It’s turning into a due-diligence theme week, here at Law Shucks. First we had Fairfield Greenwich claiming its principals so believed in the fund’s due diligence, that they co-invested in the disastrous Madoff ponzi scheme. Yesterday, it was Harbinger Capital claiming that what appeared to be insider trading was actually the result of its phenomenal due diligence. We weren’t kidding when we said Due Diligence Matters.
Today, we have a CEO accusing his “financial and legal advisors” of failing to uncover and disclose fraudulent details in his own company’s financial statements, which resulted in the company filing for liquidation under Chapter 7.
The company, the fraud, and the lawyers he blames, after the jump.
Canopy Financial was a VC-funded technology company based in Silicon Valley. Its primary services helped to “streamline the administration of Health Savings Accounts [through a network of payments and processing.]” It was discovered in November 2009 that former COO Jeremy Blackburn faked a KPMG audit and used it to help secure $75 million in funding.
Interestingly enough, it is actually a former Wilson Sonsini attorney-turned-Canopy GC who becomes the hero in this investigation. Daniel Stevenson contacted a personal friend at KPMG for assistance in searching for the new CFO for the startup company. Through their exchanges of information and interactions, it was discovered that KPMG did not actually conduct the audit. Rather, it was authenticated by the now-disgraced Blackburn. A cease-and-desist letter was promptly issued and an internal investigation is now underway by Paul Hastings.
Former Canopy CEO Vikram Kashyap accuses Wilson Sonsini of failing to uncover the fraudulent practices that led to the company’s downfall. Kashyap claims that “he had no prior knowledge whatsoever of any fraud regarding Canopy’s financial statements.” Instead, much like the issue with our friends at Fairfield Greenwich, he points to his “reliance on financial and legal professionals in accepting the authenticity of the company’s financials.”
TechCrunch points out the absurdity of the game of hot potato going on right now, particularly with respect to the investment bank that led two rounds of fund-raising, which claims it was completely clueless about any wrongoing and doesn’t want to be mentioned in association with the deal:
“Hi there, I’d respectfully ask for some consideration here and would like to have our information / logos / screenshots taken off of your Canopy Financial posts. We clearly had no clue about any such wrongdoing and exposure to this is not something we are interested in. Understand you guys are all about the news, but we’re a small firm and had nothing to do with this. Please pass to Michael Arrington if you don’t mind.”
Wilson Sonsini has not commented (or sent in any emails destined to have a Streisand effect), but both partner Caine Moss (Stanford BA ’93, Harvard JD ’96) and associate Daniel Green (Stanford BA ’96, Harvard JD ’99) have since washed their hands of the fiasco.
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