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RiskJune 21, 2021

VC Fund President Gets Nearly 5 Years in Prison for Securities, Wire Fraud

Marc Lawrence allegedly siphoned employee-investor funds to pay for personal expenses.

Marc Lawrence, the president of venture capital fund Downing Partners LLP, has been sentenced to 55 months in prison for securities fraud and wire fraud for his role in a Ponzi-like scheme that took millions of dollars from investors.

According to an indictment filed in US District Court for the Southern District of New York, Lawrence and his co-defendant David Wagner, who was chairman and CEO of Downing, solicited nearly $10 million from approximately 40 Downing investors through materially false and misleading statements.

“Marc Lawrence and his co-defendant fraudulently induced employee-investors to invest over $8 million in return for sales, operations, and management expertise in profitable business operations,” Audrey Strauss, US attorney for the Southern District of New York, said in a statement. “Unfortunately for their investors, Downing generated virtually no returns, and was little more than a vehicle for Lawrence and Wagner to siphon employee-investor funds to pay Wagner’s personal expenses or pay off other investors in Ponzi-like fashion.”

Investors in Downing were known as employee-investors because they made a required investment of between $150,000 and $250,000 in the company, and were regarded as employees. However, they soon learned that Downing did not have access to millions of dollars in funding, contrary to what they were told by Lawrence and Wagner, the indictment said. They also discovered that Downing often couldn’t make payroll, had virtually no products to sell, and that the employee-investments accounted for the lion’s share of the company’s funding. Employee-investors also learned that Wagner and Lawrence had misrepresented the companies in Downing’s portfolio, their product readiness, and their ability to generate revenue.

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The employee-investments “were solicited through materially false and misleading statements regarding, among other things, Downing’s use of investor proceeds, sources of funding, financial condition and ability to pay salaries to employee-investors, and portfolio companies,” said the indictment.

And when several employee-investors sued Wagner, Lawrence, and Downing over allegations of fraud, the two leaders continued the scheme by recruiting employee-investors into a new company called Cliniflow Technologies LLC, and again allegedly used materially false and misleading statements about the company in order to lure investors. The indictment also said that Wagner received a $400,000 loan and $100,000 grant from the Connecticut Department of Economic and Community Development for Cliniflow after making materially false statements. The funds were supposed to be used for Cliniflow’s purported relocation from New York to Connecticut; however, Wagner transferred most of them to other Downing entities and also used some of it to buy a BMW for his daughter.

Lawrence, 54, pleaded guilty to two counts of securities fraud and one count of wire fraud. In addition to the prison term, he has been ordered to serve three years of supervised release, and to pay forfeiture of $150,000 and just under $4.5 million in restitution to victims of his fraud.

Buy Tech, But Not the Big Boys, and Use Private Equity, UBS Says

PE is a much better way to own technology companies, and there are more pickings, the bank argues.

By Larry Light

Tech stocks are regaining a bit of the old momentum, with a 7.6% bounce off their most recent slump, since early May. But UBS cautions investors not to be sucked back into these shares.

It’s better, the bank advised, to invest in tech through private equity (PE), which means not going for the giants that so dominated the market last year—a view with resonance among institutional investors, who have strong positions in PE. “We don’t think investors should rush back into big tech,” wrote Mark Haefele, UBS’s global wealth CIO, and his team, in a research report.

Tech is still not where the action is, UBS noted. The re-opening and reflation trades favor the likes of energy, financials, and real estate. The report pointed out that fixed-income yields are on the way up, which doesn’t favor tech stocks, and governments are looking to crack down on huge tech companies like Amazon, Facebook, and Google-parent Alphabet.

All told, the S&P 500 is up 12.4% year to date in 2021, with the tech-heavy Nasdaq Composite trailing at 9.7%. What a switch from last year, when the S&P advanced just 16.2% in price terms, way behind the Nasdaq, at 43.6%.

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Private ownership of tech outfits already is widespread, Haefele’s group said, and so it’s time-tested. PE tech acquisitions globally hit an all-time high for a quarter in this year’s first period, clocking in at $82 billion. There are roughly 497,000 global private tech companies, compared to the roughly 8,100 publicly held tech firms. UBS commented that, given the enormous privately held inventory of tech providers, “the breadth of investable companies is vast.”

Successful private tech companies these days tend to be focused on enterprise software and information technology (IT) services, which are more resilient in downturns, the bank’s report read. Plus, it sees “particular opportunity” in such segments as digital subscriptions, fintech services, cybersecurity, and e-commerce. A lot of those are good investments that got their start through PE’s younger brother, venture capital (VC), Haefele’s analysis reasoned.

Indeed, many buyers of VC entities are PE partnerships. PE buyouts of VC-backed companies increased to 16.4% of worldwide exits in 2020, from 9.7% in 2010, according to PitchBook data. That overshadows strategic acquisitions from other, often larger, companies and initial public offerings (IPOs), as ways for VC investors to cash out.

In 2020, an EY report said, technology made up 24% of PE deals by total value, up from 19% in 2019. Of the dozen biggest US tech acquisitions this year (not counting buyouts from special purpose acquisition companies, or SPACs), PE firms were behind seven of them, by FactSet’s count.

The top-dollar one thus far this year is Thoma Bravo’s buying security software vendor Proofpoint in April for $12.3 billion. In February, Stone Point Capital and Insight Partners teamed up to purchase tech-fueled real estate company CoreLogic for $6 billion.