I don't think anyone is saying their management didn't know. Of course they did. My point is that it wasn't viewed internally as a significant fraud... simply a way to improve productivity. There is an intellectual argument that having people sit in front of a computer longer than they need to simply to hit some 'arbitrary' time target is a waste of time.
That type of intellectual approach works great for startups but, as Greg mentions, they aren't a startup anymore. Do you blame the CEO? Yeah, sort of. But this was the same CEO that got them from a raw idea to a huge success. And keep in mind that they didn't start out operating in a regulated environment... and it's not natural for an early stage executive to want to bring in an extra layer of friction (like a chief compliance officer), so it's not surprising that this happened. I'd push up a big chunk of the responsibility to the board on this one.
This isn't some sort of massive fraud, failing or step function in the arrogance of venture-funded startups. It's just a company that got a bit sloppy in an environment that doesn't tolerate the sloppiness. They're paying the price and are moving on.