Due Diligence Lessons from the ‘HyperVerse’

Well friends, it is the dawn of a new year, when many people take stock of their finances and consider whether everything is in good order—or it is time for a change. For some, that change means updating their asset allocation to match changes in their goals or needs. For others, that can mean seeking an investment pro to work with. We have written a lot about this over the years, with handy tips on doing due diligence and learning all about a wealth manager’s history, processes and values. That advice is timeless, so we won’t rehash it—instead, allow us to share a mind-boggling story we read today in hopes it will help you not accidentally sign on to a scam.

Ponzi schemes are serious business. Well, not serious business in practice—the opposite, really—but serious risks for investors to mind. Fisher Investments Founder and Executive Chairman Ken Fisher wrote the book on them in the Madoff scandal aftermath: How to Smell a Rat. It details the common threads among scams and red flags to watch out for. That includes too-good-to-be-true returns, appeals to certain affinity groups, advertised celebrity connections, flashy jargon, opaque tactics, charismatic principals and a business model that requires turning over custody of your money to an entity that isn’t a registered, regulated bank or brokerage firm.

So of course we clicked on this marvelous Guardian headline Wednesday morning: “Chief Executive of Collapsed Crypto Fund Hyperverse Does Not Appear to Exist.” And there we found some excellent investigative reporting by Guardian Australia senior correspondent Sarah Martin, who went down the rabbit hole of a failed cryptocurrency fund, HyperVerse, that may or may not have been related to another collapsed bitcoin company, Blockchain Global. The latter is currently in liquidation, and its founders are under investigation by Aussie securities regulators, with no charges presently filed. These same founders appeared in promotional materials for HyperVerse, but one is distancing himself from the fund and the other hasn’t commented.^[i]

In reporting this story, Martin dug up some of that promotional material and found a presentation slide introducing HyperVerse’s purported CEO, Steven Reece Lewis. It was a paint-by-numbers resume full of just-right buzzwords and an intriguing personal history. Econ major. Former Goldman Sachs derivatives trader. Founder of two companies. All things one could easily verify. So Guardian Australia tried … and came up empty. No school records at his alleged universities. No records in the UK’s business registry or the SEC. The presentation claims he sold his first company to Adobe, but Adobe “has no record of any acquisition of a company owned by a Steven Reece Lewis in any of its public SEC filings.”^[ii] Goldman had no record. And Reece Lewis himself had no online presence outside a Twitter profile started one month before HyperVerse’s launch—no LinkedIn, no nothing. A figment, a ghost, impossible for Guardian Australia to contact for comment.

The fake CEO part of this is novel, but the rest isn’t. This slide was designed to hook people with the right language and biographical details—just enough to suspend disbelief. People were supposed to see reputable names like Goldman and Adobe and glean credibility. Heck, the slide touting his “resume” even has the word credibility typed at the top right. Investors were to look at the picture of Reece Lewis, see a bit of grey hair at his temples and hairline, the un-flashy yet fitted navy suit and think, yes, this is a serious and successful gentleman who in 2016 clearly “saw the disruptive potential of blockchain technology, and predicted that the crypto market would be the key driving force in economic growth over the next decade.” They were not supposed to say to themselves, “Self, what good is it to have predicted this in 2016, by which time bitcoin had already been through one hype cycle and blockchain frenzy was in full swing?”^[iii]

So lesson one: Don’t fall for buzzwords or take flashy resumes on faith. Do a little homework to ensure the person to whom you will entrust your money is an actual flesh-and-blood human who is who they say they are.

Which brings us to lesson two: Don’t lean on celebrity endorsements. We all saw this first-hand with FTX and its liberal use of celebrity connections and advertisements. Less flashy testimonials are no better. In this case, HyperVerse touted video endorsements from Steve Wozniak, Chuck Norris, a comedian named Jim Norton and ex-boy bander Lance Bass. “The Norris ‘shout out’ to HyperVerse states that ‘under the leadership of [nonexistent] CEO Steven, HyperVerse will be the leader of metaverse space.’ Wozniak said: ‘I’m here to support Steven and HyperVerse,’ and ‘I can’t wait for the HyperVerse.’”

Guardian Australia contacted all four for comment. None replied. But the paper’s simple sleuthing revealed all are on Cameo, where you can hire celebrities to film short shout-outs for birthdays and other things. Apparently companies have also used this site to get celebrities to read marketing scripts, which seems to be a plausible explanation here. The likelihood every actor or musician on Cameo researches the company behind every marketing script they are paid to read seems, well, low. Time is money, ya know?

Lastly, applying even a smidge of scrutiny to HyperVerse’s claims should have revealed its high Ponzi scheme likelihood. “Investors in HyperVerse were able to buy ‘memberships’ with minimum returns of 0.5% a day, with a 300% return over 600 days. Incentives were also offered for recruiting new members.” Not only is this a textbook example of too-good-to-be-true returns, but it is one of the most obvious pyramid schemes we have seen in a long while. It calls to mind that scene from The Office where Michael Scott is pitching his new business venture to the fine folks at Dunder Mifflin. He draws a diagram showing how you get more and more money the more recruits you have under you, and Jim walks up to the white board and draws a big pyramid over it. Here, see for yourself.

There is a temptation here to see all of this as funny because it is so ridiculous. But participants lost nearly $2 billion. People really do fall for this stuff because the pitches and propaganda are designed to override critical thought via emotion. Your best defense is to always turn your brain back on, be aware of the red flags and hunt for them. They will usually be there, in plain sight, if not quite as absurd as this example.