Former Trustify CEO’s Indictment Highlights Due Diligence Dilemma

Wall Street Journal

The indictment of the former chief executive of Trustify Inc., who is accused of misleading investors about the startup’s financial performance, underscores the challenges facing investors who conduct early-stage due diligence in competitive deals.

The U.S. Justice Department charged Daniel Boice, co-founder of Arlington, Va.-based Trustify, last month with fraud and money laundering, saying he misrepresented the company’s revenue and the size of the business when soliciting investments. Trustify, which said it operated an online marketplace for hiring private investigators, raised $18.5 million in venture funding. Mr. Boice also misappropriated investor funds for himself, the indictment alleges.

Mr. Boice “would provide investors and potential investors with detailed Trustify financial statements that materially and falsely inflated Trustify’s financial performance, including its monthly and annual revenues,” the indictment alleges.

The alleged scheme led to millions of dollars in investor losses, the Justice Department said. Trustify has “effectively ceased operations,”  according to the Securities and Exchange  Commission, which filed a parallel civil case.

The SEC complaint also names Jennifer Mellon, who was a Trustify executive and was married to Mr. Boice, as a relief defendant, seeking the return of money obtained from the alleged fraud. Ms. Mellon wasn’t charged in the criminal indictment.

Mr. Boice couldn’t be reached for comment. Waffa Hanania, Mr. Boice’s attorney, declined to comment.

Ms. Mellon’s attorney, Martin Weinstein, said he was awaiting documents from the SEC and couldn’t comment on the complaint. “She is cooperating fully with the government and she wants to put this behind her,” he said.

Trustify’s case puts a spotlight on a culture of Silicon Valley in which ultracompetitive investors might not ask for hard evidence such as official bank statements from startups when they are rushing to invest in a hot funding round that only allows days or hours to commit to an investment.

“If you feel like you need verification of something and are afraid of asking for it because it will throw you out of the deal or someone will really be offended, maybe it’s not the right deal for you,” said Stephen Palley, partner at law firm Anderson Kill, who advises startups and investors. “Or it’s a risk you are willing to take.”

Most seed-stage startups, as well as many Series A startups, don’t have audited financial statements or a chief financial officer given the cost of such measures in the earliest stages of a company, according to several venture investors.

Two Trustify investors said that they hadn’t seen audited financial statements from Trustify. The investors said they didn’t know if the company ever had audited financial statements.

This due diligence problem is only exacerbated during a heated venture market that had been setting records for valuations and funding levels before the coronavirus pandemic.

“In an overheated environment everyone wants to get in and people can get sloppy,” Mr. Palley said. Trustify had raised funding from some 90 investors, according to the indictment. Those investors included Slow Ventures, Anchorage Capital Group, Structure Capital, and Plum Alley Investments, according to PitchBook Data Inc. and people familiar with the matter. Anchorage Capital Group and Structure Capital declined to comment. Slow Ventures and Plum Alley didn’t respond to requests for comment.

Anchorage had filed a lawsuit in March 2019 against Trustify, alleging that the firm had wired about $2 million to Trustify for the Series B round but that the startup hadn’t sent the firm any stock.

In one investment memo to prospective investors reviewed by WSJ Pro, Mr. Boice said Trustify has “50+ sex trafficking victims freed,” as well as “149 adoptee / birth parent reunifications,” “32 domestic violence victims helped” and “1 death row exoneration.” It couldn’t be determined if these claims were truthful.

“They seemed like normal people,” one investor said of Mr. Boice and others at Trustify. Mr. Boice went beyond inflating Trustify's revenue, the indictment alleges. In June 2018, Mr. Boice sent a fake email to an existing investor, pretending to be a new investor who was confirming the wiring of $7.5 million to Trustify, to convince the existing investor to invest more into the company, the indictment alleges.

Mr. Boice in early 2019 told a potential investor that Trustify had $18 million in its bank account, when it had less than $10,000 and was being evicted from its office, the indictment alleges.

“Motivated fraudsters are going to be able to get away with a lot,” said Anderson Kill’s Mr. Palley“There’s ways to protect yourself. Get as much source material directly from the horse’s mouth as possible.”