This month I served on a jury in Boulder County, Colorado. My fellow jurors and I were tasked with deciding a felony securities fraud case involving a Colorado startup that raised a $250,000 investment from a single backer. The venture took shape in mid-2012 in the form of two Colorado limited liability corporations (LLCs), and turned thermonuclear just thirteen months later.
What follows is a brief exploration of the failed business, the criminal case, and my assessment of the lessons that entrepreneurs can draw from this venture-backed debacle.
Background
An author named Brad Haga (a no-show for the trial) convinced a guy named Bret Gardner (the defendant) that America needed a Western-themed version of “50 Shades of Grey” geared toward an audience of male outdoorsmen. The crux of this plan was to promote the literary series through a marquee hunting and fishing web portal (the WebMD of hunting and fishing).
Bret pulled his father, Gary Gardner, into the venture and the shit show was off and running. In just over a year, the team burned through $250,000 in venture capital and had very little to show for their efforts (contractually none of that money was supposed to go toward salaries or member compensation, though a lot did).
On Friday, August 19, 2016, after a 5-day trial, the jury found Bret Gardner guilty of securities fraud (a class three felony in Colorado). Mr. Gardner will be sentenced on October 4, 2016.
The Business - Novels
Brad Haga persuaded the team that he had spent years developing character studies, chapter outlines and content for a series of 5 novels that were sure to capture the attention of American outdoorsmen.
The protagonist in these stories, Thomas Edward (TE) Scoundrel, is a banal mix of James Bond, Matthew Quigley and Jack Reacher. After receiving several accelerated battlefield promotions during the American Civil War, TE musters out of the Union army with the rank of Colonel.
Over the course of the series, TE travels the world and battles a litany of cliche villains. When TE wasn’t hunting and fishing (amidst a flurry of feigned product placements), he would indiscriminately make love to wanton women along the frontier.
The Business - Website
Haga and the Gardners envisioned promoting the Scoundrel series exclusively through a web portal designed for huntsmen and anglers. The group’s investment prospectus noted that hunting and fishing enthusiasts were being shotgunned across the Internet through their various Google queries.
This venture sought to build an authoritative gateway where outdoorsmen could swap stories, share pictures and absorb [sponsored] product recommendations. The plan called for an avalanche of content to captivate viewers and skyrocket the site to the top of search engine results.
The same investment prospectus glossed over the fact that no one on the Scoundrel team had any web product management experience, let alone any background building Internet publications. Ultimately, the website was not built and never launched.
The Business - Financier
At a quaint pawn shop in Longmont, Colorado, the Scoundrel team found a financial backer. For almost two decades Rod Brandenburg and his family have run Grandpa’s Pawn & Gun. In Brandenburg, Haga and the Gardners found an enthusiastic supporter of the hunting and fishing lifestyle.
Rod Brandenburg quickly bought into the Scoundrel pitch and invested $250,000 through two rounds, one in May June 2012 and one in December 2012.
The Criminal Case
When he met Rod Brandenburg, Bret Gardner held a Series 7 stockbroker’s license. The business card that Bret handed to Rod on their first meeting noted that securities were provided through the Grant Williams brokerage.
Bret’s license was relinquished just two days before Mr. Brandenburg invested in the business, and that was one fact which led the jury to determine that the investment contract offered to Mr. Brandenburg was a bonafide “security” under the Colorado Securities Act.
As a security, this investment failed to convey many material facts and important disclosures (like the team not knowing what the hell they were doing).
Lessons Learned
Below are my thoughts on how entrepreneurs can avoid ending up being cast as a “Scoundrel”. The key takeaways are in bold.
- Know Your Investor - Rod Brandenburg had never been an angel investor. In fact, it was revealed during the trial that he had never invested money into a venture that he did not solely control. He was also very web-adverse; he wasn’t a savvy Internet user and had no realistic expectations about what it would take to establish a web property and build an online audience. Find the right investors.
- Share a Worst Case Scenario - The prospectus for the Scoundrel deal showed a conservative, most likely and optimistic scenario. The conservative scenario showed that Mr. Brandenburg would receive all of his investment back in just two years. In fact, Mr. Brandenburg never saw any dividend or repayment on his $250,000 investment. Don’t gloss over risks.
- Full Disclosures Should Be Full - Days after the first investment wires cleared the bank, the Gardners issued themselves a 10% finder's fee. These gentlemen were convinced that such compensation was standard, and took their cuts unbeknownst to Rod Brandenburg. The finder's fees were just one example of material allocations of company resources that were never disclosed to the company's financial backer.Always error on the side of caution and disclose.
- Implement Financial Controls - Brad Haga went on a December 2012 shopping spree where he used a company debit card to make purchases at retailers like Victoria's Secret, Bath and Body Works and Roth's Fresh Markets. At the same time, he was withdrawing large sums of money from neighborhood ATMs. This behavior was flagrantly nefarious and went on for months; it showed that the company had no internal controls governing the use of company funds. Keep personal expenses out of your company books.
- Be Frugal And Disciplined - The most precious resources in startups are time and money. Rampant spending robbed the Scoundrel venture of time and it’s chance to bring a product to market. Make every dollar count.
- Reward At Milestones - The Scoundrel team was at the mercy of Brad Haga’s perpetual “writer’s block”. Haga never delivered a manuscript for the first installment of the book series, let alone the additional four volumes. This production failure ultimately sunk the Scoundrel venture. If Bret Gardner had not paid nearly $100,000 in licensing fees to Brad Haga up front, he would have had leverage for persuading Mr. Haga to meet his agreed upon obligations. Tie incentives to progress.
Ironic Symbolism
There were several notable concepts in this trial that carried poetic meaning. Here are a few:
- These guys named one of their LLCs “Scoundrel”. This moniker gave the entire venture a dishonest and unscrupulous semblance from the beginning.
- The team’s publishing plan called for never showing TE Scoundrel’s face on book covers or advertising artwork, just as Brad Haga never showed his face during the criminal trial. My fellow jurors and I really struggled to understand Mr. Haga. Was he a misrepresented author or a criminal mastermind? We only saw his silhouette.
- The series carried the slogan “Live to the fullest. No apologies.” True to that motto, this team spent recklessly and quickly ran out of operating capital. The court record will show that no apologies were ever offered to Mr. Brandenburg.
- The Scoundrel group came together through their mutual enjoyment of a very contrived novel called “What Matters” (featuring a whopping 11 Amazon reviews). A core tenet of the “What Matters” storyline is honesty. A lack of honesty from the operating members of this venture (Brad Haga, Gary Gardner and Bret Gardner) quickly doomed the project.
Final Thoughts
In my opinion, after spending 5 days reviewing evidence and hearing testimony, Brad Haga may be the guiltiest party involved is this case. This guy received licensing fees, collected commission advances and spent frivolously on company debit cards. Additionally, Mr. Haga did not show up for the criminal trial, which struck me as being cowardly.
I left the Boulder County Courthouse convinced that Brad Haga of Independence, Oregon is a genuine scoundrel.