Billionaire Tom Siebel faces tumult at C3.ai as investor lawsuit, brief sellers query metrics

Tom Siebel has been using the substitute intelligence wave.

Three years after promoting his prior software program firm, Siebel Techniques, to Oracle for practically $6 billion in 2006, he began C3.ai, a supplier of AI options to companies. That firm, which went public in 2020, now sports activities a roughly $4 billion market cap and, in Siebel’s phrases, is “more and more acknowledged because the gold normal in enterprise AI.”

However Siebel has a rising refrain of skeptics.

Quick sellers have been pounding his firm of late with a sequence of allegations: inflating margins, misclassifying income, participating in “aggressive accounting” and for an absence of transparency in the way it counts clients. Siebel says it isn’t true, and blasts the shorts for driving his inventory worth down to allow them to earn money, or “cowl the brief and pocket the income,” as the corporate mentioned in an official response.

Siebel has additionally been criticized for promoting lots of of tens of millions of {dollars} value of shares within the months following the corporate’s 2020 IPO. An investor lawsuit from final 12 months alleges that, forward of its public market debut, the corporate made deceptive statements about its entry to a 12,000-person gross sales power tied to its partnership with power firm Baker Hughes.

And over two dozen former C3.ai workers, who CNBC contacted in wanting into these allegations, described a tradition of worry on the firm that filtered down from the highest. A lot of the ex-employees requested not be named due to nondisclosure agreements or considerations over job repercussions for these nonetheless within the tech trade.

Wall Avenue would not know what to make of the story. The inventory, which fortuitously trades beneath the ticker image AI, shot previous $177 within the heady post-IPO days of late 2020 because the Covid increase led to elevated demand for cloud software program whereas near-zero rates of interest incentivized buyers to pump cash into development. The corporate’s market cap swelled past $17 billion on the time.

Since then C3.ai has been on a inventory market curler coaster, that includes principally steep declines. Shares plunged 77% in 2021, a 12 months that was fairly good for software program, after which one other 64% in 2022, which was the worst 12 months for tech because the monetary disaster.

The attract of AI has introduced buyers again, with C3.ai shares up 210% 12 months up to now, by far the perfect efficiency within the cloud software program group.

On the coronary heart of C3.ai is the 70-year-old Siebel, who has a internet value of near $4 billion, in keeping with Forbes. One former worker in a management place in contrast him to Logan Roy, the media tycoon from the HBO sequence “Succession.” The ex-employee described Siebel as charming and charismatic, however a “tyrant” who “humiliates individuals.”

Siebel began Siebel Techniques in 1993, just a few years after leaving Oracle, the place he labored beneath founder Larry Ellison as a senior vice chairman. That firm was a pioneer in buyer relationship administration (CRM) software program, or software program for salespeople, and it turned the core of Oracle’s CRM providing when his former employer acquired it, a deal that launched Siebel into the billionaire class.

In an unique interview with CNBC at C3.ai’s headquarters in Redwood Metropolis, California, Siebel sat down to debate the latest allegations from buyers and former workers concerning him and his firm. He insisted that demand for C3.ai’s know-how is rising quickly, and he struck a defiant tone in defending the corporate’s accounting practices in addition to the tradition that he is constructed.

C3.ai says it makes use of synthetic intelligence to foretell a bunch of points starting from fraud detection to serving to firms optimize their operations. Through the years, it is attracted distinguished clients, together with the U.S. Division of Protection in addition to oil and gasoline giants like Shell and Baker Hughes.

An investor lawsuit, initially filed within the Northern District of California in March 2022 and amended in February of this 12 months, focuses on C3.ai’s relationship with oilfield-services firm Baker Hughes, which accounted for 45% of complete income within the first quarter of 2023.

Of their joint venture agreement, Baker Hughes says it makes use of C3.ai’s options and in addition sells the product to firms within the oil and gasoline trade.

The grievance alleges C3.ai misrepresented that it had a 12,000-person gross sales group with deep trade experience within the oil and gasoline trade as a part of its partnership with Baker Hughes.

The lawsuit alleges the defendants “did not disclose that C3 didn’t have entry to and was not in a position to make the most of the 12,000-person salesforce — however as a substitute arrange a separate gross sales division that relied on salespeople that didn’t have the trade connections, experience, help or necessary gross sales quotas of Baker Hughes’ typical salesforce.” 

The entry to the 12,000-person gross sales group was first made public in C3.ai’s IPO filing in November 2020. Siebel continued to publicly tout that sizable gross sales power with Baker Hughes a minimum of 13 occasions in 2021, in keeping with his public appearances reviewed by CNBC.

When requested about this, Siebel mentioned, “I do not bear in mind saying it 13 occasions,” however he reiterated that the scale of the Baker Hughes workforce promoting C3.ai was represented to him as “someplace round 12,000.” 

A Baker Hughes spokesperson mentioned he “cannot give a particular determine,” including the corporate has “groups the world over that promote C3.ai options.” Dan Brennan, a senior vice chairman at Baker Hughes who oversees the partnership, was on the firm’s headquarters the day CNBC interviewed Siebel. He additionally could not present an actual quantity when initially requested.

“We have got a big gross sales power,” Brennan mentioned. “That gross sales power is empowered to promote numerous options together with C3.” Brennan later estimated that the 12,000 determine was in the precise ballpark. 

Two former Baker Hughes workers, who requested to not be recognized as a result of worry of repercussions, instructed CNBC that whereas there are 12,000 complete gross sales individuals on the firm, they aren’t all educated and certified to promote the C3.ai product. 

A 2021 amendment to the three way partnership settlement between the 2 firms reveals that C3.ai would prepare “as much as sixty (60) Baker Hughes personnel” on its product freed from cost. 

One of many Baker Hughes workers who spoke to CNBC had educated gross sales personnel on the C3.ai product. On the coaching he attended, he estimated there have been round 60 gross sales workers.

He additionally mentioned the product was troublesome to study and that workers weren’t allowed to promote it with out going by a rigorous approval course of. He mentioned he had no concept how they may certify 12,000 individuals.

A Baker Hughes spokesperson mentioned in response that the corporate educated “nicely past 60” individuals on the know-how and that “each firms proceed to have interaction in coaching alternatives on C3.ai choices.”

In a movement to dismiss the swimsuit, C3.ai’s attorneys wrote that Siebel’s statements in regards to the gross sales power are “traditional puffery that no affordable buyers would have taken actually” and are “apparent hyperbole.”

A former SEC official, who requested to not be named, instructed CNBC that firms are allowed to burnish their model by “puffery,” however they can not change essential numbers which might be relied upon by buyers.

When requested how buyers ought to perceive the distinction between puffery and factual statements, Siebel mentioned to ask buyers as a result of he cannot communicate for them. Siebel mentioned he is assured the lawsuit will probably be dismissed. 

CNBC’s “Final Name” aired a report Thursday night time on the investor lawsuit towards C3.ai and the corporate’s relationship with Baker Hughes. After the video aired, C3.ai mentioned on Twitter that the statements made by CNBC “misrepresent C3 AI and its basic enterprise practices” and that “the enterprise outcomes communicate for themselves.”

Along with the declare of an inflated gross sales power, the investor swimsuit towards C3.ai additional alleges that the disclosure contributed to an “artificially inflated” inventory, which Siebel and different insiders then took benefit of by promoting greater than 11 million shares.

Siebel, who stays the most important particular person shareholder, offered about 3.4 million shares for near $288 million in March 2021, simply three months after the IPO. Lockup durations for insiders are usually six months, however C3.ai insiders might promote after 90 days if sure provisions had been met, together with if the inventory was 33% above the IPO worth.

“Because of this, C3’s lockup provision created a perverse incentive for C3 executives to pump up C3’s inventory worth within the first six months following the IPO,” the swimsuit mentioned.

Reed Kathrein, who beforehand represented buyers in reaching a settlement towards Theranos — the medical-technology firm that failed to deliver on its guarantees — is now behind this investor lawsuit towards C3.ai. His view is that continued statements from the corporate in regards to the Baker Hughes relationship helped bolster the inventory.

“It is about smoke and mirrors to promote your organization,” Kathrein instructed CNBC, including that it is also in regards to the finish outcome that comes from promoting lots of of tens of millions of {dollars} value of inventory “as soon as the general public has purchased into that.”

The lawsuit says the publicity in regards to the huge Baker Hughes gross sales power “artificially inflated C3’s inventory” when the corporate first went public. It alleges C3.ai quietly restructured its gross sales group, which “sat exterior of the group” and “didn’t have the relationships” or “deep trade experience” of the Baker Hughes gross sales workforce. The swimsuit additionally says that Siebel didn’t announce the change till December 2021.

The day after that announcement, the inventory opened at $31 a share, a drop of greater than 80% from its peak a 12 months earlier. Kathrein’s 4 buyers allege the multi-month lag on that disclosure was one of many components that value them greater than $1.2 million.

In keeping with monetary paperwork, there have been roughly 11 transactions made by Siebel between March 2021 and November 2021 totaling over $630 million. Siebel and different insiders offered greater than $730 million value of inventory, the filings present. 

“That’s staggering,” Kathrein mentioned. “In the event you consider in an organization, you are not going to dump your inventory.”

As of the latest proxy filing final 12 months, Siebel nonetheless owned over 31 million Class A and Class B shares.

“In the event you have a look at the proportion of my possession within the firm, that was a really small share,” Siebel mentioned in his protection. “I’m nonetheless the most important shareholder and I’ve a considerable dedication to the corporate.”

In an April 2023 filing, Baker Hughes introduced it divested 1.7 million C3.ai shares, bringing its possession to six.9 million shares.

A Baker Hughes spokesman mentioned its relationship with C3.ai stays the identical and that its dedication “has not modified.” 

However a financial filing reveals C3.ai has not but acknowledged a considerable amount of income from the partnership.

C3.ai’s quarterly submitting for the interval ended January, signifies it had $87.9 million in unbilled receivables, that means its clients hadn’t been invoiced and thus had not paid for companies they’d acquired. Baker Hughes accounted for greater than 90% of these unbilled receivables.

Siebel mentioned that is how typically accepted accounting practices (GAAP) work.

“The cash will probably be invoiced, the cash will probably be collected,” he mentioned. “I am not sure what there’s to not like.”

He mentioned an unbilled receivable is “simply cash the corporate is owed in some unspecified time in the future sooner or later.”

In a public document revealed on its investor relations web page, C3.ai reiterated it has no considerations about its unbilled receivables associated to Baker Hughes and detailed a future fee schedule. The doc mentioned unbilled receivables would drop to $57.4 million associated to Baker Hughes for the fourth quarter. On its earnings name on Wednesday, C3.ai reported that it nonetheless had $70.7 million in unbilled receivables from Baker Hughes.

Dangers about the corporate’s shut ties to Baker Hughes had been central to a letter in April from short-selling funding agency Kerrisdale Capital to C3.ai’s auditor. The letter claimed the corporate engaged in “aggressive accounting” to “inflate its earnings assertion.”

Kerrisdale pointed to C3.ai’s “extremely conspicuous development” in unbilled receivables, largely from Baker Hughes, and wrote that “accounting crimson flags abound with the Baker Hughes relationship.”

The inventory plummeted 38% within the two buying and selling days after Kerrisdale’s letter.

It is not the primary time brief sellers have focused C3.ai.

Spruce Level Capital Administration, a short-selling agency, published a report in February that flagged considerations over the corporate’s “much less clear” technique for counting clients, its “revolving door” of chief monetary officers and its historical past of pivoting its focus to the most recent buzzword.

C3.ai cycled by three CFOs since 2019, along with one performing CFO in 2018 and the present CFO, who each nonetheless work on the firm. When requested in regards to the excessive turnover of executives extra broadly, Siebel mentioned most left for private causes and pointed to an analogous turnover at firms like Tesla, Spotify and Twitter. 

Concerning the common change of focus, the corporate was named C3 Power to assist power firms enhance their operations, scale back prices and enhance income. Spruce Level mentioned it pivoted to IoT (Web of Issues) when that “buzzword peaked” and expanded to incorporate different industries. In 2019, it modified its identify from C3 IoT to C3.ai, a transfer Spruce Level mentioned mirrored the hype round synthetic intelligence.

C3.ai has denied the statements from each companies, defending its monetary stories as correct and indicating that its enterprise is rising quickly. 

In an announcement to CNBC, a spokesman for C3.ai referred to as the Kerrisdale letter “a extremely artistic and clear try by a self-acclaimed brief vendor to brief the inventory, publish an inflammatory letter to maneuver the inventory worth downward, then cowl the brief and pocket the income.”

The spokesman identified that Kerrisdale is being sued by an investor who alleges the letter “contained false and misleading statements for the aim of manipulating and driving down the value.”

Siebel referred to as the brief sellers “shrewd” and mentioned their stories are an try to maneuver the inventory worth on the expense of retail buyers. 

“I believe typically crime pays and this seems to be a type of instances,” he mentioned. 

A day earlier than CNBC was scheduled to interview Siebel for this story, C3.ai launched a preliminary earnings report for the primary time, forward of its reporting date of Might 31. Income for the fiscal fourth quarter exceeded steering and its loss was narrower than anticipated, the corporate mentioned. The inventory jumped 23%, recouping a few of its losses that adopted the Kerrisdale report.

Nonetheless, following C3.ai’s full earnings report after the shut of buying and selling on Wednesday, the inventory dropped 13% as a result of a disappointing forecast.

Siebel instructed CNBC that the controversy over unbilled enterprise was “misconstrued” by brief sellers and {that a} large 4 accounting agency had audited its financials. The corporate declined to offer the identify of the agency.

Lots of the 30 former C3.ai workers who spoke with CNBC mentioned the corporate has had a troublesome time attracting new clients they usually declare that people who have come within the door originated from Siebel’s relationships. 

The overwhelming majority of these ex-employees additionally described a problematic tradition, revolving round worry of Siebel and intense oversight from the CEO.

Of the 30 ex-workers, 5 praised Siebel’s hard-charging method as imperfect however efficient.

For a optimistic perspective on Siebel, an organization spokesperson referred CNBC to Ken Goldman, who served as Siebel Techniques’ CFO from 2000 to 2005. Goldman has by no means been instantly employed at C3.ai however mentioned he’s an advisor to Siebel and was an early investor within the firm. 

“He takes excellent care of you when you do your job,” Goldman mentioned, concerning Siebel. “He’ll be sure that financially he takes excellent care of you.”

Goldman additionally mentioned Siebel “has his id on this firm,” and “is singularly centered on this firm to the detriment of different actions and hobbies he used to have.”

However questions stay in regards to the well being of the enterprise. C3.ai’s monetary filings present the corporate pivoted to an opaque new system for counting clients.

CNBC reviewed the corporate monetary filings, which clarify the way it counts clients. The paperwork say the corporate considers mum or dad firms like Baker Hughes as a buyer. Moreover, every division contained in the mum or dad firm and all third events that entity sells the software program to are additionally thought of distinctive clients.

In a March 2022 earnings report, C3.ai mentioned it did not account for all divisions and third events correctly with its prior buyer calculation technique. Utilizing its new technique, the shopper rely jumped from 110, as had been beforehand reported for the quarter, to 218. The full variety of mum or dad firms C3.ai serves declined from 53 within the October 2021 quarter to 50 within the January 2022 interval.

Siebel mentioned C3.ai has complicated clients and licensing fashions, which required it to vary its buyer rely. 

The corporate once more modified the way in which it counts clients in its newest earnings report and mentioned it was to to account for “buyer engagement.” Siebel mentioned the outdated methodology for counting clients did not acknowledge the “complexity of our contractual and pricing buildings and the involvement of resellers.”

Below the brand new system, buyer rely jumped to 287 within the interval ended April 30, from 247 1 / 4 earlier. Nonetheless, utilizing the outdated technique, C3.ai added solely eight clients, closing the interval with 244, up from 236 the prior quarter.

Regardless of all of the latest controversy, C3.ai nonetheless has its defenders on Wall Avenue.

Gil Luria, an analyst at DA Davidson who recommends shopping for the inventory, wrote in a report on Might 15, that C3.ai has a rising pipeline of shoppers and is benefiting from a surge in enterprise demand for AI. He disputes the findings of the brief sellers.

“I might argue that when you look merchandise by merchandise at every little thing the brief sellers have mentioned, it is both confirmed to not be appropriate or deceptive, or the corporate was in a position to deal with correctly,” Luria mentioned in an interview.

Siebel, after all, agrees with that evaluation.

“The demand for what we do has by no means been better,” Siebel mentioned. “The enterprise prospects in entrance of C3 are terribly optimistic.”

His legacy will depend on it.

— CNBC’s Nick Wells, Scott Zamost and Sam Woodward contributed to this report.

Electronic mail tricks to investigations@cnbc.com

WATCH: Tom Siebel’s interview with CNBC