Fraud Beneath The Canopy

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).


As first reported this morning by TechCrunch, Canopy Financial appears to have largely been a facade. Its technology is real, but many of its tax statements, customer records and financial results were bogus. Sources tell peHUB that the company laid off approximately 100 of its 120 employees last Thursday, after an investor 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. 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 and a review of the company’s technology.

Spectrum declined to comment, but a source tells us that the firm now believes that most of what it viewed was bogus. This includes a supposed audit from KPMG, including KPMG letterhead and boilerplate. The source says that KPMG may have been retained by Canopy, but it did not 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 today that the figure was at $60 million by last year, 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. peHUB has been unable to confirm this information.

We are playing phone tag with Canopy, and have put in calls to Spectrum, Foundation and GGV. If we connect with any of them, we’ll update this post. I’ve also left a message for Financial Technology Partners, which served as placement agent on the recent round. Here’s a PDF copy of their tombstone upon the deal’s completion. (Note: The PDF was removed at the request of Financial Technology Partners. -Ed.)

Deborah Gage assisted in the reporting of this story