In an action alleging that they provided misleading information about the finances of Bitwise Industries Inc., a private technology services startup headquartered in Fresno, California, the U.S. District Court for the Eastern District of California issued judgments against Jake Soberal and Irma Olguin, Jr., the former co-CEOs, on January 31, 2024.

Case Summary

Plaintiff Securities and Exchange Commission (referred to as the “Commission” or “SEC”) alleges the following:

ACTION SUMMARY

1. In 2022, Jake Soberal and Irma Olguin, Jr. (collectively known as “Defendants”), who were the co-founders and co-CEOs of Bitwise Industries, Inc., based in Fresno, along with its parent company, BW Industries, Inc. (together referred to as “Bitwise”), raised around $70 million by falsifying documents and deceiving investors. Bitwise provided services such as technology training, software development, and real estate management.

2. During Bitwise’s Series B-2 securities offering in 2022, Defendants deceived investors by making false statements, including exaggerating the company’s financial metrics. To support these false claims, Defendants provided fabricated documents, such as altered bank statements and a fake audit report, to some investors. Approximately 20 investors, including individuals, institutional investors, and venture funds, participated in Bitwise’s Series B-2 offering.

3. Defendants assured investors that Bitwise had substantial revenue and maintained strong cash balances, but this financial stability was a facade. Soberal and Olguin were aware that Bitwise had generated much less revenue than claimed to investors. Additionally, they misrepresented Bitwise’s cash reserves while concealing the company’s frequent cash shortages and struggles to cover operational expenses. Defendants also misled investors about an audit of Bitwise’s financial statements and provided a falsified audit-related document to an investor.

4. The scheme orchestrated by Defendants began to unravel in late May 2023 when Bitwise faced a cash shortage and couldn’t pay its employees. Defendants then disclosed Bitwise’s true financial state to the company’s Board of Directors, which included representatives of major investors. The following day, Bitwise indefinitely furloughed its entire workforce of approximately 900 employees. Shortly after, the Board removed Defendants as co-CEOs.

5. On June 28, 2023, the Board filed for Chapter 7 bankruptcy on behalf of Bitwise Industries, BW Industries, and related entities in the United States District Court for the District of Delaware. These entities are currently undergoing liquidation proceedings.

6. Defendants’ actions, as detailed in this Complaint, constitute violations of federal securities laws’ antifraud provisions. Specifically, Defendants breached Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as Section 17(a) of the Securities Act of 1933.

7. The Commission seeks permanent injunctions, disgorgement of unlawfully obtained profits with prejudgment interest, and civil monetary penalties in this action. Additionally, the Commission requests an order restraining Defendants from participating in securities issuance, purchase, offer, or sale, either directly or indirectly, except for personal accounts, and imposing officer and director bars.

Defendants

1. JAKE SOBERAL

Jake Soberal, aged 37, resides in Fresno, California. Soberal co-established Bitwise and served as its Co-Chief Executive Officer until June 2023. Soberal was admitted to the California State Bar in November 2011.

2. IRMA OLGUIN

Irma Olguin, Jr., aged 42, resides in Caruthers, California. Olguin co-established Bitwise and served as its Co-Chief Executive Officer until June 2023.

Related Entities

1. BW INDUSTRIES, INC.

BW Industries, Inc. (“BWI”) is a Delaware corporation with its principal place of business in Fresno, California. It is the parent entity of Bitwise Industries. BWI and its securities are not registered with the Commission in any capacity. On June 28, 2023, BWI’s Board of Directors filed a petition for bankruptcy on behalf of BWI, Bitwise Industries, and several other BWI subsidiaries. These entities are currently in liquidation.

Bitwise Industries, Inc. is a California corporation with its principal place of business in Fresno, California. It is a wholly-owned subsidiary and was the operating entity of BWI. Bitwise Industries and its securities are not registered with the Commission in any capacity.

2. IRMA OLGUIN

Irma Olguin, Jr., aged 42, resides in Caruthers, California. Olguin co-established Bitwise and served as its Co-Chief Executive Officer until June 2023.

Factual Allegations

I. BITWISE AND ITS BUSINESS

Soberal and Olguin jointly founded Bitwise in 2013. Before co-founding Bitwise, Soberal practiced as an intellectual property lawyer, while Olguin founded multiple other start-ups.

Bitwise operated three core businesses: (1) a “Workforce” division focusing on providing apprenticeship training for technology roles; (2) an “Enterprise Solutions” division delivering project-based systems implementation and software development; and (3) a “Community” division concentrating on developing and managing a commercial real estate portfolio. Its mission aimed to rejuvenate what it termed as “underdog cities” by fostering their technology sector growth.

Soberal and Olguin established and headquartered Bitwise in Fresno. Before its collapse in 2023, Bitwise had announced expansions into other U.S. cities, including Bakersfield, Merced, Toledo, Buffalo, and El Paso.

As co-CEOs, Defendants jointly managed Bitwise. Employees perceived them as joint decision-makers. Broadly, Soberal oversaw Bitwise’s real estate portfolio, while Olguin supervised the technology consulting business. Both were involved in Bitwise’s fundraising activities, communicating with potential investors through various channels like phone calls, emails, and meetings. Major decisions related to Bitwise’s fundraising were jointly discussed and agreed upon by Defendants.

II. DEFENDANTS RAISED APPROXIMATELY $70 MILLION IN 2022

In 2022, recognizing Bitwise’s need for additional funding to cover operational expenses, Defendants opted for a “Series B-2” offering, attracting a mix of existing and new investors. During the June to December 2022 period (the “Series B-2 Period”), Bitwise secured around $70 million from institutional, venture, and individual investors in its Series B-2 round. Some investors included social impact funds interested in both financial returns and societal or environmental benefits.

The Series B-2 investors were swayed by Soberal and Olguin’s representations of Bitwise as a growing enterprise with substantial revenue growth, gross margins exceeding 40%, and sizable cash reserves. Many were attracted to Bitwise’s purported potential to build a profitable business while fostering economic growth in underserved areas.

III. DEFENDANTS SOLICITED INVESTORS THROUGH FALSE AND MISLEADING STATEMENTS

During the Series B-2 Period, Defendants resorted to numerous false and misleading statements and provided fabricated documents to investors to conceal Bitwise’s dire financial situation.

A. Defendants Misrepresented Bitwise’s Revenue and Gross Margins

In connection with the Series B-2 offering, Defendants furnished investors with financial statements indicating significant, consistent revenue growth for Bitwise. According to these statements, Bitwise achieved $59 million in annual revenue in 2021, with quarterly revenue escalating from $8.4 million in Q1 to $21.6 million in Q4.

The Stock Purchase Agreement for the Series B-2 offering, signed by Olguin on behalf of the company, asserted that the provided financial statements adhered to generally accepted accounting principles (GAAP) and that Bitwise maintained a standard accounting system consistent with GAAP. GAAP compliance is crucial to investors for enabling financial comparisons across companies.

Despite these assurances, Defendants were aware or recklessly disregarded that the financial statements provided were not GAAP-compliant. Before the Series B-2 Period, Bitwise’s finance department employees had alerted Defendants that the reported revenue figures were not GAAP-compliant. Additionally, Bitwise’s external auditor revised the company’s revenue figures downward in April 2022 due to GAAP non-compliance.

Despite warnings, Defendants persisted in providing investors with non-GAAP revenue figures throughout the Series B-2 Period. They prepared Bitwise’s external financial reports themselves, excluding the finance department to deviate from GAAP standards and inflate revenue.

Defendants’ non-GAAP revenue figures were inflated due to the inclusion of impermissible financial line items under GAAP, such as recognizing revenue upfront for long-term deals instead of over the actual earning periods.

Defendants also misrepresented Bitwise’s gross margins to investors. Claiming approximately 47% gross margins in 2021 misled investors into believing Bitwise’s financial stability and growth, when, in reality, Bitwise had negative gross margins.

Defendants’ misrepresentations regarding revenue and gross margins painted a false picture of Bitwise as a rapidly growing, financially robust company, enticing investors with the promise of favorable returns.

B. Defendants Misrepresented Bitwise’s Cash Balances

Throughout the Series B-2 Period, Defendants made false statements regarding Bitwise’s cash reserves, consistently exaggerating its cash balances to appear more financially stable than it was.

Defendants regularly inflated Bitwise’s cash balances, presenting it as having more cash than actual. For instance, financial statements claimed Bitwise never had less than $9.4 million in quarterly cash balances since Q1 2020, with $29.4 million in cash as of March 2022, and over $67 million as of November 2022, all of which were false.

Defendants knew or disregarded Bitwise’s cash shortages, evidenced by repeated instances of unpaid operating expenses until additional funding was obtained. Following Bitwise’s collapse, Defendants admitted to misleading investors by conflating cash with illiquid real estate holdings to inflate cash balances

Defendants went further to fabricate documents, such as sending an investor a falsified Bitwise checking account statement in June 2022 and overstating cash balances.

Despite these misrepresentations, Bitwise struggled to meet basic expenses due to its lower revenue than claimed. Defendants, aware of Bitwise’s cash issues, actively managed payments and concealed loans taken to sustain operations.

Defendants profited personally from Bitwise’s financial struggles, issuing short-term loans to Bitwise and charging significant fees. These self-serving loans were not disclosed to investors, with investor funds being diverted to repay them instead of business operations.

Defendants’ deception regarding Bitwise’s cash balances misrepresented the company’s financial health to investors.

C. Misrepresentation of Bitwise's Audited Financial Statements

Before 2020, Bitwise lacked audited financial statements. In October 2020, Bitwise engaged an external auditor to audit its financial records for the fiscal year 2020.

The auditor's report was issued in April 2022. It significantly differed from the financial statements previously presented by the Defendants. The auditor couldn't verify many of the assets or revenue claimed by Defendants. For instance, the audited statements reduced Bitwise’s total assets from $87 million to $42 million, lowered its revenue from $31 million to $9 million, and raised its net loss from $7 million to $26 million.

During the Series B-2 Period, investors requested Bitwise’s audited financial statements. Due to the gap between the audited and previously provided financial statements, Defendants sought to withhold the audited ones from inquiring investors. In July 2022, four months post-audit completion and submission to Bitwise, Soberal, and Olguin falsely claimed, when questioned by investors, that the audit of the 2020 financial statements was still ongoing, thereby delaying the provision of audited financial statements.

Defendants either knew or recklessly disregarded the falsity of their statements to investors regarding the availability of Bitwise’s audited financial statements. This misinformation was crucial to investors as the audited statements would have unveiled Bitwise’s true financial state, likely dissuading them from participating in the Series B-2 offering.

Defendants fabricated an audited financial statement. In September 2022, one investor, concerned by the absence of audited financial statements, reduced its planned $10 million investment to $5 million. In December 2022, Soberal and the investor discussed the potential additional investment of $5 million. To entice this investment, Soberal and Olguin agreed to falsify the audited financial statements to enhance Bitwise’s financial image. Soberal then misrepresented that the audit was recently completed and attached a document he claimed was the audited financial statement.

The document sent by Soberal to the investor was fraudulent, dated December 1, 2022, while the actual audited financial statements were from April 7, 2022. The fabricated document significantly deviated from the authentic audited financial statements. It inflated Bitwise’s total assets and revenue while minimizing its net loss. Following receipt of the fake audited financial statements, the investor injected an additional $5 million into Bitwise’s Series B-2 offering.

IV. SOBERAL AND OLGUIN'S SCHEME UNRAVELED WHEN THEY COULD NO LONGER SECURE FUNDING

Despite the mounting financial challenges faced by Bitwise, Soberal, and Olguin persisted in masking the company's true financial status. For instance, in March 2023, they informed Bitwise's Board that, as of December 31, 2022, the company boasted a cash reserve exceeding $77 million.

Even while being aware of Bitwise's actual cash deficits, the defendants continued their quest for funding sources to sustain the company. By early 2023, Bitwise, under Soberal's guidance, procured over $20 million in loans backed by purported company real estate. Soberal presented documents to the lender, seemingly indicating the Board's approval of these transactions. However, the defendants forged the Board's signatures on these documents, and the Board remained unaware of these loans.

On May 28, 2023, the defendants apprised Bitwise's Board of the company's financial turmoil and its inability to meet payroll obligations. During an emergency meeting the subsequent day, the defendants failed to elucidate the whereabouts of the investor funds raised by Bitwise. Additionally, they disclosed for the first time that the company was indebted to the tune of over $20 million in private loans.

On May 29, 2023, Soberal and Olguin convened a video conference for Bitwise's entire staff, during which they delivered a prepared statement announcing immediate furloughs for all personnel and the likelihood of paychecks bouncing.

On June 3, 2023, the Bitwise Board declared the termination of Soberal and Olguin's positions and appointed a Board member as interim CEO.

Subsequently, on June 28, 2023, the Board initiated Chapter 7 bankruptcy proceedings in the United States District Court for the District of Delaware on behalf of BWI, Bitwise Industries, and various affiliated entities. Presently, these entities are undergoing liquidation procedures.

Claims For Relief

1. FIRST ALLEGATION FOR RELIEF (BREACH OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5)

The Commission reaffirms and integrates by reference paragraphs 1 through 51.

By participating in the actions delineated above, the Defendants, directly or indirectly, in association with the purchasing or vending of securities, through the utilization of interstate commerce instruments or mail services, with an intention to deceive:

1. Implemented ploys, strategies, or deceptive methods;
2. Rendered false statements of significant facts or omitted to disclose material facts essential for preventing the communicated statements from being misleading in the context under which they were conveyed; and
3. Engaged in activities, customs, or commercial practices that functioned or would function as deceit or fraud towards other parties, including securities buyers.
4. Due to the aforementioned, the Defendants have transgressed, and unless restricted and ordered otherwise, will persist in contravening, Section 10(b) of the Exchange Act and Rule 10b-5 under it.

2. SECOND ALLEGATION FOR RELIEF (BREACHES OF SECTION 17(A) OF THE SECURITIES ACT)

The Commission reiterates and integrates by reference paragraphs 1 through 51.

Through their involvement in the actions detailed above, the Defendants, directly or indirectly, during the offer or sale of securities, utilizing the channels of interstate commerce instruments or mail services:

a. Demonstrated intention, employed tactics, schemes, or stratagems to deceive;

b. Acquired money or assets through false representations of significant facts or by neglecting to disclose crucial facts necessary to prevent the transmitted statements, under the circumstances they were conveyed, from being deceptive; and

c.Engaged in dealings, customs, or business practices that were or would be fraudulent or deceitful towards purchasers.

Due to the above circumstances, the Defendants have violated, and unless restricted and directed otherwise, will persist in violating, Section 17(a) of the Securities Act.

Request For Remedy

The Commission respectfully petitions the Court to:

I. Permanently prohibit Defendants, directly or indirectly, from infringing Section 10(b) of the Exchange Act and Rule 10b-5 thereof, along with Section 17(a) of the Securities Act.

II. Permanently prohibit Defendants, directly or indirectly, inclusive of but not confined to, any entity under their ownership or control, from participating in the issuance, purchase, offering, or sale of any security. However, it's noted that such prohibitions shall not impede Soberal or Olguin from engaging in the purchase or sale of securities for their personal accounts.

III. Issue an edict prohibiting Defendants from holding office as an officer or director in any entity possessing a class of securities registered with the Commission under Section 12 of the Exchange Act or mandated to file reports under Section 15(d) of the Exchange Act, as per Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act.

IV. Issue a directive mandating Defendants to relinquish all unlawfully obtained proceeds or undue enrichment originating from the activities delineated in this Complaint, alongside pre-judgment interest accrued thereupon.

V. Issue a directive mandating Defendants to remit civil monetary penalties in accordance with Section 20(d) of the Securities Act and Section 21(d) of the Exchange Act.

VI. Retain jurisdiction over this lawsuit, adhering to the principles of fairness and the Federal Rules of Civil Procedure, to execute and enforce all orders and decrees issued herein, or to entertain any suitable petitions or motions for further remedy within the jurisdiction of this Court.

VII. Bestow any other remedy or redress that this Court deems equitable and essential.

Relief Granted

The rulings prohibit Soberal and Olguin from infringing upon Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, along with Rule 10b-5 under the latter. Moreover, the judgments impose injunctions based on conduct and prohibit both defendants from serving as officers or directors. Additionally, they defer the matters of disgorgement and civil penalties for the court's further deliberation. Soberal and Olguin, without admitting or denying the SEC’s allegations, agreed to the implementation of the judgments.

Key Takeaways For Investors

Investors should note several key takeaways from this situation:

1. TRANSPARENCY MATTERS

Ensuring transparency in financial reporting is crucial. Investors should scrutinize audited financial statements for accuracy and consistency.

2. SCRUTINIZE LEADERSHIP

The actions of company leadership can significantly impact investment outcomes. It's essential to evaluate the integrity and transparency of executives.

3. BEWARE OF RED FLAGS:

Discrepancies between presented financial information and audited statements should raise red flags. Investors should investigate such inconsistencies before making investment decisions.

4. LEGAL COMPLIANCE

Companies and executives must comply with securities laws. Any violations can lead to severe legal consequences, affecting both the company's operations and investors' interests.

5. RISK ASSESSMENT

Understanding the risks associated with investments is paramount. Investors should conduct thorough due diligence to assess risks accurately.

6. LONG-TERM VIABILITY

Assessing a company's long-term viability beyond surface-level financial metrics is critical. Look beyond reported numbers to understand the underlying financial health and sustainability of the business.