Snap IPO Warning: Ex-Employee Says Books Are Cooked

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Snapchat’s social media parent, Snap, Inc., seemed headed for a $5 billion IPO until a former employee alleged in a conveniently timed lawsuit that the company misrepresented its financial position and pressured him for proprietary secrets about his former employer, Facebook.

Anthony Pompliano’s complaint claims that he only ran Snapchat’s “growth and engagement team” for 3 weeks before he was terminated. His lawyer, according to the Los Angeles Times, said: “Mr. Pompliano was terminated because he refused to participate in a scheme to deceive the public and artificially inflate Snapchat’s valuation in anticipation of its” initial public stock offering.”

The accusations appear to allege that Snap, Inc. was seeking to violate the United States Securities Act of 1933, referred to as the “truth in securities” law. The law has the dual objectives of requiring that investors receive financial and other significant information concerning securities being offered for public sale; and prohibiting deceit, misrepresentations, and other fraud in the sale of securities.

Snap, Inc. spokeswoman Mary Ritti said in a statement that the complaint is without merit: “It is totally made up by a disgruntled former employee.”

Breitbart News reported in late December that with “2016 being the worst year for initial public offerings (IPOs) since the 2007-8 financial crisis,” Silicon Valley was hoping Snap, Inc. as the company behind the popular chat app’s $25 billion “unicorn” private market valuation, would renew excitement for tech deals by raising $5 billion in a January.

New IPOs raised a $19 billion in 2012, and the number of deals peaked at 32 in 2014. But 2016 saw only $1.2 billion raised on 11 deals — fewer than half as many deals as last year and only 70 percent of the cash raised.

But Snapchat is now the third most popular social app among 18-34 year old millennials, and is expected soon to take the number 2 spot from Instagram. More importantly, its penetration is even more powerful among the 19-24 year old college-aged demographic. About 70 percent of college students report posting on Snapchat at least once a day, compared to 11 percent reporting that they post on Facebook with the same frequency.

Backed by a stable of top tech venture capital firms that include Benchmark Capital, General Catalyst Partners, and Lightspeed Venture Partners; the IPO had Wall Street whispering that huge investor demand for Snap shares could motivate some of the other 182 private unicorns to go public and launch Silicon Valley toward a very lucrative year.

Pompliano’s complaint for damages claims that “Snapchat will not let anything stand in its way of an IPO, including obligations to represent material facts accurately.” But a third of the suit’s 21 pages filed in the Los Angeles County Superior Court are blacked out by Pompliano’s attorney, David Michaels. He indicated to the Times that the “redactions protect information possibly subject to a confidentiality agreement between his client and Snap.” Snap has 10 days to file a motion to maintain the redactions.

Un-redacted snippets from the lawsuit indicate that there are two performance metrics that the company knew were fraudulent, but still used during the recruitment process to induce Pompliano to jump from Facebook to Snap. Pompliano specifically alleges that because its chief executive, Evan Spiegel, “did not care” for numbers, Snap lacks sophisticated methods of verifying user statistics.

Pompliano alleges that because his the “truth” concerning his termination would be so “potentially damaging to Snapchat’s planned IPO, terminating him wasn’t enough to ensure that the public was kept in the dark. Accordingly, post-termination, Snapchat sought to destroy his career and reputation by waging a smear campaign.” The suit implies that Snap is still providing similar false and misleading data points to its venture capital investors.