Friday, June 20, 2014

Doing the Right Thing: A General Partner is Ousted

Doing the Right Thing:  A General Partner is Ousted

Yesterday I came across an article in Forbes written by Nathan Vardi reporting that Steve Burrill had been removed as general partner of Burrill Life Sciences Capital Fund III.[1]  The article piqued my interest because the removal of a general partner by investors is quite unusual, and because I’d done due diligence on and recommended an investment in the predecessor fund when I was CIO at North Carolina in 2002.  The removal of Mr. Burrill was revealed because one of his former partners, Dr. Ann Hanham, is suing him.[2]


According to the complaint, last September Dr. Hanham, as well as two other partners, Roger Wyse and Brian Fong, became aware that Mr. Burrill had diverted about $20 million in capital from Fund III as pre-paid management fees and other expenses and loans.  They also learned that Mr. Burrill had not met a capital commitment to Fund III.  When confronted by his colleagues, Mr. Burrill acknowledged the situation and asked Dr. Hanham and her two colleagues to work with him to help raise additional funds to eventually resolve the situation.  They insisted that the fund be reimbursed and that the advisory committee of the investors be informed of the irregularity.  When Mr. Burrill refused, Dr. Hanham and her colleagues wrote a letter to the investors.  As you might expect, Mr. Burrill didn’t take kindly to Dr. Hanham’s actions, and she was fired.

The advisory committee hired a forensic accounting firm, which verified Hanman’s, Wyse’s, and Fong’s claims.  They then amassed two-thirds of the investors in order to oust Mr. Burrill.   Hanman, Wyse, and Fong are managing the remaining assets in the fund.

As a critic of alternative investments, I could focus on the impropriety committed by Mr. Burrill.  After all, it provides a prime example of the ability of the general partner to impose hidden or unauthorized fees on limited partners.  Andrew Bowden, the SEC’s Director of the Office of Compliance Inspections and Examinations, made this very point in a recent speech (see, “The Regulators Understand:  SEC Examinations of Private Equity [May 8, 2014]).[3]  Undoubtedly, the GP of a fund is in a position to play all sorts of financial games that are extremely difficult for LPs to detect.

However, there’s a more important story that surfaces from the ouster of Mr. Burrill.  Dr. Hanham and her colleagues did the right thing.  When confronted with a financial irregularity, they took their fiduciary role seriously.  In addition, the investors acted quickly and decisively in addressing the matter.  Dr. Hanham’s letter was sent to the advisory committee in late October.  By late February investors had acted.  Moreover, it’s apparent from the court documents that North Carolina led the effort to address this matter.  Although Fund III has some other prominent investors, such as Calgene, Monsanto, Unilever, and Oregon, Appendix C of Dr. Hanham’s complaint shows that North Carolina’s outside counsel conveyed the notice of removal.  Moreover, Treasurer Cowell’s appears as the first LP signing the resolution. 

The State Treasurer and the Director of Private Equity for the Investment Division of the North Carolina Department of State Treasurer deserve enormous credit.   They did the right thing.



[1] http://www.forbes.com/sites/nathanvardi/2014/06/18/exclusive-steven-burrill-removed-from-control-of-venture-fund-for-unauthorized-payments/
[2] http://webaccess.sftc.org/minds_asp_pdf/Viewer/DownLoadDocument.asp?PGCNT=0
[3] http://www.sec.gov/News/Speech/Detail/Speech/1370541735361#.U2l1Na1dVsp

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