Updated October 30, 2020 - 8:07 pm
Cybersecurity and fraud prevention company NS8 filed for bankruptcy Tuesday saying the company fell victim to fraud after its co-founder was arrested and charged last month with creating fictitious revenue on bank statements.
The Las Vegas-based company filed for Chapter 11 bankruptcy protection in Delaware.
Daniel P. Wikel, the chief restructuring officer of NS8, said in a declaration filed with the court that the company CEO and co-founder Adam Rogas “intentionally and grossly overstated its revenue, gross margin, and the extent and profitability of NS8’s operations to current and prospective investors, the other members of the senior management team, the board of directors, and corporate partners.”
According to the declaration, approximately $72 million of the $123 million obtained from investor funds based on falsified bank statements were used to finance a tender offer and repurchase of investor shares.
Rogas pocketed $17.5 million of investors’ cash when the company purchased a portion of his shares in the company, the filing said.
“Unfortunately, it appears that the Series A Round was obtained by Rogas through deception and fraud,” Wikel said in the declaration.
Rogas was being investigated by the U.S. Securities and Exchange Commission and was arrested in mid-September, facing federal charges of falsifying bank statements to get money from investors. NS8 said it was unaware of the fraud.
“It seems ironic that the co-founder of a company designed to prevent online fraud would engage in fraudulent activity himself, but today that’s exactly what we allege Adam Rogas did,” William F. Sweeney Jr., FBI assistant director, said at the time.
In early September, Rogas resigned after an employee in NS8’s finance department discovered the true balance of funds in the company’s revenue account. A week later, NS8 laid off a majority of its workforce citing financial troubles. According to the company, NS8 had employed 215 employees across the world as of May 2020.
When the company announced the mass layoffs, Rogas told the Review-Journal at the time that the SEC investigation began in November 2019 and “it has little if anything to do with why people were let go.” Rogas said then that NS8 was “hiding behind the SEC investigation and its ambiguity to infer a more nefarious narrative and shift the blame.”
Wikel said the company “shifted quickly away” from its business strategy to expand into an “aggressive cash preservation mode.”
A Chapter 11 bankruptcy allows a company to continue operations while reorganizing its obligations, said Andrea Gandara, a commercial bankruptcy attorney at Holley Driggs Law Firm.
The filing also gives a company time to assess finances and negotiate with creditors to resolve outstanding debt. Those can include landlords, vendors, and even employees who are owed wages.
According to NS8’s Chapter 11 petition, Invictus Global Management LLC has provided a $10 million loan to finance the company’s legal proceedings.