Tailspin: JetSmarter tried to be the Uber of private jets, now it faces lawsuits, losses and security questions

Last spring, Leonardo Galvez got an offer from JetSmarter that seemed too good to pass up.

The private jet start-up was offering Galvez its top-of-the-line "sophisticated membership," which included unlimited, free private jet flights and the chance to bring a guest. The membership usually costs $50,000 a year, but JetSmarter told Galvez that if he acted now, he could get three years for $97,500. He accepted the longer membership.

Weeks later, Galvez was stunned when he tried to book a JetSmarter flight. Rather than flying for free as promised, he was told he would have to pay 75 percent of the cost of his flights. The guest pass and other benefits also disappeared, he said.

"My heart dropped," Galvez said. "My membership meant nothing anymore. It was the easiest money I ever lost in my life."

Galvez filed a lawsuit against JetSmarter and its salesperson for a refund and damages. JetSmarter declined to comment on any specific lawsuits but said in a statement that "changes to our member services and benefits were within the rights of our membership agreement," which states that the company can "change, suspend or terminate" services or benefits at any time. The company also said members still have access to certain benefits.

But Galvez's story is shared by many JetSmarter customers interviewed by CNBC. More than five years after taking the industry by storm with an app that promised to become the Uber of private jets, JetSmarter has left a trail of angry customers, at least 13 lawsuits and concerns over security. While some customers are satisfied, others now call it a "fraud," a "high-tech shell game" and an "unlawful bait-and-switch," according to lawsuits filed against the company.

CNBC interviewed dozens of JetSmarter members, more than 20 former employees and a wide range of industry executives, vendors and partners of the company. It also obtained internal documents and communications, as well as member lists, investor presentations, and video and photos from JetSmarter passengers and crew.

JetSmarter CEO Sergey Petrossov
Source: CNBC
JetSmarter CEO Sergey Petrossov

What emerges is a picture of a high-flying start-up that claimed to be revolutionizing jet travel but was actually losing millions of dollars a month and failing to deliver on promises to customers and investors. With celebrity customers like Kim Kardashian and DJ Khaled, and an ambitious young CEO, JetSmarter became the first "flying unicorn," touting a valuation of over $1 billion. Now, the company is worth less than one-fifth that amount, based on its latest investment.

Behind its elite image, JetSmarter has used legal threats and lawsuits to silence critics, customers and the media. JetSmarter sent a letter demanding that CNBC "cease and desist" from contacting current and former employees who it said were bound by nondisclosure agreements.

In a statement, JetSmarter said it "adamantly rejects any allegations of fraud or 'bait-and-switch' tactics." It said that like any start-up, it is going through a business transition and is "more positive about the health of our business than ever." It acknowledged "a number of members are unhappy with certain changes," but said the "vast majority of our core customers understand the necessity of these decisions to ensure the long-term viability of JetSmarter."

Yet after the company abandoned its original business plan, its path to profitability remains uncertain. It faces unknown costs from the customer lawsuits and refunds, as well as a class-action lawsuit that has gone into arbitration in Florida.

It also faces questions from two federal agencies — the Federal Aviation Administration and the FBI. The nature and extent of the inquiries is unclear, but one person interviewed by the FBI about JetSmarter said the agency asked about its financials and business practices. JetSmarter said it "is not itself the subject of an FBI investigation."

Whatever its future, JetSmarter has given up on the controversial business model that made it famous and attracted thousands of customers — all-you-can-fly private jet memberships.

'It was a no-brainer'

In September 2016, then-Florida Gov. Rick Scott joined JetSmarter CEO Sergey Petrossov to cut the ribbon on the company's new multimillion-dollar headquarters office in downtown Fort Lauderdale.

"We're changing the way that people fly," the then-28-year-old Petrossov told the crowd. "We've democratized the space. We're really changing not just Fort Lauderdale, but the world."

In an industry crowded with start-ups and fleeting competitors, JetSmarter became a celebrated disruptor. Founded by Petrossov, a Moscow-born tech entrepreneur, it attracted a star-studded list of early investors that included Jay-Z and the Saudi royal family.

The premise was simple: Many of the private jets flying around the skies are empty or under-used. JetSmarter could buy those seats cheaply and use an app to connect the seats with passengers. A membership model would give JetSmarter recurring revenue and create a critical mass of customers — like, say, Netflix — that could allow the company to one day to go public.

JetSmarter doesn't own its planes, but charters them or books space from other companies. Initially, JetSmarter bought cheap seats on "empty legs" — flights that are empty because the planes are being repositioned after other flights. But as membership grew, JetSmarter began offering its own "shuttle services," where it would charter a plane on a popular route and fill it with JetSmarter members. Customers could also initiate their own charter flights, with JetSmarter selling the remaining seats to other customers.

The shuttles were a huge success, and membership grew to around 10,000. It opened offices in London, Dubai, Zurich, Moscow and Saudi Arabia. Members raved about the service, which gave them all-you-can-fly private jet service for as little as $7,000 or $9,000 a year. In the early years, JetSmarter also included free helicopter service to its airports as well as on-board catering.

Sally Horchow, a Broadway producer who travels frequently between her Los Angeles home and New York, paid $9,000 for an annual membership in early 2015. She said she flew 13 times across the country in a Gulfstream IV. The flights were a fraction of the cost of other private jet companies and were even cheaper than flying first-class on commercial carriers — all while avoiding the hassle of airport security.

JetSmarter member Sally Horchow
Source: CNBC
JetSmarter member Sally Horchow

"It was a no-brainer," Horchow said. "The value proposition in the original company was just kind of ridiculous." She tried to do the math to figure out how JetSmarter was making money on her membership, but the numbers weren't even close.

"It must cost this much money for gas alone to fly one person across the country times 12," she said.

Yet the savings for customers became huge losses for JetSmarter. A G4 typically costs more than $6,000 per hour to operate, so a one-way trip from New York to Los Angeles would typically cost more than $30,000. Even if those costs are spread out among eight to 10 passengers — and customers say they sometimes had JetSmarter planes to themselves — Horchow's membership wasn't enough to cover more than two round-trip flights.

Peter Maestrales, CEO of on-demand charter company Airstream Jets in Boca Raton, Florida, wrote a series of blog posts analyzing JetSmarter's economics in 2017. In one post, titled "Is JetSmarter a Ponzi Scheme?" he calculated that JetSmarter was losing up to $22,000 on an individual shuttle flight between New York and California.

"In order to keep the scheme afloat, they must keep increasing the number of active members," Maestrales wrote in the post, which he was forced to remove. "However, the more members JetSmarter signs up, the faster they burn through their investment capital."

Other private jet companies had tried a similar membership model and failed. BlackJet, DayJet and Beacon all closed down due in large part because memberships could never cover the costs of flying.

Former BlackJet CEO Dean Rotchin
Source: CNBC
Former BlackJet CEO Dean Rotchin

"It's like taking money and throwing it into a barbecue and burning it as fast as you can burn it," said Dean Rotchin, founder and former CEO of BlackJet, which folded in 2016. "The operating cost of these aircrafts is very expensive."

Former employees say JetSmarter was losing up to $5 million a month in 2016 and 2017. It was also spending heavily on marketing and events. It enlisted an army of celebrities, from Kardashian and supermodel Emily Ratajkowski to baseball legend David Ortiz and celebrity chef Robert Irvine, to tout the company as "brand ambassadors." It hosted champagne-filled parties in New York, Los Angeles and Miami to attract wealthy new members. And it sponsored booths and VIP lounges at yacht shows, art fairs and other gatherings of the rich.

Petrossov never disclosed or discussed the company's losses in his many press interviews and articles about the JetSmarter. Privately, he told investors and employees that JetSmarter was like Amazon or Uber, which lost money for years to build scale. He also said JetSmarter was creating a "community" of wealthy consumers that it could eventually monetize through sponsorships, partnerships and other sales.

But even as JetSmarter was bleeding cash, Petrossov's family continued to profit. His wife, Lolita, was the company's chief operating officer and ran the day-to-day business, according to court documents and former employees. Petrossov's brother was also employed by the company. The Petrossovs live in a $2 million house in a gated community in Boca Raton.

To fund its losses, JetSmarter raised cash through three investment rounds. It said its third round, in 2016, raised $105 million and valued the company at $1.5 billion. A year later, however, JetSmarter needed more cash. Former employees said paychecks were delayed by four to five weeks when JetSmarter couldn't meet payroll. A shuttle-experience manager, Grace Lamey, sued the company alleging that she and other employees weren't being paid for overtime. (Lamey and JetSmarter settled and neither side would comment). JetSmarter said "all of our employees have always been paid."

In early 2017, JetSmarter's president, Gennady Barsky, was arrested and charged with five counts of grand theft stemming from an earlier business that had no connection to JetSmarter. Barsky pleaded not guilty to all of the counts and left the company. The case is pending.

But Barsky was a key link to the company's investors, and his departure made fundraising more challenging, former employees say.

JetSmarter put together an investor presentation filled with optimistic projections to raise funds. It forecast revenue growing from $124 million in 2016 to more than $2 billion in 2019. It said membership would surge from 5,839 in 2016 to over 100,000 in 2020. Today, JetSmarter has about 8,000 members, according to people close to the company. The company declined to comment on any financials or its current membership numbers.

JetSmarter finally found an investor in Santa Monica, California-based Clearlake Capital, which invested alongside Leucadia National, now called Jefferies Financial Group. Neither Clearlake nor JetSmarter would disclose the amount. But people familiar with the deal said Clearlake and Leucadia invested around $75 million for ownership of about a third of the company. Clearlake also got priority in the event of a bankruptcy or liquidation as well as other considerations.

Jefferies declined to comment.

It's unclear how much Clearlake — which has become actively involved in running the company — has invested since the funding round. But its investment implied a valuation for JetSmarter of less than $250 million — a drop of more than 80 percent.

After Clearlake's investment, JetSmarter's salespeople were pushed even harder to recruit new members and raise cash, according to former employees. Andrew Pressler, a former salesperson at JetSmarter who was fired, said the sales team would conduct what they called "money grabs," using special deals, multiyear agreements or incentives to sign up members and bring in cash.

"We had to show our investors we were making money," Pressler said.

Former JetSmarter employee Andrew Pressler
Source: CNBC
Former JetSmarter employee Andrew Pressler

The push accelerated in early and mid-2018, with salespeople pressing for larger dollar amounts from members. Sales staff told members that they had been selected for an elite, special deal on the sophisticated membership, where they could buy multiple years upfront for a discount.

Joann Bachewicz, a JetSmarter member in Lansing, Illinois, was told she could get three years of sophisticated membership for $87,092, a discount from the already discounted price of $97,500. JetSmarter told her the membership would include free flights under 3½ hours, a discount on longer flights and the potential to bring three guests, according to her lawsuit.

But last June, after signing up countless new sophisticated members, JetSmarter changed its terms. Members say they were no longer able to book free flights. After paying five-figures for memberships, they were now being told that they would have to pay additional charges to fly.

Members had already seen their benefits dwindle over the years. Beginning in 2016, Jetsmarter started eliminating its free chopper service and catering. Then it started charging members extra for longer flights and added other fees. It created different tiers of memberships, with a "simple," "smart" and "sophisticated" membership.

JetSmarter member David Micciulla
Source: CNBC
JetSmarter member David Micciulla

"I said to them that basically, this is what they call a bait and switch," said David Micciulla, a former media executive who joined JetSmarter in 2017 with a $9,000 membership. "This wasn't what they sold me."

When customers complained or asked for refunds, JetSmarter pointed them to the lengthy legal language in their membership agreements that said the company could "change, suspend or terminate any of the services or benefits at any time."

In her lawsuit, Bachewicz said that when she asked JetSmarter to explain the changes, a JetSmarter representative wrote back "my hands are completely tied in this situation as these changes had come from our investors," adding "I completely understand (Bachewicz's) frustration but all the rules have change [sic] and wish there was something I could personally do."

JetSmarter member Leo Galvez
Source: Leo Galvez
JetSmarter member Leo Galvez

Galvez, like many members, is no longer using JetSmarter because the added costs of the flights made it unaffordable. And because he borrowed the money from a friend, he is still paying back the loan.

"This was a big hardship for me," he said. "I don't care who you are, $97,000 is a lot of money."

Some customers — especially higher-profile names — say they have gotten partial refunds or credits from the company. Other customers say they are pleased with JetSmarter's service and the recent changes. Stacey Feinberg, a venture capitalist in Los Angeles, said she joined JetSmarter in 2017 and after her first flight "I said, oh my God, this is the best thing since pizza delivery."

She said she welcomes the recent membership changes and fees because "I wanted them to raise prices to stay in business."

"You got an amazing opportunity. Be glad it lasted as long as it did. It's not really a form of transportation. It's a lifestyle," she said.

Yet even some of JetSmarter's celebrity clients remain bitter. Backstreet Boys singer Nick Carter said he became a member for around $15,000. He took only one charter on JetSmarter and said the service and experience was so "horrible" that he never flew JetSmarter again. He hired an attorney to try to get a refund, but JetSmarter refused.

"I felt like I was taken advantage of," Carter said.

Because JetSmarter's membership agreement requires members to settle their disputes in arbitration, many members have joined a class arbitration proceeding underway in Florida. Yet at least a dozen other customers have filed consumer-fraud lawsuits against the company, with many seeking seven-figure damages.

A lawsuit filed by Los Angeles-based attorney Derek Milosavljevic, which seeks at least $2 million in damages, alleges the company "reneges on its promises, regularly reducing and terminating services it actually provides and demanding new and ever higher additional payments for services it promised were included for an annual fee."

Drugs and large amounts of cash

Some JetSmarter customers and crew members have also raised concerns about security screening and some of the passengers aboard the flights.

On a flight from Las Vegas bound for New York last September, a 23-year-old music DJ named Maurice Paola started shouting and threatening to kill other passengers, according to court documents.

The pilot made an emergency landing in North Platte, Nebraska, and local authorities removed Paola from the plane and arrested him.

CNBC could not locate Paola for comment.

JetSmarter said "When we are aware of a passenger that could pose a security threat to our flights, we ban them from flying on our flights. Each operator follows standard protocols and procedures for when passenger behavior poses a risk to the safety of other passengers on the flight. In this case protocol was followed and as soon as Mr. Paola exhibited signs of inappropriate behavior, the flight operator made the decision to ground the plane."

The company said it also has the "most rigorous security standards in private aviation, including background checks on the majority of customers before they fly."

But a crew member and a passenger on the flight said there was no security check or passenger screening before takeoff.

Crew and passengers say they often saw passengers using JetSmarter to transport drugs or large amounts of cash. Security dogs are used for some JetSmarter flights to inspect bags, but members say there were many flights with no security checks.

Maurice Paola, a disc jockey who was arrested for making terroristic threats aboard a JetSmarter flight
Maurice Paola, a disc jockey who was arrested for making terroristic threats aboard a JetSmarter flight

"There were definitely drug dealers of all kinds who were carrying lots of cash on the planes, in you know, designer bags," Horchow said. "It was like $100,000 in a Goyard bag."

Another member said he witnessed a security dog reacting to a large suitcase being loaded onto the plane. When he asked the bag's owner about the screening, the passenger said: "The dogs are trained to sniff cash, and I have a lot of cash in the bag."

There are no clear federal laws limiting the amount of cash passengers can carry on a domestic private jet. Some private jet companies impose their own limits of $10,000 for cash on board. International fliers are required by law to report amounts over $10,000. JetSmarter's membership agreement forbids passengers from carrying on more than $50,000 in cash.

One crew member for a private jet operator said he refused to fly JetSmarter flights starting last summer because of concerns over drugs.

"A guy gets on the flight in New York and flies to Miami and then returns two hours later," said the crew member. "He does that three times a week and you have to wonder. JetSmarter is behaving like a commercial airline, selling seats. But they don't have the same security. It's a big loophole."

JetSmarter said in a statement that it has "on-the-ground security teams that screen for narcotics, explosives, cash and weapons for shared flights." It added that its recent changes, including the reduction of member benefits, helps all of its customers by "elevating the quality of people flying together."

Waging a legal battle

JetSmarter's legal team has also waged an aggressive campaign against critics and former employees. Its membership agreements previously barred members from making any "negative comments" about the company or its executives "orally and in writing" — a requirement other jet companies say is highly unusual in the industry.

After posting his financial analysis of the company in 2017, Maestrales received a letter from JetSmarter calling his posts "false and defamatory." JetSmarter demanded that he remove the posts.

When he refused, JetSmarter sued him for libel, saying Maestrales was a competitor who published the statements to harm JetSmarter's business. After he failed to appear in court, a default judgement was entered for JetSmarter, and when Maestrales failed to remove the post, JetSmarter asked the judge to impose a daily fine and to "incarcerate" Maestrales until he complied with the court's order. Eventually, he removed the posts.

In a statement on the case, JetSmarter said that "while we always welcome customer feedback, we do not tolerate libelous or defamatory statements."

JetSmarter has also sued or allegedly threatened to sue former employees. After working at JetSmarter for six months, Pressler was fired. He said JetSmarter never gave him any warning or reason, but Pressler said it was likely because he was offered a job by a JetSmarter customer over a recorded phone line.

Pressler wrote an account of the firing and his work at JetSmarter on LinkedIn. He wrote that "I'm passionate about the product and the presence they have in the tech world," and that he "wanted nothing more than for JetSmarter to prevail." But he said getting fired so suddenly after relocating to Florida just for JetSmarter was "cold hearted" and that "usually the ones that screw you end up getting screwed."

JetSmarter app
Source: CNBC
JetSmarter app

The next day, JetSmarter's general counsel sent Pressler a letter demanding that he immediately remove post, which it said was "false and libelous," and violated Pressler's employment agreement that barred him from disparaging the company or any of its executives. The letter said Pressler was fired for "poor performance" and that he had "lied to customers regarding JetSmarter's products and services." Pressler denies the claims, but quickly removed the LinkedIn post.

"It's extremely weird," Pressler said. "I'm an employee that was there for less than six months. ... Why were they so threatened by me? I had no idea."

JetSmarter said it does not comment on specific employee matters.

Last September, JetSmarter's general counsel, Anastasija Snicarenko, sent a letter to CNBC demanding that it "immediately cease and desist" from calling former and current employees. It said current and former employees were bound by confidentiality and nondisclosure agreements and that CNBC was "tortuously interfering with JetSmarter's contractual relationships."

After requesting an interview with Petrossov, JetSmarter sent a legal list of conditions for the interview, including a requirement that prohibited from quoting former or current employees. CNBC refused the conditions and Petrossov declined to be interviewed.

Today, JetSmarter is betting on a new business model — acting as a crowdsourcing middleman between passengers and private jets. JetSmarter customers can charter a plane by buying a minimum number of seats (usually three or four) and JetSmarter sells the rest to other customers. Rather than relying on members, the company is now touting its growing "total customer base" that includes nonmembers. JetSmarter is still not profitable but is now making money on some flights, according to an investor in the company.

Still, JetSmarter has another cloud over its future — federal inquiries. One person familiar with the FAA said that after the Paola flight, the agency is looking into whether JetSmarter is complying with rules governing commercial versus private aviation flights. If it's found to be in violation, JetSmarter could face large fines or challenges to its continued operation.

The FBI is also asking questions about JetSmarter, according to people familiar with the matter. One industry executive, who asked not to be named, said he was interviewed this fall by two FBI agents, who asked about everything from JetSmarter's business and sources of cash, to possible drugs and cash being transported on JetSmarter flights.

A spokesman for the FBI said the agency "does not confirm/deny the existence of an investigation as a matter of policy."

JetSmarter said, "We were in contact with the FBI in response to its investigation of Maurice Paola. We have fully cooperated with them and all authorities. JetSmarter has never been the subject of an FBI investigation." It added that "JetSmarter has not received any request for financial information from the FBI."

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