Ethics Case Study Discussion: OXYwater
Backgrounder
From 2010 to 2012, the co-founders of OXYwater secured $9.5 million in investments to produce a new sports drink, which they claimed had higher amounts of oxygen and healthy minerals in it.
The company began running out of money in 2012, and then closed permanently in 2013. It’s at that point that investors wondered what happened to their money, so the FBI and the IRS became involved in an investigation.
They found that the co-founders misappropriated approximately $2 million in funds, spending money on luxury items, such as swimming pools, cars, guns and jewelry. The investors lost all their money, and the co-founders were convicted of fraud, money laundering and tax crimes. They are now serving prison sentences, during which time they are on the hook fines and restitutions to their victims.
Information in this case study is based upon publically available information. Compli, Mr. Ruden and Ms. O’Donnell are not affiliated with the companies or individuals mentioned below.
Case Discussion
Ambyr's View:
Based on the publically available information about this company, it appears to be an example of a startup with no formal ethics program in place. Major ethical breaches can happen in any company, even small companies and startup environments. Investors should inquire about, and understand, how the startups they invest in approach ethics and protect against ethical breaches.
Rick's View:
The cofounders asked their friends and family to invest. The co-founders were athletes— I believe they were involved in college or professional sports—and were asking for investments from a close network of sports colleagues. So it was a breach of trust in more ways than one, unfortunately.
Advice for Leaders
Ambyr's Advice:
When investors know the founders personally, they might feel comfortable investing based on trust rather than on objective diligence. They might also be less focused on board and investor oversight than unaffiliated, outside investors. Effective board oversight is critical and will help avoid situations where the company closes and investors are left scratching their heads.
Rick's Advice:
The lesson here, and it’s an important one for individuals and companies, is not to invest if there is no corporate compliance program or code of ethics in place, because violations occur when there is no ingrained culture based on ethical behaviors, or set of standard business practices. This is the case certainly for OXYwater, where there was not only a lack of oversight, but also, apparently, no middle management layer either.
Meet our panel:
Rick Ruden
Rick is our Senior Product Marketing Manager here at Compli, and our resident subject matter expert when it comes to the topic of Ethics and Compliance.
Ambyr O'Donnell
Ambyr advises early stage technology companies preparing for an acquisition, IPO or scaling for high growth. She has served both public and private technology companies, most recently serving as Vice President and General Counsel of Tripwire, within the cybersecurity space. Ambyr’s practice focuses on corporate law, mergers and acquisitions, technology licensing and general business matters.
Join Rick and Ambyr dissect this case further, along with other ethics enforcement case studies in our on-demand webinar
