DOJ, SEC Investigating $32 Million CrowdStrike Deal With Carahsoft

(Bloomberg) — US prosecutors and regulators are investigating a $32 million deal between CrowdStrike Holdings Inc. and a technology distributor to provide cybersecurity tools to the Internal Revenue Service, according to two people familiar with the matter and a document seen by Bloomberg News.

Investigators for the Justice Department and the Securities and Exchange Commission have been interviewing people and collecting records related to the deal, according to the document and people. They spoke on condition of anonymity because they are not authorized to discuss the matter.

Carahsoft Technology Corp. paid CrowdStrike for the deal that the cybersecurity firm closed on the last day of a fiscal quarter in 2023, but the IRS never purchased the products, Bloomberg first reported in October. The transaction under investigation was big enough that it could have made the difference between CrowdStrike beating or missing Wall Street projections for the period, although the Austin, Texas-based company has declined to detail how it accounted for the deal. The day after CrowdStrike reported results for the record quarter, its shares rose 10%.

The parallel probes, which haven’t been previously reported, also represent additional scrutiny of Carahsoft, a dominant reseller of technology to the US government. The FBI searched the firm’s headquarters last year, and federal prosecutors are conducting a separate civil investigation of whether the company conspired with another technology firm to overcharge the government.

CrowdStrike spokesperson Brian Merrill said in an email, “we stand by the accounting of the transaction.” A lawyer for Carahsoft, Samarth Barot, declined to comment.

A spokesperson for the US Attorney’s Office for the Southern District of New York, Nicholas Biase, declined to comment. An SEC spokesperson, Cory Jarvis, said the agency doesn’t comment on “the existence or nonexistence of a possible investigation.”

As early as last fall, SEC and DOJ investigators were questioning former CrowdStrike employees involved in the deal, as well as IRS staff, and they’ve continued to pursue interviews in recent weeks, according to the people and document. They’ve also collected records related to the deal, including written communications from employees of the IRS, CrowdStrike and Carahsoft.

The investigators asked witnesses detailed questions about the interactions between CrowdStrike sales staff and IRS officials in the lead up to the deal’s closure, one of the people said. They’ve inquired repeatedly whether the agency purchased the CrowdStrike software and were told no, the person said.

IRS officials did not respond to calls and emails seeking comment.

Prosecutors from the US Attorney’s Office for the Southern District of New York are among those working on the investigation, according to the person.

The deal under scrutiny is complex and some specifics of it remain unclear. Documents from Carahsoft and CrowdStrike show that it was for identity threat protection software to be used by the IRS. The agency, however, never bought it.

CrowdStrike closed the deal on the last day of its third fiscal quarter in 2023. In a subsequent earnings call, Chief Executive Officer George Kurtz highlighted it by saying, “identity threat protection wins in the quarter included an eight-figure total deal value win in the federal government.”

Carahsoft has been making on-time payments to CrowdStrike, the cybersecurity firm told Bloomberg last fall. Both companies explained then that they had a “non-cancellable order” between them, but declined to say why they struck the deal without a purchase in place from the IRS, or what became of the millions of dollars worth of software subscriptions that were at stake.

In an earnings report in November 2024, CrowdStrike excluded roughly $26 million from its annual recurring revenue for the quarter. The company’s chief financial officer, Burt Podbere, said the unusual move followed the company determining the transaction wouldn’t be repeated “after a distributor in the federal space provided notice of its intention to exercise transferability rights with respect to a transaction.”

CrowdStrike representatives have declined to elaborate or say whether the comments were related to the deal involving the IRS and Carahsoft.

At the time of the deal, some CrowdStrike staff raised internal concerns that the company was “pre-booking” the transaction, which they viewed as incomplete because it was unclear whether the IRS would ever make the large purchase, Bloomberg previously reported. US regulators have in some cases sued and fined companies over alleged pre-booking, also known as channel stuffing, claiming they misled investors by improperly recognizing revenue to inflate their financial figures.

A CrowdStrike spokesperson previously said it was “demonstrably false” that there was any pre-booking and that the deal was reviewed and “given a clean bill of health.”

US investigators have already spent years examining Carahsoft, a leading player among resellers and distributors that help technology companies navigate the complexities of selling to government agencies. In September, agents from the FBI and the US Department of Defense searched the company’s Reston, Virginia, headquarters.

A Carahsoft spokesperson said at the time that it was cooperating with the FBI probe, which involved “an investigation into a company with which Carahsoft has done business in the past.” The Justice Department is also conducting a separate civil investigation of Carahsoft and SAP SE for potential price fixing on government contracts, as Bloomberg previously reported. The German firm is cooperating with the civil probe, according to a spokesperson.

There’s no known link between CrowdStrike and the civil investigation nor the search of Carahsoft’s office. A representative of the cybersecurity company previously said it’s not connected to either.

Federal investigations, especially of complex cases, often run for years and many end without any formal accusations of wrongdoing.

Adam Pritchard, a professor at University of Michigan Law School and former SEC lawyer, said that regardless of what investigators find, the probes will cost CrowdStrike and Carahsoft in legal fees and managers’ time, and draw scrutiny from their boards of directors. He said investigators will likely be interested in whether the companies had any “additional understandings” about the deal beyond their contract and, if so, whether they were disclosed to auditors.

“If I were investigating, I would want to know if there were implicit understandings that if the deal didn’t go through with the IRS that they could work out the money over the course of their ongoing relationship,” said Pritchard.

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