VC-backed Canopy accused of fraud

VC-backed, Canopy Financial, a San Francisco-based provider of technology that helps streamline the administration of health care savings accounts, has allegedly created false customer records and false financial statements from KPMG, as first reported last week by TechCrunch.

As of late last week, no charges have yet been filed.

Sources tell PE Week that the company earlier this month laid off about 100 of its 120 employees after an investor audit allegedly 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.”

The company was launched five years ago by Vikram Kashyap, who raised more than $88 million in VC funding, including a $62.5 million infusion in the summer from Spectrum Equity Investors and return backer Foundation Capital, according to Thomson Reuters (publisher of PE Week).

Through his attorney, Kashyap issued the following statement: “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.”

The statement also said that Kashyap—who prior to Canopy was a management consultant at American Express and, before that, an associate at Battery Ventures—will leave his role as CEO, but will remain as chairman, “helping to ensure that anyone who committed fraud is held fully accountable.”

Sources say that before Spectrum Equity invested, it conducted its typical due diligence, which included reviews of company financial statements and technology as well as discussions with customers and existing investors.

Spectrum declined to comment, but a source says that the firm now believes that most of what it viewed was bogus. This includes a supposed audit on KPMG letterhead. The source says that KPMG may have been retained by Canopy, but it did not produce the audit provided to investors.

Kashyap said last year that Canopy reported revenue of $9.4 million in 2007. TechCrunch reported that the figure was at $60 million by last year, and sources say that Spectrum and Foundation were given even an even higher revenue figure before the firms invested 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.