First, Success; Then, Excess; Now, a Shut-Down

September 20, 2016

Chelsey Franks
Vice President, Investigations
Bishops Services

Statistics have proven time and again that living beyond one’s means is one of the key signposts of a fraudster. Individuals are often driven to commit dishonest or illegal acts in order to cover up or maintain an excessive and unrealistic lifestyle.

Case-in-point, Mike Rothenberg, the young founder of four-year-old Rothenberg Ventures, has come under media fire after his alleged spending and extravagance has led to a shut-down of his venture firm. As TechCrunch reports, among his various indulgences, “Rothenberg was hiring, employing up to 60 people across Rothenberg Ventures at one point. For a firm that manages hundreds of millions of dollars, that wouldn’t be a startling amount of overhead. But Rothenberg Ventures has raised $47 million across four funds dating back to 2013, according to SEC filings. Given that firms typically collect 2 percent of what they raise in management fees, that would leave just $940,000 per year for Rothenberg’s entire operation. In fact, most funds of a similar size are run by two or three people.” So on an operating budget of $940,000, he proceeded to book a $400,000 Superbowl suite, private jet membership at $2,000 per month, while spending time with A-list celebrities – famous by association, perhaps? He even employed up to three executive assistants at one point.

BackChannel reported, regarding Rothenberg, that his Finance Director quit the firm in February of this year, and then in late-August, “her replacement filed a lawsuit alleging that Rothenberg had asked him to charge business expenses on his personal AmEx — and then refused to reimburse him for charges totaling $109,000.” Just this week, on September 12th, the firm “dropped Rothenberg’s name from its title, replacing it with Frontier Tech Venture Capital.”

One of many other reds flags was the 2015 founding by Rothenberg of a virtual reality production company called River Studios to create videos for celebrity musicians, which was funded with $5 million from Rothenberg Ventures. Many investors indicated that they did not know -- nor was it disclosed in annual reports -- that he was founding and funding his own business with their dollars, despite the fact that the investment was roughly 50 times the size of the seed investments the firm normally makes.

The Rothenberg scenario raises the issue – yet again – that continued due diligence on one’s employees, business partners and investees is of high importance. It can’t be stressed enough – doing a background check at the beginning of a relationship is a great first step to knowing who you’re doing business with or hiring. But what about 2-3 years in? With Rothenberg, for instance, in May 2015, Bloomberg was already questioning the firm’s operations, stating, “Given the company’s finances, it’s not entirely clear how it pays for such a large staff. Rothenberg says the firm has four sources of noninvestment revenue, including renting office space to startups. He wouldn’t detail the other three.” (In response to the Bloomberg article, Rothenberg allegedly paid to send two employees to the San Francisco International Airport, “so they could head to airport newsstands and buy copies of the issue in hopes that it wouldn’t be as widely read.”)

Keep in mind that the overall picture is just as important as the individual components in a person’s background check. And you don’t have to go it alone – a good due diligence investigations partner can hold your hand and provide everything you need to know to have peace of mind in hiring and investing. And, partnered with effective due diligence investigations, the power of observation can also help you spot red flags.