilty and agreed to pay $4.3 billion to resolve the Justice Department’s investigation into violations related to the Bank Secrecy Act (BSA), failure to register as a money transmitting business, and the International Emergency Economic Powers Act (IEEPA). Changpeng Zhao also pleaded guilty and agreed to pay a $50 million fine to failing to maintain an effective anti-money laundering (AML) program, in violation of the BSA and resigned as CEO of Binance.
Binance’s guilty plea was part of coordinated resolutions with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), Office of Foreign Assets Control (OFAC), and the U.S. Commodity Futures Trading Commission (CFTC).
In April 2024, Zhao was sentenced to four months in prison by Judge Richard Jones of the Western District of Washington. The four month sentence was significantly less than the 36 months federal prosecutors had initially sought in their sentencing memo.
2. Terraform & Do Kwon
On February 16, 2023, the SEC charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.
According to the SEC’s Complaint, from at least 2018 through 2022, Terraform and Kwon offered and sold crypto asset securities in unregistered transactions and perpetrated a fraudulent scheme that led to the loss of at least $40 billion of market value, including crippling losses for U.S. retail and institutional investors. Terraform and Kwon marketed their crypto asset securities to investors in the United States and other countries, repeatedly telling investors that the tokens would increase in value. By 2022, the LUNA token, one of Terraform’s crypto asset securities, had a market value among the ten highest in the world for crypto assets.
The SEC claimed Terraform and Kwon violated the securities offering registration provisions and antifraud provisions of the federal securities laws. To increase confidence in the Terraform ecosystem, and promote trading of its crypto asset securities, Terraform and Kwon engaged in a ploy to deceive and mislead investors into believing that Terraform blockchain was being used to process and complete real purchases by retail consumers in Korea.
On April 5, 2024, following a nine day trial, a Southern District of New York jury found Terraform Labs PTE Ltd. and Do Kwon liable for defrauding investors in crypto asset securities. The court had previously found that Terraform Labs and Kwon unlawfully offered and sold crypto asset securities in violation of the registration provisions of the Securities Act of 1933.
On June 13, 2024, following the unanimous jury verdict finding Terraform and Kwon liable for fraud violations, the SEC announced that Terraform Labs and Do Kwon agreed to pay over $4.5 billion. As part of the agreement, Terraform is to pay $3.6 billion in disgorgement, $467 million in prejudgment interest, and a $420 million civil penalty. They will also cease selling crypto asset securities, reduce operations, replace two directors, and liquidate remaining assets to compensate investors, pending court approval in their bankruptcy case. Do Kwon agreed to jointly pay $110 million in disgorgement and $14.3 million in prejudgment interest with Terraform, and an $80 million civil penalty. Both Terraform and Kwon will be permanently enjoined from violating registration and fraud provisions.
The SEC has created an information page for investors harmed by the Terraform fraud.
3. Joonko & Illit Raz
On June 11, 2024, Illit Raz, founder and former CEO of Joonko Diversity, Inc. (“Joonko”), a startup company headquartered in New York which had developed an AI recruitment software, was charged by the DOJ with one count of securities fraud and one count of wire fraud.
According to the DOJ’s Press Release and Indictment, in 2021 and 2022, Raz allegedly made false claims regarding key aspects of Joonko’s business. Such claims included the alleged false representation of how many customers Joonko had at the time and falsifying the identity of customers. The government claims these false representations induced prospective and existing investors, including venture capital firms, to invest approximately $27 million in 2021 and 2022 funding rounds.
The one count of securities fraud and one count of wire fraud each carry a maximum sentence of 20 years in prison if Raz is convicted. Additionally, on June 11, 2024, the SEC charged Raz with alleged securities violations.
According to the SEC’s Press Release and Complaint, from at least 2018 through June 2023, Raz made repeated material misrepresentations to investors regarding Joonko’s business, including its customer base, capable technology and its revenues. The SEC seeks a permanent injunction, civil money penalties, disgorgement with prejudgment interest, and an officer-and-director bar against Raz.
4. Toptal Litigation and Taso Du Val
In 2019, Breanden Beneschott, co-founder and former COO of Toptal, sued the company and co-founder Taso Du Val in Florida court for breach of contract, fraud, and unpaid wages. He also demanded a 17% stake in the company, which he claimed was verbally promised to him. The company and Du Val counter sued on several fronts including embezzlement, fraud, civil conspiracy, breach of fiduciary duties, and other claims. Both these cases were dismissed by the parties, following an out-of-court settlement agreement.
In 2020, Denis Grosz, an investor and former advisor of Toptal, sued the company and Du Val in Federal Court in San Francisco for breach of contract and other claims. In 2012, Grosz invested $1 million in seed financing in Toptal. Du Val allegedly promised Grosz that his investment would eventually entitle him to own ~10% of the equity of Toptal. Grosz also received the opportunity to obtain an additional 1.5% equity in Toptal, under the terms and conditions of an Advisor Agreement.
Separately, Toptal and Du Val sued Grosz and Mechanism Ventures—a startup studio formed by Grosz in 2019 that hired Breanden Beneschott as its CEO— for economic advantage, contractual and tortious breach of the covenant of good faith and fair dealing, business disparagement, and other claims in Nevada Court. In November of 2023, a jury trial found Grosz liable for breach of contract and of good faith related to his position as an adviser. Toptal won a little over $16 million in damages, including awards of about $500,000 each against Grosz and Mechanism, and $15 million in punitive damages against Mechanism. The judge later lowered the punitive damages to $1.6 million. Grosz and Mechanism have appealed the verdicts in Nevada Supreme Court.
In 2021, Toptal sued in New York state court for tortious interference with contract, unfair competition, misappropriation of trade secrets, as well as breaches of confidentiality, non-solicitation and non-compete agreements against Defendant Andela, Inc. (“Andela”), “a recent competitor of Toptal, and numerous former Toptal personnel that Andela has hired and deployed, in violation of their confidentiality, non-solicitation and non-complete agreements with Toptal, to improperly gain access to Toptal’s trade secrets and confidential information, compete unfairly with Toptal, and poach additional Toptal personnel, clients and the talent that Toptal matches and sources to clients.” This litigation is ongoing.
You may read more about these cases in the following media profiles:
At Booming Toptal, No Stock for Employees or Investors (The Information, Aug 2019 - subscription required)
A $1 Million Bet on a Tech Startup Spawns Investor-Founder Fight (Bloomberg, June 2024 - subscription required).
5. Outcome Health & Shah, Agarwal and Purdy
On July 1, 2024, Rishi Shah, Shradha Agarwal, and Brad Purdy, former executives of Chicago-based Outcome Health, were sentenced for their roles in a $1 billion corporate fraud scheme. Shah received seven years and six months in prison, Agarwal three years in a halfway house, and Purdy two years and three months in prison.
According to the DOJ’s Superseding Indictment, court documents and trial evidence, Outcome Health installed screens and tablets in doctors' offices and sold advertising space on these devices, primarily to pharmaceutical companies. Shah, Agarwal, and Purdy sold more advertising inventory than they possessed and under-delivered on promised campaigns. They concealed these under-deliveries by lying to clients, making it seem like they met the contracted number of screens. Purdy inflated data metrics to falsely show high patient engagement with Outcome's devices. This fraud, which lasted from 2011 to 2017, resulted in over $45 million in overbilled services.
According to the DOJ, The executives also defrauded Outcome's lenders and investors by misrepresenting revenue in 2015 and 2016. They then used the inflated revenue figures in Outcome’s 2015 and 2016 audited financial statements to raise $110 million in debt financing in April 2016, $375 million in debt financing in December 2016, and $487.5 million in equity financing in early 2017. The $110 million debt financing resulted in a $30.2 million dividend to Shah and a $7.5 million dividend to Agarwal, and the $487.5 million in equity financing resulted in a $225 million dividend that benefited Shah and Agarwal.
On April 23, 2023, a federal jury convicted Shah, Agarwal, and Purdy of multiple counts of fraud and other charges. Three other former Outcome employees, Ashik Desai, Kathryn Choi, and Oliver Han, pleaded guilty prior to the trial. Desai will be sentenced on September 20, Choi on October 4, and Han on October 11.
In February 6, 2020, the SEC obtained a partial consent judgment against Desai, who was charged with fraud in connection with raising nearly half a billion dollars from investors.
The SEC’s Amended Complaint alleges that Desai, Shah, Agarwal and Purdy engaged in a fraudulent scheme where they falsely portrayed the company’s success to investors, clients and auditors. The complaint charges Desai and the three other executives with violating, as well as aiding and abetting Outcome’s violations, of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Act of 1934 and Rule 10b-5.
Desai consented to an entry of a judgement permanently enjoining him from violating the antifraud provision referenced above. Additionally, the judgement provides that the amount of any civil monetary penalty will be determined by the court at a later date upon motion of the SEC. The SEC’s actions against Shah, Agarwal and Purdy are ongoing.
About the UC Center for Business Law San Francisco
The UC Center for Business Law San Francisco was founded in 2018 with the mission of bringing together leading scholars, business leaders, practitioners, regulators and students to engage in the study, teaching and practice of business law at UC Law SF (formerly UC Hastings).
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