CalPERS CEO Marcie Frost looks to have set up the board for a huge embarrassment. Indeed, this post is doing her a favor of sorts, since the organization will have the chance to abort the approval of election notice for the upcoming board elections that was set to be approved tomorrow.
The election notice calls for CalPERS to provide online, phone, and Internet voting, when CalPERS’ Internet election vendor Votem, has fired nearly all its staff, including the ones promised to work on its account, and has high odds of not being in business by the time the election rolls around.
We warned in a January 14 post that Votem, like its predecessor, was likely to default on any agreement due to financial distress. This call looks to be correct, charitably assuming that CalPERS has actually managed to sign an agreement with Votem (we described at considerable length then why the way CalPERS wanted to do that was a non-starter). If CalPERS has no agreement with Votem, it is still remiss, because its election notice has details that work only if Votem were to be the vendor, and by having the board approve it with no agreement in place, it would give Votem considerable negotiating leverage.
On Tuesday, Cleveland Scene reported that Votem Corporation had failed but later had to revise the story to say Votem had missed a payroll and fired nearly all its employees. Cleveland Scene also made clear that it doubted some of Votem’s claims about its current condition:
Update: This article’s previous headline stated that Votem had closed and that all employees had been fired. CEO Pete Martin told Scene in an email that while the company had “kicked off a restructuring and recapitalization” plan on Friday that included “major layoffs,” Votem is still in operation and actively supporting current customers. Scene can not verify that and sources say that is not the case.
Votem’s official version does not inspire confidence. From The Block:
“Last week the company ran into short-term liquidity issues resulting in restructuring and recapitalization of the company, which included layoffs. The company is still operating with a skeleton crew and although our future is in question, we are working tirelessly on multiple fronts to positively turn around the situation. To be clear, we have employees and are actively supporting our current, active customers,” said CEO Pete Martin.
Cleveland Scene also reported that Votem fired all the employees it hired from CalPERS’ former election vendor, Everyone Counts, which went out of business right before it was supposed to count the 2018 election. This matters because documents we obtained in a Public Records Act request showed that Votem had assured CalPERS that all of the Everyone Counts employees who had been working with CalPERS would be retained.
As we pointed out, because Votem had acquired only the assets of Everyone Counts, the last election was counted by Votem when Votem had no legal relationship with CalPERS. CalPERS misled the board and took steps to give the impression that the former vendor, Everyone Counts, managed the tabulations.
Understand how serious this lapse was. CalPERS’ member database was in the hands of an outside party with whom CalPERS had no contract whatsoever, no agreement to maintain confidentiality, no agreement to return the records, and no basis for asserting liability if any of that data was purloined or got out into the wild.
The Block reported that Votem had tried to raise funds in a Series B round from a venture capital firm, but that deal appeared to have fallen through. The Block also published this account from a self-proclaimed former employee:
They barely tried and didn’t even come close to making a dent. Total incompetence from the leadership team and Pete Martin particular. I hope anybody thinks twice before doing business with him. He is neither competent nor, in my opinion, honest,” a user claiming to be an ex-Votem engineer wrote.
How are we sure that CalPERS intended to use Votem? You can see the fingerprints in the election notice at the end of this post. You can also view it here.
Recall that for the last two election cycles, CalPERS had two companies working together via an operating agreement that CalPERS misleadingly called a joint venture. A large printer, K&H Printing, which prints many of the ballot types certified for use in California, has a small side business it operates under the dba “Integrity Voting Systems”. K&H not only printed and mailed the CalPERS ballots, but its Everett, Washington facility was the return address for the paper ballots. K&H opened and scanned the ballots.
The Internet voting vendor, Everyone Counts, handled the Internet voting, the phone “channel” and also ran the customer support line (for things like getting a replacement ballot or a PIN for voting online). Remember those ballot images that K&H scanned? They were sent to Everyone Counts to tabulate along with the phone and Internet voting totals. That process, and the announcement of the results, took place at the Everyone Counts office in La Jolla, California.
If you look at the election notice, you see this customer service phone number:
This is an Everyone Counts phone number which Votem apparently acquired when it bought the assets of Everyone Counts. This screenshot comes from a search on “Teachers’ Retirement System of Louisiana” + “Everyone Counts.” Everyone Counts managed an election for the Teachers’ Retirement System of Louisiana:
This part of the election notice shows that CalPERS again intends to open and scan the paper ballots in one place and have the official tabulation in another:
The first address is of a K&H Printing facility in Everett, Washington. CalPERS 2018 election notice listed same street address, but a different suite number. Both the 2018 and 2019 notices show the same La Jolla address for the tabulation.
We will take the liberty of hoisting sections of our January 14 posts on Votem. First, our comments on its obvious financial weakness and the CalPERS failure to do due diligence:
Why Votem Corp. Looks Shakier and Shadier Than Everyone Counts Did
It’s a safe bet that Everyone Counts was on the verge of bankruptcy. It’s hard to come up with any other reason for defaulting on the “joint venture” when it would have taken Everyone Counts only a few days more to complete its obligations to CalPERS for the 2018 election.
The apparent business failure of Everyone Counts should have alerted CalPERS to the fact that Votem, a smaller company with what looks like weaker backing, could also default on any agreement due to running out of money. Yet CalPERS did no financial due diligence on Votem whatsoever. 6
As we indicated at the top of this post, the press has taken up near-universal expert concerns about the integrity of mere electronic voting, meaning the use of equipment not connected to the Internet in local polling stations, as being so tamper-friendly as to necessitate that they generate paper trials or be replaced with voting systems that do. If neither of those can happen, officials need to reinstitute paper ballots to assure election integrity. Internet voting is obviously leagues more risky.
That means that Votem now faces a hostile environment and a contracting market for its services. Governments, far and away the biggest targets for Internet voting, are rapidly backing away from insecure voting systems. Parties that run private elections have to be reading the RussiaRussia! press. Many of them won’t want to risk criticism by taking an Internet voting flier any time soon. And it is unlikely Internet voting will stand up to more tires-kicing. 7
Everyone Counts was a vastly more substantial business than Votem is. Everyone Counts was founded in 1997, had estimated annual revenues of $15 million, and roughly 90 employees. It also had $30 million of funding. And it had a much higher press profile, as witness that it featured prominently in the Atlantic story we cited earlier.
Votem was founded in 2014. It had 24 employees before acquiring the assets of Everyone Counts.8 It appears to have raised under $3 million in funding: “less than $1 million” from founder Peter Martin. The Fast Facts” sheet it gave to CalPERS said it raised $1.2 million in a Series A round from 14 individuals and roughly $360,000 in a Bitcoin-like “initial coin offering” (ICO) from five individuals.
Using an ICO for fundraising for development of its voting platform is a huge red flag. It says Votem had to resort to a gimmick which is widely regarded as a scam and which the SEC has decided to crack down on aggressively, in a marked departure from its usual complacency.
Mind you, Votem did make a Form D filing with the SEC saying it was making an unregistered securities offering with its ICO. However, the SEC is taking a very tough stand and has subpoenaed many ICO issuers over whether they complied with the usual exemption cited for making an unregistered offering, that of selling the securities only to “accredited” investors, meaning individuals with over $1 million in net worth or $200,000 in annual income. The SEC is seeking disgorgement and payment of fines in the event of violations.
While CalPERS did ask Votem about past and pending litigation, it didn’t ask whether the SEC had subpoenaed Votem, another due diligence lapse.
And even if Votem did comply fully with SEC requirements, there is still cause for concern. Votem didn’t do a conventional funding with its current investors or try to expand the base of investors in its company. That does not speak well to the confidence of Votem’s investors in its business.
On top of that, at least one of Votem’s major investors might deter others from joining. We obtained the names of all 14, which Votem did cough up when CalPERS insisted. Earlier, Votem had identified only its “>5%” investors, in addition to its founder/CEO Peter Martin.
Top of that list of major investors, and out of alphabetical order, implying it was the largest, was:
Greg Landegger (Parsons Whittemore Family Office)
Parsons & Whittmore is an Alabama paper mill family. The patriarch of the Parsons & Whittemore family, George Landegger, pled guilty in 2015 to a Federal criminal charge of hiding assets in a Swiss bank account. It is very likely that some, and probably most, of the money managed by the family office comes from George Landegger.
As our Clive pointed out:
Even if we’re generous and say Votem has $3M in funding, that barely covers worker comp. Thirty employees earning £100k a year would burn that in a year. Or sixty people drawing $50k a year [remember, Votem has said it will take the Everyone Counts employees that were serving them, it likely has to make similar commitment to the other four Everyone Counts clients it hopes to convert]. The ICO prospectus lists over ten employees just on the coin side of the business which has no discernible income stream.
They’re likely going to need additional funds to survive to the end of 2019, unless they get some significant sales volumes coming through on the electronic voting platform.
Yves here. Back to the current post. The idea that the even-weaker-than-Everyone-Count company Votem was likely to fail was obvious. It turns out the Cleveland business community was skeptical of the company and its backers, but somehow CalPERS didn’t sus that out. From Cleveland Scene:
One local entrepreneur who preferred to remain anonymous because of their connections with Votem told Scene that the company’s fate was “exactly what [they] expected,” and that it was a bad look for both Cleveland and the Blockland initiative [founded by local auto dealer Bernie Moreno].
They admitted that while local entrepreneurs sympathize with the employees losing their jobs, many of them are probably greeting the Votem news with pleasure — “What’s the German word? Schadenfreude?” — because it validates many of their doubts and warnings about the hype over Blockland and blockchain start-ups generally.
But even worse,CalPERS ignored the risk and appears to have taken no preventive measures.
And this part of one of our January 14 posts on Votem has also held up well:
This mess sits squarely on CEO Marcie Frost’s desk. She is setting up Doug Hoffner, whose name is on the signature line of the yet-to-be-signed contract amendment, to get a massive raise, from roughly $187,000 to as much as $312,500. It appears he is to be rewarded for his burgundy-wearing enforcement of staff showing support for Frost having lied about her education, which was evident in an earlier Public Records Act response, and other demonstrations of loyalty. His failure to take notice of and do damage control for this fiasco show that he regards the substance of his job as unimportant. And that is likely an accurate reading of Marcie Frost’s priorities.
The board needs to wake up and smell the coffee. Either Marcie Frost shapes up and gets her priorities straight, or she needs to be told to find a new job.CalPERS 2019 Election Notice