VC Rothenberg sues Silicon Valley Bank, seeking to clear reputation

Mike Rothenberg's story has all the elements of a Silicon Valley drama: A wunderkind shakes up the venture capitalist business with explosive and splashy success, only to see his firm all but collapse amid accusations of mishandled funds and lavish spending.

Now, Rothenberg, 34, is seeking redemption in a new chapter, filing a lawsuit on Monday that blames a single bank for struggles two years ago that cost his business more than $100 million in investment gains and marred his reputation.

The lawsuit alleges Silicon Valley Bank violated Rothenberg's specific instructions, transferring $4.25 million to a wrongly established bank account and creating the appearance he had misappropriated investors' money. That allegedly caused employees to flee Rothenberg Ventures Management Company and torpedoed plans for a 2016 round of investments.

The lawsuit, filed in California Superior Court, accuses Silicon Valley Bank of negligence, deceit, fraud and unfair business practices. The suit, which seeks a jury trial, alleges the bank was eager to please Rothenberg in hopes of securing his company's business and took shortcuts to do so. See below for the complaint in full.

"The bank created the false appearance that the management company and Mr. Rothenberg had wrongfully misappropriated millions in investor funds," says the suit, which seeks damages to compensate for tens of million of dollars in lost investment. "Having been effectively branded as an embezzler by the bank's unauthorized transfer, the management company collapsed, costing fund investors tens of millions in would-be investment gains and destroying Mr. Rothenberg's career."

Silicon Valley Bank said Tuesday it'll fight the case. "We strongly disagree with the allegations made in the lawsuit," the bank said. "We intend to defend the lawsuit vigorously, and we will further seek any remedies as appropriate."

SVB, founded in 1983 and headquartered in Santa Clara, California, specializes in the high-tech clients and reported $56 billion in assets for its most recent quarter.

Whether the legal action will restore Rothenberg's standing in the venture capital community is an open question. On the same day the suit was filed, the Securities and Exchange Commission said Rothenberg had agreed to barred from the brokerage and investment advisory industry for five years for misappropriating funds and misrepresenting their use to investors. Rothenberg, whose firm faces fines for what the SEC called a "fraudulent scheme," didn't admit or deny the SEC's allegations.

Still, Rothenberg's lawsuit against SVB is a potent reminder that reputation and money go hand-in-hand in Silicon Valley. Reputation helps VCs lure limited partners, the people who supply the investment capital. It also makes VCs attractive as investors in start-ups.

"We'd like to bridge the information gap between what people believed to be true and what actually happened," Rothenberg said in an interview. "We would like Silicon Valley Bank to come clean about their actions and stop doubling down on trying to pretend it didn't."

A high-flyer laid low

There is no shortage of venture capitalists in Silicon Valley and San Francisco, its northern annex. Still, Rothenberg attracted attention because of his relative youth, starting the firm at age 28.

"People called us the millennial venture firm," said Rothenberg, who holds bachelor's and master's degrees from Stanford University and launched his fund while getting an MBA from Harvard. "I picked venture capital to be my startup."

His approach involved smaller investments, usually between $100,000 and $250,000. Unlike other VCs, he didn't try to micromanage startups by securing board seats. The firm focused on networking events where startups and investors could meet.

"I think our portfolio unequivocally works," Rothenberg said, pointing to investments in notable companies like Elon Musk's SpaceX and Matterport, a maker of 3D cameras used by real estate agents.

Other investments include Patreon, which lets people pay creators for their work; Boosted, an electric skateboard maker; Andela, which seeks to cultivate African programming talent; and Planet Labs, a satellite photography company.

The pinnacle of Rothenberg's networking-centric style is Founder Field Day, where startup founders and investors schmooze at AT&T Park, the homefield of baseball's San Francisco Giants. It's been held every year from 2014 to 2017.

Rothenberg was also enthusiastic about the prospects for virtual reality, putting together an effort called River to produce VR content and invest in very young VR startups.

His fixation on the brand got him in trouble with the SEC, which said in its complaint that Rothenberg leased a suite at Super Bowl 50, financed a race car team and threw private parties at resorts to raise its profile. "Rothenberg commingled and funneled cash through a network of bank accounts and entities to pay these expenses, with most of the cash coming from the Rothenberg Funds, much of which defendants had misappropriated under the guise of management fees, administrative expenses, advances, and so-called 'carry fees' purportedly due to RVMC," the SEC alleged.

Bad press

All appeared fine until late December 2015, when SVB transferred $4.25 million that the limited partners had paid Rothenberg Ventures in advance as fees for managing its 2015 round of investments. Though the fees were earmarked for the firm, Rothenberg Ventures wasn't to take possession of the entire amount immediately, instead receiving fees from it on a predetermined schedule, the suit says.

The firm intended to use the deposited fees as collateral for a loan, which it wanted to complete before the end of the year, according to the suit. On Dec. 23, Rothenberg instructed the bank to set up an account owned by the 2015 investment fund for that purpose, according to the lawsuit, and the bank did so on the same day. The bank, however, didn't have enough time to complete its customary three-week internal control process before the year end, the suit says. So it took a shortcut, the suit says, creating a new account owned by the management company without telling Rothenberg.

The transfer set off a cascade of events that led to rumors of financial misconduct, an exodus of employees and the near-collapse of the firm, the lawsuit says.

"The unauthorized transfer had an inescapable and devastating effect: it created the false appearance that Mr. Rothenberg had embezzled millions in investor funds," the suit says.

As employees left, Silicon Valley media took notice with stories appearing in TechCrunch and Wired. The firm's eye-catching ways were now attracting attention for a different reason, and its activities and the spending that went along with them became liabilities.

Rothenberg bridled at the treatment. The Founder Field Day event didn't cost investors money because sponsors -- including big tech companies, law firms and banks -- foot the bill, he said. SVB was one of those sponsors, the lawsuit says, an assertion archived websites support.

The VC acknowledges that River's staffing and business dwindled as employees decamped for DMG Entertainment. But he said there was no financial trickery and made clear on first page of Rothenberg Ventures' investor agreement that "the economic upside belonged to investors."

Since the 2016 implosion, the Rothenberg Ventures payroll has dropped from 12 employees to a handful. Rothenberg has assumed many duties of those who've left.

Rothenberg Ventures has 175 limited partners and none of them have sued the firm, Rothenberg said. One of them, attorney Jeff Nardinelli, is part of the Quinn Emanuel Urquhart & Sullivan team representing Rothenberg in the lawsuit.

The hollowed-out venture firm couldn't go ahead with its plans for the 2016 investments even though it had raised $20 million of a planned $50 million from investors, Rothenberg said. That took a toll on investment deals the firm already had arranged, including in video game toolmaker Unity and stock-trading service Robinhood, the suit says.

New faces coming to Rothenberg Ventures

Rothenberg said he'll devote time to the lawsuit but others, including some new hires, will oversee the firm's operations.

"I'm bringing on new partners and hope to announce them soon," he said. "It's really important for stability. Let's let everybody take a breath, reset and bring in new faces."

First published Aug. 20 at 5:04 p.m. PT.
Update Aug. 21 at 8:35 a.m. PT : Added response from Silicon Valley Bank.

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