Silicon Valley Frontlines: More On The Canopy Financial Fiasco ...

As expected the SEC has filed suit against Canopy Financial as a company and against one of the founders, Jeremy Blackburn, who was also Chief Operating Officer. The lawsuit filing makes interesting - and rather sad - reading. In it, and I quote the lawsuit verbatim in passages in italics below, the SEC alleges:

"During the period from at least October 2008, through at least August 2009, defendants Canopy Financial, Inc. (“Canopy”) and Jeremy J. Blackburn (“Blackburn”) engaged in a fraudulent scheme to raise $75 million from investors in a private placement offering for the Canopy preferred securities (the “2009 Canopy Offering”). To induce investors to invest in the offering, Canopy, through Blackburn and others, provided unsuspecting investors with documents misrepresenting the Canopy’s financial condition. Before the 2009 Canopy Offering, Canopy and Blackburn provided falsified financial statements, a falsified audit report, at least one falsified bank statement, and inaccurate monthly operating reports to investors."

And ...

"As part of the 2009 Canopy Offering, Canopy received approximately $75 million and Blackburn received approximately $1.625 million after redeeming 250,000 shares of Canopy common stock. As part of the scheme, Blackburn also misappropriated at least $1.17 million in investor funds into his personal bank accounts. After the payouts in the 2009 Canopy Offering, on information and belief, Canopy retains approximately $8 million."

The suit then goes on to detail numerous alleged misrepresentations by the defendants when raising $75m in their Series D funding from Spectrum (a major VC) and others. These include:

Faking the existence of an independent financial audit by KPMG and forging a related KPMG audit report and audited financials.

"Blackburn knew that KPMG had never audited Canopy’s financial statements and that the KPMG Audit Report was forged and Canopy’s audited financial statements were false" and
"Blackburn sent Kashyap an email dated June 30, 2009, attaching the KPMG Audit Report and the audited Canopy financial statements, with an email subject heading of “Audit Finally Complete,” and email text stating “I never wanna [sic] go through this again!!”" and
"Blackburn reminded Banas to lie about the existence of the KPMG audit in two emails from Blackburn to Banas dated April 13, 2009"

Provided false information to prospective investors in Canopy Monthly Operating Reports

"The Canopy Operating Reports provided to investors show an increase in the number of client accounts, increasing from 214,735 in February 2009, to 1,012,002 in May 2009." and
"Blackburn knew or should have known that the Canopy Operating Report entries showing the number of client accounts were false. As of June 2009, Canopy’s internal records show that it only had 81,618 client accounts"

Forged a material bank statement

"Canopy, through Blackburn, provided to Spectrum a Northern Trust Company (“Northern Trust”) account statement purporting to show Canopy’s cash balance for the period June 2009 was approximately $8.9 million." and
"Blackburn forged, or caused to be forged, the June 2009 Northern Trust bank statement he provided to Spectrum before the 2009 Canopy Offering. The forged statement misstated the ownership of the account, the real bank account number and the real account balance. The forged statement showed the account as a Canopy account ending in -9601 with a balance of $8.9 million. The real account was a custodial account for the benefit of a Canopy client, Coventry Health, with an account number ending in -9602, and a balance of approximately $86,000 in June 2009."

So what exposed the alleged fraud? Apparently the hiring of it's new General Counsel (chief in-house legal officer).

"In or about November 2009, Canopy, through its newly-employed General Counsel, began a search for a Chief Financial Officer and contacted an acquaintance at KPMG for possible candidates. Canopy’s General Counsel sent what he understood were the KPMG Audit Report and “Canopy’s audited financial statements” to his KPMG acquaintance." and

"KPMG quickly responded to Canopy and advised Canopy in a “Cease-and-Desist Demand” letter dated November 3, 2009, that Canopy used KPMG’s name without KPMG’s authorization and consent. Further, KPMG told Canopy that it: (1) had never been retained nor agreed to audit any of Canopy’s financial statements; and (2) did not issue the audit opinion dated June 29, 2009."

You can download a copy of the full suit below, but you get the picture. This alleged fraud should have been exposed a lot earlier - or, better, never have happened - if the company had hired a CFO early in the year as apparently it started to do in some informal manner (despite the statement above - beginning a search in November 2009 - it was certainly under consideration much earlier).