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Zenefits Could Face Criminal Charges

By Ephrat Livni, Esq. on February 24, 2016 2:58 PM

Employees at the insurance brokerage Zenefits must not be feeling very Zen as the startup's shooting star comes crashing down like a house of cards. The company is under investigation in California and Washington and regulators warn that criminal charges could be filed against those who sold health insurance without proper licensing.

Zenefits' new CEO, David Sacks -- who replaced the company founder Parker Conrad just last week -- has already stated that the company skirted compliance requirements in order for workers to sell insurance. According to The San Francisco Business Times, Sacks has said that controls "have been inadequate and some decisions have just been plain wrong." Now regulators are investigating the free human resources software service that makes its money selling employment benefits.

A Star Is Born

Up until just a few months ago, Zenefits was considered a prime example of the new business genius. The company's founder and CEO, Parker Conrad, managed to make his software-service-benefits-sales startup idea into a reality valued in the billions of dollars by investors. And he did it all in a t-shirt.

But Zenefits' CEO stepped down last week and David Sacks, the new CEO, admitted that Zenefits assisted its brokers in obtaining certification improperly. Sacks said that many California sales representatives used a software tool that bypassed required pre-licensing training materials. Thus, Zenefits workers became insurance brokers.

It may have seemed like a clever fix for the pesky business of compliance. But it's starting to look shortsighted now that regulators in two states are threatening criminal prosecution. A spokeswoman for the Office of the Insurance Commissioner in Washington told reporters Tuesday that a decision will come, "Within a month."

Both individual workers and the brokerage as a whole could be on the hook. Selling insurance without a license can be a felony offense in Washington, so subject to prison time. Meanwhile, the brokerage could lose its license to do business in the state.

Tech Startup Bubble?

But is this action on the part of regulators too little, too late, given how many people have already been taken in by Zenefits? Perhaps more importantly is the Zenefits story an indication that other supposedly promising startups are built on spin?

Last week, the Wall Street Journal pointed out that the Zenefits is no different than many other tech startups. Many of the new businesses ignore regulation until they succeed, according to the WSJ. In other words, sometimes the new genius is just old-fashioned cheating.

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