SEC Charges Rothenberg Ventures in Fraudulent Scheme
sec.gov"Without admitting or denying the allegations in the SEC’s complaint, Rothenberg and Rothenberg Ventures agreed to settle the charges. The settlement is subject to approval by the federal district court for the Northern District of California which would determine the amount of disgorgement and civil money penalties. Rothenberg also agreed to be barred from the brokerage and investment advisory business with a right to reapply after five years. An SEC order imposing the bar will be instituted following court approval of the settlement" [1].
Besides blowing investors' money on lavish staff events, which is a dick move but not necessarily illegal, Rothenberg also invested "$5 million from Rothenberg Ventures' second and third funds in his own startup company, River Studios" [2].
blowing investors' money on lavish staff events, which is a dick move but not necessarily illegal
I'm not an expert on this topic, but if a limited partner agrees to something like "2 and 20" fees doesn't that imply that the other 98% of the money is to be invested and not used for expenses? 2% management fee on $64M assets is only $1.2M which is pretty small considering the size of staff they had.
It's less bad if the investors agreed to high fees, but it could still be embezzlement if the money was spent on personal stuff.
There is something called fund expenses. A GP can allocate part of the fund to pay towards expenses they deem to be fund expenses. For example, the audit would be classified as a fund expense. Most funds have an outside administration company that handles the money and approves/rejects these decisions.
Many funds have "chargeable" expenses like research and travel. These come directly out of the fund and not the management fee.
Source: former hedge fund trader
> Besides blowing investors' money on lavish staff events, which is a dick move but not necessarily illegal
Can you talk a bit about where the line is between this being merely unethical as opposed to outright illegal?
If you're in charge of the company, you can authorize expenditures for anything that reasonably relates to the company's business, including attracting investors, retaining employees, or incenting them to succeed. It's reckless to spend all your money on parties, but not illegal.
But if you authorize the company to spend money on something which is in itself illegal (cocaine or weed for the parties, hookers instead of strippers), that's illegal. And if you effectively direct the money to your own benefit (pay for your house's landscaping, new pool, pet grooming bill) that's not legal (among other things, it counts as taxable income and I bet you forget to pay on that).
I think you left out this one:
If you make invoices that say you've ordered soda for the programmers, but there are no deliveries of soda because the money for sodas went to your overseas numbered account, that's illegal.
Another place you could go wrong is if you try to hide your poor financial decisions by giving fraudulent reports to shareholders/SEC.
(Example: Enron)
From the sec complaint
> Defendants at all relevant times were investment advisers within the meaning of Section 202(a)(11) of the Advisers Act [15 U.S.C. § 80b-2(a)(11)].
My personal guess: that law makes various actions (self-dealing, lying about what investment funds are being used for, non-arms-length transactions, etc) crimes instead of civil torts.
Plus, you know, just plain fraud.
What does "dick move" mean to you, in this context?
The "0 lawsuits filed" stat on his website now seems a bit foreshadowing
150 Investments Made
175 Limited Partners
5 Years of Experience
0 Lawsuits Filed
Maybe he can post a "Days since last SEC action" sign in the office.
From the page's title:
> The Actual Mike is not quite the virtual Gatsby
Jay Gatsby was a criminal. Of course he says he's "not quite the virtual Gatsby." But he's still essentially likening himself to a fictional criminal.
Jay Gatsby was a criminal. That's gray. It's hinted and perhaps likely that he was a bootlegger. As that was legal before prohibition and after, it's hard for me to morally judge him a criminal what with his character never having been charged and convicted of any crime.
Bootlegging, by definition, is illegal.
But legally...he was a criminal (probably).
Just like people who drove 80mph were criminals during the Emergency Highway Energy Conversation Act, but they weren't before or after that.
No, legally people who are convicted of crimes are criminals.
Hm, then there should be a name for someone who commits a criminal act.
Agreed. I also never understood why Al Capone has such a bad stigma when he was really just a run of the mill tax evader.
I think there's a great deal of evidence to suggest Capone was more than a run of the mill tax evader even though all they nailed him for was tax evasion.
https://en.wikipedia.org/wiki/Al_Capone#Saint_Valentine's_Da...
https://en.wikipedia.org/wiki/Chicago_Outfit#Al_Capone's_emp...
I was referring to this part of the post:
> his character never having been charged and convicted of any crime.
Or is the idea that if you are charged for shoplifting it is okay to spread the idea that you are a murderer?
> he's still essentially likening himself to a fictional criminal
And Steve Jobs likened himself to a pirate (along with half my grade school).
I had two meetings with Rothenberg in 2016 before their troubles started and the whole vibe of the place seemed off.
The people who asked me to come in were "partners" who I had good conversations with, but when I came in it was only interns who took the meetings. Now, that's not crazy in the valley, but what is crazy is that the interns had no connection with the partner, had no idea the meeting was going to happen, no background on our company and absolutely no technical or market knowledge around Augmented Reality, which is what they claimed to be experts in. This was in both cases.
After the blow up at the end of 2016, I received an email from yet another "partner" in 2017 asking to meet up. I asked them if anything had fundamentally changed and this was the response:
"In many ways, everything has fundamentally changed haha.
If you're available though, I'd love for you and your co-founder to join us for a Warriors game next week. We're still waiting on the other series to wrap up, but we expect to have a home game Monday night. We have a box at Oracle Arena, and it would be great if you guys could come along."
So clearly they had no problems throwing money around. Seems nothing changed.
Really sad honestly.
Without admitting or denying the allegations in the SEC’s complaint, Rothenberg and Rothenberg Ventures agreed to settle the charges. The settlement is subject to approval by the federal district court for the Northern District of California which would determine the amount of disgorgement and civil money penalties. Rothenberg also agreed to be barred from the brokerage and investment advisory business with a right to reapply after five years. An SEC order imposing the bar will be instituted following court approval of the settlement.
Fascinating, but not surprising, that it settled right away. I am curious whether the settlement details would be made available in any way.
Whistleblower here. It took 25 months from when I reported the fraud until the settlement.
I hope you were well compensated for going out on that limb. Thanks.
the whistleblower gets some significant % of settlement
Out of curiosity, would you do it again? Has there been any damage to your professional life?
Article is about the whistleblower/commenter above.
https://www.bloomberg.com/news/articles/2017-05-09/he-blew-t...
> Rothenberg’s staff included frat brothers from Stanford, and he was known for buying luxury boxes at concerts and high-profile sporting events, sponsoring auto racing, supplying virtual-reality headsets at parties he threw for minor celebrities, organizing puppy-petting parties, even renting out San Francisco’s AT&T Park, where the Giants play.
How much do puppy-petting parties cost?
Hell, if you do it right, I bet you could work with a local shelter to get it for just about free, if you're a big enough business.
Get them to bring the pets on site (maybe you'd have to pay for transit costs?) for an adoption drive where employees could play with the animals and start the adoption process if they found the right one.
I can see why future employers might find this tough to swallow. It’s a difficult thing because on the one hand you want enployees that do the right thing and are generally ethical people, and this certainly shows that he meets that criteria. On the other hand, companies don’t want the liability of having an employee that has proven that they are willing to share confidential information and documents, such as bank records, with third parties - regardless of the reason.
I hope he lands on his feet, or gets enough of a reward that he doesn’t have to work for a while, since finding work may be tough now. Doing the right thing isn’t always easy.
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Good job and thanks for sticking your neck out!
Good job Francisco!
Can you eli5/to:Dr exactly what the frauds were
I'm curious to know:
- Does the firm and/or the individual have enough money? i.e. will the settlement, once paid, make investors whole?
- Why does stealing $7 three times get someone a life sentence, but stealing $7MM once get zero jail time?
> - Why does stealing $7 three times get someone a life sentence, but stealing $7MM once get zero jail time?
It doesn't--stealing $7 isn't a felony, and no three-strikes state predicates a life sentence on three non-felonies.
But to address your general point: there are two different kinds of things. Criminal law isn't just about the effect, but the culpability of the offender. Is the offender a "bad person?" How bad is she? The outcome of killing a person can be anything from no crime at all to murder depending on the mental state of the person who did it--accidentally, recklessly, or intentionally.
"Stealing" is easy to prove and easy to understand as something intrinsically wrong, so we draw a harsh, bright-line rule against it. Financial "fraud," however, is much more complicated. With fraud, the actual transfer of money is voluntary. The crime instead relates to the circumstances surrounding the transfer. What representations were made, etc.? In this case, the $7 million was "excess fees." What exactly is "excess fees" and why are they such a clear violation of social norms that the person belongs in prison?
That's why we have civil actions. Civil actions address a broad range of conduct that we want to discourage, but which isn't so obviously intrinsically immoral that we want to send people to jail over it (even when they involve lot of money). As folks correctly point out below, the underlying conduct could support criminal prosecutions, which may still come. But the SEC's civil suit serves a different function.
Old news at this point, but there are probably plenty of people serving life for small theft in CA on the old law:
https://www.sfgate.com/news/article/Stealing-one-slice-of-pi...
California used to invoke the three strikes law where the first two crimes were serious felonies, and the third was anything. But not three misdemeanors.
It was still felony petty theft... how stealing a pizza is a felony is messed up, but it was still a felony.
"criminal prosecutions, which may still come"
I had misunderstood this point. I thought the settlement was like the 'plea bargain' I've seen on American TV shows, i.e. that the settlement meant that would be no criminal charges.
Thanks for the thoughtful explanation.
That helps explain the incarceration rate in the US. Mo money mo problems.
The SEC only has authority to levy civil fines. They issue a fine, and then hand the case over to the US Attorney's Office (and often state attorney generals' offices), which then build a criminal case.
Stay tuned. This may not be over yet.
(A good comparison is the Fyre Festival, which led to both civil and criminal charges: https://www.cbsnews.com/news/fyre-festival-founder-billy-mcf... . )
Edit: Theranos was another where the SEC acted first, then the criminal case came next. https://www.vox.com/2018/6/15/17469332/theranos-elizabeth-ho...
And other times criminal charges comes first.
For example, SEC investigated Bernie Madoff multiple times, but the it was the FBI that decided to act, based on a criminal complaint.
Sentence: 150 years.
In this case should one be allowed to request a death penalty? Wouldn't 150 years in jail be considered cruel and unusual punishment?
> should one be allowed to request a death penalty?
If prison conditions are bad enough for someone to even consider that, that's a damning indictment of the prison system.
> Wouldn't 150 years in jail be considered cruel and unusual punishment?
Certainly not unusual, and jail doesn't seem inherently cruel, if we believe some people are enough of a danger to society that they need to be kept out of it. (Of course some particular jails might be cruel).
(I'm using the British English meaning of "jail"; I'm aware that in US English the term has a technical meaning)
> If prison conditions are bad enough for someone to even consider that, that's a damning indictment of the prison system.
really? a cage is still a cage, no matter how nice. i'm not thirty yet; to live out more than half of my life in confinement, with no hope of release, sounds like a fate worse than death to me. if i were near the end of my life already and had a family, it might be a different calculation.
Not that it really invalidates the point behind your question, but FYI currently felony larceny has a of minimum of $500-2,500 depending on the state.
(Though until 2013, Indiana actually had a no minimum.)
I went to Founders Field day in 2016, and I have to say from the vibe of that event this doesn't surprise me at all. It was literally like being in an episode of Silicon Valley.
I do worry what this means for their incubator program though. They've been one of the few funds willing to throw a lot of dumb money at VR projects that just sound cool, and I'm all for that.
I think if you steal millions of dollars you should go to prison. And a fraud like this should have the same type of punishment as other types of theft.
> I think if you steal millions of dollars you should go to prison
Not in corporate America
Can somebody explain whether this can still lead to criminal prosecution?
As I recall from the Theranos stuff - the SEC reached a similar settlement with Elizabeth quickly [1]. My understanding is that they want to protect the markets and get bad actors banned without years of trials. But then, the DOJ came in filed separate charges that will likely take much longer to prosecute, but have the potential for more severe punishment such as prison term.
So - is this a sign that more significant trouble is coming for Rothenberg?
[1] https://www.sec.gov/news/press-release/2018-41
[2] https://www.justice.gov/usao-ndca/pr/theranos-founder-and-fo...
SEC cannot prosecute criminal charges. What they can do is build a case and hand it over to DoJ/FBI for actual criminal prosecution (which as you said can take years).
The taint of an SEC investigation is enough to scare away most investors from the entity though. Which is really helpful.
I wonder if this precocious racket will pay out over Rothenberg's lifetime vs. just banking his pedigree and network on some boring low risk career track. He's currently ahead a few million but his reputation is toast.
I keep a file on my Dropbox titled "Where Are They Now?" for exactly this purpose. Whenever I get curious about this sort of thing I add their name, a brief description, and the date to a list.
I don't just do it for "bad" people, but for all sorts of people that become notable for one reason or another. For example I (somewhat) recently added David Hogg & Emma González to the file.
I'm hoping that it will prove to be interesting reading in 10-20 years.
Please share this in 5-10 years :)
Always interested in this kind of analysis. Even if it's just your opinion/anecdotes.
This is a great idea!
They seemed like clowns to me (including calling to ask us to come pitch, setting up a time, and then forgetting about it when we showed up). Seeing them at industry events they didn't seem like they knew what they were doing. So how did they get LPs?
So how did they get LPs?
I don't know what the pitch was prior to "I turned $100k invested in Robinhood into $20 million of paper gains" but I think I have a pretty good idea of the conversation after.
They were only managing $64M, that's not exactly significant.
Sounds fun! Anyone move to IC engineer to tech VC without being part of a startup exit?
There's also https://news.ycombinator.com/item?id=17804063, which has a bit more background info.
Did he really leave lorem ipsum text under his testimonials?
Cause google translate returns garbage... blah blah blah "Nam mourning for the Playstation notebook" ... what?
7 million sounds like a drop to settle for, plus likely a small fine.
Read The Chickenshit Club. Basically, after Enron and Arthur Anderson, Congress and the Courts worked to neuter the ability of the SEC and the DoJ to really punish these guys. Combine that with people in those offices not wanting to go too hard, lest they not be able to get jobs with the very law firms they're going against after, and you have a recipe for government not really caring about what business is doing.
"Rothenberg also agreed to be barred from the brokerage and investment advisory business with a right to reapply after five years. An SEC order imposing the bar will be instituted following court approval of the settlement."
How much does that cost?
https://en.wikipedia.org/wiki/Henry_Blodget would seem to indicate it doesn't necessarily cost at all.
yeah I've pretty much given up on the justice system.
if you have money regardless of how you obtained it, the law always favor those with capital for the most part. Unless you try to fight back against government's monopoly on violence....drug traffiking being a major competition, it makes sense why harsh sentences are handed out for drug dealers while white collar criminals that inflict damage to millions of people all over the world gets a slap on the wrist.
> I've pretty much given up on the justice system
The SEC can't bring criminal charges. They levy fines, usually limited to repaying the money one stole plus their administrative expenses, ban people from the industry and refer cases for criminal prosecution. Their point is to stop damage, not necessary punish it.
The criminal process is more selective about what it attacks. It's where justice is delivered. As a result of due process, it's also much slower.
I remember similar complaints in the months between the civil penalties for Holmes et al and the announcement of criminal charges. These things take time. Sometimes, the bar for criminality isn't met. That said, the most damaging parts of this to Rothenberg are (a) the bad publicity and (b) being barred from the industry. The latter is probably much worse than $7 million.
> yeah I've pretty much given up on the justice system.
I just hate this mentality. Listen, I know things have been rough and defeatism is a natural way to feel in that context. But "giving up" is one of the ways things end up like this. Don't give up. Fight for justice.
There are a lot of times where there is nothing you can do. Fighting in the face of certain defeat is also a poor decision. As much as I understand your dislike of defeatism, there is a similar danger of being aimlessly angry and flailing about in a haphazard manner -- which I think it just as prevalent as defeatism. One of the reasons we actually choose corrupt officials to govern us in the first place is because they successfully rally our anger against something and promise to fight for our cause.
When there is nothing you can do, you must wait and look for an opportunity. It's not so much the giving up on fighting that's the problem, it's the giving up on hope. Improvements come slowly and are the result of much patient work.
Having said that, I hate waiting as much as the next person. :-(
> government's monopoly on violence
Can I get a source on this?
Max Weber. However, he stated it as Today, however, we have to say that a state is a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory.
Politics as a Vocation.
http://fs2.american.edu/dfagel/www/class%20readings/weber/po...
Thanks for a direct link to the [1918] speech. This definition originates from the sociology school in academia.
This is a sort of tenant of the modern state if you look at it a certain way. Ultimately the threat of violence is invested in the state to ensure the law is followed.
It is not a pitchfork and torch mob that should come after you should you appear to have committed a serious crime, but rather the government's police agencies that will come to arrest you, very physically if need be.
I see, monopoly on violence is a legitimate concept in the political/public sciences. I think "monopoly" has several definitions depending on the field.
Thanks for the clarification + source.
It's a full spectrum of monopolies that collectively represent a colonial apparatus...I'm not talking naval and nuclear projection or occupying a foreign country...
Putin has clearly mastered a new type of war that specifically weakens America's monopoly on violence both domestically and internationally.
You can already see the symptoms of an institution slowly coming to gripes to a major espionage campaign that did not stop after the USSR fell but evolved into a criminal state, one that explicitly seeks to include criminal elements to distance the Kremlin.
Americans rely on a network of multi-national corporations to do their bidding, Russians rely on the mob.
that is the accepted definition of State. a State can arm a faction (police, army, etc), and have the freedom to decide how to use it (removing you from some place, keeping you at another place, invading another State, etc). a corporation and citizens can't. hence a monopoly on violence.
And like many social science "theories" it's entirely incongruous with reality. One counter-example suffices to disprove a universal claim.
The United States is that exception, because our constitution explicitly recognizes, not grants, our right to arm ourselves independently of the State (or States really), only with some regulation permitted.
The actual definition of State can easily be found in the dictionary: "a nation or territory considered as an organized political community under one government."
A monopoly on violence, not guns. The U.S. constitution does not empower you to incarcerate your neighbor.
Actually US citizens can legally perform arrests, we just don't have the same legal presumptions that peace officers do.
Also it's obviously implied that the right to bear arms includes the right to use them under at least some circumstances. It would just be as ludicrous as saying freedom of the press only covers your right to own a press in your house or business and not your right to print things with it.
> Actually US citizens can legally perform arrests...
And in doing so, they are acting as self-deputized agents of the state. They're temporarily "arming" themselves with the state's power to use violence in furtherance of its (legitimate) interests in enforcing its laws. They could not legally do that without the state's sanction.
EDIT: Some countries don't even limit the power of "citizen's arrest" to their own citizens. The UK's relevant statute specifically says "any person", emphasis added, may act thusly.
The rights that citizens protect with violence don’t generally require the state’s authority. I don’t need a law to give me the right to use force to defend myself and my property, that right is naturally mine. It is however very nice that the state’s laws generally respect those natural rights. Now the state can use citizens to enforce its laws irrespective of rights, that’s called conscription, as in for example a sheriff’s posse.
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