New York lawsuit is a window into Bitwise’s problems. It cost company $6.4 million

An apparent quest for cash last fall prompted Fresno-based Bitwise Industries and its co-CEO, Jake Soberal, to sell the company’s rights to millions of dollars in federal tax credits for keeping employees on the payroll during the COVID-19 pandemic.

But a lawsuit filed in early April in New York — and settled less than a month later — alleged that when the U.S. Internal Revenue Service issued the refund checks, Bitwise received and deposited the checks into its bank accounts rather than turning the money over to the buyer of the credits, thus violating the terms of their deal.

In its April 4 complaint, 1861 Acquisition LLC accused Bitwise of breach of contract, fraud and other allegations over its purchase of Bitwise’s federal Employee Retention Credit, a program of the federal Coronavirus Aid, Relief and Economic Security (CARES) Act. The lawsuit claimed that 1861 Acquisition entered two separate contracts with Bitwise — one in October 2022 and another in Novembe 2022 — to purchase ERC tax credits that Bitwise expected to receive from the government.

The lawsuit was settled on May 1 after Bitwise agreed to a stipulated settlement to repay 1861 Aquisition — a multimillion-dollar payout that came less than a month before the Fresno technology and real estate company announced over the Memorial Day weekend that it was immediately putting all of its 900 employees, in Fresno and across the U.S., on furlough from their jobs.

By that time, the company was already showing signs of cracks in its financial foundation.

The sale price paid by 1861 Acquisition to Bitwise is not disclosed in the court documents, but the tax credits themselves generated a refund from the IRS for almost $6.2 million. The terms of the sale contract between Bitwise and 1861 Acquisition called for the IRS refund to either be sent directly to 1861 Acquisition, or if received by Bitwise, to be forwarded immediately to 1861 Acquisition as the buyer of the credits.

Neither Bitwise Industries nor Soberal filed a response to the lawsuit, according to the New York court records. Bitwise was served notice of the lawsuit on April 10, court records show, while Soberal was served on April 16.

Why Bitwise agreed to sell its rights to tax refunds

According to information from the Internal Revenue Service, “the Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while either shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to Dec. 31, 2021.”

Attorneys for 1861 Acquisition wrote in their complaint that the amount of time that a business might have to wait months, or more than a year, for the IRS to process and issue ERC tax credit refunds.

As a result of the uncertainty over how long it would take for businesses to receive their refunds, “a secondary market developed for the purchase and sale of ERC credits,” the lawsuit states. “This market allowed employers who had an immediate need for liquidity to sell the rights to the ERC credits in exchange for an immediate payment.”

Agents for 1861 Acquisition eventually learned that the IRS issued refund checks to Bitwise Industries by mail on Dec. 27, 2022, according to court records. But when Bitwise received the checks at its Bitwise South Stadium offices on Van Ness Avenue in downtown Fresno, the company, “in direct breach of the agreements ... deposited the Refund Checks in an account it held at Central Valley Community Bank” in Fresno.

Court records include images of the three checks, with Bitwise’s endorsements on the back of the checks.

“At that time, (1861) was unaware that the Refund Checks had been issued, or that Bitwise had deposited them,” the lawsuit states. “In fact, Soberal told Field Point (1861 Acquisition’s agent) on Jan. 3, 2023 — the very day that Bitwise deposited the Refund Checks — that Bitwise had not yet received them, and affirmed that Bitwise would forward the Refund Checks to Plaintiff in the event the IRS sent them directly to Bitwise.”

The lawsuit asserted that throughout the month of January, on nine additional dates, Soberal repeatedly told 1861 Acquisition’s agent that Bitwise had not received the checks.

Fraud allegations after repeated “mispresentations”

The situation came to a head in mid-March, when the U.S. Treasury Department notified 1861 Acquisition that the refund checks had not only been sent to Bitwise’s Fresno headquarters, but had been deposited.

On March 21, “Soberal falsely asserted that he and Bitwise were still unable to confirm whether Bitwise had deposited the Refund Checks totaling over $6 million,” the lawsuit alleged. The following day, attorneys for 1861 Acquisition sent Bitwise a demand letter for immediate payment of the money.

The fraud allegation in the lawsuit revolves around Soberal’s repeated denials that Bitwise received or deposited the checks. “Plaintiff relied on the false statements made by Bitwise and Soberal to its detriment, by foregoing and delaying enforcing its rights under the agreements,” the suit states.

“Even once Plaintiff learned from the IRS the truth about Bitwise’s wrongful retention of the Refund Checks, Bitwise and Soberal continued their campaign of deceit,” the complaint asserts. “In his emails with the Plaintiff and its agent …, Soberal repeatedly misrepresented that he was unaware of and unable to confirm whether Bitwise had deposited the Refund Checks.”

The complaint asked New York Supreme Court Justice Margaret Chan to award 1861 Acquisition the amount of the tax refunds totaling $6,178,874.46 plus interest, as well as punitive damages of more than $18 million.

Court records, however, indicate that the lawsuit was settled about a month after Bitwise agreed to immediately pay the owed funds plus interest to 1861 Acquisition — a total of almost $6.4 million — on or before April 28. Chan approved the stipulated settlement on April 26, and the case was discontinued on May 1.

The conclusion of the lawsuit, apparently triggered by the repayment, came less than a month before Bitwise and its co-CEOs, Soberal and Irma Olguin Jr., announced on May 29 that the company was immediately furloughing its entire workforce because of sudden and “unexpected” financial circumstances.