Uncle Sam accuses Aussie AI startup boss of financial fakery that duped investors

Crikey! $40M of investments in 'digital employees' allegedly went down faster than a frosty Fosters

The former CEO of an AI startup that promised to replace humans with "digital employees" has been accused by the US Department of Justice and Securities and Exchange Commission of raising $40 million from investors, including venture capitalists, after showing them deliberately falsified financial records.

Australian Baba Nadimpalli, 41, is the co-founder and former CEO of Skael – a business process automation outfit established in 2016 that promised to use AI to replace staff for simple tasks. He allegedly faked info about the business’s revenue to impress investors – then used their cash to pay his personal debts.

According to a January indictment [PDF] unsealed on Tuesday by the DoJ, Skael claimed that its software could create bots that could save a customer 2.5 hours a day per employee and $100,000 per year by taking over mundane workloads, keeping both staff and customers happier.

The indictment states that Skael charged an implementation fee to create a digital human, and subscription fees for ongoing use.

But Skael allegedly told would-be investors it had subscribers – but they weren’t paying.

According to American authorities, in January 2020 Nadimpalli misstated the startup's annual recurring revenue (ARR) and falsified bank statements.

Those representations allegedly brought in $3 million of funding, followed by another $7.85 million over the next year. Then in 2022, Skael started a Series A funding round that garnered around $30 million from credulous investors, leading to a valuation of $230 million.

Nadimpalli is accused of deceiving investors as well as his own financial director, who was hired in June 2021. It's claimed he passed falsified banking documents to the new hire and prepared a slide deck that contained false claims that numerous companies were paying customers of Skael.

To support the Series A funding round, prosecutors allege that Nadimpalli created "an electronic data room" of corporate data, claiming millions in annual recurring revenue (ARR) that didn't exist. By the end of 2021, the site is said to have falsely claimed Skael's ARR was around $7 million – including overstating the spending of one client by a factor of ten and making others up entirely – and stating that customer churn was zero.

Some incoming investor cash flowed into Nadimpalli's pockets, it's alleged. The indictment claims he used corporate funds to make mortgage and property tax payments on his San Francisco home, pay off his and his wife's personal credit cards, and cover the cost of car payments and home renovations. In total, he is accused of lifting over $500,000 from the business.

By 2022, it appears that the game was up, according to an SEC indictment [PDF]. In July of that year, we’re told Nadimpalli admitted to investors that ARR wasn't $7 million and the board launched an investigation. Before that probe ended, Nadimpalli and the directors agreed to wind down the business and he returned home to Australia. Skael's domain is currently up for sale, and it looks unlikely that investors will ever see their money again.

Nadimpalli is charged with three counts of securities fraud and seven counts of wire fraud. If convicted, he's facing at least 40 years in prison and fines of over $5 million – though the maximum sentence is unlikely for this kind of white-collar crime. ®