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Former Head of Cyber-Fraud-Detection Startup NS8 Arrested on Fraud Charges – Wall Street Journal


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Former Head of Cyber-Fraud-Detection Startup NS8 Arrested on Fraud Charges – Wall Street Journal

In June, cyber-fraud-prevention startup NS8 Inc. trumpeted how a $123 million fundraising round would fuel “hyper-growth.” Three months later, the Las Vegas-based company has fired most of its employees and federal prosecutors have charged its former chief executive with fraud. Law-enforcement agents arrested Adam Rogas on Thursday in Nevada in connection with alleged securities fraud,…

In June, cyber-fraud-prevention startup NS8 Inc. trumpeted how a $123 million fundraising round would fuel “hyper-growth.” Three months later, the Las Vegas-based company has fired most of its employees and federal prosecutors have charged its former chief executive with fraud.

Law-enforcement agents arrested
Adam Rogas
on Thursday in Nevada in connection with alleged securities fraud, with Justice Department officials saying he created tens of millions of dollars in fictitious revenue and assets on financial statements provided to investors. Mr. Rogas also pocketed $17.5 million of their cash when NS8 bought some of his shares in the company, according to prosecutors.

“As alleged, Adam Rogas was the proverbial fox guarding the henhouse,”
Audrey Strauss,
acting U.S. attorney for the Southern District of New York, said in a statement.

Prosecutors charged Mr. Rogas with securities fraud, wire fraud and fraud in the offer and sale of securities.

The Securities and Exchange Commission in a separate complaint alleged Mr. Rogas continued cooking the books even after the agency initially subpoenaed him last November.


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In two instances in March, an FBI investigator said, Mr. Rogas replaced real deposits in NS8’s bank statements, totaling a few hundred dollars in purported revenue from customers, with fake deposits of $999,999.99 apiece.

His arrest came a week after NS8 management told staff in tearful video calls that he had abruptly resigned, federal investigators were circling and most of the startup’s more than 200 employees would be losing their jobs within days, according to four former staffers.

NS8 President Tiffany Kleemann, who broke the news to staff last week, said in an email to WSJ Pro that the situation was a nightmare. “I was devastated and angry,” said Ms. Kleemann, who assumed the duties of chief executive after Mr. Rogas resigned Sept. 1.

Mr. Rogas, a 43-year-old Las Vegas native whose LinkedIn profile shows he previously worked for other brand-safety and fraud-prevention firms, didn’t respond to requests for comment this week. His lawyer,
William Sullivan Jr.
of law firm Pillsbury Winthrop Shaw Pittman LLP, said Friday that he was evaluating the government’s claims and that Mr. Rogas would plead not guilty.

Audrey Strauss, acting U.S. attorney for the Southern District of New York



Photo:

Bryan Smith/Zuma Press

Founded in 2016, NS8 sells software that helps digital merchants automate fraud detection. E-commerce platforms can install the company’s plug-in to analyze new accounts, transactions and other customer behavior to pinpoint fakes and reduce losses.

The company, which said on its website that it had international offices in Singapore, Australia and the Netherlands, claimed in a June blog post announcing $123 million in new funding that it was “among the fastest-growing fraud detection platforms in the world.”

Four former employees described a positive workplace culture, with one,
Doug McLean,
saying he came out of retirement in August to become the company’s vice president of product marketing—only to be laid off last week.

“I looked at the problem they were solving and the team they were solving it with and thought, ‘This might be fun,’” Mr. McLean said. He described NS8 as having “lots of velocity; not a lot of process.”

Federal investigators allege that might have been at least partly by design, and an NS8 spokeswoman said in a statement the company’s board learned Mr. Rogas had fabricated much of its revenue and customer information to cover up cash-flow problems.

NS8’s board and a skeleton staff of remaining company officials are cooperating with investigators and haven’t made a final decision on the company’s future, the spokeswoman said.

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While Mr. Rogas boasted of NS8’s growth to employees and in news coverage of the startup, the company’s sales figures were mysterious to many inside the company, former employees said. Mr. McLean said when he arrived he was told by other officials that many of NS8’s customers couldn’t be identified because they purchased the company’s service through a third-party platform.

“We’d get the revenue, but we didn’t always know who was paying it,” Mr. McLean said.

Prosecutors allege Mr. Rogas fabricated more than $40 million in revenue to help raise the $123 million funding round in June led by venture-capital firms including
Lightspeed

Venture Partners and
AXA

Venture Partners.

Mr. Rogas similarly told Ms. Kleemann, who joined NS8 in June, that the company had resources to grow and eventually go public, she said. NS8 had raised nearly $35 million before June’s funding round, according to investment database Crunchbase.

“With significant investment by prestigious, experienced firms just recently completed, there was no reason for me to doubt that [what] I was told wasn’t the truth,” Ms. Kleemann said.

It is unclear whether Lightspeed and AXA knew federal investigators were looking into NS8 when they invested in the company. Lightspeed didn’t immediately respond to a request for comment. An AXA spokesperson declined to comment.

FBI and SEC officials allege NS8 used some of its venture funding to buy shares from its stock and option holders, including Mr. Rogas.

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An FBI agent said in an application for the arrest warrant for Mr. Rogas that an NS8 employee discovered a discrepancy in the company’s bank account in late August: The balance totaled tens of thousands of dollars, rather than tens of millions as Mr. Rogas had previously claimed. Mr. Rogas resigned from NS8 days later.

NS8 employees let go in recent days have shared news of the company’s implosion with their LinkedIn networks and commiserated with one another on a post-layoff Slack channel, the four former employees said. Another former staffer on Wednesday filed a lawsuit alleging that NS8 didn’t properly alert employees of the reason for the job cuts as required by federal labor law.

NS8’s spokeswoman said employees were told in a Sept. 10 letter they would be laid off the following day due to “sudden and unforeseeable business circumstances,” adding they wouldn’t receive severance packages. She declined to comment on the lawsuit’s claim that more than 200 people were laid off.

Ms. Kleemann said in her email to WSJ Pro that she was preparing to leave NS8 and was taking some solace in the continuing work of investigators. “Adam has been arrested with the hope that he will be held accountable and face justice like he should,” she said.

Write to David Uberti at [email protected] and Jared Council at [email protected]

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