A simple bank error and a malicious employee put a former Silicon Valley venture capitalist at the center of what has now become a multi-count criminal fraud case, the man says in court records, urging a federal judge to dismiss the charges.
Michael Rothenberg, 36, of San Francisco, is now on his own, defending himself pro se against 23 separate criminal counts, including bank and wire fraud. Authorities allege Rothenberg lied to his bankers to obtain credit and to his investors about where the money was going for his business, Rothenberg Ventures Management Company (RVMC).
Rothenberg has pleaded innocent and claimed he’s the victim of a cascading series of errors and overzealous government lawyers, court records show.
In a 2018 reply to a Wells Notice, for instance, Rothenberg’s then-attorney – former SEC San Francisco regional office director Marc Fagel – told his former colleagues that it was all “an unfortunate case study in how a prolonged SEC investigation, however well-intentioned, can have a devastating impact on a promising start-up and its investors.”
Rothenberg attached Fagel’s reply to a brief of his own, urging US District Judge William Alsup to dismiss the criminal case against him with prejudice.
Firms’ responses to SEC Wells Notices are rarely made public.
In Rothenberg’s and Fagel’s telling, Rothenberg Ventures employees accidentally double-counted a $4 million line of bank credit and assumed that millions were missing. An IT staffer saw the messages to the company’s general counsel, stole them and handed them over to the Commission. “These mistaken fears of missing cash precipitated personnel departures, negative press in the Silicon Valley tech media, and this inevitable SEC investigation,” Fagel wrote in April 2018.
To this day, Rothenberg has claimed in court papers, none of the government agencies coming after him have alleged that he stole money, merely that he didn’t properly notify his investors where the money was going.
“Despite the dire straits the firm suddenly found itself in, RVMC took steps to cooperate with the staff’s investigation, including retaining a forensic accountant to verify that the purportedly missing cash was still sitting in the bank and that investor funds had, in fact, been properly invested,” Fagel claimed in the 2018 Wells Notice response.
The company “candidly self-reported information about problems that had arisen, such as a planned co-investment which fell through in the midst of (and as a result of) the impending crisis, only to find such matters (which the firm subsequently remedied) cited as a basis for the staff’s proposed charges,” Fagel added.
Rothenberg Ventures had grown quickly from its $5 million founding in 2012. By 2018, when the SEC came calling, it was managing more than $100 million in assets and had successfully “seeded” such companies as Elon Musk’s SpaceX and robo-broker-dealer RobinHood, Fagel claimed in his Wells reply.
So what went wrong?
“At most,” Fagel concluded in 2018, “the staff’s allegations amount to unintentional errors by a nascent private fund in full view of its investors, personnel and counsel. Recognizing such issues, Mr. Rothenberg has tried to resolve the matter with the Staff, offering to stipulate to the entry of an order that would impose relief short of an associational bar, but the staff has declined such overtures.”
In 2018, the Commission published a settlement order that said Rothenberg, without admitting or denying any wrongdoing, had accepted at least a five-year bar. The sides put off the question of penalties but earlier this year, Rothenberg was ordered to pay more than $31.4 million in disgorgement, prejudgment interest and fines.
In late June, federal prosecutors in San Francisco charged Rothenberg by information. Defendants can only be charged by information if they agree to waive their rights to appear before a grand jury. Rothenberg had not done so.
Prosecutors say in court filings that the filing was a minor error due in part to the ongoing confusion over the COVID-19 crisis. In any case, authorities say, they’ve since obtained a grand jury indictment against Rothenberg.
But Rothenberg says in his pro se motion to dismiss that the “government irreparably tainted due process in violating my sacred right to indictment by Grand Jury, as we can never again be certain of an untainted Grand Jury pool.”
He urges Alsup to toss the case “for the hundreds of people who’ve helped and are praying for me, and who I’ve helped and tried to help throughout my life, and for the humanity in addressing the suffering I have been enduring due to the government’s very public investigation into (predominantly disproven) accusations into my company Rothenberg Ventures and now prosecution of me personally, expanding into its fifth unrelentless year of damaging every aspect of my life.”
Bill Myers covers private fund enforcement from Washington, DC.