Dive Brief:
- Nevin Shetty, the former CFO for commerce software company fabric, took $35 million from the company without permission and then lost it during the cryptocurrency market’s crash, according to a federal indictment returned by a grand jury Wednesday.
- “The essence of the scheme and artifice to defraud was for Shetty to enrich himself by secretly transferring $35 million in Company A corporate funds to a cryptocurrency investment platform that Shetty owned and operated,” the indictment filed in the U.S. District Court for the Western District of Washington alleges.
- Shetty, who served as fabric’s CFO for approximately a year, intended to pay the company 6% interest — investing in cryptocurrency positions that could have yielded returns of 20% or more annually, according to the indictment. Shetty’s arraignment is scheduled for May 25, according to a press release by the U.S. Attorney’s Office in Seattle.
Dive Insight:
Fabric, which provides software platforms for retail companies, appointed Shetty to the CFO role in March 2021, according to a company press release. The company’s board “developed concerns” about Shetty’s competency in the position soon after hiring him, according to the indictment, and by March of the next year, fabric’s CEO and chief operating officer informed him he could not continue in the role.
Wesley Pua, a veteran of employee experience technology company Verbate, has served as the company’s CFO for the past five months, according to his LinkedIn profile.
The transfer of the company’s funds to HighTower Treasury, a decentralized finance platform incorporated by Shetty in February 2022, occurred after he learned he would no longer be serving as fabric’s CFO and despite the fact that as its finance chief, Shetty helped draft the company’s investment policy, which dictated its funds should only be invested in fixed income instruments payable in U.S. dollars, the indictment charges.
Companies commonly create such safeguards to protect their cash, yet Shetty disregarded the measures that he helped to draw up when transferring the funds to HighTower, Assistant United States Attorney Philip Kopczynski, who is prosecuting the case, told CFO Dive in an interview.
Another wrinkle in the case is the signing of a “Treasury Account Agreement” between fabric and HighTower, where he acted as president, on March 31, 2022. The agreement, which was signed by Shetty on behalf of fabric and his partner in the HighTower venture on behalf of that company, referred to the investment from fabric as a “Treasury Account” and set forth the terms that HighTower would pay fabric 6% interest on its investment.
However, no one besides Shetty was aware of this agreement’s existence until a month after it had been signed, the indictment alleges. The first of the wire transfers took place a day after its signing on April 1.
This type of self-dealing is “an element of the government’s allegations that support the wire fraud here,” Kopczynski said, but noted that this type of self-dealing is not necessarily a federal crime.
The transfer of funds, which were moved “secretly and by means of interstate and foreign wire transmissions,” by Shetty to a Circle Internet Financial account set up for HighTower, took place between April 1 and 12 of 2022, the indictment said.
Circle issues the USDC stablecoin — cryptocurrency tokens so named because their value is typically pegged to a fiat currency such as the U.S. dollar — and allows depositors to hold funds in that cryptocurrency.
Once transferred, Shetty invested the money in two main ways, the indictment alleges: through acquiring stablecoin TerraUSD (UST) as well as acquiring “synthetic assets” through Mirror, a platform that enabled holders of UST to “buy digital assets that tracked the prices of other assets.”
In May 2022, TerraUSD and its sister token Luna crashed, wiping out $50 billion in valuation, kicking off the start of a so-called “crypto winter,” and, subsequently, rendering the value of Shetty’s investment to near-zero.
The crash put stablecoins and cryptocurrencies under a regulatory spotlight, with lawmakers as well as cryptocurrency leaders split on how to categorize and regulate these digital tokens.
Circle was among those companies facing increased scrutiny, though the company favored regulation and has a “robust dialogue” in place with regulators, its CFO Jeremy Fox-Geen told CFO Dive in a previous interview. Circle did not respond to a request for comment.
Kopcynski declined to comment on the cryptocurrency aspect of the case beyond what was included in the indictment.
Shetty only informed fabric of the transfers once the value of those investments had declined, according to the U.S. Attorney’s Office. fabric reported the embezzlement to the FBI, which then launched an investigation.
“Since May 2022, fabric has been cooperating with law enforcement in the investigation of the company’s former CFO Nevin Shetty’s conduct in the misuse of $35 million of fabric funds,” a fabric spokesperson told CFO Dive in an email. “We are thankful for and appreciate the hard work that the FBI and U.S. Attorney’s Office have done in helping resolve this matter. While the amount taken is substantial, fabric remains very well-funded with years of runway.”
The commerce software company currently has $293.5 million in funding after the close of a Series C backed by Softbank last February, according to Crunchbase.
In an emailed statement on behalf of Shetty, his attorney Cooper Offenbecher, partner in firm Allen, Hansen, Maybrown & Offenbecher, said they “disagree with the government’s decision to indict Mr. Shetty” and that they have been in regular contact with the U.S. Attorney’s Office “regarding the merit of any criminal prosecution stemming from this investigation.”
“As the CFO of his former employer, tasked with making investment decisions for its benefit, Mr. Shetty was personally devastated by these losses, which occurred as a result of a catastrophic crash in the cryptocurrency market in May 2022,” Offenbecher said in the statement. “We look forward to responding to these allegations in Court.”
