On April 2, 2019 the founder and former Chief Executive Officer of Jumio Inc., Daniel Mattes, agreed to settle with the Securities Exchange Commission (SEC) for more than $17 million for defrauding investors. (Govind, Bloomberg). According to the SEC, Mattes “grossly overstated” Jumio’s 2013 and 2014 revenues before selling his personal shares to private investors. (Press Release, SEC). Mattes’ settlement with the SEC followed shortly after another SEC settlement with Jumio’s former Chief Financial Officer, Chad Starkey. Starkey also settled charges for failing to exercise reasonable care concerning the company’s financial statements and signing stock transfer agreements that falsely implied Jumio’s board of directors had agreed to Mattes’ sale of his private shares. Id. After Mattes’ shares were sold, Jumio restated its financial results in 2015, which showed depleted revenues and led to the company filing for bankruptcy. (Govind, Bloomberg).

Founded in 2010 by Mattes, Jumio Inc. is a global company that utilizes its AI-powered Trusted Identity software to verify the real-world identities of its customers. (About Jumio, Jumio). Mattes was the CEO of Jumio until his resignation in April 2015 in connection with an internal board investigation into the charges brought by the SEC. (Cohan, Forbes).In December 2015, Jumio informed its investors that it would restate its financial results from 2013 and 2014. And in March 2016, the company entered Chapter 11 bankruptcy proceedings, stating that "certain legacy issues combined with related government investigations and proceedings have made it difficult for Jumio to secure necessary funding for its operations." Id. Subsequently, on May 6, 2016 Jumio was acquired by Centana Growth Partners for $850,000, and became Jumio Corporation. Id. Since the acquisition, annual recurring revenues increased 289% from $18 million in the second quarter of 2017 to $70 million in the second quarter of 2018. Id. 

Although the SEC complaint does not speak to the specific laws that Mattes was charged with violating, the act of defrauding investors falls under SEC Rule 10b-5. Under Rule 10b-5 it is unlawful for any person, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange to 1) employ any device, scheme, or artifice to defraud; 2) to make any untrue statement of a material fact or to omit to state a material factnecessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or 3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. The focus of the SEC charges against Mattes related to the second element in Rule 10b-5, making an untrue statement of material fact.

According to the SEC complaint, shortly before selling his shares, Mattes told an investor that he wouldn’t sell any of his shares because there was “lots of great stuff coming up” and that “he would be stupid to sell at this point.” (Press Release, SEC). While this statement to an investor is not the only ground the SEC had for filing the charges against Mattes, it presents an interesting question as to whether this kind of representation to an investor is mere sales puffery, which can be a defense to materiality under securities liability. In Eisenstadt v. Centel Corp., the 7thCircuit Court held that “mere sales puffery is not actionable under Rule 10b-5…”. The court reasoned that it would be “unreasonable for investors to attach significance to general expressions of satisfaction with the progress of a seller’s efforts to sell, just as it would be unreasonable for them to infer from a potential bidder’s apparent lack of enthusiasm that the bidder was uninterested rather than just jockeying for a better price.” Eisenstadt v. Centel Corp., 113 F.3d 738 (7th Cir. 1997). Here, Mattes’ statement follows common sales puffery language akin to “things are going well”, but he expands on that statement by specifically indicating that he would “be stupid to sell” at that point. As Jumio restated its financial results after Matte’s representation, showing depleted revenues, Matte’s statement was presumptively untrue. Thus, Mattes’ representation to the investor likely falls outside of the safe harbor of sales puffery, which means his representation was an untrue statement of material fact under Rule 10b-5. 

In a press release from the current Jumio board of directors the company stressed that it had cut ties with Mattes and Starkey, and that the settlement procured by both ex-executives did not affect the day to day operations of the company. (Press Release, Jumio). In fact, the company claimed that it has verified over 170 million identities in more than 200 countries and territories worldwide and, in 2018, grew its customer count by 60 percent and sales volume by 70 percent year-over-year. Id. Jumio was also named the winner in Business Intelligence Group’s 2019 Artificial Intelligence Excellence Awards. (About Jumio, Jumio). While the fraudulent behavior from both former executives could have derailed the company, it appears that Jumio, post-Mattes and Starkey, has an eye on a very productive and successful 2019.