At Any Cost: The South African fraudster who took the tech world for more than $40 million

By Stephen Timm

Eran Eyal had it all: a trendy New York apartment, a jet-set lifestyle and investors lining up to get in on his million-dollar cryptocurrency start-up, Shopin. But the New York police pounced in 2018, charged him with fraud and packed him off to Rikers Island. As $42 million went up in smoke, the South African entrepreneur was exposed as an audacious fraudster determined to succeed at any cost – even if it meant spinning a web of lies to do so. 

• Language: English
• Publisher: Tafelberg
• Release date: Jan 29, 2021
• ISBN: 9780624091189

Stephen Timm

  Stephen Timm is a Cape Town-based journalist, researcher and writer. He has written for a number of publications on the small business sector. He is the winner of the Africa SMME Award for Journalist of the Year (2005). Between 2017 and 2020 he served as editor of Ventureburn, a South African publication that covers Africa’s tech start-up sector.  

Book preview

9780624089810_FC

Stephen Timm

The South African fraudster

who took the tech world for

more than $40 million

Tafelberg

This book is dedicated to the memory of Matthew Buckland, a boss, mentor and inspiration, who was first to see a book in this entire saga.

When you want something, all the universe conspires to help you achieve it.

– Paulo Coelho, The Alchemist (a favourite book of Eran Eyal)

Preface: Why I wrote this book

I first met Eran Eyal while doing an interview for a business mentor colleague of mine, sometime in the early days of Springleap. This is when the business had a supposedly growing online platform that got consumers to vote for their favourite T-shirt designs, which the start-up sourced from a network of designers. It was in or around 2010 when he was still living in Cape Town. He and his business partner, Eric Edelstein, had an office in a gentrified nook of Woodstock, near the city centre. Eyal came across as charming and bright, something few people hesitate to comment on today.

At the time Eyal and Edelstein had netted millions of rands in investment from well-heeled investors and were the talk of the town in the city’s nascent tech start-up scene. No one doubted that the company was going places. It was regularly featured in the country’s business media and was continually winning awards or pitching at glamorous international start-up events.

There was little indication then of the multi-million-rand fraud that Eyal would pull off just a few years later, after he pivoted the start-up to become a crowdsourcing platform for advertising agents to link up with designers and market experts. At the time there were already mumblings from some in the sector about whether Springleap was really making money, or whether all the company had to show for itself was an ability to win round after round of investment. What I, like many, wondered was where was all that money going?

But we soon found out, when Eyal was charged in August 2018 with fraud. At the time I was working as the editor of Ventureburn, a South African online publication that covers Africa’s tech start-up sector. Eyal, it turned out, had lied to numerous investors – about who his clients were, his team’s credentials, and even how many designers the company worked with. At the time, when any of his team members approached him with the mounting evidence of wrongdoing, he did nothing to remedy things. But little did anyone then know that the fraud extended well beyond Springleap, to two other start-ups he subsequently ran or founded.

This is the story of how it all played out, of the endless lies he told in an effort to become wealthy by getting investors to part with their money.

His is a story already well known in the Silicon Valley start-up scene – in what has come to be referred to as fake it till you make it, where tech entrepreneurs will stop at nothing to have their start-up rise quickly to the top, even if it means having to tell a few lies to do so. It shows how easy it is to lie about your start-up if you know how to work the system – by name-checking the right people and by playing to the often complacent media that reports on the sector by saying all the things they want to hear. In this way, countless tech start-up founders are able to get away with inflating the importance and size of their companies, while keeping cover in the often secretive world of software technology.

I approached Eyal to take part in the book, before I made a week-long trip to New York. As is his right to do, he turned down my request to comment and explain his side of the story.

In a WhatsApp message he sent me on 11 February 2020 he wrote:

I cannot unfortunately participate in an interview for a myriad reasons. Primarily, it could be an invalidation of my plea deal. I get that things don’t add up. Perhaps time will lift the veil … either way, I’m starting a new chapter in my life and wish the same for all those concerned, namely one that will lead to clarity and prosperity. Thank you again for your understanding and respect of my situation. With care. E

Despite this, and despite blocking me from his profile on social network LinkedIn, he never did remove me as a friend on Facebook until close to publication of this book when I asked him for permission to use images from his Facebook profile. (He refused.) Why he did not remove me earlier remains an eternal mystery. Did he secretly want to have a book written about him and the saga?

In a strange twist, Eyal was arrested by immigration authorities just days before I was to arrive in New York City and so he would not have been available for a face-to-face interview anyhow.

While some who knew Eyal agreed to speak to me, others steered clear. During my time writing this book and reporting on the saga, I repeatedly attempted to reach out to Edelstein. Despite at least once acknowledging my messages, he has only responded to say that he does not wish to comment. Likewise, another former business partner, Steven Gray, did not return calls, emails or messages after initially providing a very brief comment vetted by his attorney.

Many of those who appear in the book are not named, as they agreed to speak to me on condition that I did not use their name. I have honoured that request.

1

The arrest

Eran Eyal could be forgiven for feeling a little anxious as he stood in his lounge on the 38th floor of One North Fourth (1N4). The shiny new building situated on the East River in New York towers over all else in Williamsburg, Brooklyn. It was early evening as he watched the sun dip below the high rises in the distance. From up here, as you look out from the glass-covered apartment walls of his corner apartment, the whole Manhattan skyline opens up before you. Amid the twinkling city lights one can easily make out the Empire State Building on the skyline and 1 World Trade Center, the site of the September 11 attacks.

But Eyal’s mind was elsewhere. There were grumblings from investors that things were not right in the $42.5 million initial coin offering (ICO) that his retail blockchain start-up Shopin had concluded four months back in May 2018. A few minutes later he took the elevator down to the ground floor. This part of Williamsburg was quiet, only three blocks away from the pubs and restaurants on the suburb’s busy Bedford Street. His Uber Black was just pulling in, heading up the slip road that leads to 1N4. It had to be his, because it was an Uber Black. And he always travelled in style.

He climbed in and the car headed down North Fourth, past Shopin’s headquarters at WeWork above the Wholefood Market store. He watched as they passed a steady stream of young city professionals making their way back to their apartments from the Bedford Avenue subway station. When they hit the Brooklyn-Queens Expressway the car accelerated.

It would be just under an hour before he was at the check-in counters at JFK International Airport, where he’d collect his first-class ticket for his 11 pm flight to Singapore. It was the first time he was flying solo, without his chief marketing officer Doron Wesly. Eyal also had plans to meet with Shopin investors Julian, flying in from Hong Kong, and Bassie, who was jetting in from Miami. They were among a list of 20 pre-vetted investors Eyal was expected to have dinner with in the city state. Eyal had also secured several meetings with prospective retailers. He hoped to get them on board to invest in Shopin’s new $3 million mini-ICO. Most importantly he wanted to let them know in person that the things they’d been hearing about the start-up were all just bad rumours, brought on by some who were intent on seeing the project fail.

Pulling into the airport, he got out of his Uber and strode into the terminal building. He spotted his check-in counter and walked past the economy-class passengers as they stood in a line that trailed back from the desks. There was barely another person at the priority check-in. These days Eyal always travelled first-class. Gone were his days of economy-class travel. He’d moved on and was in a new league. A return ticket easily came to $10,000. But the company was paying, so why not. And he was the founder of a successful tech company. Sometimes you had to act the part. He waited his turn before approaching the airline official behind the desk. As he put his carry-on bag down, he heard his name being called from behind him. Two uniformed customs officers stood there. They called him over. They asked for his passport. He obediently handed it to them. That’s when one of the officers told him that he was under arrest. They cuffed him and led him away to a side office. What was going on? Had he just become the victim of a crypto-kidnapping?¹

This was obviously all a bad mix-up, he thought. In the office the customs officers read him his rights. He was made to hand over his Hermès Apple watch and iPhone, before they bundled him into a vehicle and drove him to a police station in downtown Brooklyn, only a few kilometres from his apartment. At the station he was handed over to the police. The time noted down for arrest was 8.40 pm, on Thursday, 23 August 2018,² before a police vehicle took him north into Queens and across a short bridge to Rikers Island prison. The facility – infamous for beatings by prison guards – sits on a 400-acre island next to New York’s LaGuardia Airport. It’s the same prison where the former head of the International Monetary Fund (IMF), Dominique Strauss-Kahn, was sent in 2011 after being charged with rape. As the facility sits atop an old landfill, the smell of rotting eggs lies thick in the air.

For months leading up to his arrest, New York authorities had been watching him. They had been given full access to his emails and the social-media sites he frequented by the tech companies hosting these services, after getting a grand jury to grant their request for access. All they would have had to do was conduct a reference check of the airline to determine whether he was indeed on that flight.

The next day, after what seemed like the longest night of his life, Eyal was charged by the New York Attorney General with defrauding four investors from Springleap, the start-up he launched in South Africa and ran from New York until over two years prior to his arrest, when it was shut down. Standing before the judge, he pleaded not guilty. It was obvious what was going on here, he thought. He’d been framed, of course, by someone who was very jealous about the millions he’d netted in Shopin’s ICO. He wasn’t going to jail for no one, they’d see, he thought as he stared at the judge before him.³ He remained resolute. After all, he thought, when you want something so badly, nothing can stand in your way.

2

A friend called Eric

Our story really starts with the registration in 2006 of Crowdtech Holdings, likely by Eyal himself. The company would later include a subsidiary, Springleap.

At about that time Eyal approached his close friend Eric Edelstein to invest in a few T-shirt shops. The two go back a long way. Eyal and Edelstein had been childhood friends, having grown up together in their home town of Durban. They had even worked together as youngsters at a flea market.¹

On first impressions Edelstein came across as cocky, but he was always someone who enjoyed a good laugh. He had a large, round face, which was often speckled with four-day-old stubble or a beard. His manner of speech was very distinctive – he had a forced way of speaking that made him seem at times as if he was either struggling to communicate or talking out of the side of his mouth. There was always a wry smile on his face. In comparison, Eyal had a small voice, less authoritative than Edelstein’s very controlled, pushy talk. Eyal came across as gentler than Edelstein.

Edelstein, whose former neighbour in Durban while growing up was the billionaire founder of pharmaceuticals maker Aspen Pharmacare, Stephen Saad,² would say later that he’d been an entrepreneur from a young age. When he was 10 he ran a stall at a craft market selling books and comics, and by 13, he claims, he was already trading shares on the Johannesburg Stock Exchange (JSE).

But after completing a BCom degree in finance, rather than venture out and become an entrepreneur, Edelstein opted for a desk job in Cape Town in 1999 as a financial analyst with Bidvest, managing a team of debtors and creditors. After this job he moved to Johannesburg to work for Electronic Data Systems, a global IT outsourcing company started almost four decades before by former US presidential hopeful Ross Perot. There he managed financials in a company of about 500 people. The company offered to help fund his studies to become a chartered accountant if he agreed to work for them for the next six years. Initially he was excited about the opportunity, but over a few drinks a cousin convinced him rather to throw in his lot and start a web development company with him. The very next morning Edelstein handed in his resignation and joined his cousin.

Full of ambition, and looking to build a Silicon Valley start-up, Edelstein decided to make for London to try his luck there. He headed off on a working holiday visa and, upon arriving, took a job at an investment bank. In his spare time he began working for a few start-ups. It was during this time that he came up with an idea for a website called YoungTravellers.com that could help guide young people like himself who had come to the UK looking for work. A year after arriving in London he and a few co-founders were able to raise £1 million in angel investment for the start-up. The money was to be disbursed in 20 tranches of £50,000 a month. Within a few weeks Edelstein had hired 12 people and had an office right next to Gumtree, a company that would later go on to become a classified ads giant. It was the year 2000. Then, eight weeks later the internet bubble burst. The start-up’s investors refused to put in the next tranche of money and the business went bust. Edelstein’s first start-up ended in tears. It wouldn’t be his last failure.

But there wasn’t much time to reflect on things. Shortly there-after Edelstein received a call from a friend who said he’d heard what had happened to him. He asked if he wanted to get involved with a Johannesburg-based business founded by Durban-born businessman Martin Moshal that carried out internet marketing. It turned out that the company managed various internet casino groups. On his return to South Africa, Edelstein took a position as an online media buyer, with hours from 12 pm until midnight. On Edelstein’s first day on the job he got an IRC chat request from an Alexxxxx. IRC chat is the equivalent of what WhatsApp and Facebook Messenger are today. The chat request turned out to be from none other than Vinny Lingham, who would later become a Shark Tank South Africa judge and who is today arguably one of South Africa’s most successful names in the world of internet start-ups. Lingham claimed he knew Edelstein. The two soon realised that they had been chatting on IRC chat for five years already about business ideas and other things.

A few months later Lingham heard that Google had launched Google AdWords and told Edelstein that internet search was going to be the next big thing. You stood to get paid a tidy sum in sales commission by running pay-for-click marketing – basically buying traffic from search engines and sending this traffic to certain websites which then paid you commission for doing so. They had to cash in while they could, said Lingham, who suggested they launch a company together. He roped in his then girlfriend Charlene Troskie (who today is his wife) and an old school friend from his home town of East London, Llew Claasen. Together the four decided to set up the business in Cape Town. The year was 2003.³

The four moved quickly. Within days of deciding to start the business, which they called Incubeta, Lingham phoned an estate agent and the four got a house in the plush leafy suburb of Constantia. Within a few months there were desks all over the lounge. Things were very casual, perhaps too casual. Claasen, Edelstein, Lingham and Troskie would often conduct business in their dressing gowns, working into the early hours of the morning, until 3 am or 4 am, to service their US clients, who were six hours or more behind South African time. But it was worth it. Within three to four months the start-up was sending clients R100 million in customer bookings. For this they were making a tidy package in commissions.

After about two or three months the four decided that they needed a real business place to work from, and so they took an office at the Bandwidth Barn, a tech hub situated in an old factory building in the then grimy suburb of Woodstock right next to the city centre. Things really took off. Within six months the business had grown from 4 to 70 people. Venture capital (VC) companies began piling money into the start-up. Even South African internet billionaire Mark Shuttleworth invested in the company. In January 2007 his first instalment of a R25 million investment was paid to the company.⁴ Using the success of Incubeta, the four then founded subsidiary internet companies such as search engine agency Clicks2Customers.com, affiliate network TrafficSynergy.com and website builder Yola.com.⁵ Yola proved to be one of the most successful of the subsidiaries. After raising funding from Richemont founder and South African billionaire Johann Rupert, Lingham did a management buy-out. In total the company raised over $40 million in investment. He then relocated overseas to Silicon Valley, where he ran Yola with a small team of employees. While Edelstein would stay on as a small shareholder and leave the company in April 2008, Incubeta would later merge with Netherlands-based internet marketing service DQ&A in 2015, in a deal worth more than R1.5 billion.⁶ With all that success, it was no wonder that Edelstein appeared to some as a little cocky.

When Edelstein got the call from Eyal to come help him out with a new start-up, in or around 2006, he told him not a chance. But Eyal kept pestering him. In what Edelstein would later call a moment of stupidity, he flew to Durban to meet Eyal and agreed to set up a T-shirt shop with him called ESquared. The two coined the name from their initials, the four E’s.

Eyal and Edelstein set up ESquared’s first store on the corner of Gordon and Florida roads, a partly suburban area. This store would later close and would be replaced by another in Durban and a second outlet in Sea Point, Cape Town.⁷ The idea was to stay open until late at night and offer coffee while screening movies. It soon grabbed the attention of some. Together the two began importing clothing that they would then sell at the store, which soon became a chain when the two opened more outlets in the city. A local national newspaper, The Times, called it a funky T-shirt-cappuccino store with a primarily male clientele.⁸ It also became one of magazine GQ’s coolest shops in Durban.

For a few months the two had fun, flying to Thailand to source clothing. But fun aside, the company was losing money. The two then came up with the idea to pivot the company, after realising that many of the designs they saw in Bangkok were not made by locals, but rather by designers based elsewhere. This got them thinking. In the US there was a start-up called Threadless.com, a Chicago-based ecommerce site founded in 2000 by Jake Nickell and Jacob DeHart, that was making waves. Essentially Threadless.com allowed users to submit T-shirt designs to an online platform. The public then voted on the designs and the winning ideas got