peHUB Wire: Wednesday, April 29, 2009

In August 2002, actor Danny Glover attended a dinner party at the Marin County home of Samuel “Mouli” Cohen, founder of VC-backed digital jukebox company eCast Network. The festivities were to mark the launch of Cohen’s new philanthropic organization, and Glover was there as a representative of Vanguard Public Fund, a San Francisco-based charity focused on eradicating racism. Cohen was immediately impressed by Glover’s sales pitch (after all, he’s Roger Murtaugh), and lunched just two days later with Glover and Vanguard president Hari Dillon.

The subsequent relationship spanned nearly five years, but came to a crashing halt earlier this month, when Vanguard sued Cohen for fraud, breach of contract and breach of fiduciary duty. Seems that approximately $18 million changed hands between the two parties, but not in the direction you might imagine.

In its complaint, Vanguard describes an ongoing deception that would put Cohen’s audacity on par with that of Bernie Madoff. Specifically, Cohen allegedly offered Vanguard the opportunity to purchase some of his personal shares in eCast, of which he was stil executive chairman. Moreover, he told the charity that Microsoft had quietly agreed to acquire eCast at a “1 to 1 peg.”

In other words, Vanguard would buy shares for $3.50 a piece, and get paid off in Microsoft stock that was trading at around $23 per share. All the acquisition needed to do was clear some regulatory and legal hurdles. Cohen added that Vanguard execs should not mention the pending acquistion to anyone, because press leaks could cause Microsoft to back out.

Soon after, Vanguard agreed to buy 600,000 eCast shares from Cohen, for approximately $2.1 million.

So good so far, except for one giant problem: Microsoft had not agreed to buy eCast. In fact, sources at eCast and Microsoft tell me that the two sides never even held serious M&A discussions. It was a total ruse.

But Cohen allegedly kept up the grift, convincing Vanguard to buy more and more shares. By the end of July 2003, Vanguard had shelled out just over $6.2 million. That date is also important for two other reasons:

1. On July 11, 2003, Cohen and eCast were named as defendants in a civil suit by individuals who accused Cohen of a very similar fraud to what I’m describing in this post (note: eCast is also named in the Vanguard suit, since some early Cohen/Vanguard meetings occured at the company’s offices). The case was settled out of court, as was a subsequent case filed in February 2004.

2. Cohen was no longer an officer of eCast, according to a VC investor in the company’s Series D round, which closed in August 2003.

eCast did not return requests for comment, but I’d think there may have been some cause and effect between #1 and #2.

Beginning in late 2004, the suit alleges that Cohen told Vanguard that all eCast shareholders were required to pay certain transaction and legal fees related to the still-pending acquisition. In a meeting at Cohen’s home, Vanguard’s Hari Dillon and another plaintiff asked what was taking so long. Cohen supposedly replied that eCast was considering a rival offer from Google. It was another bogus claim, according to an eCast source, but the Vanguard folks continued to believe. More importantly, they continued to pay — to the tune of another $11.5 million!

By May 2007, Vanguard was struggling from the weight of its (unrealized) financial commitment to eCast. It began discussing some sort of buyout with Cohen, who continued to insist that the Microsoft deal was proceeding. The complaint alleges that Vanguard reached an oral agreement with Cohen, whereby Cohen would buy back Vanguard’s shares at $19 each (which would still be a “value” for Cohen, given the price of Microsoft’s stock). Vanguard also claims to have executed related paperwork prepared by Cohen.

But Cohen never signed the papers. Instead, he began talking about how a “tough environment” was making the deal difficult to close. When Vanguard questioned the deal’s existence, Cohen didn’t provide a satisfactory answer, thus prompting the lawsuit. Among its requests, Vanguard is asking for remuneration of the $19 million.

eCast did not return requests for comment. The company has raised around $105 million in total VC funding, from firms like El Dorado Ventures, DCM, Crosslink Capital, Electronic Arts, Focus Ventures and Mobius Venture Capital.

I also tried reaching Cohen, via an email address listed on a cached page of a now-defunct website he used to run. Someone replied that the account was still active, but I have not heard back since explaining the discussion topic. Go here to view a copy of the suit.

Top Three

Quantenna Communications Corp., a Sunnyvale, Calif.-based fabless maker of wireless chipsets, has raised $13.85 million in Series C funding. Southern Cross Venture Partners led the round, and was joined by return backers Grazia Equity, Sequoia Capital, Sigma Partners and Venrock. The company has now raised more than $42 million in total VC funding.

Apollo Global Inc., the parent company of University of Phoenix, has offered to buy UK education and training company BPP Holdings PLC (LSE: BPP) for approximately $447 million. The deal would value BPP shares at a 70% premium to Tuesday’s closing price. The Carlyle Group holds a 19.9% stake in Apollo Global.

China Investment Corp., a $200 billion sovereign wealth fund, has named Hu Bing as head of private equity. He previously was responsible for CIC’s fixed income investment and trading desk.

VC Deals

Paylon Medical Corp., a New York-based developer of implantable drug delivery systems, has raised $21 million in Series A funding. Baird Venture Partners led the round, and was joined by Hambrecht & Quist Capital Management, Fountain Healthcare Partners, BB Biotech Ventures, Cross Atlantic Partners and Arcus Ventures.

Conductor Inc., a New York-based provider of enterprise SEO measurement and optimization solutions, has raised $10 million in Series A funding. Matrix Partners led the round, and was joined by return backer FirstMark Capital.

Associated Content, a Denver-based online publishing company focused on both professional and user-generated content, has raised $6 million in Series C funding. Return backers include Canaan Partners, Softbank Capital and Tim Armstrong. It had previously raised $15.4 million.

Eucalyptus Systems Inc., a Santa Barbara, Calif.-based developer of an open-source private cloud platform, has raised $5.5 million in Series A funding. Benchmark Capital led the round, and was joined by BV Capital.

DigitalBridge Communications Corp., an Ashburn, Va.-based provider of WiMax broadband service to underserved communities, has raised an undisclosed amount of new venture capital funding. National Rural Telecommunications Cooperative was joined by return backers Paladin Capital Group, RedShift Ventures, CNF Investments and Novak Biddle Venture Partners. The company previously raised over $30 million in equity, plus $16.5 million in debt.

Buyout Deals

Major shareholders of both Shinsei Bank and Aozora Bank reportedly oppose a merger. The article doesn’t identify specific opponents, but Shinsei is one-third owned by JC Flowers, while Aozora is controlled by Cerberus Capital Management.

Source Interlink Companies Inc., a Bonita Springs, Fla.-based magazine wholesaler and publishe! r controlled by Yucaipa Cos., has filed for Chapter 11 bankruptcy protection.

PE-Backed M&A

Lincoln Educational Services Corp. (Nasdaq: LINC) has completed its $2.8 million acquisition of Clemens College, a provider of associate programs in hospitality management. Lincoln Educational is majority-owned by Stonington Capital.

ShotSpotter Inc., a Mountain View, Calif.-based provider of gunshot location systems for the public safety and military markets, has acquired the Planning Systems Inc. unit of QinetiQ North America. No financial terms were disclosed. ShotSpotter has raised just over $30 million in VC funding, from firms like Band of Angels, City Light Capital, Claremont Creek Ventures, Labrador Ventures, Lauder Partners, Levensohn Venture Partners, Norwest Venture Partners, Broidy Capital Management and The Westly Group.

PE Exits (Nasdaq:WWWW) has acquired substantially all the assets and select liabilities of Solid Cactus, a Shavertown, Penn.-based builder of e-commerce sites. No financial terms were disclosed. Solid Cactus raised $450,000 in seed funding last year led by Ben Franklin Technology Partners.

Firms & Funds

Primus Financial Holdings has launched as a Hong Kong-based financial services firm, which will focus on financial advisory, wealth management and private equity services! . It has $1 billion under management, and will be led by Robert Morse, former Citigroup Asia CEO, Huan Guocang, former HSBC Asia I-banking chief and Wing-Fai Ng, current managing partner of Primus Pacific Partners.

Sverica International announced that its third private equity fund closed last November with $265 million in capital commitments. The bi-coastal firm focuses on buyouts in the lower middle-markets.

Human Resources

Kiran Rao has joined Grove Street Advisors, a PE advisory with more than $6 billion under management, as a principal. He previously was with Boston Consulting Group.

Jean-Manuel Richier has joined The Blackstone Group as a Paris-based senior managing director in the firm’s European advisory group. He previously was Citigroup’s deputy head of I-banking for France.