Mozido: The financial industry's Theranos?

As party tricks go, it’s tough to top what went down at Michael Liberty’s 2014 charity bash, which he sponsored together with his financial technology startup, Mozido. As the sun set over the Pacific, a plane soared above the 1,000 guests at an elegant Santa Monica beach club and disgorged 13 former Navy SEALs and two of Liberty’s executives. The former group was accompanied by a giant American flag; the latter two held a giant cheque, signed by Liberty, for $1 million, designated to support military families.

The USC marching band serenaded guests with a medley of patriotic songs. Speeches came from the likes of retired general James Mattis, former head of US Central Command, and the former Mexican president Vicente Fox. As donations piled in, the aptly named Liberty took his place at the podium in a crisp blue suit, white shirt and red tie. “We as Americans have a moral obligation to step up and do our part,” he said in his Kennedy-like New England accent.

For Liberty, his part could easily handle $1 million. That year Mozido, his little-known Austin-based company, entered unicorn status, having finished raising $300 million, much of it at a valuation of $2.4 billion, from a diverse roster of glittery investors, including hedge fund legend Julian Robertson, Google billionaire Eric Schmidt’s venture fund, MasterCard, an Abu Dhabi sheikh and well-regarded Wellington Management, which oversees billions for Vanguard and led the fundraising.

What were they buying into? On paper, the silver-tongued Liberty sold a vision of using mobile payments to “unlock financial freedom” for the roughly 2 billion people around the world with a cellphone but no bank account. Rather than offer a branded product, Mozido would focus on so-called white-label services to other companies.

How he would actually do that wasn’t exactly clear. Mozido has had all sorts of fancy people on its board at various times, including Mark Zuckerberg’s sister, Randi, and the former CEOs of Priceline, First Data, Interpublic and MasterCard. (Mozido issued a press release touting the addition of former Pakistani prime minister Shaukat Aziz; it now says he never joined.) But it initially didn’t have much to talk about in terms of technology.

Instead, Liberty would take his newfound cash hoard—and the ability to issue shares at a now-lofty valuation—and buy his vision. Not unlike the blank-cheque companies (sell shares to the public, figure out what to do with the money later!) that were in vogue ahead of the global financial crisis, Mozido was essentially a blind bet on Liberty—one made even odder by the fact that he holds no executive title or even a board seat, even though he’s the company’s largest individual shareholder and put the enterprise in motion.

For a while it worked. In February 2015, Mozido paid $750 million for China’s PayEase, a fast-growing internet and mobile payments company. The preferred shares Mozido issued to finance the merger were priced highly, and Mozido was subsequently valued at $5.6 billion. Within months, Robertson, Schmidt, et al, had seen their bet on Liberty, in theory, double. And Forbes estimates that Liberty’s personal stake in Mozido made him, in theory, a billionaire. Mozido purchased or invested in eight other companies, mostly tiny startups operating around the world in areas ranging from loyalty marketing and mobile operator services to risk management.

But a funny thing has happened on the way to the exit. Mozido finds itself under siege from angry employees and disgruntled partners, while a former director has received subpoenas from the Department of Justice (DOJ) and the Securities & Exchange Commission (SEC) seeking financial records related to Liberty and Mozido.

For all his charm and decades of dealmaking, the 56-year-old Liberty is an unknown character. When he recently met with Forbes, it was a rare interview with a national news organisation. Liberty chose to appear in the conference room of a New York City law firm, flanked by three lawyers, two crisis public relations specialists and Mozido’s CEO, Todd Bradley, who ran Hewlett-Packard’s biggest unit. Liberty was, of course, still pitching: “We are the only pure-play mobile payments commerce and consumer engagement platform that is fully deployed and compliant. We are in China, we are in India, we are in Africa.”

Meanwhile, back at Austin headquarters, executives were fretting over more mundane issues, like how to pay employees. Mozido has delayed making payroll five times since April—its June 15 payroll was made ten days late. Its renewal for employee medical insurance was two days late in June, payments to vendors are being stretched, and the company has yet to pay out end-of-year 2015 bonuses to employees.

Liberty shrugs off the cash flow issues, saying, “People who actually run businesses understand sometimes you have a delay.” He maintains that the company is close to securing a credit line from Asia: “This is not any kind of chronic situation.”

What about the Department of Justice subpoena? “Mozido has been told it is neither the subject nor target of any DOJ investigation,” a lawyer representing Mozido says. Neither Liberty nor Mozido will comment on the SEC subpoena.

Mozido has also turned to layoffs this year. “Those cuts are happening whether we had $1 billion in the bank or $1 million in the bank,” Liberty says, referring to the normal restructuring that takes place after acquisitions.

As with Theranos, the poster child of exuberance in the era of unicorn startups, it would be easier to accept these explanations if he—or anyone—could point to exactly what Mozido has that’s worth $5 billion. But even after talking with more than ten current and former employees, I found it hard to come up with anything beyond Liberty’s platitudes. And it’s easy to envision a scenario where yet another of the era’s Icaruses, complete with its own blue-chip board of directors, plummets to earth.

If Theranos founder Elizabeth Holmes provided the perfect personal narrative for a 21st-century entrepreneur—a young Stanford dropout with a transformative idea and a penchant for dressing like Steve Jobs—Michael Liberty’s Dickens-meets-Horatio-Alger tale feels more century or two ago. Most of his saga takes place around the town of Gray, Maine, where he grew up poor, the son of a brickmaker. When he was 14, his half-brother died in a motorcycle accident, part of a chain of events, according to a local report, that resulted in his parents moving away from Maine, leaving Liberty to fend for himself. “My life was ruined at 14 years old,” he says to an ex-colleague in a 2011 email obtained by Forbes. “I’ve never fully emotionally recovered.”

“I was the only kid I knew who had an entire house to himself,” he recalled in 1989 to a local reporter. “After awhile I guess I went a little crazy. I thought about running away, even suicide.” Instead, he embraced basketball and his Catholic faith, as he began his search for self-respect.

Liberty ultimately found salvation through entrepreneurship. He started with a sandwich shop, then in 1983 launched a dairy farm. But his main business became real estate, where he focussed on federal- and state-subsidised housing, first in Maine and then other states, followed by a seemingly endless string of varied enterprises, from Maine shirtmaker CF Hathaway to Playboy Energy Drink to a series of low-budget Hollywood movies.

Even surrounded by lawyers in a conference room, the 6-foot-2 Liberty displays the kind of charm that can sell anything to anybody. Those who know him echo that idea: His big smile, his ability to connect with others and his connection to the struggling region where he got his hardscrabble start. “Michael is a collector of people,” says Ken Robinson, executive chairman of Whitehorse Technologies, a cybersecurity company Liberty founded.

His collection goes way beyond the A-list investors and boards. As friends, he taps the likes of Wal-Mart heir Alice Walton and Marshall Field department store heir Frederick ‘Ted’ Field, co-founder of Interscope Records. As a mentor, he cites former Maine senator and US Defence Secretary William Cohen. For the godfather to his son, he tapped basketball legend Shaquille O’Neal, who helped promote one of Liberty’s low-income housing deals in Colorado (“He’s a sweetheart,” Liberty says).

Liberty began fixating on mobile payments in the late 1990s. He started with a wireless content company, Mobile Media, that in 2004 morphed into Affinity Mobile, which tried and failed to conduct an IPO. Around 2007 Affinity morphed again into Mozido and launched a prepaid mobile money-transfer product called Trumpet that targeted Hispanics and the unbanked. It was sold through RadioShack. Liberty claims Trumpet was the first mobile wallet in the US, filing a mobile-wallet patent around 2012.

“He has a natural sales ability, but it comes from his genuine conviction of this space,” says pal Ted Field. “All he has done for the last years I have known him is evangelise” mobile payments.

But by 2008, court documents suggest, Liberty was claiming he was next to broke. In the late ’90s two Liberty-controlled companies committed to invest $25 million in venture fund Keystone Venture V, which had raised $100 million, mostly from pension funds, for tech investments. Liberty never made significant investments, but he did hop on Keystone’s advisory board, and the fund invested $27 million, some of which went to companies he owned or had invested in.

The SEC filed a complaint in 2006, accusing Liberty of working with one of the men who had set up the fund to improperly divert $9 million, with $4.5 million going to benefit Liberty directly. The remaining $18 million of the $27 million total investment was lost when the underlying companies failed, the SEC claimed. Liberty denied the ­charges but settled with the SEC in 2008, agreeing to pay $6 million. The SEC waived payment of $5.4 million based on the financial declaration of Liberty, who ended up paying only $600,000 over three years. “If a financial declaration was filed, inevitably this was a waiver for inability to pay,” says Seth Taube, the head of securities litigation at law firm Baker Botts and a former SEC enforcement lawyer.

The SEC was not Liberty’s only legal opponent in recent years. Liberty has battled James Stanley Jr, who worked for Liberty for 20 years and eventually served as CEO of Liberty Group. Liberty and Stanley ultimately had disputes over loans and benefits. Around 2013, an arbitrator found in favour of some of Stanley’s claims and ordered Liberty to pay $1.8 million. Court records show the arbitrator also found that Stanley “occasionally assisted [Liberty and his corporate entities] in certain activities or was aware of actions... [that] could be said to mislead creditors, limited partners, other investors and regulators.”

In another legal skirmish, Liberty sued Crystal and Jesse Biltz, Liberty’s former partners in a preschool in Santa Monica, California. Cassidy Preschool opened its doors in 2009, with a Liberty entity as the majority owner. But by 2013 Crystal Biltz claimed the partnership no longer worked and then opened another preschool. Liberty sued the Biltzes for breach of contract. The Biltzes countersued Liberty. In February, a jury found in favour of the Biltzes and awarded them $3.38 million. Liberty has since settled the case.

Liberty says that, given his 37-year career, he’s been involved in relatively few lawsuits and that litigation is part of doing business. Given the current swirl around Mozido, which goes past lawsuits to cozy fees and a trajectory more notable for financial engineering than computer engineering, one could agree that for Liberty this is just business as usual.

As with Theranos, which has claimed to have a silver bullet in the area of blood testing but has never proved it, Liberty talks up Mozido’s ability to provide payments services and products using its cloud-based technology with any mobile phone ever made to three kinds of clients: Mobile network operators, retailers and banks.

Those clients, Mozido argues, will benefit from providing their customers with mobile payments services, including loyalty and engagement efforts. Mozido says it has already made more than 20 sales deals in July and has brought in $100 million in revenue in the past 12 months, a double-digit increase. But it declines to publicly name clients.
 
Liberty likes to tout Mozido’s potential to reach 1.5 billion people because they’re customers of phone carriers with which Mozido has partnered. That talking point comes largely from Mozido’s acquisition of CorFire, which uses technology that allows a phone to conduct a transaction while close to a point-of-sale terminal. “We already have massive scale,” Liberty says. “Nobody has the scale that we have.”

Tellingly, Mozido won’t say how many of those 1.5 billion people actually use a Mozido-enabled mobile wallet. One of the few clients Mozido publicises, Deutsche Telekom, told Forbes its mobile wallet has been used by between 10,000 and 99,999 of its 40 million mobile customers in Germany.

While Mozido says it can’t name its retail clients, it has publicised its work on the mobile payments apps of Dairy Queen, Dunkin’ Donuts and a platform for a bottler of Coca-Cola in southeast Mexico. Dairy Queen’s website shows that only 200 of its 4,400 stores in the US participate in the MyDQ mobile payments programme that Mozido started working on in 2013. A Dairy Queen spokesperson says it is “primarily a loyalty app, payments are optional.” Meanwhile, the Dunkin’ Donuts payments app that Mozido acquired in the CorFire deal has 20 million downloads—but last year Dunkin’ Donuts jumped to a competitor for its newest US mobile-payments project. “In the months I was there, never having a product launch for a company that was an eight-year-old startup” was surprising, says an employee who quit Mozido this year.

Mozido’s other big acquisition, PayEase, connects Chinese banks and card networks, processing billions of dollars in transactions, mostly in China. It has long been a payment processor for Apple and represented more than two-thirds of Mozido’s revenue over the past year, says CEO Bradley.

The deal came with a questionable provenance. Liberty says Mozido was introduced to PayEase by Jack Grubman and that Grubman was paid a fee by PayEase in connection for his services. Yes, that Jack Grubman, the 1990s telecom analyst barred for life from the brokerage business after the SEC charged him with issuing misleading research. Didn’t this violate the ban? Grubman says that he provided PayEase with management consulting services but that PayEase needed a liquidity event to pay him and that his two introductions between Mozido and PayEase were focussed on a business relationship rather than the merger.

According to the SEC, an individual seeking buyers for a company is soliciting buyers for a security, but Columbia University law professor John Coffee says that if the individual does it only once, that person would likely not be seen as being in the brokerage business. “I am not stupid,” Grubman says. “I am more careful than you would believe.”

Regardless, the $750 million deal—$135 million in cash, the rest in preferred shares at a hefty valuation—sapped Mozido’s reserves, especially since some of its other deals have not worked at all. The company says it loaned $6.5 million to Appconomy, a mobile software company in Austin, Texas, but Mozido sued Appconomy in June, claiming the loan was in default and Appconomy had swindled Mozido to get it. In a statement, Appconomy denied the charges and said Mozido “appears to be a failing, would-be unicorn, in which huge amounts of investor capital have been consumed with little to nothing substantively to show for it.”

Mozido executives say they are excited about turning banks on to mobile payments, citing JPMorgan Chase’s Chase Pay. Liberty says Mozido just won a deal to provide services to a 27-bank consortium in Taiwan.

But Mozido will have to continue competing for business with big digital security companies that have long relationships in the banking sector, like Gemalto and Oberthur Technologies. “At Mozido there were a lot of starts along the way and nothing ever completed,” says Ted Fifelski, president of SimplyTapp, a mobile payments software company that Mozido invested in last year. “Can you point to anything they have completed beside using their investors’ money to buy other stuff?”

A few days after Mozido delayed payroll for the first time in April, its senior executives organised a meeting to calm employees, some of whom were heading for the exits. Bradley, the CEO, said there was an effort to raise new equity and debt financing. Before payroll was delayed again in the middle of May, employees were notified that a term sheet had been signed and a debt refinancing would close in three weeks. “To the victor goes the spoils,” Bradley would later tell employees. That financing has not yet happened, but Liberty says the “recapitalisation is in process literally as we speak.”

Liberty’s role in the company continues to be enigmatic—and self-serving. The largest shareholder putatively has no official role, yet those familiar with Mozido say he clearly pulls a lot of strings, especially when it comes to financing and deals, and sometimes he reaps money for himself when he does.

It was Liberty who got Nicholas Adams, a partner at Wellington Management, to make its big anchor investment in Mozido, a person familiar with the matter told Forbes. Wellington also made the biggest investment in Powa, a UK mobile-payments unicorn that collapsed in February, as well as investing in another company Liberty founded, DaVincian Healthcare, which is based in the same Austin office building as Mozido. (Interestingly, Wellington does not have a Mozido board seat, despite its large investment.)

Liberty was paid a $1.25 million fee for his services in putting together a now-defunct joint venture with Mara Group, Ashish Thakkar’s high-profile African conglomerate. The details of the arrangement were filed in New York State court by Derek Rundell and Gary ‘Court’ Coursey, who have worked together at TomorrowVentures, Eric Schmidt’s venture fund that invested in Mozido. Coursey and Rundell entered into a deal on behalf of themselves to put together the Mara joint venture with Mozido for a $2.5 million fee that would be financed by Wellington. Liberty, who claims to have worked “hundreds, if not thousands,” of hours on the effort, struck a separate deal to get half of the fee, which Mozido claims was paid by Mara Group.

Liberty had another agreement with Coursey and Rundell that contemplated sharing other $2.5 million fees for additional Mozido joint ventures in India and the Middle East, but those deals never happened. “I don’t draw any salary from the company, but if I bring an opportunity to the company and the company deems it appropriate, they can pay a compensation,” Liberty says.

In November, Liberty filed a defamation lawsuit that claimed Coursey, Rundell and former Mozido director Phil Geier were extorting Liberty and Mozido. All three deny wrongdoing. Coursey, Rundell and Geier claim that Mozido and Liberty cheated them out of equity stakes in the company, which Mozido denies. Geier and his family had earlier sued Mozido and Liberty in Delaware and Florida.

To some it might be unclear what all these guys are fighting over. The company, which loses money, still hasn’t stemmed its cash-flow concerns. All those blue-chip directors are no longer on the board. Between those SEC and Justice Department subpoenas, the feds are clearly fishing for something, though it’s unclear what or whether they’ll find anything. And it’s still not apparent how Mozido can justify its unicorn status. “In order to opine on the technology, one has to know ‘what is behind the curtain’,” says a Mozido spokesman. “Those who know the details and the specifics are confident that the technology is next-generation state of the art.”

In other words, trust us.