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A Venture Capitalist Who Insider-Traded the Apollo Cooper Deal, Also Stole $65 Million By VC Fraud

In strange occurances in the VC world, WSJ has an incredible story:

A boyish 43 years old, Iftikar Ahmed ticked every box of the immigrant success story, going from Harvard Business School to Goldman Sachs Group Inc. and then landing as a partner at one of the oldest venture-capital firms in the country. He and his wife owned a mansion in Greenwich, Conn., and two apartments on Park Avenue in Manhattan, and gave large sums to local and Indian charities.

Yet before Mr. Ahmed fled the U.S. in May, he allegedly stole $65 million through a series of frauds that prosecutors and regulators said became increasingly brazen over the years and that exploited the trust-based culture of the venture-capital firm, Oak Investment Partners. Regulators said Mr. Ahmed began to commit fraud within months of joining Oak in 2004.

Mr. Ahmed’s former colleagues at Norwalk, Conn.-based Oak found that he used doctored deal documents, phony exchange rates and fake invoices to siphon off millions of dollars into secret bank accounts, according to prosecutors and regulators. Oak made the discoveries only after Mr. Ahmed was arrested on insider-trading charges unrelated to his work at the firm.

Interestingly enough, these insider-trading charges are on the Apollo-Cooper merger which eventually failed, but on the announcement the Cooper stock went up from $25 to $33. Ahmed’s friend, Amit Kanodia, knew about it beforehand – Kanodia’s wife was the lawyer for Apollo and was directly involved. Kanodia called Ahmed and boom, Ahmed bought shares of Cooper, and call options, and netted $1.1 million from the illegal insider trade. (From the SEC)

And That Pandora’s Box…

That investigation led the SEC into Ahmed’s other activities. Which involved being a VC General Partner for Oak Investment Partners. And the story came out:

  • Ahmed pushed Oak’s other partners into making what seemed to be a $20 million investment in a Hong Kong retailer, but he only put in $2 million – and pocketed the rest. He even put a “1” in front of financial projections of the retailer to make things look better! Oh and guess what, a simple google search reveals that the investment was $2 million, noted even then – Oak’s other partners apparently didn’t see it.
  • When Oak invested $7.5 million into a Korean company, he told the company to pay an upfront $600,000 to avoid paying future dividends (sort of an upfront dividend). But instead of paying Oak, Ahmed put the money into his own account.
  • Ahmed made $20 million through fake invoices. Apparently this is like: Ahmed gave an investee company a fake invoice, and they paid.
  • He used a different exchange rate to report the earnings on an exit of CD Networks in Korea of $47 million. He made $4.2 million which is like a 10% spread, and no one noticed.
  • He even got Oak to buy into a firm (Nomorerack) whose shares he owned, without disclosing his interest – and made $5.5 million there.

He Ran Away To India, Jailed For 61 Days!

To escape the US law he fled to India, leaving his wife and three children behind.

And as luck would have it, he was arrested for entering illegally. And jailed for 61 days for illegally entering India! And that should feel like a year in an American jail, in some kind of poetic justice.

He’s not allowed to leave India but is out on bail, and the US is working to extradite him.

This is quite something; that a US VC partner would be frauding his firm, and effectively, their investors, by doing these side deals and leeching money by misinformation. It’s obviously a  lack of oversight, but that very lack of oversight is what allows VC firms to invest large sums of money in relatively short time – if there was a firm level audit on every expense or investment, nearly all investments would be hugely delayed. But a post-facto audit might not be such a bad idea, as it’s turning out.

Aside: Could This Be Happening In India?

Kashyap Deorah has a hilarious take on what’s happening in the Indian Venture Capital and Startup Industry.

Everything between MRP and invoiced sale is a discount, a capital expenditure invested in buying the asset of lifetime value of customers. Sounds shady? Stop being retro. Investors find it progressive. They love the way you think about investing heavily in your customer’s life. Every once in a while, your investor might ask you to report two to three times higher fundraise than the actual investment made. Don’t be all stuck up when that happens. Look at it as the MRP of your funding round which your investors bought at a discount. It is standard practice, just like treating MRP as GMV.

While this is meant as a tongue in cheek article, this has been known to happen in too many cases. We have cases where venture capital companies have invested in companies founded by, say, the wife of a managing partner, and then those companies have gone bust. We have cases where fraud has been detected by the VC after they invested in the firm, but instead of following due legal process to recover the money, the firms just “eased out” the unethical people, and let the fraud stay. Because if they did reveal it, the valuation of their company would fall. We have many bad eggs in the industry, but none of the laws that will deter them, and none of the enforcement that will nail them. But if investors decide, after Ahmed’s case, to be more stringent in auditing the VC firms they put money into, there could be more skeletons that come popping out.

  • A well written article..indian start up industry is just looking for revenue and branding growth in any condition and no consideration is given to profits…like ola is telling their investor that we are building brand..but i ask tell me the profit dude!!