The US Securities and Exchange Commission has laid charges against the founder of several venture capital funds in San Francisco, along with his investment advisory firm, for overcharging investors to fund personal projects.

Rothenberg Ventures LLC was formed as a Delaware limited liability corporation in September 2012. Fourteen limited partners (i.e. silent partners whose liability is limited to the amount of their investment in the company) opted in to backing Rothenberg’s seed fund. They included professional investors and high-net worth individuals, as did his wider base of customers.

Michael Rothenberg, 34, has been responsible for making all final decisions regarding the strategy, investments, and operations of the funds managed by the Rothenberg Ventures Management Company. Rothenberg Ventures LLC is another defendant from the same stable of businesses. The management company’s promotional materials extolled the virtues of its connections with Silicon Valley and marketed itself as the venture capital firm for millennials, i.e. people who came of age this century, claiming to be the venture capital firm "most uniquely positioned to find talented, millennial founders."

The case arises out of a Rothenberg scheme to defraud both the venture capital funds he and his companies managed and the investors in those funds. According to documents that the SEC possesses, the venture capital funds have nearly 200 investors and more than US$64 million of assets under management. The venture capital funds were established with the purpose of investing primarily in the equity of technological companies in their early stages.

Rothenberg, an investment advisor, and the Rothenberg Ventures Management Company that he founded and managed, allegedly used various deceptive ruses to misappropriate money from the funds and investors in those funds and to create the false appearance that the money was being used for legitimate fund expenses or investments or had otherwise been paid back. The SEC’s complaint alleges that Rothenberg and his firm misappropriated an estimated $7 million of excess fees and other funds.

They allegedly took fees from the venture capital funds (which were their advisory clients) before they were owed to the Rothenberg Ventures Management Company; took fees in excess of what they could be entitled to earn over the entire life of the venture capital funds they managed; misappropriating investors' money intended for a single-investment fund; improperly used money from one of the venture capital funds to collateralise a line of credit that a bank extended to the management company, which they then used to conceal their prior misappropriation from the fund; undertook undisclosed transactions in an effort to 'paper over' money that they had misappropriated from investors; and misappropriated proceeds from the sales of successful fund investments to conceal previous misappropriation.

The SEC wants the US District Court for the Northern District of California to make the defendants disgorge their ill-gotten gains, to pay pre-judgment interest on them and to pay civil money penalties in accordance with s209(e) Investment Advisors Act 1940. Without making any admissions, Rothenberg and Rothenberg Ventures have offered to settle the charges, subject to court approval. Rothenberg has also agreed to be barred from the brokerage and investment advisory business with a right to reapply after five years.