Enforcement News: SEC Charges Founder of Joonko with Perpetrating An “Old School Fraud Using New School Buzzwords”

• Posted on: Jun 12 2024

By: Jeffrey M. Haber

On June 11, 2024, the Securities and Exchange Commission (“SEC”) announced (here) that it charged the Chief Executive Officer and founder of the now-shuttered artificial intelligence recruitment startup Joonko Diversity, Inc. (“Joonko”),¹ with defrauding investors of at least $21 million by making false and misleading statements about the quantity and quality of Joonko’s customers, the number of candidates on its platform, and the company’s revenue.

According to the SEC’s complaint (here), Joonko claimed to use artificial intelligence to help clients find diverse and underrepresented candidates to fulfill their diversity, equity, and inclusion hiring goals. To raise money for Joonko, the SEC alleged that Defendant falsely told investors that Joonko had more than 100 customers, including Fortune 500 companies, and provided investors with fabricated testimonials from several companies expressing their appreciation for Joonko and praising its effectiveness. Defendant also allegedly falsely told investors that Joonko had earned more than $1 million in revenue and was working with more than 100,000 active job candidates.² When an investor grew suspicious of Defendant’s claims, Defendant allegedly provided the investor with falsified bank statements and forged contracts in an effort to conceal the fraud. According to the SEC, the scheme unraveled in mid-2023 when the investor confronted Defendant, who admitted to forging bank statements and contracts and making false statements about Joonko’s revenue and number of customers.

“We allege that [Defendant] engaged in an old school fraud using new school buzzwords like ‘artificial intelligence’ and ‘automation,’” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As more and more people seek out AI-related investment opportunities, we will continue to police the markets against AI-washing and the type of misconduct alleged in today’s complaint. But at the same time, it is critical for investors to beware of companies exploiting the fanfare around artificial intelligence to raise funds.”

The SEC filed its complaint in the United States District Court for the Southern District of New York. The SEC charged Defendant with violating the antifraud provisions of the federal securities laws. The SEC is seeking a permanent injunction, civil money penalties, disgorgement with prejudgment interest, and an officer-and-director bar against Defendant.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced (here) criminal charges against Defendant (e.g., one count of securities fraud and one count of wire fraud).³

Footnotes

1. On May 24, 2024, Joonko filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware.
2. After Defendant made the alleged false and misleading statements about Joonko’s customers and revenue, several investors, including investment banks, who received those statements invested in a series of funding rounds with Joonko. The first round of investments occurred on or about June 1, 2021. A second round took place on or about June 2, 2022.
3. It is important to remember that charges contained in an indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.