FYRE Festival: Expectations v RealityFYRE was billed to be the ultimate luxury music festival experience. You may remember the ads featuring today’s ‘It’ girls of the Jenner and Hadid persuasion as well as 400 Instagram influencers, models and other millennial movers and shakers. Its infamous founder, Billy McFarland touted FYRE to be “The biggest event of the decade, I promise you.” Yet the event never even happened. People were promised cocktails on the beach, resort-style villas and meals prepared by?VIP chefs, but for the thousands who paid between ?900 to ?75,000 a head to attend FYRE, they arrived on the Bahamian island of Great Exuma to see sand-swept mattresses, sagging tents, soggy cheese sandwiches in styrofoam boxes…and nothing more.
FYRE Festival fraud: Who is Billy McFarlandMcFarland’s entrepreneurial journey reads like that of many whizz kid serial entrepreneurs. The 28-year-old started his first business, an outsourcing company that connected brands with designers, at age 13. He dropped out of university to pursue entrepreneurship, like many American greats.
And like many American greats, he went on to found an online ad company, Spling, and another exclusive credit card company called Magnises that offered members with luxury perks. He knew his market early on: young people with a lot of disposable income and a hunger for living the high life.McFarland’s most ambitious enterprise is Fyre Media Inc., the parent company of the Fyre Festival. He positioned Fyre Media as a massively successful business worth $90 million, but investigations reveal that the company actually turned over about $60,000 in its heyday. McFarland built his brand around a persona he had carefully cultivated over the years; that of a hyper-wealthy jet-setter living in a $21,000-a-month penthouse apartment in New York and driving a $110,000 Maserati. Billy McFarland was arrested on 30?June 2017 and, in March last year, pleaded guilty to fraud. In July 2018, he admitted two more counts of fraud for setting up another ticket-selling scam while on bail. He admitted to scamming investors of more than $26 million by giving them false documents that made Fyre Media look successful. McFarland admitted that he knew he had “betrayed the trust of my investors, my customers, my family”.
Since then, he has been found guilty and jailed for six years. The judge described him as “a serial fraudster” who had been dishonest for “most of his life”.Read the full case document from McFarland’s case here.
Why did investors buy McFarland’s story?Buzzacott’s Corporate Finance expert, Alex Judd believes that the disaster could have been avoided with basic financial due diligence. “Being the accountants that we are, we couldn?t help but identify areas where our diligence work would have raised red flags, stopping the venture in its tracks before it spiraled out of control,” he says. Judd’s team works with investors, banks and businesses undergoing growth who require due diligence to be performed for investments, lending, and acquisitions. He explains, “Due diligence is about taking a step back to see the bigger picture and providing assurance that the decisions being made are the right ones.”
10 red flags that would have killed the FYRE Festival scam at the outset
- Unsubstantiated revenue false representations were made to investors regarding the company’s turnover, with income claimed to be in the millions when it was actually under $100k.
- Bank overdrafts using overdrafts as longer-term funding, which should be used as part of the working capital cycle.
- High cash burn a company spending money faster than it receives money raises the issue of ?when will it run out
- Large cash payments any company dealing with cash raises the risk of fraud. It could also link to money laundering, undisclosed payments and understatement of profits.
- Accounting controls the control environment in the finance team would have been exceptionally weak, with Billy McFarlan being the only person having true transparency and control.
- Personal AMEX payments the management team and other employees were forced to make personal AMEX payments, again highlighting the control weaknesses and lack of cash.
- Lack of adequate insurance policies a high-level review of the company’s insurance policies would have identified there was no cancellation insurance. This would give a clear indication of management’s appetite for risk.
- Local staff unpaid reviewing creditors gives a clear indication of a company’s ability to pay them. Not paying staff gives an immediate indication of how frail a business is.
- Spiraling marketing spend this occurred mainly before the festivals downfall, however high marketing spend to acquire customers can indicate whether a business is viable in the long term.
- Last minute property and lease changes from the Investment Memorandum the company lied about its property holdings. A review of the property leases and commitments would have identified the dire financial position the festival and company was in.
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