Saturday, December 06, 2008

The strange case of IT Factory

The Danish IT sector, and indeed the entire Danish business world, has been shaken in the recent week, by the story of how one of the most successful growth stories in recent years have turned out to be pure fiction, based on massive fraud.

For my Danish readers, there won't be any news in this post, as the Danish press has been covering the story extensively. I haven't, however, found any international coverage, except some coverage of the fact that the Bjarne Riis' cycling team has lost one of its major sponsors.

The company in question, IT Factory, and was a mixture of a software house, a consulting company, and some sort of license dealership for, among others, IBM.

In 2003 the company went bankrupt, and some investment partners bought it up, and inserted a new daily leader, Stein Bagger. Under his leadership, the company turned around pretty fast, and started to show impressive growth, becoming one of the market leaders, according to its yearly financial reports.

In the last couple of years, the company has won a number of awards by among other Børsen (a daily business newspaper), Computerworld, and Ernest & Young, because of its impressive numbers.

A lot of us in the business were somewhat puzzled by this, since no one appeared to neither actually know quite exactly what the company was doing, nor know anyone who had worked there, or worked together with anyone from there. That might not sound so weird, but the IT consulting business is not that big in Copenhagen, so odds are that you've worked together with someone from any of the major players in the market.

Of course, such things matter little, compared to the results, and we were all impressed by the financial reports from them.

Then, last week, the truth began to appear.

The head of the board of directors of the company, Asger Jensby, went public with the news that Stein Bagger had disappeared a couple of days before, while at a business conference in Dubai with his family (leaving his wife and his daughter behind).

The same day Bagger disappeared, Asger Jensby had found out that Bagger had told someone else, a business partner Alan Vestergaard, that they (Bagger and Vestergaard) would take over the company from Asger Jensby. Vestergaard was under the impression that everyone was in agreement about this, but Jensby had never heard about this before.

This, combined with Bagger's disappearance, led Jensby to start an investigation. The first couple of days, the investigation lead nowhere - everything appeared in order - but then they found a secret office that Bagger had leased close by, in which they found some incriminating documents.

This lead to Jensby going public with the news of Bagger's disappearance, and the news that it appeared that there had fraud in the region of $100 million. At the same time, the company filed for bankruptcy.

Following these news, there have been more investigations into the matter, and the fraud appears to be closer to $200 million.

Naturally, the question arise: How could this go on, without anyone knowing?

It seems that Bagger used a number of fake companies all over the world, selling and buying stuff to and from IT Factory, thus inflating its income, while enabling him to get money out of the company.

More precisely, what appears to have happened, is that Bagger would make a fake company that would sell some computers to IT Factory. Bagger would then go to a leasing company, making a deal with them, getting them to pay for the computers in exchange for a leasing deal on those very computers.
Of course, no actual computers existed, but only Bagger knew that.

Then, when time came to pay the leasing rate, Bagger would use another fake company to buy a bunch of licenses - enough to pay the bill for the leasing.

Any given rate of the leasing is of course much smaller than the entire sum, so even if it was 10% of the cost, there would still be 90% of the money left. And there would still be no computers.

Stein Bagger appears to be a very charismatic person, who were able to convince people that whatever doubt they might have, were unfounded. This explains why none of the members of the board of directors started to ask questions, or rather, why he was able to convince them that they didn't need to see some information on the customers, when they asked about them.

Another factor was of course greed. The company appeared to be going really well, and the customers always paid on time.

Still, some people were asking questions. A freelance journalist, and blogger, Dorte Toft (link in Danish) had raised some very serious questions when the Danish Computerworld gave IT Factory the prize for IT company of the year a few months back.

Her digging showed that there were serious questions that one could raise about IT Factory, and even more so about their customers. As a matter of fact, the two customer cases that Computerworld got for their article about IT Factory when they received the prize, were run by two Swedish men who had been found guilty of fraud in the past.

The Danish tax department were also investigating the company for fraud with sales taxes. Something any member of the board of directors should have seen as a serious warning sign.

In other words, the warning signs were there, one just had to look for them. Maybe it would not lead one to realize how badly the situation was, but it would lead one to understand that there was something very wrong.

My prediction is that there will be some legal procedures happening against the board of directors, and I'll also predict that at least Jensby will found guilty according to the rules of the liability for the board of directors. I also think that the accounting company responsible for signing off the company's financial records, KPMG, will get fined.

Update: It appears that Stein Bagger has turned himself in at a police station in Los Angeles. I'll write more about this case, as the story develops.

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