Fraud by Venture Capital Fund Managers?

I have been involved in the venture capital industry for over 25 years, and it is the extremely rare case that managers of venture capital funds have been accused of fraud.  I'm of the view that the vast majority of venture capital fund managers are honorable people with strong sense of values and integrity, and it disappoints me when fraud is alleged.  However, when cases of fraud are alleged, it serves as a poignant reminder for venture capital fund investors to conduct thorough due diligence on fund managers before investing and to be vigilant after investing to identify any potential fraud.

Reuters recently reported in "Venture Capitalists Sues Former Boss, Now Fired, For Fraud" that G. Steven Burrill, founder of life science venture capital firm Burrill & Co. (the website was down at the time of this writing, but the link is www.burrillandco.com) has been fired from the firm he founded and sued for fraud.  If the allegations are proved true, this would mark a sad chapter in the career of this longtime biotech investor, and a sad moment for the venture capital industry.

I have seen the rare case of scandal or alleged misconduct among venture capital fund managers (primarily related to sex or drugs), and allegations of fraud are no less rare.  The following are a few of the reported fraud cases alleged against venture capital fund managers:

• Earlier this year the SEC charged a venture capital fund manager with fraud by using fund assets to pay a fake front company controlled by the manager.
• In 2011, the SEC alleged that a venture capital fund manager committed fraud in connection with a fund he promoted.
• In 2009, the SEC filed a complaint alleging that a venture capital fund manager committed fraud in connection with raising a fund and operating as an unregistered broker-dealer.
• In 2008, the SEC alleged that a former venture capitalists defrauded investors and using the money to buy a stake in a professional hockey team.
• In 2008, a venture capital fund manager was convicted of defrauding investors of more than $20 million in connection with raising a fund and financing for a company.
• In 2005, an accountant associated with a venture capital fund pled guilty to fraud in connection with the diversion of capital from a venture capital fund.

Unfortunately, fraud does occur, and the foregoing examples are again a reminder to be diligent and vigilant when investing in venture capital funds.

If you are aware of any other allegations of fraud or wrongdoing by venture capital fund managers, please let me know.

Link to Reuters story:  http://www.reuters.com/article/2014/06/20/us-venture-fraud-burrill-idUSKBN0EV01720140620