close

For more than four decades, Fenwick & West LLP has helped some of the world’s most recognized companies become, and remain, market leaders. From emerging enterprises to large public corporations, our clients are leaders in the technology, life sciences and cleantech sectors and are fundamentally changing the world through rapid innovation.  MORE >

Fenwick & West was founded in 1972 in the heart of Silicon Valley—before “Silicon Valley” existed—by four visionary lawyers who left a top-tier New York law firm to pursue their shared belief that technology would revolutionize the business world and to pioneer the legal work for those technological innovations. In order to be most effective, they decided they needed to move to a location close to primary research and technology development. These four attorneys opened their first office in downtown Palo Alto, and Fenwick became one of the first technology law firms in the world.  MORE >

From our founding in 1972, Fenwick has been committed to promoting diversity and inclusion both within our firm and throughout the legal profession. For almost four decades, the firm has actively promoted an open and inclusive work environment and committed significant resources towards improving our diversity efforts at every level.  MORE >

FLEX by Fenwick is the only service created by an AmLaw 100 firm that provides flexible and cost-effective solutions for interim in-house legal needs to high-growth companies.  MORE >

Fenwick & West handles significant cross-border legal and business issues for a wide range of technology and life sciences who operate internationally..  MORE >

At Fenwick, we are proud of our commitment to the community and to our culture of making a difference in the lives of individuals and organizations in the communities where we live and work. We recognize that providing legal services is not only an essential part of our professional responsibility, but also an excellent opportunity for our attorneys to gain valuable practical experience, learn new areas of the law and contribute to the community.  MORE >

Year after year, Fenwick & West is honored for excellence in the legal profession. Many of our attorneys are recognized as leaders in their respective fields, and our Corporate, Tax, Litigation and Intellectual Property Practice Groups consistently receive top national and international rankings, including:

  • Named Technology Group of the Year by Law360
  • Ranked #1 in the Americas for number of technology deals in 2015 by Mergermarket
  • Nearly 20 percent of Fenwick partners are ranked by Chambers
  • Consistently ranked among the top 10 law firms in the U.S. for diversity
  • Recognized as having top mentoring and pro bono programs by Euromoney

MORE >

We take sustainability very seriously at Fenwick. Like many of our clients, we are adopting policies that reduce consumption and waste, and improve efficiency. By using technologies developed by a number of our cleantech clients, we are at the forefront of implementing sustainable policies and practices that minimize environmental impact. In fact, Fenwick has earned recognition in several areas as one of the top US law firms for implementing sustainable business practices.  MORE >

At Fenwick, we have a passion for excellence and innovation that mirrors our client base. Our firm is making revolutionary changes to the practice of law through substantial investments in proprietary technology tools and processes—allowing us to deliver best-in-class legal services more effectively.   MORE >

Mountain View Office
Silicon Valley Center
801 California Street
Mountain View, CA 94041
650.988.8500

San Francisco Office
555 California Street
12th Floor
San Francisco, CA 94104
415.875.2300

Seattle Office
1191 Second Avenue
10th Floor
Seattle, WA 98101
206.389.4510

New York Office
1211 Avenue of the Americas
32nd Floor
New York, NY 10036
212.921.2001

Shanghai Office
Unit 908, 9/F, Kerry Parkside Office
No. 1155 Fang Dian Road
Pudong New Area, Shanghai 201204
P.R. China
+86 21 8017 1200


Grand Jury Indicts Startup Founder Isaac Choi – Implications for Silicon Valley

​​

On June 7, the U.S. Department of Justice arrested Isaac Choi, the founder and former chief executive of the Silicon Valley startup, WrkRiot, on wire fraud charges. A San Jose, California grand jury had indicted Choi under seal one week earlier. United States v. Choi, 17-CR-308-EJD (N.D. Cal.), 17-MJ-189-DUTY (C.D. Cal.). The decision to prosecute this case is noteworthy. It demonstrates that DOJ, upon sufficient evidence, may target internal matters within a Silicon Valley startup.


Background

WrkRiot was a seed capital-backed firm based in Santa Clara, California with approximately 25 employees. The company offered a web-based job search tool that sought to improve the online experience of candidates, recruiters, and hiring managers, and in turn, their success rate. Choi hired personnel with recruiting industry and data science expertise to support the product.

Indictment

The U.S. Attorney’s Office for the Northern District of California and the Washington, D.C.-based Criminal Fraud Section of DOJ contend that Choi misrepresented to WrkRiot employees and advisers that (a) he had received a degree from New York University, (b) he had worked at JP Morgan, (c) he personally had invested certain levels of capital, and (d) the company was capitalized adequately, with sufficient funds to operate at a loss and still make payroll—a claim Choi allegedly supported with fabricated wire transfer receipts which were sent to employees.

Although the indictment refers to conversations with external investors, those conversations did not generate venture investments. Rather, to support its allegations of a scheme to defraud, the government’s indictment focuses on the recruitment and employment of, and the small sums of capital loaned and invested by, internal WrkRiot personnel. In that way, the government linked the allegedly false statements with the financial victims of the deception, as required by law. See United States v. Lew, 875 F.2d 219, 221 (9th Cir. 1989) (financial victim must be the person deceived).

Significance

The facts of Choi are not particularly complex, and are far from groundbreaking. The indictment contains a handful of wire fraud counts for conduct that, if proven, amounts to simple deception at a small Silicon Valley company. As one commentator has noted, much of the conduct is par for the course in the Valley. For employees seeking to earn their stripes and fortune at a startup, experiences similar to those at WrkRiot are practically a “rite of passage.”

A rite of passage indeed. And therein lies the novelty, and the significance, of this case for Silicon Valley. Choi has lessons to teach about the evolving landscape of criminal investigation and prosecution in the startup environment.

Implications

First, the matter came to light in August 2016 when WrkRiot’s former head of marketing, who filed a state agency wage complaint and later was terminated, used the blog Startup Grind to publicize her experience at the company. The blog post described conversations with Choi about a fictitious marketing budget, missed payroll, cashier’s checks in lieu of paystubs, false wire transfer confirmations, and internal dysfunction. The story gained traction, and ultimately The New York Times, Forbes, and other mainstream outlets picked it up. The attention garnered by this story was so significant that two DOJ components eventually brought charges. One of the two is an “away team” of financial crime prosecutors from the Fraud Section in Washington, D.C. Since this is not a case where the local U.S. Attorney’s Office needs additional resources or expertise from the Fraud Section, it can be inferred that the August 2016 public commentary and news articles caused the Fraud Section to open its own matter. On WrkRiot’s Facebook page, Choi rebutted his former marketing officer’s blog post as the rantings of a disgruntled employee. While he was doing so, however, the media coverage attracted government scrutiny on the other side of the country, spurring the investigation and subsequent prosecution. The Choi indictment demonstrates the importance of addressing whistleblower complaints and employee dissent internally. Startups lacking sufficient infrastructure to do so, or those exhibiting a cavalier attitude toward such dissent, risk the prospect of internal strife attracting unwanted government attention.

Second, the Choi indictment can be viewed as a shot across the bow for early-stage Silicon Valley startups. Most of the allegations and surrounding press criticize conduct that, while perhaps distasteful—e.g., liberties taken with a founder’s LinkedIn profile, unsupported statements to recruits about capital prospects, and internal disorganization—does not rise to the level of chargeable federal criminal conduct. Silicon Valley was built on posturing, excessive optimism, and incubator chaos. Hacker News and Startup Grind posts responding to the marketing officer’s post paint WrkRiot as a colorful, but still typical, example of Silicon Valley antics. See Katie Benner, A Silicon Valley Dream Collapses in Allegations of Fraud, The N.Y. Times, Aug. 31, 2016. In the government’s view, however, industry norms were not sufficiently mitigating to foreclose charges, at least not where there was evidence of fabricated payroll materials.

Third, WrkRiot suggests the internal affairs of a Valley startup are no longer beyond reproach, if they ever were. Traditionally, federal fraud prosecution in the technology industry has targeted harm done to parties external to a company. For instance, public company securities and accounting fraud cases primarily vindicate external shareholders and investors. See, e.g., United States v. Ruehle (In re Broadcom Corp. Options Backdating) (C.D. Cal. 2008). In private company cases, the government has focused on high-dollar misstatements to venture capital, private equity, or other arms-length investors. See, e.g., In re Theranos Inc. Investig. (N.D. Cal. 2016) (bioscience-related statements to external investors); In re Hampton Creek, Inc. Investig. (N.D. Cal. 2016) (inventory-related accounting practices affecting external investors); United States v. Mills (Motionloft, Inc.) (N.D. Cal. 2014) (acquisition-related statements to external investors); United States v. Robb (Junglegames.com) (N.D. Cal. 2001) (revenue-related statements to external investors).

Federal indictments targeting Valley startups are rare. Rarer still are indictments which vindicate only internal stakeholders at those startups. The posture of victims and the harm they suffer are key considerations for the government in evaluating whether to bring charges, and Choi is unusual because the matter seeks solely to redress harm done to company employees and advisers, and not to any external investors or counterparties. Anecdotal evidence suggests startups routinely recruit and retain talent, as Choi did here, with impressive and yet unsupportable statements about capital prospects and exit opportunities. This occurs all the more frequently where the employees are offered equity or options as part of their compensation package. It is no great leap from the allegations in Choi to a securities or wire fraud charge premised on the “foolish optimism” of statements in a conventional Valley recruiting process. Cf. Pompliano v. Snap Inc., No. 17-CV-3664-DMG (C.D. Cal. 2017) (alleging that hiring personnel misrepresented metrics concerning company’s user base and growth during recruiting process).

If the allegations in Choi are proven, at sentencing, the government may ask San Jose’s Judge Edward Davila to consider employees’ opportunity cost, namely, alternative career opportunities foregone. But that harm is speculative and not readily quantifiable within a sentencing guidelines loss calculation. The calculation may include funds Choi borrowed from employees if his deception proximately caused a loss of principal, but that amount appears to be at most $65,000, a modest sum. See Julie Bort, A Startup Burned Through $700,000…, Business Insider, Aug. 30, 2016. Even assuming some cognizable loss based on vested compensation canceled and employee equity squandered, the available information suggests that the loss amount will not exceed a few hundred thousand dollars. This conservative loss figure, coupled with the inward-looking loss causation theory, further sets this case apart and invites discussion of DOJ’s focus on the Peninsula.

Ultimately, the government’s success if Choi is litigated, and the length of any resulting sentence, will depend in part on whether a jury and judge accept the notion that Choi’s conduct amounts to something more than conventional Silicon Valley antics, that is, this was more than an unfortunate rite of passage for WrkRiot employees. Regardless of the result, the Choi indictment demonstrates that on suitable facts, DOJ will delve into the internal affairs of a startup despite only modest losses. Founders and their advisers should keep WrkRiot in mind, balancing zeal for product and capital and the need to survive with the need for both investor-facing and internal restraint.

​​​​​​