Back in June, we noted that the case against “boutique private equity firm” StraightPath Venture Partners might not be as strong as the Securities and Exchange Commission would like. For while the SEC says that four of the firm’s alleged leaders did all manner of wrong with the $410 million they raised—taking $73 million or so for themselves, making Ponzi-style payments to investors and promises about pre-IPO shares they couldn’t keep, commingling funds, etc.—it also seemed ready to wave the whole thing away in exchange for $15 million from three of the four.
Now, StraightPath and the four have had their say and, well, quite frankly, make the SEC’s case against them look pretty good.
First, on the matter of the pre-IPO shares: The SEC says StraightPath treated them seats on a Spirit Airlines flight and oversold them. To which StraightPath says: Yea, pretty much.
The firm and Mr. Martinsen and the other three defendants acknowledged that the funds sometimes lacked enough shares to cover investor commitments, in their court response filed Friday. But they said they alerted the SEC to this situation in March and denied that the shortfalls were the result of any wrongdoing.
To make up for selling a potentially lucrative investments that it they did not have, the leaders sought to make their clients whole—doing the right thing out of their own pockets. The SEC, noting the tens of millions of dollars they had taken from StraightPath, has a different way of characterizing this: commingling of funds and Ponzi scheme payments.
The defendants said that Mr. Martinsen transferred $3.3 million of his personal assets into the affected funds to cover shortfalls. Also, they said he and defendants Francine A. Lanaia and Michael A. Castillero contributed $15 million between them to an account to cover what the SEC said in May was a $14 million deficit across the funds involving shares from seven pre-IPO companies. The SEC said that the three collectively received about $74 million from StraightPath.
In fairness, however, it must have been an lot for these folks to keep straight just how many pre-IPO shares they had and just where that money came from versus some other money, because two of them couldn’t even keep track of whether they were allowed to be doing it at all.
They often said they didn’t have enough information to determine the accuracy of the SEC’s statements.
In response to an allegation that Ms. Lanaia and Mr. Castillero “were effectively barred from the brokerage industry,” the defendants said that they understood previous settlements didn’t prevent them from serving as consultants to StraightPath.
For more of the latest in litigation, regulation, deals and financial services trends, sign up for Finance Docket, a partnership between Breaking Media publications Above the Law and Dealbreaker.