What to do upon discovering fraud being committed by a CEO of a company I am invested in? [closed]

Question

I have some stock in a company I used to work for so am subscribed to the investor's update letters. In the most recent investor's update the CEO announced some very impressive statistics for the latest product, and in clear terms stated that these results had been achieved now.

I contacted an existing employee congratulating them on these impressive results (and to subtly confirm these results as I was suspicious). This employee corrected me, stating that this work is still in the design phase, and the results I was congratulating them on were an aspiration only.

I believe that what the CEO is doing constitutes fraud, especially since the company is going into a new investment round and hoping to raise more capital from the existing investors.

The other investors in the company are not familiar with the details of the work being done, and it's easy to see how they've had the wool pulled over their eyes here.

Being invested in the company I certainly have a conflict of interest here. However I do not believe what the CEO is doing is beneficial for the company in the long run, indeed this over-promising behavior has lead to tight spots for the company in the past.

This behavior is not altogether surprising: when I was an employee of the company, there was always some bending of the truth when doing pitches and meetings with clients. Indeed, one of reasons I resigned was because of being asked to fake a product demonstration in front of some clients; The CEO wasn't willing to put this in writing at the time, however I have records of contacting several other people for advice regarding this at the time.

I have several options available to me now:

• Confront the CEO directly about this and ask for an explanation.
• Raise this with the company board (which comprises the CEO and some other investors).
• Contact all of the investors (who are all being propositioned for the upcoming investment round).
• Raise this issue at the upcoming investors meeting.

What are the likely consequences of each of these options?

Answer 1

Being invested in the company I certainly have a conflict of interest here.

It's not a conflict. You literally have an interest in the company and certain rights as a stock holder.

If you're certain there is fraud, there are places you can contact and become a whistle-blower. If you're not sure, attend a stock holder's meeting and get clarification. It's up to the rest of the stock holders to decide if they're satisfied with the explanation.

Answer 2

I'd like to point out that all those 4 options you mention are based on the premise that the CEO is committing fraud. However, if it is fraud or not is quite open for different interpretations.

Based on what I've seen and know, it is not rare for CEO's to slightly exaggerate or be really confident on some project's features or progress. This is specially true when they are trying to sell or convince possible clients/investors of such project. In fact, this is a good portion of their job actually, as they have to be this sort of "nexus" between the ideas, the team, and what is achievable, so the company can navigate the industry safely.

It is true that they may sometimes be unrealistic at first; in quite some occasions I've had to pop my CEO's bubble when reaching for something unrealistic, or giving him/her a quick "careful there!" look when they start to promise the Moon to some client.

However, it is also true that in most of those situations my CEO insisted and decided to go with such approach, and eventually proved me that we were capable of doing so. Several achievements would not have been possible if we always played "safe".

Now, with that being said, I would suggest not to take this as the CEO committing fraud, and actually wait to see the results and progress to judge on facts.

---

To answer your possible scenarios:

Confront the CEO directly about this and ask for an explanation.

This seems to be the less extreme of them all, and if you really want to go with one of these options you should at least start with this one.

Naturally, doing this would make evident that someone gave you information about the "real" status of the project. This could compromise your former coworker, given that he gave you such information.

Despite that, this approach will give the CEO chance to explain on more detail the situation (as you don't usually inform the investors with each and every detail*). After this you will be able to better judge if this situation is something to worry about.

Raise this with the company board (which comprises the CEO and some other investors).

This may generate unnecessary noise, and perhaps confusion/worry. As you can guess, this will also compromise your former coworker and CEO.

In case things were not as bad as you think they are, you will be the one in an uncomfortable situation, which is why it is better to be really sure before going for this.

Contact all of the investors (who are all being propositioned for the upcoming investment round).

Raise this issue at the upcoming investors meeting.

This two are basically the same, and have almost similar effects to the previous scenario.

This approach could perhaps generate more misinformation or unnecessary panic, as the CEO won't be there at that moment to explain or defend his words. Also, if things turn out to be better than you think, this will leave you in an awkward and compromising position.

Again I suggest you double check the status with the CEO before deciding any further steps.