In a shocking turn of events that has sent ripples through the tech and investment communities, Ilit Raz, the founder and former CEO of AI-powered hiring startup Joonko, has been charged with securities fraud by the SEC. This case serves as a stark reminder of the potential pitfalls in the rapidly growing AI sector and the importance of thorough due diligence and PDF verification in venture capital investments.
The rise and fall of Joonko
Joonko, founded in 2016, claimed to use artificial intelligence to help companies find diverse candidates and meet their diversity, equity and inclusion hiring goals. The company had raised an impressive $38 million over its lifetime, including a $25 million Series B round in 2022 led by Insight Partners. The company employed around 50 people at its peak.
However, the dream quickly turned into a nightmare as allegations of fraud began to surface.
The allegations
The depth and breadth of the alleged fraud at Joonko are staggering. According to the SEC’s civil complaint (read here) and parallel criminal charges filed by federal prosecutors in Manhattan, Raz allegedly:
- Misrepresented the number of Joonko’s customers, claiming over 150 when the actual number was significantly lower. Many of the companies Raz mentioned, including prominent names like PayPal, Adidas, Nike, Atlassian and Intuit, were merely approached by Joonko representatives and never entered into any form of deal.
- Provided fake testimonials from Fortune 500 companies about the effectiveness of Joonko’s technology.
- Lied about Joonko’s revenue, claiming it earned over $1 million per year when it hadn’t even reached a tenth of that number. The investigation found that only a few paying customers existed among the reported list of over 150 customers.
- Claimed AI capabilities that the company didn’t actually possess, including the ability to automatically connect customers with diverse candidates. But everything was just a big manual effort by the 50 employees of the company.
- Provided false bank statements and forged contracts when questioned by investors. In one instance, Raz emailed an investor a forged bank statement showing an average balance of over $5,000,000, when the actual balance was much lower.
The investigation was triggered when the company’s investors became suspicious and requested the hiring of a Chief Financial Officer and a Chief Operating Officer, positions that had not previously existed. Raz had reportedly been avoiding these appointments for months.
The consequences
The scale of the alleged fraud is particularly shocking given the amounts involved. Raz is accused of defrauding investors out of at least $21 million, with the company having raised a total of $38 million since its founding in 2016. The fallout from these allegations has been severe:
- Joonko filed for bankruptcy in May 2023.
- Raz resigned as CEO in June 2023.
- The SEC is seeking unspecified money penalties, disgorgement and a bar against Raz serving as an officer or director of a public company.
- Raz faces criminal charges of securities fraud and wire fraud, each carrying a maximum sentence of 20 years in prison.
Lessons for investors and the tech community
This case highlights several important lessons:
- Due diligence is crucial: Investors must thoroughly verify claims made by startups, especially in emerging tech fields like AI. PDF verification tools can be of great assistance to go over large piles of documents in a virtual data room.
- Beware of AI washing: As SEC enforcement director Gurbir Grewal noted, this was “an old-school fraud using new school buzzwords like ‘artificial intelligence’ and ‘automation’.”
- Transparency is key: Startups must be transparent about their capabilities and customer base to maintain trust with investors and the market.
- Regulatory scrutiny is increasing: The SEC is keeping a close eye on AI-related investment opportunities and cracking down on false claims.
The role of PDF verification in preventing fraud
At VerifyPDF, we understand the critical importance of document verification in preventing fraud cases like this. Our AI-powered solution is designed to detect forged documents, inconsistencies in financial statements, and other red flags that could indicate fraudulent activity. PDF verification goes beyond simple visual checks. It involves analyzing metadata, digital signatures, and even the underlying code structure of documents to ensure their authenticity
Had Joonko’s investors used a robust PDF verification system like VerifyPDF, they might have caught the discrepancies in the fake bank statements and contracts much earlier, potentially saving millions in lost investments. PDF verification is not just about detecting forgeries; it’s about ensuring the integrity of all documentation in the investment process.
Conclusion
The Joonko case serves as a sobering reminder of the potential for fraud in the exciting but sometimes overhyped world of AI startups. As the AI sector continues to grow and attract significant investment, it’s more important than ever for investors to remain vigilant and for startups to prioritize transparency and ethical business practices.
As the Joonko case demonstrates, PDF verification is not just a technical process but a crucial safeguard for the entire investment ecosystem. By making PDF verification a standard part of due diligence, we can create a more secure and trustworthy environment for innovation and growth in the tech sector
By leveraging advanced PDF verification technologies like VerifyPDF, investors and companies can better protect themselves against fraud and ensure the integrity of their investments and operations. In the end, this will help foster a more trustworthy and sustainable AI ecosystem that can deliver on its transformative potential.
