SEC Bars Biotech's Burrill, Settles VC Fund Theft Charges
This article was originally published in Scrip
He may not be into buying $2m Wu-Tang Clan hip-hop albums, like another biotech executive that's recently found himself in hot water, but Steven Burrill apparently likes his vacations to St. Barts and Paris and spending cash, which allegedly wasn't his own, on private jets and Tiffany jewelry and other gifts for his wife – and his girlfriend, according to the Securities and Exchange Commission (SEC).
The SEC accused Burrill of stealing money from a $283m venture capital fund – Burrill Life Sciences Capital Fund III, formed in 2006 – to support his "lavish lifestyle" and to cover cash shortages at his VC businesses and pay employee salaries.
"Burrill spent his fund's capital on whatever he pleased and elevated his own interests above those of investors," said Andrew Ceresney, director of the SECs Enforcement Division.
The SEC said the venture capitalist – one of the most well-known in the biotech community – and his company, Burrill Capital Management (BCM), agreed to pay back nearly $4.8m Burrill had pilfered from investors for personal use, plus a $1m penalty, to settle charges he misappropriated $18m.
Burrill has been up against lawsuits from investors and at least one former employee claiming the VC chief had depleted the fund – the latter of which was recently settled.
Under the SEC's settlement, Burrill – known mostly for his popular annual state of the biotech industry reports, which he presented each year at the BIO International Convention – is forever barred from the securities industry.
Also barred were BCM's chief legal officer Victor Hebert and controller Helena Sen, who the SEC asserted were in on Burrill's scheme to steal cash from the fund – a plot that went as far back as 2007.
Hebert also is paying penalties of $185,000, while Sen must pony up $90,000.
The SEC said Hebert led investment committee meetings and agreed to call in additional capital from fund investors while knowing the money would be spent on expenses unrelated to the fund.
On at least two occasions, Burrill and Sen delayed distribution of payments owed to fund investors so the money could instead be used to pay the VC boss' personal expenses and the salaries of his two accomplices, regulators said.
None of the three accused conspirators have fessed up to the charges – but they didn't deny them, either.
The SEC said the three moved the $18m around by calling the cash "advanced management fees."
But in August 2013, several members of Fund III's investment committee had discovered the misappropriations and notified investors.
A Cash Flow Problem
The SEC said the scheme to take money from Fund III started in 2007, when BCM began to face cash flow shortages.
According to BCMs accounting records, the expenses for the Burrill's business entities, along with his personal expenses, far exceeded the revenue his businesses were generating.
When Sen told Burrill in late 2007 that BCM was unable to make its payroll or pay its expenses for the period because of its cash deficit, he instructed her to take $400,000 from Fund III to make up the shortfall and to treat the transaction as an "advance on management fees," which he thought could be earned back in the first quarter of 2008, according to the SEC's settlement order.
Burrill insisted those "fees" were "strictly a timing issue," because BCM was entitled to take them four days later on Jan. 1, 2008. So Sen transferred the money from Fund III's bank account to the VC company and it as a "prepaid expense" in the fund's books and records.
The same type of shortfall came up again in mid-2008, so Burrill instructed Sen to cover it by again taking an advance on management fees from Fund III.
They then repeated that cycle "on many occasions" when BCM fell short of cash – using the Fund III because it "had the most money available to it in the form of committed, but still-uncalled capital," the SEC said.
Hebert came into the plot when he joined Burrill & Co. in October 2008 as chief administrative officer, chief legal officer and managing director – becoming Sen's boss.
"Hebert never told Sen to stop taking money from Fund III, and the practice did not stop until Fund III ran out of money," the SEC said.
By May 2013, the money Burrill had taken exceeded the total management fees that could be earned over Fund III's life by at least $13m – about four years worth of fees, the SEC said.
Not only did Burrill misappropriate the Fund III's existing cash, he and his accomplices also asked investors for more money than was needed for follow-on investments so they could continue to fund BCM's operations, regulators said.
In February 2009, Sen began inflating the amounts included in the capital call demand letters above what the investment committee determined was needed for follow-on investments and the then due management fees and expenses – creating a "cushion" ranging from $50,000 to $1.5m, which was not disclosed to investors.
But Burrill and his co-conspirators eventually got caught after the Fund III's investment committee in late August 2013 became aware that virtually all the fund's committed capital had been called in and spent.
While Burrill admitted to the committee at an "emergency" meeting the next month he'd taken money from Fund III, he said it was to develop other venture funds under the his firm's brand – saying he only owed about $7.8m and hiding the fact he'd actually misappropriated a total of $18m.
All told, the SEC said, Burrill used about $4.6m of the money he misappropriated from Fund III to pay for his cash draws and personal expenses – including those lavish vacations and gifts.
Burrill, the SEC charged, "willfully violated" US investment laws through his deceit and Herbert and Sen aided and abetted him in the scheme.