peHUB Wire: Wednesday, November 25, 2009

Eight years ago, Vikram Kashyap left his job as an associate with Battery Ventures, in order to get the type of operating experience he felt was required to become a “world class” investor. After stops at eMeta and American Express, Kashyap launched Canopy Financial, a company whose technology helps streamline the administration of Health Savings Accounts. Canopy raised over $88 million in VC funding, including $62.5 million this past summer from Spectrum Equity Investors and return backer Foundation Capital.

Today, Kashyap is unemployed andseveral Canopy executives areexpectedto face both criminal and civil accusations of fraud (although no charges have yet been filed).

What happened? Well, Canopy Financial appears to have been largely a facade. Its technology is real, but many of its tax statements, customer records and financial resultswere bogus. Sources tell peHUB that the company laid off approximately 100 of its 120 employees last Thursday, after an i! nvestor audit showed signs of severe impropriety.

“The entire company thought everything was going great until two or three weeks ago,” says a former employee who asked not to be identified. “Once that [audit] happened things moved very fast. The last week in our office was like going to a funeral.”

What’s really amazing here isn’t just the alleged audacity, but also the ability to deceive. Reminds me a bit of Refco. We’re told that lead investor Spectrum went through all of its typical due diligence processes before investing, including reviews of company financial statements, discussions with customers, discussions with existing investors anda review of the company’s technology.

Spectrum declined to comment, but a source says that the firm now believes that most of what it viewed was phony. This includes a supposed audit from KPMG, which included KPMG letterhead and boilerplate. The source says that KPMG may have been retained by Canopy, but it did no! t produce the audit provided to investors (the accounting firm is not expected to face any charges).

Spectrum and Foundation Capital each did their own work over the past few weeks, trying to reconcile numbers that they felt were note adding up. “It became obvious pretty quickly that something was wrong,” says a source.

Kashyan told peHUB last year that Canopy had 2007 revenue of $9.4 million. TechCrunch reported yesterday that the figure was at $60 million by 2008, and we hear that Spectrum and Foundation were given even an even higher figure before investing in July. TechCrunch also reported that initial Canopy Financial investor Granite Global Ventures may have taken up to $25 million off the table during the most recent round — in which it did not reinvest — and that it could be named as a defandant. We’ve been unable to confirm this information.

Late yesterday, Vikram Kashyap released the following statement, via his attorney:

Vik Kashyap had no prior knowledge whatsoever of any fraud regarding Canopy’s financial statements. He is as surprised as anyone about these allegations. He relied on financial and legal professionals in accepting the authenticity of the company’s financials. Going forward, he will leave his role as CEO of Canopy, but will remain as Chairman of the Board of Directors, helping to ensure that anyone who committed fraud is held fully accountable.

This statement already has met with some derision, with one blog commenter likening it to O.J. looking for the real killer. My comp would be the situation a few years back with Bill Weld, who tried running for Governor of New York after having served as interim CEO of a PE-backed college that had been accused of fraud. Either Kashyap/Weld knew what was going on (which makes them thieves), or they were ignorant of what was going on (which makes them terrible chief executives). Heads they lose, tails they lose.

Then there is the issue of Spectrum and Foundation, and whether or not their due diligence was faulty. Same for Financial Technology Partners, the investment bank which marketed Canopy Financial’s last two VC rounds and worked on one of the company’s add-on acquisitions (FTP’s Steve McLaughlin emailed to say the firm was “utterly shocked” to learn of the fraud allegations).

TechCrunch wrote yesterday that the firms perhaps could have uncovered the frau! d with a simple phone call to KPMG, prior to cutting their checks. Perhaps, although my sense is that the Canopy crooks could have had contingencies in place (this was very sophisticated). After all, who exactly were the “clients” that Spectrum called?

Moreover, I spoke to a number of VCs yesterday who said that they would never think to verify the veracity of a KPMG audit. Seems they follow the mantra of Big Tom Callaghan: “I can get a good look at a T-bone by sticking my head up a bull’s ass, but I’d rather take a butcher’s word for it.”

Perhaps that industry standard is about to change…

Top Three

TPG Capital has received a $628 million bill for tax and penalties, from the Australian government. The tab relates to TPG’s recent sale of its stake in Australian department store Myer, via an IPO. Australia’s claim centers around two issues: Whether TPG’s $1.46 billion profit should be taxed as capital gains or business income, and if TPG was using improper tax havens. The private equity firm said it would cooperate with any investigation.

Adconion Media Group, a Santa Monica, Calif.-based online advertising network, has acquired the assets of Joost Inc., a bankrupt provider of Internet television services. No financial terms were disclosed. Adconion last year raised the equivalent of $80 million in S! eries C funding from Index Ventures and Wellington Partners. Joost had raised $45 million from Index, Sequoia Capital, Li Ka Shing Foundation, CBS and Viacom.

Facebook has established a dual-class stock structure, designed to ensure voting control by existing owners. Such a move typically precedes an IPO, but Facebook said it has no current plans to go public.

VC Deals

Asana, a San Francisco-based Web collaboration startup co-founded by Facebook co-founder Dustin Moskovitz, has raised $9 million in Series A funding. Benchmark Capital led the round, and was joined by Andreessen Horowitz. Benchmark partner Matt Cohler also invested personally and joined the Asana board.

AutoVirt Inc., a Nashua, N.H.-based provider of file virtualization and automation solutions, has raised $5 million in new VC funding, according to a regulatory filing. Return backers are Kepha Partners and Sigma Partners.

Hot Potato, a Brooklyn, N.Y.-based social networking startup focused on connecting friends and fans through live events, has raised $1.42 million in first-round funding. Backers include First Round Capital, RRE Ventures, Betaworks, Allen Morgan, Ron Conway, Chris Dixon and Founders Collective, Strauss Zelnick, Scott Banister, Ben Lerer Josh Kushner and Zach Klein.

Life360, a San Francisco-based provider of an online service for managing family safety and security, has raised $750,000 in VC funding. Backers include Founders Fund, LaunchCapital, Seraph Group and angel investor Mark Goines.

Industriaplex Inc., an Alpharetta, Ga.-based provider of outsourced supply chain management solutions to SMEs, has raised an undisclosed amount of private funding from Keating Capital.

Buyouts Deals

Clayton Dubilier & Rice has completed its recapitalization of JohnsonDiversey, a Racine, Wis.-based commercial cleaning company. CD&R invested $477 million for a 46% stake. Unilever, which bought a 33% stake in JohnsonDiversey seven years ago,retained a 4% interest.

EQT Partners is lining up more than £1 billion in leveraged financing, in order to make a run at German academic publisher Springer Science and Business Media. UK media group Informa PLC previously indicated interest in Springer, which is being sold by private equity owners Candover and Cinven.

GenNx360 Capital Partners has increased its acquisition offer forGV! I Security Solutions Inc. (OTC BB: GVSS), from $0.38 per share to$0.3875 per share in cash. GVI is a Carrolton, Texas-based provider of video security surveillance solutions.

Greenko PLC, an Indian renewable energy producer,has raised $46.3 million from the Global Environment Fund. Greenko develops, acquirers, builds and operatesrun-of-river hydro and biomass-fired plants.

New Markets Venture Partnersand Slate Capital Grouphave acquiredEcoast Sales Solutions Ltd., a Rochester, N.H.-based provider of outsourced sales and channel solutions for technology companies. No financial terms were disclosed.

PE-Backed M&A

Greatwide Logistics Services, a Dallas-based provider of third-party logistics services, has acquired the dedicated contract carriage division of YRC Logistics. No financial terms were disclosed. Centerbridge Partners bought Greatwide out of bankruptcy earlier this year.

Infinis Energy, a portfolio company of Terra Firma Capital Partners, has sweetened its bid for UK renewable energy company Novera Energy (LSE: NOEN). The new offer values Novera at 108.6 million, which is 20% higher than its original bid and a 14.5% premium to Novera’s closing price on Tuesday.

PE Exits

Metro-Goldwyn-Mayer, the debt-laden film studio that is considering a sale of itself, has send out nondisclosure agreements to about 20 interested parties, including Time Warner, News Corp., Lions Gate Entertainment Corp. and Sony Corp. The studio is currently owned by Providence Equity Partners, TPG Capital, Sony and Comcast.

TA Associates has completed its sale of Houston, Texas-basedTriumph HealthCare, a long-term acute care hospitals operator, for around $570 million to RehabCare Group Inc. (NYSE: RHB). TA bought Triumph in 2004 in a leveraged deal that included $34.5 million in equity. It had already returned its investment several times over, via a pair of dividend recaps.

Unitas Capital has received nine bids for South Korean retailer Buy The Way, from both strategic and private equity suitors. Most of the offers came in at more than $260 million.

Human Resources

Rajiv Dutta has joined Elevation Partners as a managing director. He previously was executive vice president of eBay and president of eBay Marketplaces.