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Fraud-Detection Startup NS8 Files for Bankruptcy, Paving Way for Litigation

By October 5, 2020March 22nd, 2021No Comments

Cybersecurity company lines up $10 million loan from Invictus Global Management to finance a planned litigation campaign


Cyber-fraud-prevention startup NS8 Inc. filed for bankruptcy protection Tuesday after its former chief executive was arrested on fraud charges last month and an investor put up $10 million to finance a litigation campaign over the company’s sudden collapse.

Las Vegas-based NS8 said it would use the chapter 11 process to stave off a cash crunch while launching lawsuits against founder and former Chief Executive Adam Rogas and others who collected money from the company before it went under.

Investment firm Invictus Global Management LLC has extended a loan to finance the planned litigation, aimed at recovering lost funds for victims of the alleged fraud that brought down NS8.

A onetime darling of venture capitalists, NS8 let go most of its employees, numbering more than 200, when prosecutors accused Mr. Rogas of creating tens of millions of dollars in fictitious revenue and assets on financial statements.

Lawyers for Mr. Rogas, who has pleaded not guilty, didn’t immediately respond to a request for comment on Tuesday’s bankruptcy filing.

Only months ago, technology investors including Lightspeed Venture Partners and AXA Venture Partners had led a $123 million fundraising round for NS8, which sells software that helps digital merchants automate fraud detection.

Previous backers had put up $9 million in seed funding and had bought $11 million in convertible notes, according to court papers.

NS8 used some of its venture funding to buy shares from stock and option holders, among them Mr. Rogas, who pocketed $17.5 million of investors’ cash when NS8 bought some of his shares in the company, according to federal authorities.

Prosecutors said Mr. Rogas fabricated more than $40 million in revenue to entice investors, replacing real deposits in NS8’s bank statements with vastly inflated fake deposits.

The chapter 11 case creates an avenue for NS8 to seek the return of funds it paid out when it appeared financially healthy but actually wasn’t. The bulk of potential value left in NS8 comes from these legal claims, according to a person familiar with its finances.

NS8 also will try to sell its technology and other assets, according to a declaration filed in court by its chief restructuring officer, Daniel Wikel.

Mr. Wikel said he was optimistic that at least a portion ofNS8’s assets “along with some employees can remain operative as part of a going concern,” adding, “Although no formal offers have been received, multiple parties have expressed interest in consummating a sale, albeit not for much value.” 

Original source: The Wall Street Journal