The Bitwise Fraud: How Due Diligence Could Have Saved $115 Million

December 30, 2024

The December 2024 sentencing of Bitwise Industries co-founders Jake Soberal and Irma Olguin Jr. to 11 and 9 years in prison, respectively, serves as a stark reminder that even the most promising startups can harbor devastating fraud. Their $115 million scheme, which collapsed in May 2023 leaving nearly 1,000 employees jobless, offers critical lessons about the importance of rigorous due diligence—and how even sophisticated investors can fall victim to well-orchestrated deceptions.

The Anatomy of a $115 Million Deception

Bitwise Industries appeared to be Central Valley California's greatest startup success story. Founded in 2013, the company promised to create technology jobs for underserved communities while revitalizing blighted urban areas. The founders graced Forbes Magazine, delivered TED Talks, and portrayed themselves as social entrepreneurs changing the world through technology.

Behind this glossy exterior lay a house of cards built on fabricated financials, forged documents, and outright lies. The scope of deception was breathtaking:

Inflated cash positions: In February 2022, they claimed $44 million in cash when they actually had less than $12 million

Fabricated revenues: They reported $58 million in revenue for 2021 when revenue was essentially nonexistent

Phantom investments: They falsely claimed to have secured a $150 million investment from a London firm

Doctored audits: They altered professional audit reports to show revenues 300% higher than reality

Forged bank statements: They created fake screenshots showing $23.4 million in accounts that actually contained just $325,100

By March 2023, as the company claimed $77 million in cash and $143 million in revenue, the reality was less than $5 million in cash and minimal revenue. The fraud continued until the inevitable collapse in May 2023.

Even Sophisticated Investors Can Be Fooled

One of the most unsettling aspects of the Bitwise case is how it ensnared experienced investors who should have known better. The company raised over $75 million through Series A and B rounds, attracting investment from firms that presumably had sophisticated due diligence processes.

This wasn't a case of naive individual investors being taken in by a obvious scam. These were professional investors, likely with teams of analysts and established procedures for vetting opportunities. Yet they were systematically deceived by founders who understood exactly what investors wanted to see—and were willing to forge documents to show it.

The case demonstrates that fraud can be so sophisticated and comprehensive that even experienced professionals can be fooled. When management is willing to fabricate bank statements, alter audit reports, and create entirely fictional financial narratives, traditional red flag detection becomes significantly more challenging.

Red Flags That Proper Due Diligence Could Have Caught

Despite the sophisticated nature of the fraud, proper due diligence procedures could have identified numerous warning signs that should have stopped investors in their tracks:

1. Independent Bank Verification:

The Problem: Soberal and Olguin routinely provided falsified bank statements and account screenshots.

The Solution: Investors should have required direct verification of cash balances through independent bank confirmations sent directly from the bank to the investor's due diligence team, bypassing management entirely.

2. Revenue Source Analysis:

The Problem: The company claimed tens of millions in revenue that didn't exist.

The Solution: Detailed customer analysis would have revealed the disconnect. Investors should have demanded customer lists, interviewed key accounts, and analyzed the customer concentration. A company claiming $58 million in revenue should have identifiable, substantial customers willing to verify their business relationships.

3. Independent Audit Verification:

The Problem: Management provided altered audit reports showing inflated revenues.

The Solution: Investors should have contacted the auditing firm directly to verify the authenticity of audit reports. Audit firms maintain strict protocols about report distribution and would have immediately flagged any discrepancies.

4. Cash Flow Analysis:

The Problem: A company burning cash while claiming strong revenues and cash positions.

The Solution: Detailed cash flow analysis would have revealed the disconnect between claimed profitability and constant fundraising needs. Why would a profitable company with $77 million in cash need continuous investor funding?

5. Management Background Verification:

The Problem: The founders hired unqualified family and friends to key positions, allowing them to compartmentalize information.

The Solution: Thorough background checks on key personnel, analysis of organizational charts, and questions about unusual hiring patterns could have revealed the nepotistic structure that enabled the fraud.

6. Operational Due Diligence:

The Problem: Claims of massive revenue that weren't supported by operational capacity.

The Solution: Site visits, employee interviews, and operational assessments would have revealed whether the company had the infrastructure to support claimed revenue levels. A company generating $143 million in revenue should have visible operational scale.

Specific Metrics That Would Have Exposed the Fraud

Several financial metrics, if properly analyzed, would have immediately raised red flags:

Revenue per Employee: With approximately 800 employees, Bitwise's claimed $143 million in revenue would suggest roughly $179,000 per employee. While not impossible, this would warrant deep investigation into the business model and revenue sources.

Cash Burn Rate vs. Fundraising Frequency: The constant need for new funding despite claimed profitability should have triggered intensive cash flow analysis.

Customer Concentration Risk: Any legitimate $100+ million revenue business would have had identifiable major customers whose relationships could be verified.

Accounts Receivable Analysis: High revenue claims should correlate with substantial accounts receivable, which could be verified through aging reports and customer confirmations.

The Human Element: Management Red Flags

Beyond financial metrics, there were behavioral and structural red flags that proper due diligence could have identified:

Compartmentalized Information: The hiring of unqualified family members to key positions should have raised questions about information flow and controls

Resistance to Independent Verification: Any resistance to independent bank confirmations or direct auditor contact should have been an immediate deal-breaker

Inconsistent Narratives: Professional investors should have noticed inconsistencies between public statements, investor presentations, and private conversations

Lessons for Future Due Diligence

The Bitwise case reinforces several critical principles for investment due diligence:

Trust but Verify Independently: Never rely solely on management-provided financial documents. Always seek independent verification through third parties.

Follow the Money: Cash flow analysis remains one of the most reliable indicators of business health. Profitable companies shouldn't need constant capital infusions.

Operational Reality Checks: Financial claims should align with operational capacity. Big revenues require big operations.

Management Quality Matters: The founders' decision to hire unqualified family members wasn't just poor judgment—it was a structural enabler of fraud.

Red Flag Escalation: Any single major red flag should pause the entire process until resolved. Multiple red flags should end discussions entirely.

The Broader Implications

The Bitwise fraud serves as a sobering reminder that due diligence isn't just about checking boxes—it's about maintaining a healthy skepticism even when everything appears perfect. The most dangerous frauds are often the most sophisticated ones, perpetrated by management teams who understand exactly what investors want to see.

For the investment community, this case underscores the need for more rigorous, independent verification procedures. It's not enough to rely on management representations, even when backed by seemingly authoritative documents. In an era where technology makes document forgery easier than ever, the premium on independent verification has never been higher.

The 900+ employees who lost their jobs, the investors who lost $115 million, and the Central Valley community that lost a promised economic catalyst all paid the price for inadequate due diligence. While Soberal and Olguin bear full responsibility for their crimes, the investment community must learn from this case to prevent future tragedies.

Proper due diligence isn't just about protecting investor capital—it's about protecting entire ecosystems of employees, communities, and stakeholders who depend on honest business practices. The Bitwise case proves that the cost of inadequate due diligence extends far beyond financial losses to encompass human tragedy on a massive scale.

In the end, the most sophisticated fraud is still just fraud. With rigorous, independent due diligence procedures, even the most elaborate deceptions can be exposed before they claim their victims. The question isn't whether fraud can be prevented entirely—it's whether we're willing to implement the procedures necessary to catch it before it's too late.