Fraud on Fyre

Few fraudsters have marketed their schemes on social media as effectively as the organizers of the catastrophic Fyre Festival. They branded the event as “the cultural experience of the decade” for wealthy millennials who were willing to spend thousands of dollars for an exclusive VIP weekend. (See At Up to $250,000 a Ticket, Island Music Festival Woos Wealthy to Stay Afloat, by Hannah Karp, The Wall Street Journal, April 2, 2017.)

According to Vanity Fair, more than 400 celebrities used the event’s social media tag #FyreFestival before the event, which helped to promote this so-called “Coachella in the Bahamas.” The Fyre Festival’s hashtag was viewed more than 500 million times in the first 24 hours, and tickets sold out quickly after that. However, festival organizers were selling a dream — not a reality. They seemingly had no realistic plans to make it happen.

When festivalgoers arrived on the island of Great Exuma in the Bahamas they wouldn’t find ultra-luxury villas and gourmet chefs — only chaos, lies and disappointment. (See Fyre Festival: Anatomy of a Millennial Marketing Fiasco Waiting to Happen, by Bryan Burrough, Vanity Fair, August 2017.) The disastrous event is just a side note to the main story; McFarland’s multiple fraud schemes could land him in prison.

It’s the packaging that counts

Social media marketers use sites like Instagram, Twitter, Facebook and Pinterest to almost instantaneously reach and ignite segments of the population. Near the end of 2016, Billy McFarland, at the time a 25-year-old New York self-described “serial entrepreneur,” and his Fyre Fest partner, rap artist Ja Rule, posted Hollywood-quality videos containing bikini-clad top models and social media “influencers” to advertise the event. (See one of Fyre Fest’s promotional videos.)

McFarland wanted to use the festival to promote an artist-booking app, Fyre, which he was planning to create with his small startup, Fyre Media Inc. He wanted the app to help users book talent fast and easily. However, Fyre Media had no resources to develop the app let alone organize and host a music festival. Court documents would later show that McFarland’s company had only booked revenues of just more than $57,000 in 2016. That’s when the window dressing began. (See Organizer of Failed Fyre Festival Pleads Guilty to Fraud, by Colin Moynihan, The New York Times, March 6.)

As reported in The New York Times article, according to court documents, McFarland had created a series of lies and false financial reports that grossly overstated Fyre Media’s worth and his personal financial status. McFarland had given investors a document that listed millions of dollars in phony artist bookings in the year leading up to the festival. Investors then gave him real millions, including $2 million in advance-purchase tickets from a ticket vendor.

What makes this case interesting from a fraud examiner’s perspective is that McFarland and Ja Rule apparently thought they were really going to be able to pull off the Frye Festival and repay their investors. And while McFarland told the court that he “greatly underestimated the resources” it would take to organize the festival and “lied to investors about various aspects of Fyre Media and my personal finances,” there’s no indication that he intended to simply abscond with the money. McFarland was attempting to do damage control in the middle of the disaster in the Bahamas, according to the Vanity Fair article.

As The Wall Street Journal and Vanity Fair reported, McFarland had indeed spent hundreds of thousands of dollars on tents, carpets and musical acts, and he’d rented a stage and organized charter flights from Miami. However, this was McFarland’s last-ditch effort to save face; he never came close to delivering on what he’d advertised and sold. He’d amassed a debt of more than $7 million before the festival began though it wasn’t clear how he’d spent the money. (See Fyre Festival was Buried Under Millions of Debt Before it Even Began, by Polly Mosendz, Kim Bhasin and Shahien Nasiripour, Bloomberg, May 17, 2017.)

The fraudster’s delusion

The Fyre Festival scheme is typical of many frauds. Think of the embezzler who “borrows” funds by rationalizing that they’ll pay the money back after they win big at the casino — “the end (result) justifies the means.”

McFarland’s ambitions were less altruistic. As reported in Vanity Fair, he really liked being in the spotlight. He was a bright young man with a better-than-average future awaiting him. The son of New Jersey developers, McFarland was a likeable kid who was already constructing and selling companies when he was 13.

After he graduated from a prestigious New Jersey prep school, McFarland started at Bucknell University. He dropped out of school when a Philadelphia venture-capital “accelerator” program invested in his social media app Spling. When the app didn’t pan out, McFarland moved to New York City where he seized another opportunity.

He and some of his friends longed for an American Express Centurion Card (aka the “black card”), with its accompanying fabled perks, but they knew they weren’t prime candidates, according to a 2013 article in The New York Times. So, McFarland and two partners created the “Magnises” card — a metal black card facsimile with a $450 membership fee.

He found a company in China that could remove the magnetic strip from a legitimate credit card and apply it to the newly designed metal card without damaging or corrupting the data. The Magnises card was just a way to dress up common credit cards. Cardholders enjoyed a few perks, including invitations to elaborate private parties at Magnises’ club in a rented Greenwich Village town house, according to the Vanity Fair article, and discounts to a hotel. The card had some initial success. (See A Hunk of Metal, a Chunk of Clout, by Kristin Tice Studeman, The New York Times, Dec. 18, 2013.)

McFarland’s experience hosting parties helped him meet entertainers and celebrities like Ja Rule and sparked the idea of the Fyre Media app. According to the Vanity Fair article, McFarland prepared a pitch for Comcast Ventures that valued Fyre Media at more than $90 million. Comcast had tentatively agreed to invest $10.5 million in Fyre and possibly much more. However, Comcast’s investment was dependent on a successful due diligence review of Fyre’s books and records. The deal fell apart, and McFarland was left standing in a deep financial hole as the festival date rapidly approached.

The price of infamy

At this point, McFarland exhibited a typical fraudster’s “no-retreat” mentality. Instead of cutting his losses and saving thousands of people the inconvenience of traveling to a half-built, soggy tent city, McFarland secured a $3 million loan and zoomed full speed ahead, according to the Vanity Fair article. When the owner of a restaurant located near the festival site kept asking McFarland if they’d finish on time, he’d always answer, “Yes, we’ll be fine!”

He might have been alone in his optimism, but fraudsters aren’t necessarily interested in the opinions or feelings of others. Bernie Madoff stole billions of dollars from investors and still went to work every day until he was arrested. Fraudsters typically don’t think they’re bad; as the Fraud Triangle has taught us over and over again, they rationalize their behavior to meet their psychological needs. The rest of us know this is no excuse to commit fraud so you can realize your dream of jet setting in the Bahamas.

McFarland was to learn of his next travel plans at his sentencing hearing scheduled for June 21. He pleaded guilty on March 6 to two counts of fraud and faces a maximum penalty of 20 years in prison for each of them.

Steve C. Morang, CFE, CCEP, CIA, is a senior manager at a Northern California-based CPA firm and president of the ACFE’s San Francisco Chapter. Contact him at steve.morang@yahoo.com.