VSP Legal Skirmish Gets Ugly, Cross-Complaint Filed

VSP Capital Managing Directors Joanna Rees-Gallanter and John Hamm engaged in an “extramarital affair” that they hid from their partners and limited partners, and the two of them “repeatedly used VSP Capital assets for their personal benefit and gain,” according to a lawsuit filed last week by one of their former colleagues.

Vince Vannelli, a former managing director at VSP, filed a “cross-complaint” in the Superior Court of San Francisco in response to a suit filed on Sept. 15 against him and former VSP Managing Director Matt Crisp by Rees-Gallanter and Hamm.

Put simply, each side is claiming that the other side caused the collapse of the San Francisco-based venture firm’s third fund earlier this year, resulting in millions of dollars in damages.

It is unclear whether the allegations made in Vannelli’s suit will have an effect on the agreement that VSP’s limited partners reached with Rees-Gallanter and Hamm in September for the pair to manage VSP’s second fund for a combined annual salary of $1 million (see PE Week, Sept. 26, 2005).

PE Week last week sent an email seeking comment from Rees-Gallanter and Hamm, but neither responded as of the Thursday evening deadline.

In reaction to a story written about the counter-suit and posted on PE Week’s website last week, San Francisco attorney Michael Eagan, who is representing Rees-Gallanter and Hamm in their suit, said: “It’s fairly remarkable to me that the suit made its way into the press before it was given to us; this shows that it’s a publicity stunt in my mind.”

He added that though it was “fairly predictable that the defendant would file a counter-suit,” he thought Vannelli’s charges to be “preposterous.”

Eagan would not address the counter-suit specifically. “We don’t want to litigate this thing in the press,” he said. He added that more is to come from Rees-Gallanter and Hamm. “Much more,” he said. “There is a lot that is going to come out, so expect many more filings.”

Vannelli said in a phone interview: “I really can’t comment further on the suit, pending litigation. I can only tell you that the allegations of Joanna and John are completely baseless and false, and it’s really unfortunate that I have to defend myself by filing a counter-suit. I just feel that I really owe it to the investors and to the entrepreneurs who have suffered through all of this to set the record straight concerning what took place and caused my separation from VSP.”

Vannelli’s 18-page counter-suit alleges that Rees-Gallanter and Hamm misled and deceived their partners and limited partners. One particularly contentious issue detailed in the suit is an alleged affair between Rees-Gallanter and Hamm. Vannelli and VSP’s other partners agreed with Rees-Gallanter’s suggestion that Hamm join VSP as a managing director in 2004, but Vannelli later learned “that Rees-Gallanter and Hamm had been romantically involved with one another before Hamm ever joined VSP Mgmt. Cos. II and III as a managing director, and that their involvement was the motivation for Rees-Gallanter’s campaign to add Hamm as a member of the VSP Capital management companies in 2004,” the suit claims. If Vannelli had known of the “romantic relationship” between Hamm and Rees-Gallanter before Rees-Gallanter suggested Hamm become a VSP managing director, “Vannelli would not have agreed to Hamm’s admission to the firm,” his counter-suit says.

Why is the alleged affair relevant? The suit states: “Vannelli considered this information – as well as its concealment – to be material. This was further reinforced by Vannelli’s belief that several institutional investors had investment practices and policies prohibiting them from investing in venture capital funds that are managed by members having personal relationships, such as spouses or siblings.”

Several VSP LPs, including Parish Capital Management and Duke Management Co., did not respond to requests seeking comment.

As for Vannelli’s allegation in the suit that “Rees-Gallanter and Hamm had repeatedly used VSP Capital assets for their personal benefit and gain (for example, to fund personal travel and vacation expenses and expenses of their family members),” the suit provides no documented instances.

Vannelli’s suit also says Rees-Gallanter misled VSP’s limited partners about his role with the firm. He joined VSP in 2002 as a “venture member,” working one day a week, and even though he became a managing director in November 2004, Vannelli continued to work on a part-time basis, spending just two days of each week focusing on VSP-related business, according to the complaint.

The suit says Rees-Gallanter and Hamm assured Vannelli that his part-time status as a managing director was disclosed in closing documents that were distributed to potential investors in Fund III at around the end of January 2005. But Vannelli later learned from investors that Rees-Gallanter and Hamm overemphasized his role at the firm, the suit claims.

Further, according to the court filing, Rees-Gallanter tried unsuccessfully – and without Vannelli’s permission – to convince the firm’s limited partners to add Vannelli as a “key man” to the firm’s third fund to replace Tony Conrad, a managing director who left VSP in late 2004. Fund III included a clause that allowed the LPs to vote on whether to liquidate the fund if two of its “key men” left, which is ultimately what the LPs chose to do.

The suit also alleges that Vannelli verbally quit the firm in late March, but Rees-Gallanter and Hamm consistently denied that Vannelli had resigned and that when they learned otherwise, “the limited partners and others outside the firm” were told by Rees-Gallanter that “Vannelli’s departure was due to the fact that his wife’s brain tumor problems had reoccurred (a statement which would have been false).”

Vannelli also contends in the court filing that Rees-Gallanter and Hamm crafted a plan to acquire the stakes in two of the three companies backed by fund III at below-market rates. His suit alleges that although he won the right to purchase the assets of one of those companies (Evil Twin Studios) through a blind auction, Rees-Gallanter and Hamm purposely filed suit against him and served him the complaint on the eve of the closing of his stock purchase “to prevent him from purchasing the Evil Twin Studio assets by threatening him with potential liability arising out of that sale.”

According to VSP’s website, Hamm was most recently a managing director at TCG Advisors, a division of the Chasm Group, where he “advised CEOs and executive teams in leadership coaching and management systems.” He was also a venture partner at Redpoint Ventures and a managing director at Internet Capital Group.

Hamm, who is married, was living in Los Altos, Calif., until earlier this year, when he bought a $6.2 million house in the gated San Francisco enclave Presidio Terrace.

Filings at San Francisco Superior Court show that Rees-Gallanter’s second husband, Eric Gallanter, with whom she has two children, filed for separation from her in September 2004 and filed for divorce from her in March 2005.

Crisp, who is expected to file his own counter-suit, declined to comment on the allegations made by Vannelli.