Frank student loans founder charged over US$175 million fraud

The founder of shuttered New York-based student loan assistance company Frank is facing both civil and criminal charges in parallel cases brought by the United States Securities and Exchange Commission (SEC) and the US Department of Justice.

These cases focus on alleged fake customer numbers used to clinch the US$175 million sale of the company by founder Charlie Javice to JPMorgan Chase bank in 2021.

Frank was an online platform designed to help American students negotiate the vast and complex student loan sector in the United States, that business publication Forbes in February valued at US$1.75 trillion, counting private and federal government loans.

The US central bank, the Federal Reserve, says the market has been growing, up from US$516 billion in 2007 to US$1,635 billion (or US$1.635 trillion) in the first quarter of 2023.

The debt is structured in a wide range of federal government and private repayment programmes, including a refinancing market that financial journal SuperMoney says was worth US$499.2 billion in 2022, covering US$407.5 billion in federal loans and US$91.7 billion in private debt.

A compelling proposition

This lucrative and complex market made Frank a compelling proposition for JPMorgan Chase. But the SEC and Department of Justice allege that the loan platform was not as popular with students as Javice maintained. The SEC alleged on 4 April that Javice orchestrated a scheme to deceive JPMorgan Chase into believing that Frank had access to valuable data on 4.25 million students who used the start-up’s service, when the real number was less than 300,000.

The Department of Justice complaint accuses Javice of “falsely and dramatically inflating the number of customers” to “fraudulently induce” JPMorgan Chase to acquire Frank for US$175 million. Javice stood to gain over US$45 million from the fraud, according to the criminal charges unsealed in a Manhattan court on 4 April.

In December JPMorgan Chase sued Javice citing email evidence, now also key to these two cases, that she hired a data science professor to set up almost four million fake accounts to secure the Frank sale.

Javice denies the charges, claiming in a 27 February response to the JPMorgan Chase filing that the bank itself requested this “synthetic data” when privacy laws prevented it accessing customer information during pre-sale due diligence.

Javice further claims she told JPMorgan Chase she had 4.25 million cumulative users who had viewed the Frank website, not accounts, and that other information provided before the sale, such as the marketing budget, showed the actual number of customers.

Having bought Frank and taken on Javice and her senior colleagues at the platform as employees, JPMorgan Chase subsequently closed Frank this January (2023) and sued its founder for allegedly duping the investment bank over user numbers. Javice contests the claims, alleging that JPMorgan Chase simply mismanaged the platform.

Sector no stranger to fraud

The United States student loan sector is no stranger to fraud.

The US Consumer Financial Protection Bureau in December announced that it had secured US$19.6 million worth of repayments for more than 23,000 people who were charged unlawful advance fees by five student loan debt relief companies, following a lawsuit against them.

Here the defendants were Docu Prep Center d/b/a Certified Document Center, Certified Doc Prep Services, Assure Direct Services, Direct Document Solutions and Secure Preparation Services – which were associated with Monster Loans and Lend Tech Loans.