he last time Van Wagoner
faced questions about its funds was in the mini-bear market of 1994-5. So it probably should not come as a surprise that the fund firm is once again making headlines for all of the wrong reasons.
Top of the list of issues faced by the San Francisco-based firm is a potential SEC investigation into how it has valued private placements held in its registered funds. Yesterday the fund firm disclosed in an SEC filing that the San Francisco office of the SEC is conducting a private investigation to determine whether Van Wagoner violated the federal securities laws. The filing also revealed that the SEC staff notified Van Wagoner that it had "tentatively determined" to recommend that the SEC initiate "certain civil and/or administrative proceedings" against the firm.
The NSAR-B filing added that the SEC also notified four unnamed individuals of its investigation -- the four include one current director and two former directors as well as an employee. Van Wagoner stated in the filing that it disagrees with the SEC's opinion on how the private placements should be valued.
Last Spring, though, fund auditors Ernst & Young
told Van Wagoner Funds that the fund's directors failed to adequately document supporting reasons for the valuations given to the private placements. That information was also disclosed by the firm in an SEC filing. The issue of how to value private placements in the portfolio has already sparked no less than 10 lawsuits against the firm, according to the filing.
A spokesperson for the West Coast firm was not available for comment this morning.
The valuation issue is not the only one facing the firm. Van Waggoner is also seeing its asset base erode as the bear market in technology stocks drags on. Assets under management at the firm has plummeted to just $250 million from their peak of roughly $2 billion in 2000. The firm is responding to the second issue by closing three of its six registered funds.
Those funds may be liquidated as soon as April 30, according to a form 497 filed with the SEC yesterday by the firm. Each of the three funds holds fewer than $50 million in assets. They are: Post Venture Fund ($46 million AUM), Mid-Cap Growth Fund ($20 million AUM) and Technology Fund ($47 million AUM).
There is no word if Van Wagoner is pushing ahead with plans to launch a more diversified fund (Growth Opportunities Fund) that it announced in February.
Excerpt from NSAR-B filing made on March 3, 2003
Report for the period ending December 31, 2002 Item 77E - Legal Proceedings
In 2001 the Company, the Adviser and others (including past and two present directors) were named as defendants in several purported class actions alleging, among other things, violations of federal securities law by failing to value private equity holdings at their fair value. Although the Company has not yet responded to these actions, the Company believes this litigation is without merit and intends to defend the actions vigorously. The Company believes that the outcome of the legal actions will not have a material adverse effect on the results of operations or the net asset values of the Funds.
The staff of the San Francisco, California office of the Securities and Exchange Commission ("Staff") is conducting a private investigation of the Company and the Adviser to determine whether either or both have violated the federal securities laws. Among the matters being investigated is whether either or both violated the federal securities laws by failing to value private holdings at their fair value. In September 2002, the Staff notified the Adviser that the Staff had tentatively determined to recommend to the Securities and Exchange Commission ("Commission") that certain civil and/or administrative proceedings be initiated against the Adviser. An employee of the Adviser, a former director of the Company, and two current directors have also received such notifications from the Staff of its recommendation to the Commission. The Adviser has notified the Company that the staff has not yet submitted such a recommendation to the Commission and the Adviser has communicated to the Staff that it disagrees with its proposed recommendation. The Adviser informed the Company that it believes that the outcome of the investigation will not have a material adverse effect on the ability of the Adviser to perform its investment advisory agreements with the Funds. The Company believes that the outcome of the investigation will not have a material adverse effect on the results of operations or the net asset values of the Funds. Since the investigation is still in progress, there can be no assurance of its outcome.
The costs of defending the Company, the Adviser and certain individuals related to the purported class actions and regulatory matters are significant. Substantially all such costs to date have been borne by the Adviser or have been covered by available insurance. Should costs be incurred directly by the Funds, they will be expensed as incurred and these costs, along with other Fund expenses, are taken into account in the determination of the Adviser's expense reimbursement obligations (see Note 4 to the financial statements).
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