CaaStle: Googling How to Fake an Audit

DerekWelcome back to Vaporware. Grant, I've spent the week buried in court filings.

GrantAnd I've been running the numbers on nine figures that supposedly disappeared. Should be a fun one.

DerekToday's story is Christine Hunsicker and CaaStle, a clothing rental company that started as a backyard idea in Palo Alto back in 2011.

GrantAnd ends with her sentencing, what, days from now?

DerekDays. According to the Southern District of New York, she pleaded guilty to a $300 million fraud scheme.

GrantThree hundred million.

DerekMm-hmm.

GrantFrom renting dresses?

DerekFourteen years of investor trust, a genuinely impressive cap table, and-plot twist-a whole lot of paperwork that turned out to be fiction.

GrantWe're opening with the origin story, then getting into how a logistics business got dressed up as a software.

DerekAnd somewhere in there, numbers that do not survive contact with a calculator.

GrantMy favorite kind.

DerekOf course they are.

GrantSo how does someone run this for over a decade without anyone checking the books?

DerekThat's exactly where we start, Palo Alto two thousand eleven, before any of us had a name.

GrantAll right, Derek, take us there.

Speaker 3Six days-that's what Christine Hunsicker's got before she stands in front of a federal judge in Manhattan.

GrantSix days from guilty plea to actual sentencing? That's fast.

Speaker 3August fifth, according to Justice-that's the Southern District of New York's own release. Judge Oetken-the same judge who took her plea back in March.

GrantSo how does a plus size clothing subscription box turn into a $300 million fraud case?

Speaker 3Okay, rewind with me. 2011. She's standing in a friend's backyard in Palo Alto.

GrantWait, an actual backyard?

Speaker 3Actual backyard. Bloomberg put us right there. She's thinking about growing up in rural Pennsylvania, wishing every woman could have an infinite closet.

GrantA Princeton grad from a steel town having a closet epiphany.

Speaker 3Rent the Runway had launched two years earlier, so she's watching that model and thinking, "My version, plus size first.

GrantOkay; and the name?

Speaker 3She already had it—Gwynnie Bee, named for a character from a book she'd once dreamed of but never actually wrote.

GrantSo she named a company after a character from a book that doesn't exist?

Speaker 3Doesn't exist, never will; launches in two thousand eleven as a subscription box. An Axios reports she spends the next fourteen years in near constant fund raising mode.

GrantFourteen years of pitch decks. Who's actually writing checks for this?

Speaker 3This is where it gets good. Bill Ackman, Jim Breyer, the Facebook guy, Ram Shriram, early Google board, and, at one point, Alphabet's own chairman, John Hennessy.

GrantHold on, the Alphabet chairman is on her board?

Speaker 3At various points, yeah. Per Axios and the wider reporting on the board's make-up.

GrantThat's not some rookie angel round; that's a murderer's row of Silicon Valley credibility.

Speaker 3And it bought her real headlines, Inc.'s most Impressive Women Entrepreneurs, Crain's forty under forty, all before two thousand nineteen, the year prosecutors say the lying starts.

GrantSo the resume was real, the warehouses were real, the customers were real.

Speaker 3They were; that's the part people skip past.

GrantThen at what point does a real company start pitching something that isn't there?

Speaker 3Building on that founding myth, twenty eighteen rolls around and Gwynnie Bee quietly disappears, renamed CaaStle.

GrantWait, they killed the bee just like that?

Speaker 3I know, I was sad too, but TechCrunch covered the rebrandCaaStle. CaaStle became a white label platform. Websites, warehousing, cleaning, shipping, returns, all packaged up for other retailers to plug into.

GrantSo now she's renting brands the entire operation, websites, warehouse, everything?

Speaker 3That's the pitch, and the names she dropped were serious: ABC News reported partnerships with Ralph Lauren, Ann Taylor, Banana Republic, American Eagle, Express, Maje, Vince.

GrantThat's not a client list. That's a mall directory.

Speaker 3Right? And that's the trick. She starts calling it... Clothing as a Service: Same shape as Software as a Service. Recurring revenue, high margin, scalable.

GrantExcept clothes aren't cold.

Speaker 3For the non engineers in the room, when Netflix streams you a show, the marginal cost is basically zero. When CaaStle ships you a blazer?

GrantSomebody's got to steam it, box it, mail it, get it back, steam it again.

Speaker 3There's a warehouse involved. Actual humans. actual UPS trucks.

GrantFifteen years reading balance sheets, and I've never seen software margins survive contact with a warehouse lease.

Speaker 3That's the tell. If the branding says as a service, go check who's actually touching the box.

GrantSo what was she telling investors the company was worth?

Speaker 3The Justice Department says Hunsicker was pitching a valuation north of 1.4 billion dollars.

GrantOh, with the warehouse business running on... Living on fumes?"

Speaker 3Justice's filing says the company had limited cash and heavy expenses at the time.

GrantReal estate light, software heavy, marketing everywhere, valuation math built on vibes.

Speaker 3And that's exactly when the forging starts.

GrantForged bank records to back up a story that didn't add up?

Speaker 3Forged bank statements, fake income statements, board minutes for meetings that never happened. happened. That's next. Okay, so with the valuation fantasy busted, February 2019 is when the paper trail turns criminal.

GrantWait, what actually starts happening in February 2019?

Speaker 3According to the Department of Justice, that's when she starts handing investors falsified income statements, fake audited financials, fictitious bank records, sham corporate documents.

GrantSo basically a full forged paperwork starter kit.

Speaker 3Pretty much, and it's not one investor one time. DOJ says this runs for years.

GrantNobody at any of these funds picked up a phone and called the actual audit firm?

Speaker 3We'll get to that call. It's coming.

GrantOkay, wait for it. Give me the number that broke your brain.

Speaker 3AP's indictment coverage says in August 2023 she claimed almost 24 million dollars in quarterly operating profit.

GrantProfit-and

DerekSure.

Grantthe real number?

Speaker 3Under thirty?

Derekthousand dollars.

GrantHold on. Twenty-Four Million claimed, Thirty Thousand actual. That's not a rounding error. That's a different planet.

DerekI did the math three times. That's roughly an 800-fold gap between the pitch and the bank account.

GrantI've seen guys fudge a car's mileage. This is fudging the entire car.

DerekOh, you're going to love the next part.

GrantThere's more?

DerekFast Company's reporting on the indictment says she "invented CaaStle shareholders who supposedly needed to sell-one because of a family health emergency, another because of the FTX collapse.

GrantShe invented people?

DerekFictional Sellers: fictional reasons, all to explain why shares were suddenly available.

GrantUsing FTX as your excuse in twenty nineteen is impressive. FTX didn't even collapse yet.

DerekRight, timeline's a mess, but the DOJ says the fabrication kept evolving with the news cycle.

GrantSo what's she actually charged with at the end of all this?

DerekSix counts: wire fraud, securities fraud, money laundering, false statements to a bank, and aggravated identity theft.

GrantAggravated identity theft for a fashion CEO!

DerekNow flip that on its head: one of these fake audits didn't just sit in a pitch. Pitch deck—it actually landed in front of the real audit firm.

GrantWait, wait, wait, wait. She sent a forged audit to the people who could just check it?

DerekAnd the excuse she came up with on that call is honestly one of the wildest things in the whole file.

GrantOkay, now I need that call.

DerekBuilding on that forged stack, the real audit firm actually calls her out on the fake report with their name on it.

GrantOh, no What does she say?

DerekAccording to WWD, she told them the fake audit was a prop for a lecture at Princeton and it got sent to the investor by mistake.

GrantA prop for a lecture at Princeton Was

DerekYep.

Grantthere a lecture?

DerekNo! WWD's reporting on the indictment says no such lecture

Speaker 4ever happened.

DerekSuch lecture ever existed, and she'd sent two fabricated audits to that investor while actively soliciting money.

GrantSo the prop was moonlighting as an actual crime.

DerekBasically; but wait, there's a part that got me even more.

GrantGo.

DerekProsecutors say hours before that call she ran internet searches -- fraud and, quoting the filing, created an audit firm fake.

GrantHold on, hold on. She Googled that before the call?

DerekHours before.

GrantThat's not scrambling to cover a lie-that's rehearsing one.

DerekRight, and for the non engineers listening, a search logs like a commit history, it's time stamped, it doesn't lie about intent.

GrantThat's the gap between a founder panicking and some one running a script.

DerekA time stamp search like that is hard to argue away as improvising under pressure.

GrantI've watched Sellers scramble mid negotiation; this wasn't that. This was rehearsed, like she'd written the alibi in advance.

DerekNo lecture, two fake audits, searches

GrantWow.

Dereksame day. Prosecutors don't need much more than that.

GrantSo getting caught on that call, that didn't slow her down at all.

DerekNot even close; it's what kicked off a whole second company to cover the hole.

GrantOf course it did.

DerekShifting gears, she didn't stop at the fake audits. She started a second company.

GrantWait, mid-fraud she launches something new?

DerekIn 2024, it's called P180, and according to the DOJ, it was supposed to buy up clothing brands that would then pay CaaStle for services.

GrantSo it's a customer that she also owns?

DerekRight, and DOJ says roughly $30 million got f***ed. got funneled back into CaaStle through that structure.

GrantThat's not a business, that's a pipe!

DerekAn Axios reported P180 grabbed a majority stake in Vince and a minority stake in Altuzarra.

GrantReal brands-people actually wear these clothes.

DerekP180 later sued CaaStle, calling it-and I'm quoting Axios here-"one of the largest frauds in history.

GrantThe company she built suing the company she built.

DerekIt gets better: December, two thousand twenty four, CaaStle's own board fires her as chair, bars her from raising money.

GrantGood, finally; so that's over!

DerekNope. DOJ says two months later-February, two thousand twenty five-she tries to sell nineteen million dollars of her own shares.

GrantAfter being banned? Who's even buying that?

DerekDoesn't matter. She's trying. And the detail that got me? WWD and the AP report she kept courting an investor even after federal agents seized her devices in March.

GrantHold on, hold on-the FBI already has her phone, and she's still on calls pitching?

DerekThat's the reporting.

GrantThat's not doubling down, that's just refusing to see the exit sign.

DerekWe've seen this pattern before on the show: the fraud doesn't stop when it's discovered, it stops when someone f One physically takes the laptop.

GrantSo when does someone actually take the laptop for good?

DerekOh, they take everything. Wait till you hear what the bankruptcy filing looks like. Six days-that's what's left before Judge Paul Oetken hands down a number that isn't evaluation.

GrantWalk me there! Last we left her she already had the devices with the feds.

DerekThe Justice Department says CaaStle filed chapter seven on June twentieth twenty twenty five, hundreds of investors holding stock worth exactly zero.

GrantZERO. Not restructured, not diluted-ZERO.

DerekShe was charged a month later, six counts, and this March she pled guilty one count of securities fraud in front of Judge Oetken.

GrantAnd the forfeiture?

DerekDOJ says nearly three hundred million dollars. WWD's reporting puts the exact figure at two hundred eighty seven million.

GrantOkay, but forfeiture on paper and money investors actually see in the mail-those are two very different spreadsheets.

DerekVery different.

GrantI've watched judgements like this before. The number sounds like justice. Then you find out the cash was spent on Vince, on Altuzarra, on payroll that doesn't exist anymore.

DerekBusiness of Fashion's read on the sentencing guidelines has her looking at more than fifteen years-she's exposed up to twenty.

GrantTwenty years for a Q2 that was supposed to be twenty four million and was under thirty grand.

DerekHer lawyers aren't going quiet either. They have argued for months that prosecutors are leaving out chunks of the story.

GrantThere's always a bigger story right before sentencing.

DerekFunny how that timing works.

GrantEvery single time.

DerekWhat gets me, going back to episode three, Nobody called that audit firm directly; forged paper moved two hundred and seventy five million dollars because paper is easier to fake than a phone call. Every case we've covered, same crack in the wall. August 5th, we'll see what twenty years actually looks like next to what she serves.

GrantSo that's the whole Ark-a backyard idea in Palo Alto that turned into a guilty plea in front of Judge Oetken.

DerekSix days,--she has six days between that plea and standing in front of him for real.

GrantAnd the detail that still gets me-the search history. Fraud-hours before she got on a call with actual auditors.

DerekYou either see a moment like that coming, or you're the person who typed it into a search bar.

GrantRight?

DerekThe lesson for me isn't really about fashion tech, it's that a star studded cap table doesn't audit the numbers for you.

GrantNobody checked. That's the whole pattern on this show.

DerekEvery time.

GrantIf you liked this one, tell a friend who trusts every pitch deck they read.

DerekSubscribe wherever you're listening and leave us a review. To review, it actually helps.

GrantThanks for spending this one with us.

DerekSee you next episode.