Approximately four months after being removed as general partner of the New Africa Opportunity Fund (NAOF), Sloan Financial Corp. last week filed a civil suit alleging that four individuals involved with the private equity vehicle had engaged in fraud, embezzlement and other assorted breaches of fiduciary responsibility.
The chief culprit in the supposed scam is Justin Beckett, who at one point served as executive vice president and director of Sloan Financial, the largest African American-owned investment management firm in the U.S. He also held approximately one-third of the Durham, N.C.-based firm’s stock, which made him the second-largest shareholder behind Founder and Chief Executive Maceo Sloan.
In 1997, four years after persuading Sloan Financial to form an investment subsidiary named New Africa Advisors (NAA) to trade in post-apartheid South African equity securities, Beckett pitched the idea of NAA serving as general partner of a new regionally-focused venture capital fund. The vehicle was officially formed in June of that year with Beckett as manager and $80 million worth of loan-based capital guaranteed by the Overseas Private Investment Corp. (OPIC). Beckett also helped secure an additional $40 million worth of limited partner commitments from Citicorp., Sun America Inc., Northwestern Mutual Life Insurance Co., Burden & Co., Waycross Inc., Challenger Capital Management, Allbrook International, NAF Investment and Chancellor Corp.
According to the complaint, Beckett and co-defendants Michael Sudarkasa, Dorika Mamboleo and Teresa Clarke then went on to intentionally violate both the letter and spirit of the Fund guidelines. As such, the Fund’s limited partners not only voted to remove Sloan Financial as general partner of the Fund, but OPIC also chose to withdraw a mandate it had already given Sloan Financial for a subsequent $350 million venture capital offering also targeted at African investments.
The 33-page complaint lists a number of alleged abuses, the first being that the Beckett-led group supported investments in companies that did not fall within the Fund’s investment parameters, although the suit does not specify what actual parameters were transgressed. Mark Evens, an attorney representing the plaintiff, said the main issue involved Beckett’s preference for start-up companies over established firms.
Such a charge may be difficult to prove, however, especially since the suit itself says that the Fund was designed “to invest in equity and equity-related securities of new or expanding privately held companies.” When asked about the apparent contradiction, Evens said that, when taken in its totality, the Fund’s guidelines say that if a firm is new, its management team should have an established track record and that Beckett disregarded such criteria. He added that Beckett also tried to disregard a rule preventing any single portfolio company from receiving over 15% of the Fund’s total committed capital.
Second, the suit charges that Beckett and his team participated in recklessly lavish spending that more than used up the firm’s allocated management fee of $3 million per year. According to a source familiar with the situation, the overspending was so egregious that Sloan Financial itself had to provide an additional $2.5 million over two years just to cover the additional costs.
The final, and most serious, allegation surrounds the creation of something called the New Africa Finance Corp. (NAFC). According to the complaint, Beckett and co-defendant Sudarkasa ostensibly set up NAFC to provide financial services to the Fund’s portfolio companies and to eventually become a portfolio company itself. What Sloan Financial alleges, however, is that NAFC was actually “a vehicle for Beckett and Sudarkasa to charge excessive fees and expenses to the portfolio companies for their own pecuniary benefit.”
One example of the supposed fraud perpetuated by NAFC regards a Fund portfolio company named TV Africa, then called Africa Broadcast Network Inc. According to the suit, Beckett convinced TV Africa that it should hire NAFC for its consulting services. As part of that agreement, TV Africa was to pay NAFC a 4% “success fee” for the value of any capital obtained, even if the money came from the Fund which Beckett himself ran. As such, when TV Africa secured $9 million in the second tranche of an existing agreement with the Fund, NAFC received $375,000.
“The main problem with what [Beckett] did with TV Africa is that the so-called success fee for attaining capital was financed through a loan from the Fund itself,” said a source aware of the legal proceedings. “Of course, it was a bit easier to do since he had put his wife [co-defendant Mamboleo] in as chief operating officer [of TV Africa].”
A similar accusation is made in regards to portfolio company Africa.com, which was run by co-defendant Clarke. The suit alleges that Africa.com paid out more than $1.3 million in consulting fees to NAFC, including a $200,000 annual salary to Sudarkasa. Moreover, Clarke is said to have paid off a $850,201 NAFC invoice, even though she knew it was falsified.
One of the unresolved issues in all of this legal mess is why Sloan Financial is alone in filing charges against Beckett and his team.
After all, if the complaint is accurate, then limited partners like OPIC and Citicorp. have also been defrauded and are entitled to restitution. Such curiosity is compounded by the fact that the LPs have requested and received significant loads of evidence from Sloan Financial’s counsel, including the transcript of an interview with Beckett himself.
David Lagasse, an attorney representing Beckett, said that the lack of LP action could simply be a result of investors buying into the defense argument that Maceo Sloan himself oversaw and approved virtually every action taken by Beckett and his team.
“If there were any violations here, and I don’t think that there were, they would come home to roost at Maceo’s door,” Lagasse said.
He added that the suit is especially surprising given that Beckett and his team had signed separation agreements with Sloan Financial in July of last year and that the group had cooperated with repeated requests for additional information.
A spokesman for OPIC declined comment except to say that the investment outfit is continuing to look into the matter.
Reached via phone in South Africa, Michael Sudarkasa said, “I was shocked to find myself named in the suit. Although I worked with Justin Beckett, I did nothing worthy of being sued. I look forward to getting counsel and clearing my name.”
None of the other defendants returned calls requesting comment on this matter.
Sloan Financial is asking for both compensatory and treble damages. Among the specific requests are restitution for the $1 million for the so-called lavish spending, $9 million to $12 million for lost Fund management fees and an unspecified amount for lost carried interest and potential management fees related to the $350 million fund which OPIC took away from Sloan Financial. It is also seeking a rescission of the initial separation agreement, punitive damages, attorney’s fees and a complete accounting of all funds and monies received by NAFC.
The case was filed last Monday in North Carolina State Court in Durham. Up next, local marshals have to serve the defendants with copies of the suit, at which point Beckett and his team will have 30 days to respond. Then there will be a discovery phase of up to three months, following which there are sure to be multiple motions going back and forth, including a likely one for summary judgement. If the judge declines such an option, then the case will go to trial.
“It could certainly be drawn out,” Lagasse said.
Currently, the Fund is being managed by Zephyr Management and has had its name changed to the ZM Africa Investment Fund. No alternate manager has yet been selected for the subsequent African vehicle proposed by OPIC.
Dan Primack can be contacted at Story Feedback.