The 10 Biggest Tech Industry Scandals of 2022
Photo by Luke Jernejcic on Unsplash
Corporate scandals are not a new thing in the tech industry. The last few years have seen a range of incidents from executive misconduct, to gross financial self-dealing, to outright criminal fraud at such well-known, high-flying companies as WeWork, Uber, and Theranos. But 2022 was a year in which the tech industry seemed determined to out-do itself in terms of corporate scandals.
Perhaps it was a hangover from the COVID-induced tech surge, or a generational wake-up call that there actually can be down markets, or a natural vetting triggered by higher interest rates and slower growth that has led to down rounds and a commensurate increase in investor scrutiny. Whatever the reason, 2022 seemed to unearth a new scandal virtually every week—so many, in fact, that I decided to write this post chronicling some of the biggest of the year.
With over 200,000 people who have already lost their jobs in the tech industry in 2022 according to Layoffs.fyi and more layoffs announced this year, the consequences of these scandals, over-investment, and mismanagement, are landing on workers, as is always the case. As I researched this list, I saw three big themes behind the companies that found trouble—that I’ve come to think of as the three C’s:
Cryptocurrency—with the collapse of the crypto market, the full extent of self-dealing and fraud in that sector has been exposed.
COPPA—the Children's Online Privacy and Protection Act dictates how companies need to treat underage users, who constitute a disproportionate percentage of internet and app usage.
Customer exaggeration—several companies got in trouble for a time-honored Silicon Valley tradition of grossly exaggerating their customer traction.
With those themes in-mind, here is my list of the Top 10 Biggest Tech Industry Scandals of 2022:
10) IRL
The interest-oriented messaging app IRL seemed for a while that it was going to be the next big thing to take on legacy social media players like Facebook after the company’s CEO, Abraham Shafi, claimed they had 20 million active users. On the basis of that evident growth, the startup raised $170 million round from SoftBank Vision Fund (which seems to have a knack for investing in dubious companies), Founders Fund, and other investors, reaching coveted unicorn status. The bloom started to come off IRL’s rose in May, when employees at the company said the real user base was a fraction of the 20 million claimed. The SEC is investigating the company over the claims but may not be able to prosecute their case since “users” are an ambiguously defined term and not an established financial metric. Many, many, many tech companies exaggerate their user growth, and they are rarely caught. Although this case is not likely to end up in more than a slap on the wrist by the SEC, the company seems to be entering a downward spiral. In June, they announced a lay off 25% of their 100 employees and actual IRL users are proving harder to find than . . . well, unicorns.
9) Embark
Over-invested categories are breeding grounds for corporate misconduct—flush with cash and pressured to move fast, with no time for diligence or corporate governance. One such category is autonomous and alternative-energy vehicles, eager to draft on the success of Tesla. Embark, an autonomous trucking startup and Y Combinator alumni, seemed determined to follow in the wake of electric and hydrogen fuel cell company, Nikola—one of 2021’s biggest corporate scandals when it was revealed that the company’s founder and CEO, Trevor Milton, made outright fraudulent statements about “nearly all aspects of the business.” (Milton was found guilty in October, 2022). Although Embark’s mismanagement and deception was nowhere near as egregious as Nikola’s, the company has quietly lost 98% of its value. Sidestepping the usual diligence and regulatory filing process of an IPO, Embark went public in 2021 via a SPAC by Northern Genesis Acquisition Corp. II, which valued the company at $5.2 billion. Unfortunately for Embark, its product, revenue, and overall business were nowhere near ready to endure the scrutiny of being a public company. First, a report from corporate misconduct short-seller, The Bear Cave, asserted Embark’s valuation was based more on “puffery rather than actual substance.” Then a shareholder class-action lawsuit charged Embark with overstating its product capabilities. The result has been a loss of over $5 billion in public shareholder value, and a business trading below its cash value—self-driving this company into the ground.
8) Snapchat
Like another social media company on this list (see #2), Snapchat didn’t have one big headline-grabbing scandal, but 2022 was a tough year for the company. In May, the app popular among teens for its vanishing messages was hit with a class-action lawsuit claiming it captured and stored biometric data in a manner that violated of the Illinois Biometric Information Privacy Act, resulting in a $35 million settlement. Also in May, the company faced a separate class-action lawsuit led by a 16-year old girl who says she was sexually exploited on Snapchat starting at age 12. Never would have guessed an anonymous messaging app primarily used by teens would attract sexual predators. The app has also been accused of enabling drug dealers to target teens that have led to fentanyl overdoses.. With over 100 million daily active users in North America and 90 percent adoption among 13- to 24-year olds, Snapchat plays on outsized role in the life of America’s youth—many who naively believe the vanishing messages afford them privacy, but under-appreciate the potential of that stealthy communication model for exploitation. The scandals have taken a toll on the parent company, Snap. In August, Snap announced a 20 percent reduction in staff, nearly 1,300 employees, and went on to badly miss their Q3 earnings target. Meanwhile, Snap’s stock price has steadily plunged by around 90% from its peak at the end of 2021. The only thing disappearing faster than a Snapchat message is Snap’s shareholder value.
7) Fast
The “buzzy” e-commerce start-up, Fast, promised to empower “one-click checkout” for online retailers, similar Amazon’s popular one-click purchase feature. After raising over $120 million, valuing the business at $500 million in 2021, the company disclosed in March of last year that it was unable to raise additional capital on its anemic annual revenue of just $600,000 and was desperate to find a acquirer. That knight in shining armor never arrived. In April, the company abruptly shut down after spending money faster than a craps junkie on a Vegas bender. The scandal with Fast is mostly one of gross internal financial mismanagement by fast-talking founder and CEO, Domm Holland. The company grew to over 500 employees, reaching a burn rate of $10 million per month thanks to extravagant expenditures, including pricey partnerships with sports teams and an alleged offer of $1 million to the electronic pop group, the Chainsmokers, to perform at a Fast corporate event just months before shutting down. I’m not sure the fired employees or bag-holding investors would want “Something Just Like This.”
6) Helium
Here’s a tip: if a company is described as a “crypto darling” run the other way. After a few pivots, the nearly decade-old, Shawn-Fanning-co-founded crypto experiment known as Helium seemed to have finally developed an interesting, if complicated, business model. Touted by the New York Times at the time, Helium intended to build out a nationwide network for the “Internet of Things” (think cameras, sensors, refrigerators, and other appliances) by selling a $500 device that people were supposed to run in their house and then earn money from that device mining Helium’s cryptocurrency. Sound confusing? You’re not alone. Although the company touted stories of savvy Helium owners who had allegedly made fortunes from the devices, the reality was the business was secretly handing out the bulk of its cryptocurrency to insiders, not miners who bought their hardware. When the price of their Helium Network Token, or HNT, collapsed, the people who had bought the devices were left holding the proverbial bag while insiders and investors like Andreessen Horowitz and Tiger Global pocketed millions. As the scheme collapsed, stories have emerged about users (including company employees) cheating the system by clustering devices that were supposed to be distributed network nodes, lying about corporate partnerships with Salesforce and Lime, failing to generate revenue from what is supposed to be the company’s real business of selling access to its wireless network, and a growing perception the entire thing could be a “well-coordinated scam.”
5) Frank
Although not well-known, Frank, a “buzzy fintech startup,” was one of the more brazen fraud cases of the year. Going beyond merely exaggerating their user growth, Frank allegedly fabricated the existence of millions of users entirely. After being named to the Forbes “30 Under 30” list in 2019, founder and CEO Charlie Javice sold her company, a financial service for streamlining student financial aid applications, to JPMorgan Chase in 2021 for a whopping $175 million. In December, Chase sued Frank and Javice herself for completely fabricating 4.265 million customers “who did not actually exist,” more than 15-times the meager 300,000 customer accounts the company actually had at that time, according to the suit. Wow . . . If you’re gonna lie, lie big, I guess. Javice is counter-suing (of course), claiming Chase’s accusations are “groundless” and intended to deny her millions in rightful compensation. Regardless of how the cases are resolved, Frank is emblematic of the worst proclivities of venture-backed tech startups—privileged founders who feel birthright-entitled to fantastic wealth, a “fake it till you make it” mindset that is an enabler to outright fraud, self-reinforcing media hype cycles that anoint companies without journalistic integrity, the ability of high-profile billionaire investors (in this case, Marc Rowan) to Midas-touch their own deals, and abysmal due diligence by investors and acquirers. By all accounts, Frank appears to have run the Theranos playbook. Whether it will also result in criminal conviction of Javice on fraud charges remains to be seen.
4) Vonage
As anyone who has tried to cancel a recurring subscription can attest, tech companies make canceling deliberately hard to do. In the case of internet phone provider, Vonage, the FTC determined that the company’s attempt to obfuscate a customer’s ability to cancel was so deliberate it was illegal. In November, the Federal Trade Commission required Vonage to pay $100 million in refunds to customers it exploited using a variety of unethical tactics. Vonage makes it incredibly easy to sign up for its service using so-called “negative option” schemes, in which a free trial automatically converts to recurring monthly charges unless the customer remembers to terminate it first. Once those charges start, the company makes it extremely difficult to cancel—including not offering any form of online cancelations, forcing customers to speak to a live “retention agent” on the phone, making the cancelation phone number essentially impossible to find, failing to transfer customers to cancelation agents, charging “junk” cancelation fees not disclosed at sign-up, and even blatantly continuing to charge customers without authorization after they cancelled, according to the FTC. Sadly, these same illegal tactics are employed by hundreds of tech companies that rely on monthly subscription payments from customers.
3) Epic Games
The creator of the smash-hit, “kid-friendly” (because, why wouldn’t we teach our children to indiscriminately shoot other people?) online shooter game, Fortnite, was accused by the FTC of illegally collecting the personal information of millions of children, and tricking them, using manipulative techniques called “dark patterns,” into unintentional payments in the game. The shady tactics resulted in a financial windfall for Epic, but violated the aforementioned Children’s Online Privacy Protection Act (COPPA), which limits the collection of personal information and game access for children under age 13. In December, Epic paid for those violations with a record $275 million fine plus $245 million in consumer refunds resulting from an investigation by the Federal Trade Commission, which has vowed to crack down on such tech industry practices. In a statement on the settlement, Epic described its practices as “longstanding industry standards” and, sadly, they’re right. Skirting COPPA rules is a well-honed practice among tech companies, particularly in gaming and social media, because, candidly, users under 13 are voracious, viral, and the primary drivers of huge user growth. And dark patterns, such as confusing button labels, disguising user consent, and deliberately accident-prone UI layouts, that trick users into online purchases are practically ubiquitous in the industry.
2) Twitter
Elon Musk arriving at Twitter headquarters with a symbolic kitchen sink. (Photo credit: Twitter/@elonmusk)
Rather than a single lightning strike scandal, Twitter in 2022 was a never-ending rolling thunder of daily, if not hourly, scandals. From the first moments of tortured courtship, through the dramatic he-said/they-said attempts to back out of the deal, to the epically disastrous reign of the most impetuous, egomaniacal, self-appointed leader the corporate world has perhaps ever seen, Twitter has been a case study in how to destroy value for shareholders, employees, advertisers, and users. An entire journalistic ecosystem documented every cringy moment of this dumpster fire, and whole books will be written on the depths of ineptitude and hubris that this company has descended to. So I have no desire to provide a full recounting here, but just a few of the lowlights in this shit-show-within-a-train-wreck include: suspending journalists accounts, banning links to other social media sites, widespread layoffs, resignations of hundreds of employees, a mass exodus of advertisers, the decimation of the company’s remaining content moderation team, and a litany of other incidents so numerous, tiresome, mercurial, and self-destructive that even Musk’s closest confidants lost faith in his rule—culminating in a public end-user vote of no confidence against him and his pledge to step down, eventually. The meta-scandal to this unprecedented display of hubris is a new bar of ego-centrism that Musk and like-minded tech multi-billionaires have established. Check that, the real scandal is what else could have been done with $44 billion dollars. Once this plays out, it may prove to be one of the most pointless, self-immolating destructions of wealth of all time.
1) FTX
FTX founder and ex-CEO, Sam Bankman-Fried. (Photo credit: Royals Blue)
It’s only fitting that the year of the crypto implosion would have a crypto company at the center of one of the greatest frauds of all time. Sam Bankman-Fried has punched his ticket to the fraudster hall of fame, alongside Bernie Ebbers, Kenneth Lay, and Bernie Madoff. The investors in this Chernobyl-esque meltdown include a strangely familiar set of names—among them, Sequoia Capital, SoftBank, and Tiger Global. All told, over 90 different investment funds happily pumped an estimated $1.8 billion into FTX at valuations as high as $32 billion. When you step back, you can’t help but observe how fucked in the head these investors must have been to put that kind of money into a company just founded in 2019 by a then-26-year-old kid who operated the company out of the Bahamas with no corporate oversight and operated by a pack of other twentysomething buddies who were all dating each other. What could possibly go wrong? This punchline of a bad venture capital joke started to unravel in November, when FTX announced it was facing a “liquidity crisis” thanks to the collapse in cryptocurrencies—well . . . that and the estimated $2 billion in customer funds that disappeared out the “back door.” Each generation comes up with a new euphemism for embezzlement, but Sam Bankman-Fried (or SBF as he’s known—side note, never invest in anyone who goes by a three-letter acronym, see MBS) took this to a new level—so unprecedented in its scope, we might need to change the term “Ponzi scheme” to “FTX scheme.” Looking like a stoned, high school dropout apprehended while playing video games in his mom’s basement, SBF was arrested in the Bahamas on December 12. The SEC charges were as outrageous as they were predictable—diverting the funds of customers to FTX’s privately-held subsidiary crypto hedge fund, Alameda Research, which was run by 28-year-old Caroline Ellison, an alleged romantic interest of SBF. You literally can’t make this shit up. While FTX’s gullible users thought they were making a fortune in crypto, SBF and his posse were dipping into their customers’ funds like their own personal stash of Mary Jane—going on a spending orgy that included investments in other crypto companies, purchases of real estate, sports stadium naming rights, and massive political donations (mostly to Democrats). It all culminated in something I, for one, did not see coming (spoiler alert!): a bankruptcy filing as the remaining entity digs through the shrapnel inside the crater for anything salvageable. FTX is the epitome of the malignant self-dealing that has come to define the current tech industry. With no corporate or regulatory oversight, unlimited troughs of money, and obfuscated business models designed to enrich insiders, companies like FTX have come to represent the new Silicon Valley—one in which greed, ego, and hubris have completely overwhelmed the last remaining platitudes of “making the world a better place” that the tech industry used to hold dear.
Perhaps the aspect of this list that most troubles me is it was hard to narrow down to just 10 scandals. Dishonorable mentions go to: Hydrogen Technology Corp, another crypto firm charged by the SEC for manipulating the market for their token for their profit; Genesis, a crypto lender to high-net-worth individuals that recently filed for bankruptcy; Clearco, a mismanaged Canadian fintech company that is rapidly imploding as it lays off staff; HeadSpin, a mobile app testing company that recently settled fraud charges; VM Ware, which the SEC charged with misleading investors and manipulating their financial statements; and NVIDIA, which paid $5.5 million to settle SEC charges that it also misled investors. Meanwhile, 2023 promises to be more of the same, with the U.S. Justice Department accusing Google of monopolistic practices and TikTok being accused of violating children's privacy, not to mention the entire business coming under legislative scrutiny as an alleged pawn of the Chinese government.
These scandals are the symptoms of a broken and morally bankrupt industry. In almost every instance mentioned above, there are dozens, if not hundreds, of similar companies embracing these same “best practices” who just haven’t been caught yet—violating consumer privacy, abusing users’ trust, manipulating customer behaviors, exaggerating metrics to investors, exploiting legal loopholes, and evading regulations. The Libertarian, free-market bent of tech has metastasized into an illness at the heart of the industry—one that the insiders guarding the hen house have proven unable or unwilling to remedy. Fortunately, unlike in the dot-com bust, many of these financial scandals have concentrated their collateral damage on the private investors who are causing the problem in the first place. But as layoffs, customer complaints, and financial losses mount, something eventually might need to be done about Big Tech.