CEO who ran tech unicorn once valued at $1.2 billion charged with fraud after allegedly spending millions on his wedding and art classes

Amanda Gerut is the west coast editor at Fortune, overseeing publicly traded businesses, executive compensation, Securities and Exchange Commission regulations, and investigations.

According to the Department of Justice, Abraham Shafi, 38, who lives in Hawaii, allegedly told venture capital investors the growth of his event-based social media app, IRL, was “organic” from people inviting their friends to download it. Shafi claimed the company only spent $50,000 a month on marketing and PR to acquire new users, court records show. In reality, IRL spent about $200,000 per month on advertisements to help inflate the number of users and hid that data from potential investors,

“This is a free organic channel (users are not incentivize or paid for these invites, and must invite each friend individually with no bulk invites),” an email written

Meanwhile, Shafi allegedly concealed IRL’s ad spending

“Shafi had spent millions of dollars on paid advertising in the form of incentive advertising, a type of advertising in which users are provided a reward in a third-party app if they download IRL,” the DOJ stated in an announcement. “In the lead up to Series C, Shafi asked his vendor for a ‘big burst’ of ads for ‘a few days’ to drive more installs of the IRL app.”

SoftBank has since sued Shafi for $150 million and the IRL founders, in turn, have sued their former venture capital investors and board members. In legal filings, Shafi has previously denied wrongdoing.

A Delaware Chancery Court memorandum opinion written

Lawyers for Shafi did not respond to a request for comment. A SoftBank spokesperson declined to comment. Shafi and the other founders have denied the bot allegations.

All told, the SEC claims Shafi spent $5.7 million on ads between 2019 and 2021. However, in his pitch deck to investors,

The Series C funding round closed and Shafi sold $7.5 million in his own stock options while SoftBank and others invested $170 million. Afterward, IRL hired a chief financial officer who allegedly asked Shafi about IRL’s payments to the third-party firm paying the ad company. In response, the indictment claims Shafi switched gears, allegedly directing someone affiliated with the company to create “false invoices” to make it look like the money spent on the ads was paying for Amazon Web Services, short message service (SMS), and Google Cloud costs. 

Meanwhile, the SEC and the DOJ claim Shafi was using IRL to fund his personal expenses, before and after the Series C. The indictment states Shafi used IRL business

In 2022, the SEC subpoenaed Shafi and others at IRL about user metrics and vendor payments. In response, IRL launched its own internal investigation, the indictment states. 

At that point,

Will’s summary of the final months at IRL note the SEC investigation prompted lots of back and forth at the startup. The company hired outside counsel and multiple law firms and investigators to respond to the agency’s subpoenas. One outside firm reported the platform was overrun with bots and had few human users, while another found scant bot activity. In April 2023, after the SEC deposed two of the VC-appointed board members, a special board committee allegedly told Shafi to resign or he would be suspended over his use of the IRL

After Shafi’s suspension, IRL user numbers tanked, court records show.