The former president of
A source close to the situation predicted more indictments are coming.
“The level of deceit and fraud, the intricacy of the fraud, was stupefying,” the source said. “There will be surprise guests in the jail cell—other people, potentially within and outside the company, will get caught up in this.”
Former Canopy President Jeremy Blackburn was charged with wire fraud, which carries a maximum penalty of 20 years in prison, a $250,000 fine and mandatory restitution, according to the Federal Bureau of Investigation.
The criminal complaint, filed in the Eastern Division of the U.S. District Court’s Northern District of Illinois, claims that Blackburn allegedly diverted more than $2 million of a $60.5 million investment in Canopy by
Separately, the Securities and Exchange Commission last week filed a civil enforcement action against Canopy and Blackburn.
Blackburn, 36, co-founded Canopy in 2004 with Vikram Kashyap, who recently stepped down as the company’s CEO, and Anthony Banas, the company’s former CTO. Neither Kashyap nor Banas has been charged in the case. Kashyap issued a statement through his attorney last week that he was unaware of the alleged fraud and would stay on as Canopy’s chairman.
Blackburn appeared in court last week and is free on a $1 million unsecured bond. A committee of outside directors that excludes the founders of Canopy is working with authorities on the case.
Technology website TechCrunch first reported allegations of fraud at Canopy on Nov. 24. The following day, the Chicago-based company filed for Chapter 11 bankruptcy protection.
Canopy makes software for financial institutions and health care companies to better manage health-related spending accounts. It raised $88.5 million in venture capital over three rounds from
Thomson Reuters’ VC database shows that:
• GGV was the sole funder of the company’s $15 million first round in December 2007;
• Foundation Capital led Canopy’s second round in July 2008, putting in $8 million of the $11 million total, with GGV putting in another $2 million and an undisclosed investor putting in $1 million;
• and Canopy raised a third round of $62.5 million solely from Spectrum Equity Investors in July of this year.
As part of the round raised last summer from Spectrum Equity, Canopy agreed to provide audited financial statements and said that Blackburn and two other co-founders would sell up to 10% of their shares, according to the complaint. Blackburn sold shares for $1.6 million, while “Individual B” (which the complaint identifies as Canopy’s CTO, but does not name) sold $975,000 worth of shares, the complaint alleges.
The complaint also alleges that Canopy provided a falsified audit to investors that it claimed had been done by accounting firm KPMG. KPMG never audited Canopy’s financials, but it did provide an SAS 70 audit and in March had e-mailed a sample of an independent audit and other documents to Canopy’s chief administrative officer, who forwarded the documents to Individual B, according to the complaint.
The complaint also alleges that in April Blackburn sent an e-mail to Individual B saying he would “ghost write a note for you to send to [Individual A] and I re: KPMG today. Remember you’re supposed to be spending time with them today…cool?” (The complaint identifies “Individual A” as Canopy’s CEO, but it does not name the individual.)
Authorities allege that on June 30, Blackburn e-mailed the falsified KPMG audit to Individual A with the subject line “Audit FINALLY Complete.” Individual A in turn forwarded the report to Spectrum Equity and the investment bank involved in the Series D financing, according to the complaint.
Individual B, meanwhile, sent the report to Ridgestone Bank, where he had an account ostensibly to hold HSA funds for a Canopy client, and sent falsified bank accounts to Spectrum, according to the complaint.
In a similar situation involving VC-backed Entellium Corp., the former CEO was sentenced for three years while the CFO received a two-year jail term earlier this year for committing wire fraud to attract venture capital. The Seattle-based company, which made customer relationship management software, previously raised nearly $50 million in VC funding from Ignition Partners, Sigma Partners and Intel Capital. Entellium declared bankruptcy and sold its assets at auction to Intuit for $7.6 million.