Credit: Centricity
In 2021, while seeking an investment for his tech company, startup founder and CEO Michael Brackett is alleged to have made a startling choice. Brackett’s company, Centricity, was ostensibly on the cutting edge of machine-based learning. Centricity boasted a proprietary AI technology which could analyze consumer preferences and predict product demand, a crucial innovation in manufacturing and retail stocking. Centricity claimed that the firm sold its resulting marketing data to more than a dozen United States manufacturing clients.
After raising an initial $2.5 million from angel investors in 2019, Centricity ran out of money. By 2021, it was time for another round of capital pitches. Rather than revealing the true state of his struggling company to potential investors, Brackett falsified bank statements to represent an inflated balance, manufactured a fake customer list, and fraudulently claimed more than $3 million in revenue, according to a U.S. District Court indictment. Brackett approached a willing investor with allegedly-doctored documents in hand who, presumably impressed by the company’s successes, transferred $500,000 to Centricity’s account.
Days after the transfer, the unnamed victim investor became suspicious of the manipulated bank statements Brackett provided, as it appeared they were altered. The investor attempted to reverse the transaction, but it was too late—Brackett had already withdrawn the money. Of the thirteen United States corporate clients Centricity claimed to have on the books, only two ever actually used the company’s service, and both only tested the product at a nominal cost. Brackett was indicted in August on one count of securities fraud and one count of wire fraud. He faces twenty years in prison for each of the two counts.
Securities Fraud
Brackett is accused of committing securities fraud violating Title 17, Code of Federal Regulations, Section 240.10b-5. Section 240.10b-5 specifically addresses securities not listed on a national securities exchange. Securities fraud is committed when “manipulative, deceptive, or other fraudulent” means are used in connection with the sale of any security.
The indictment alleges that Brackett sent manipulated bank statements to short-term lenders in hopes of securing funding for Centricity. These bank statements falsely displayed Centricity’s total balance to be $594,420.06 when in reality the company’s total account balance was only $94,420.06, over six times less.
Brackett also allegedly solicited an investment of $500,000 from a venture capital firm under false pretenses. It is claimed that he provided the venture capital firm with a falsified customer spreadsheet showing a yearly revenue of $3.7 million from a total of thirteen customers. However, only two of the listed customers actually paid Centricity, and they paid amounts far less than represented on the spreadsheet. Finally, the venture capital firm’s investment is alleged to have been based—at least in part—on this false information provided by Brackett.
Conviction Requirements
To successfully convict Brackett for a violation of Title 17, Code of Federal Regulations, Section 240.10b-5, the plaintiff must prove the following elements: (1) the individual misrepresented a material fact; (2) the individual did so knowingly; (3) the plaintiff relied on the individual’s material misrepresentation; and (4) the plaintiff’s reliance on the material misrepresentation caused their loss. Allegedly, Brackett provided false financial information about the company’s total balance and customer spreadsheets to investors and did so knowingly. The venture capital firm relied on the information provided by Brackett and consequentially lost their investment.
Taking the facts alleged in the indictment as true, the standard for securities fraud seems to be met, but Brackett could have several defenses at trial. Brackett will likely argue that he did not have the requisite intent to manipulate, deceit, or commit securities fraud. He will try to persuade the jury that the total balance displayed to investors on the bank statements was a mistake and not an intentional misrepresentation. The balance sheet contains one additional numerical digit which could be an innocent mistake or clerical error. To strengthen his case, Brackett may be able to provide evidence to show that he believed the information he gave to investors was true. By showing that he relied on the advice he received from attorneys or accountants who are more knowledgeable in the field, he may be able to prove his innocence. If Brackett is successful in showing that he lacked the requisite intent to commit securities fraud, he may be able to mitigate his culpability.
Brackett may also argue that the statute of limitations has expired to bring a claim against him. Under 28 U.S.C. Section 1658(b), securities fraud claims must be brought within two years of the discovery of the facts constituting the violation, and not more than five years after the alleged violation. Brackett will argue that the alleged conduct occurred in June 2021 and the victim learned of this fraud scheme within days. The indictment was brought against Brackett in August 2023, twenty-six months after his alleged misconduct, possibly past the statute of limitations. If Brackett is successful in proving the statute of limitations has expired then he may be able to dismiss the securities fraud claim.
Wire Fraud
In addition to securities fraud, Brackett was accused of committing wire fraud violating Title 18, United States Code, Section 1343. Wire fraud is the act of creating a plan for purposes of “obtaining money . . . by means of false or fraudulent pretenses, representations, or promises . . . transmitted by means of wire, radio, or television communication.”
As mentioned above, the indictment alleges that Brackett sent falsified documents of customer lists, which presented potential investors with excessive revenue numbers. In reliance on these alleged fraudulent documents, an investor wired an investment of $500,000 to Centricity. Upon learning that the documents were doctored, the defrauded investor allegedly attempted to reverse the wire transfer. This attempt failed, and neither the bank nor Centricity were able to return the funds because Brackett allegedly transferred the funds out of the account. Days later, Brackett resigned and Centricity ceased operations.
The facts alleged in the indictment, if taken as true, support the statutory requirements for wire fraud. However, to successfully defend against the wire fraud claim brought by the venture capital firm, Brackett would need to show the false information provided to the firm was not material to the firm’s decision to invest in the company. In the last decade there has been an upward trend in Venture Capital (VC) firms investing in early stage startups. An investment by a VC firm in the amount of $500,000 dollars is a relatively small amount in the industry and oftentimes funding is extended to early stage companies that have little to no profit. Brackett can argue that the firm was really interested in Centricity’s AI algorithm because it had the potential to change the future of the grocery industry and that its decision to invest was not based on the customer list.
Per 18 U.S.C Section 3282, the statute of limitations for wire fraud claims must be brought within five years. The wire fraud occurred in June 2021 and Brackett would have no defense to show the limitations have expired.
Conclusion
Brackett’s trial date is still pending so his guilt or innocence is yet to be determined. If he is unable to defend against the securities fraud and wire fraud charges, he could face up to twenty years in prison. Brackett's case is not the first fraud attempt in the investment world and will surely not be the last. This serves as another reminder for investors to do their due diligence when investing in a startup, and a reminder to founders to be honest about their product.
*The views expressed in this article do not represent the views of Santa Clara University.