On Fyre: You Know Fraud When you see it

Christina Sautter, Carla Reyes, Najarian Peters and I are proposing a presentation for next year’s SXSW on the Fyre Festival and the obvious and easily discoverable signs that the festival and its underlying companies would be a failure. Please vote it up: https://panelpicker.sxsw.com/vote/100616.

Here are more details on the presentation:

Everybody wants to be a part of the next best thing—whether it’s by being the first to attend the next Coachella or to be the first person to invest in the next Facebook. When Billy McFarland developed the Fyre Festival and Fyre Media, he preyed on our basic human desires to be included and to be the first.

His ventures were the perfect storm for a good fraudulent scandal: emotional appeal, endorsements by famous people, investors believed to be knowledgeable, and documentation that looked real enough to trick people. These factors made people completely ignore the obvious red flags.

By going just slightly below the surface, and asking some common sense questions, Fyre Festival attendees and Fyre Festival Media investors could have avoided a loss that by many estimates exceeds $25 MM.

When Billy McFarland and Ja Rule began promoting the Fyre Festival, they did so without having a venue or artists booked, or any real company infrastructure to make the festival happen. The Festival was intended to promote the Fyre talent-booking app. McFarland leveraged falsified success of his previous venture, Magnesis, to make himself look like a successful business person, soliciting millions in investments in Fyre Media and Fyre Festival.

Together with Ja Rule, he pitched the festival as a once in a lifetime experience on a private island available only to a limited number of people…for a price.

Although McFarland didn’t spend money on employees, venues, or musical acts, he invested millions in making the event look legitimate on social media. He paid Kendall Jenner $250K for a single Instagram post. He invited several models to the island to film promotional videos. The event was launched on social media before the island was purchased.

The original plan was to use the first round of funding to buy an island…but when an appropriate island could not be found the plan was abandoned. The organizers took money without any concrete plans, and with only a few months to coordinate the event was doomed to fail.

By March there is no real site for the event, McFarland is focused on raising funds to bail out all of his ventures and committing securities fraud in the process, and acts are not confirmed. The ticket sales are reduced from 200,000 to 40,000, and the premier caterer is dropped because of the budget.

The day before the event, headliner Blink-182 drops out.

When attendees arrive on April 28 they arrived to chaos. The promised Villas and Yachts were a tent city with cold food and no accommodations. After the first attempt the second weekend of the festival is cancelled.

Many attendees sued to recover the cost of the event and for other damages. Billy McFarland has faced criminal charges and is currently in litigation with the SEC. The investors lost all of their investment, and it has been revealed that all of McFarland’s businesses are a sham.

There are several lessons to be learned from the Fyre Fraud. Many can be uncovered by asking simple questions and looking just beyond the glossy videos and promotional materials.

There are many lessons to be learned, but we will focus on 4 key takeaways:

    Never invest in companies without experts, audited documents, and structure
    Be wary of unregistered securities and unregistered brokers
  • Be wary of a large event that is not linked to a proven and reputable payment system.
  • Don’t give away your data and property for free because of FOMO.

In SEC filings and other pleadings, it is clear that McFarland was the head of a sham enterprise, comprised of 3 companies. He began the pattern of inflating values and skipping governance requirements with Magnesis, then he leveraged the perceived success of that company to get investors into the Fyre ventures.

Every corporation should be comprised of shareholders, who elect a board of directors, who then hire officers, such as a CEO, CFO. Those officers then hire experts to help manage the day to day operations of the business, such as accountants and attorneys. There’s no evidence that McFarland followed any of these protocols with his businesses. He maintained all control. As an investor, a simple review of what is on file with a state Secretary of State would let you know if a company is a single person enterprise.

In addition, when McFarland provided financial reports and reports on other investors and potential acquisitions, there was no accounting firm associated with the financials, no investment bank affiliated with the acquisitions, and no law firms engaged day to day. The only law firm involved was hired to paper a fake acquisition, based on the false documents McFarland produced over the years.

Just a little diligence, and paying attention to the fact that no reputable experts were involved, could have exposed this fraud to McFarland’s investors.

McFarland prepared the offering memos, handled all the transactions, formed the companies, and generally acted as a broker-dealer for the investment in his companies. The only problem is that McFarland was not registered with FINRA or any other agency, and was not complying with a single SEC or other government regulation. Although he was issuing securities, none of his companies were registered.

A search of the SEC website would have revealed these facts to his investors, and the lack of company structure could also have given festival participants a hint that something was not right with the company. If McFarland had registered properly with the SEC, he would not have been able to continue his scheme of falsifying financial statements and investment materials.

When investing in private and unregistered entities, or with unregistered broker dealers, know that you are investing without the protection and oversight of government agencies. You should be more diligent about reviewing background documents, having financials audited, and securing the services of attorneys to help ensure you aren’t making a bad investment.

Fyre Festival was supposed to be a cutting edge high tech and cashless event. Payments on sight would all happen electronically, the event vendors would know who to charge and who should be given things because of their package by a simple swipe or scan. Transportation to and from would also operate as seamlessly and cashless as the event itself.

However, when packages were purchased and amenities were added on, it was not clear where the money was going. Ticketmaster and other concert management companies were not involved. There was no PayPal or eventbrite contract. Instead, people blindly sent thousands of dollars to Fyre directly—and I’m sure there wasn’t review of the terms and conditions when payment was made.

Two participants sued and received a judgment for $5MM—but receiving a judgment and collecting a judgment are two different things. With all enterprises bankrupt and McFarland in jail, there is little likelihood of recovery.

When paying for events on line, beware of the promise of high tech. Don’t let it distract you from the basics—like policies for refunds, event or travel insurance options, and contingencies for cancellation.

The entire point of the Fyre Festival was to be a part of a viral public event. People signed up and spent thousands to be a part of epic instagram moments. Because the point was to be public, little consideration was given to privacy, ownership of intellectual property, or the ability to attend the event without having every moment publicized.

A company that is lax on governance, disregarding securities regulations, and taking payments in an insecure manner is probably giving little consideration to the protection of your data.

It’s fine to be a part of a public moment, but remember that your public persona, your likeness, and your personal data are all things that you own and possess, and have the right to license and control. Don’t give those things away just to be included and seen.

A business with good PR could be a reputable company with marketing that matches the quality of the business—or it could be the next startup taking famous people for a ride. Before investing, always look behind the curtain. Before paying for something online, investigate to make sure you are paying for something real. And before sharing your data, review the terms and conditions to make sure your quest to be a part of the next best thing isn’t also costing you your privacy and intellectual property.

The Fyre festival is fraud in plain sight—you just have to acknowledge that you’re seeing it when it happens.

If you’d like to see the full presentation, please vote for us on the SXSW panel picker! And if you’d like to contact us we can be reached by email or on social media.