In the past few days Israeli startup Vesttoo, hitherto an obscure insurtech company mainly known for its annual funding rounds at steadily rising valuations that at the end of last year brought it to unicorn status, has found itself in the eye of the storm.
The company’s board of directors has hired the services of at least one investigations firm, and four international law firms, to examine apparent fraud on the company’s systems in which one of its customers provided forged collateral documents to an insurance company, in amounts in the hundreds of millions of dollars.
The results of the investigation will not only decide the fate of the Israeli company, which employs 100 people in Tel Aviv, but will also affect the good name of its major investors, among the US investment bank Goldman Sachs, Banco Santander (through Mouro Capital) and Royal Group of the UAE.
Vesttoo is also connected to big-name firms that advise it on regulatory matters, among them law firm Meitar, which is carrying out the legal examination of the fraud together with an unnamed Israeli investigations firm, and accounting firm Ernst & Young, the company’s auditors.
Matching insurance companies to investment
Vesttoo has developed a digital marketplace where insurance companies in need of liquidity meet banks, pension funds, investment houses, and wealth funds looking for new ways of investing in the insurance world.
The insurance companies need arises from the fact that, unlike banks or credit institutions, they are limited by regulation in their ability to leverage their capital, and have to present collateral against the policies they sell, in order to avoid the risk of insolvency.
Vesttoo’s systems offer insurance companies the ability to find such collateral on the capital market, while enabling investment institutions to participate in investment in it. In a typical deal, the investor buys an insurance linked security, a bond (or other financial instrument) reflecting the risk in one or more insurance portfolios.
The company said in the past that it had developed algorithms that help the insurance companies and financial institutions to price the collateral, in order to make it more marketable. The suspicion at Vesttoo is that one of the investors, or one of the banks representing the investor, presented forged collateral documents, thus exposing the insurance companies that received these commitments to regulatory risk.
The affair came to light in a routine periodic review of the investor by the bank, in which the investor has to produce confirmation of financial strength. One of the checks found deficiencies, and the bank alerted the insurance company, which in turn alerted Vesttoo.
In the wake of the findings, several senior managers left their positions in the company’s offices in the US, among them Deputy Chief Legal Officer Daniel Goldfried and Chief Financial Officer Gaurav Wadhwa. Another person to have left is Interim Chief Legal Officer Lauren Smith. Former Chief Legal Officer David Schonbrun left Vesttoo in April, after less than a year in the post.
Despite the departures in the US, the company’s management in Israel has succeeded in steadying the ship and preventing an outflow of employees from its Tel Aviv offices.
Company employees not under suspicion
Vesttoo has not dismissed any employees, but industry insiders familiar with the company say that it might have to do so later on. “The company’s reputation has taken a hit, and in the insurance market that is important. It’s to be hoped that this is a blow from which it can recover.”
Sources close to the company have made clear that the suspected fraud is not attributed to anyone within the company, but to one of the customers using its marketplace. The source of the fraud is in the connection between the investor and the insurer in deals in which Vesttoo carried out the pricing of the collateral. According to the company, the responsibility for underwriting and executing the deal lies with the customers using the platform, not with it.
Moreover, the company hired several law firms to make certain that it was not exposed to regulatory or legal sanctions, and according to the sources close to the company it was found to be in the clear.
Vesttoo has declined to provide details about the international regulatory and legal examination, but sources inform “Globes” that was carried out by Appleby in Bermuda, by Mayer Brown in the US, and by Clifford Chance in the UK. As mentioned, these examinations were carried out in addition to the internal investigation at the company to find the source of the fraud with the assistance of an investigations firm and law firm Meitar. The company is still trying to understand who was behind the fraud and their location, and the risk involved.
Vesttoo said in a statement: “In the normal course of business, the fear arose of a breakdown in the company’s processes, and an examination is currently being carried out by professional firms. Some members of the company’s senior management decided not to wait for the final results of the examination, and we respect their decision. When the examination process is concluded, we shall provide an update with the details.”
Vesttoo grew as an obscure, private company, almost under the radar. Reports about it mainly related to the rapid growth in its valuation; it became a unicorn within three years of being founded, and has enabled several investors, and the founders, to sell shares in secondary sales for millions of dollars. The company was founded in 2020, raising its initial capital from Yariv Gilat and Guy Benartzi, controlling shareholders in blockchain company Tectona (TASE: TECT), who have backed several crypto ventures.
The company went on to raise capital from Ran Tzror’s SureTech Investments (TASE: STEC), and then from major funds such as Hanaco Ventures, co-founded by Pasha Romanovski, Lior Prosor, and Alon Lifshitz, Banco Santander-backed Mouro Capital, and Black River, a venture capital firm founded by Russians based in Barcelona. These were joined by Abu Dhabi-based Royal Group.
According to PitchBook, the valuation of the company shot up from $22 million in 2021 to $1 billion by the end of 2022. In early 2023, SureTech Investments and the founders sold shares in a secondary sale at a discount of 30%. Each of the founders – Yaniv Bertele (CEO), Alon Lifshitz (chief financial engineer – no connection to Alon Lifshitz of Hanaco), and Ben Zickel (CTO) – pocketed about $1 million before tax from this sale.
“Although the event is beyond the bounds of the company, it involves a breakdown at best, and at worst fraud, and that’s a scandal, a significant event that could have an extreme impact on the company,” a senior technology industry source familiar with the details of the investigation says.
Published by Globes, Israel business news – en.globes.co.il – on July 19, 2023.
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