When start-up nation image was allegedly used to defraud foreign investor

What happens when Israel’s start-up nation reputation is allegedly used to try to defraud foreign investors into funneling tens of millions of shekels into a technology going nowhere?

By
March 14, 2019 20:55
3 minute read.
A cityscape of Tel Aviv is seen during the night-time in Israel May 27, 2017.

A cityscape of Tel Aviv is seen during the night-time in Israel May 27, 2017. Picture taken May 27, 2017.. (photo credit: REUTERS/AMIR COHEN)

 
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What happens when Israel’s start-up nation reputation is allegedly used to try to defraud foreign investors into funneling tens of millions of shekels into a technology going nowhere?

That is one of the key questions in the case of Kazakhstani businessman Zhabargali Kesikbaev against Israeli entrepreneur Max Bluvband for defrauding him out of around NIS 10 million and trying to defraud him out of another NIS 10m.

According to Kesikbaev, he was conned into investing millions into a technology that was not viable when Bluvband and others used Israel’s dot-com reputation as well as knowingly made false misrepresentations to him about the technology’s potential.

In contrast, Bluvband said that Kesikbaev’s claims are a smokescreen to derail attention from his violation of their investment agreement for which Bluvband is suing for around NIS 10m.

The case is expected to go to trial in the Tel Aviv District Court in June.

Ironically, Kesikbaev’s lawsuit came in September 2016 following a lawsuit by Bluvband and his company Live Lens in July 2015 against the Kazakh investor, alleging he had failed to invest an additional NIS 10m. which he had committed to investing.

All parties agree that Kesikbaev initially invested around $2m. in the company Live Lens, which was developing an application for smart phones.

In exchange for his initial investment, Kesikbaev received 51.68% of the company’s shares and became its controlling shareholder.

However, Kesikbaev alleges that around six months later, Bluvband and other defendants asked him to invest an additional $3m. into the venture.

To pressure him, they allegedly told him that if Kesikbaev did not invest the additional funds, that they had other potential investors who could step in and dilute his ownership shares and control of the company.

The Kazakhstani investor claims that these other potential investors were fictitious. Rather, he says the whole scheme was a false representation to fool him into throwing more money at Bluvband and his co-conspirators.

Bluvband said that the request for additional invested funds and the negotiations over that investment were legitimate.

In June 2014, Kesikbaev signed an agreement to invest the additional $3m. However, he now challenges the validity of that agreement, saying he signed it in reliance on the misrepresentations by Bluvband.

Also, he said Bluvband concealed the alleged fact that the application had lost its market potential and that the additional funds could not change that.


Kesikbaev submitted a financial expert report to the court approximately two weeks ago which supports his claims that Live Lens and its product did not have a viable chance of competing with their competition.

A lawyer for Bluvband said on Thursday that they would be submitting a counter-expert report in the near future to prove that Live Lens and the product were viable.

According to Kesikbaev, regulatory restrictions of the Central Bank of Kazakhstan blocked him from sending the full $3m. in one lump sum.

A lawyer for Bluvband questioned whether the bank issue was legitimate or an excuse for violating the investment agreement.

Instead, Kesikbaev said that, in February 2015, he and Bluvband signed a new agreement that split the $3m. into six payments of $500,000 each over time.

After he transferred the first payment, he said that the bank asked for clarifications about the company when it turned out that its income was only NIS 8,000.

This was the point when Kesikbaev said he learned that the company had made false representations all along about the viability of its technology since other parallel products had penetrated the market before Live Lens.

Bluvband disputes these allegations.

Kesikbaev ceased any further funds transfers to Live Lens.

He accuses Bluvband of using the around NIS 10m. he invested with Live Lens to pad his pockets and the pockets of his associates.

The lawsuit said that Live Lens was not a case of an unsuccessful start-up investment which failed despite its best efforts.

Rather, the lawsuit said that Bluvband and other defendants misused the investment funds for their own purposes and not for developing the technology, which they knew could not succeed due to the competition.

The court previously dismissed some legal motions by Kesikbaev and required him to amend some of his legal claims, but Kesikbaev’s lawyer said that these were procedural issues and that his claims are now moving forward.

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