A tax snafu led to Bitwise Industries’ unraveling. It could lead to Federal criminal charges.

A frantic, three-month cash dash by Jake Soberal, the chief executive officer of Bitwise Industries, to convince local investors to provide hard money loans may have ultimately led to the sprawling tech hub and real estate venture’s undoing.

Now, as reports of the firm’s financial collapse reverberate, prospective investors who were solicited for hard money loans are sharing insights and appeals from the firm, a pair of which were first reported by GV Wire on Wednesday.

Driving the news: A late April email to one prospective, Valley-based hard money lender by Bitwise’s Soberal provided a primer on the firm’s impending financial crunch and detailed the conundrum that necessitated seeking intensely unfavorable loan terms.

• In 2022, Soberal claimed, Bitwise moved to sell its Employee Retention Tax Credit (ERTC) issued by the Internal Revenue Service to an unnamed third party.

• The ERTC is a tax benefit that was created as part of the CARES Act, the Trump-era $2 trillion pandemic relief legislation. Refined in subsequent pandemic legislation, program offered businesses up to $26,000 per employee if they could show that COVID was hurting their bottom lines and that they were continuing to pay workers.

• After assenting to the transaction, Bitwise authorized the IRS to direct the tax credit funds to the purchaser. Despite that, the IRS mistakenly deposited the tax credit proceeds into Bitwise’s bank account this year, Soberal said.

• While not explicitly mentioned in the email, it is assumed that Bitwise spent the mistakenly deposited ERTC proceeds.

• Speaking to The Sun, the lender noted that Soberal’s initial pitch included frequent references to the fact that Bitwise officials discovered the deposit and self-reported the discovery to its counterparty while informing them that they would be unable to pay immediately.

• In his email, Soberal claimed Bitwise reached an agreement with its tax credit purchaser in mid-April to repay the entire amount of credits along with an additional fee due to the delay in payment.

• “Last week [week of April 16], Bitwise reached verbal agreement with the firm who purchased the ERC Credits to repay the entire amount on or before June 1 for an additional fee,” Soberal wrote. “However, without notice to Bitwise the firm sought and obtained a temporary restraining order against Bitwise.”

• The Bitwise co-CEO claimed that the company’s liquidity requirements were tied to active due diligence on a pending investment from Goldman Sachs valued at $80 milllion.

• The pending investment from the Wall Street bank was allegedly separate and distinct from the $80 million investment – announced in March but officially funded in 2022 – led by Kapor Capital and Motley Fool with Goldman and Citibank serving as minority partners.

• Soberal said that tapping Bitwise’s $65 million cash-on-hand reserve to pay $5 million to its counterparty in the tax credit controversy would jeopardize the pending Goldman investment.

Tax Credit fight goes to court: On the other end of the ERTC transaction was 1861 Acquisition LLC, a Delaware-registered, New York-based company, which contracted with Bitwise to acquire the credits.

• On April 4, 1861 Acquisition filed a complaint against Bitwise Industries in the Manhattan-based New York County Supreme Court alleging unjust enrichment, fraud, conversion, and breach of contract over a pair of contracts to acquire the proceeds from Bitwise’s tax credits.

• In providing context to the court, 1861 Acquisition alleged that on Oct. 7 and later on Nov. 10, 2022, Bitwise and Soberal reached an agreement to sell $4.048 and $2.044 million worth of ERTC credits to 1861 Acquisition.

• As part of the agreements, Bitwise agreed not to commingle incoming ERTC funds with its company funds. Bitwise also warranted that it would instruct the IRS to direct payment to 1861 Acquisition.

• If the IRS inadvertently sent payment to Bitwise rather than 1861 Acquisition, Bitwise was contractually obligated to forward payment to 1861 Acquisition within three business days. Failure to forward the payment, according to the terms of the contract, would require Bitwise to pay a penalty of 10 percent interest on the IRS distribution until it was sent to Plaintiff.

• Soberal served as a guarantor on the pair of agreements, exposing him to personal liability in the event Bitwise failed to comply with its terms.

• While Soberal told Valley-based lendors in solicitations that “[the] IRS errantly deposited the credits into Bitwise’s bank account in 2023,” 1861 Acqusition alleged that Bitwise was notified by an 1861-affiliated financial servicing company on Dec. 23, 2022 that it would be soon receiving an ERTC distribution from the IRS in the form of a check.

• Four days later, the IRS issued three refund checks to Bitwise totaling $6,178,874.46.

• On Jan. 3, 2023, Bitwise deposited the checks into its bank account at Central Valley Community Bank, allegedly violating two provisions of the sale agreement: the three-day transfer provision to 1861 Acquisition and the prohibition on commingling funds.

• The same day, 1861 Acquisition alleged, Soberal told the financial servicing company that Bitwise had not received the checks.

• Soberal would deny receipt of the checks eight subsequent times in the month of January, despite Bitwise having deposited them on the third day of the month.

• By mid-March, 1861 Acquisition received notice from the U.S. Department of Treasury that two of the checks had been deposited on Jan. 3.

• Emails to Soberal yielded a response that it was “news to him,” the complaint reads.

• 1861’s servicer continued to follow-up with Soberal throughout March to confirm receipt of the third check and demanding payment of the tax credit proceeds plus additional interest, as ascribed in the agreements.

• Emails attached to the complaint include a March 20 email in which Soberal claimed that the company had retained a new chief financial officer who was just starting on the job and added that he personally did not have access to the business’s bank account.

• “[It] defies credulity that Bitwise would be unaware of, or could not confirm, the existence of such a large sum in its bank account,” the complaint filed on behalf of 1861 Acquisition reads.

• Neither Bitwise Industries nor Jake Soberal responded to the complaint, prompting 1861 Acquisition to pursue a temporary restraining order on April 11 to enjoin Bitwise from “transferring or depleting” the $6.1 million in ERTC funds it received from the Treasury Department.
• The request for a temporary restraining came more than two weeks before Soberal claimed it had reached a settlement agreement to the Valley lender.

• Supreme Court Judge Margaret Chan granted the temporary restraining order.

• Two weeks later, on April 25, the two sides filed a stipulation of settlement, with Bitwise and Soberal agreeing to pay $6,178,874.46 in ERTC funds owed to 1861 Acquisition and an additional $191,291.17 in interest dated to April 28.

Read the complaint:

What were lenders getting? Along with eye-popping short-term interest rates, Soberal offered up the entirety of his and co-CEO Irma Olguin Jr.’s 6,378,238 shares in the company as collateral.

• One local investor-turned-lender accepted the deal in March, issuing a multi-million dollar loan to Bitwise in exchange for the full slate of shares owned by Soberal and Olguin.

• Despite reaching a loan deal that saw their entire stock holdings encumbered, Soberal continued to market loan offers to would-be local hard money lenders misrepresenting that he had unencumbered rights to all 6,378,238 shares.

• Such false representations to induce loans would expose Soberal, and possibly other Bitwise officials, to Federal charges including wire fraud, loan fraud, and/or bank fraud.

• The lender who accepted the March loan offer filed a Uniform Commercial Code lien against the shares, securing a place in line among creditors in the event of a bankruptcy.