A troubled Oak.

Photographer: F. Carter Smith/Bloomberg News

Venture Capitalist Made Some Pretty Good Deals for Himself

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Let's say someone has a thing that he wants to sell, and someone else wants to buy that thing, and they don't know each other, but you happen to know both of them. What should you do? One very tempting option would be:

  1. Go to the seller and say, hey, I found someone who wants to buy your thing; she's willing to pay $1.5 million.
  2. Go to the buyer and say, hey, I found someone who has a thing to sell you; he wants $3.5 million.
  3. Buy from the seller for $1.5 million, sell to the buyer for $3.5 million and pocket the difference.

When I say that this option is tempting, I don't just mean for me. A lot of people succumb to temptation! There is the case of Jesse Litvak, the former Jefferies mortgage-bond trader who was convicted of fraud for conducting negotiations in that vein.  There is the case of Yves Bouvier, an art dealer arrested in Monaco for allegedly doing something like this with a Modigliani painting.  If you are a middleman in opaque markets, your whole value-add is knowing the buyer and seller and their respective reservation prices. And one way to measure and be compensated for your value-add is to just take the difference between those prices for yourself. If the seller's reservation price is $1.5 million, and the buyer's is $3.5 million, then there's two million dollars of value to be gained in the transaction. By someone. Why not you?

Well, one reason would be that this sort of thing can stray perilously close to fraud, as, you know, those fraud cases suggest. Different markets have evolved different norms about what you can and can't say or do in your efforts to capture that spread, but none of them seem all that clear. Generally speaking it's a bad idea to outright lie: You can maybe insinuate that you've got a seller at $3.5 million and a buyer at $1.5 million, or be strategically vague about who your seller is and where exactly you're sourcing your thing, but you shouldn't literally say the words, "I have a seller who's demanding $3.5 million," if you don't. At least don't put it in writing. But I emphasize that this is not legal or ethical advice and that the exact rules applicable to bond traders, or art dealers for that matter, are very much contested territory these days.

On the other hand if you're on the board of directors of the seller, and an investment adviser to the buyer, then all of this is right out. Definitely don't do this:

Ahmed arranged for one of Oak's funds to purchase shares of a Chinese e-commerce company at a price that was significantly higher than the price the sellers actually agreed to sell their shares. Ahmed then diverted the excess funds to an account that he controlled. Specifically, in August 2014, Ahmed negotiated for one of the Oak funds to purchase shares of the Chinese e-commerce company from a British Virgin Islands company (the "BVI Company") that held those shares. Although Ahmed knew that the third party seller was willing to sell these shares for $1.5 million, Ahmed recommended that the Oak fund purchase the same shares for approximately $3.5 million. Based on Ahmed's recommendation, which also included false representations about the finances of the Chinese e-commerce company, the Oak fund made the purported $3.5 million investment. Oak wired the purchase price to an account that Ahmed claimed was held by the BVI Company, but was in fact controlled by Ahmed.

That's from the Securities and Exchange Commission action earlier this week against Iftikar Ahmed, who was both a general partner at venture capital firm Oak Investment Partners and on the board of directors of the BVI company. He allegedly conned his fellow board members into thinking he had a buyer at $1.5 million:

On or about July 30, 2014, Ahmed corresponded with one of the other BVI Company board members about the potential sale of its Company A shares. Ahmed claimed he had negotiated a sale of the shares for $ 1.5 million, but that the third party buyer was now skeptical of that price in light of Company A's "declining revenues" and "significant loss" of business. Ahmed suggested he believed he could convince the buyer to purchase the shares for approximately $1.3 million. The board member indicated that he was comfortable with a sale at that price.

On or about the morning of Monday, August 11, 2014, Ahmed e-mailed the two other BVI Company board members claiming that the potential buyer "ke[pt] going back on price." Ahmed proposed that the BVI Company sell its shares of Company A to Oak rather than a third party buyer. Ahmed claimed that "the fair price would be $1.5MM."

And then conned his fellow Oak partners into thinking he had a seller at $3.544 million:

In stark contrast to his statements to the other BVI Company board members, Ahmed recommended that Oak XIII pay $3.544 million to purchase the BVI Company's stake in Company A. In making this recommendation, Ahmed misrepresented the financial condition of Company A. As noted above, in his August 10, 2014 email recommending the investment to Oak, Ahmed claimed that Company A was "do[ing] quite well" financially, had more than $1 million in revenues in June 2014, and had "turned a little profit too." In fact, on or about August 8, 2014, Ahmed had received information about Company A's financials, which noted that estimated revenues for June 2014 were approximately $725,000, and the company had a net loss of more than $200,000.

And then kept two sets of deal documents so that no one would figure out that he'd kept the spread:

To conceal his fraud, however, Ahmed provided Oak with altered deal documents. On August 12, 2014, after Ahmed had received executed copies of the deal documents from both of the other BVI Company board members, Ahmed emailed to Oak personnel executed deal documents that falsely depicted a purchase price of $3.544 million.

In addition to misrepresenting Company A's finances and using altered deal documents that overstated the actual purchase price, Ahmed caused Oak XIII's money to be wired to a bank account that he controlled. Specifically, the wiring instructions Ahmed provided to Oak were not for an account held by the BVI Company, as Ahmed claimed in the wiring instructions, but rather were for the account held by Relief Defendant Ahmed Sole Prop.

According to the SEC, he did this sort of thing more than once, including one notable effort where he had a seller for $2 million and got an Oak fund to pay $20 million, pocketing the difference for a sweet sweet 90 percent finder's fee.  In apparently unrelated news, he was also charged with insider trading last month, allegedly making $1.1 million on an insider tip about a proposed acquisition of Cooper Tire. I mean, that's fine I guess, but why do that if you can make an order of magnitude more just having your VC fund wire you money? Not only is the wiring-yourself-money gig much more lucrative, but insider traders just get caught so often. And it's tempting to read the timing here -- insider trading case a month ago, self-dealing case this week -- as suggesting that calling attention to himself by insider trading is how Ahmed got caught on the other stuff.

But if the SEC is right about the other stuff, it's way worse than insider trading. Not only did Ahmed allegedly lie to and rip off both sides of those transactions, but he did it while being a fiduciary to both sides. The SEC points out that, "As an investment adviser, Ahmed owed fiduciary duties to the funds that he advised on Oak's behalf," but as a director of the BVI company he also had fiduciary duties to the seller. In a private market with no liquidity and little information about the value of the asset, both sides trusted Ahmed to get them a fair price. And he agreed to a role where he owed them both honesty and loyalty. And then he -- allegedly -- tricked both of them.

That's very different from the Litvak and Matthew Katke cases shaking the bond markets. At least no one trusts bond traders

“We’ve always said in this business that there are lies and there are bond lies,” said one veteran mortgage-bond trader who now works at a money-management firm. “They’re like white lies. You’re not transacting in a market with grandma…the guy on the other side is doing the same thing.”

But these scandals do seem to come up mostly in opaque, illiquid markets. Where nobody knows what a thing is worth, there are more opportunities to find buyers who are willing to pay way more than sellers want. When that happens, the value of making a deal can be really large, and the services of a middleman can be really valuable. And the temptation for that middleman to take all of the value for himself can be overwhelming.

  1. Sometimes he'd make them even more imaginary: He'd already own the thing, but he'd go to a buyer and pretend he was negotiating with an imaginary seller who wanted more. As we discussed the other day, Litvak's conviction is up on appeal, and his chances of a reversal seem pretty decent.

  2. This seems to be a thing in the art market; consider also Ronald Perelman's lawsuit against Larry Gagosian, accusing him of doing something sort of similar with a Cy Twombly painting. That case was dismissed for lack of reasonable reliance, which might be of interest to the Litvak crowd.

  3. That's Iftikar Ali Ahmed Sole Prop, "a purported business with a bank account at a large national bank." The SEC says that "the full name of the Ahmed Sole Prop bank account misleadingly suggested that Ahmed Sole Prop was 'doing business as' the BVI Company," which is funny because the abbreviated name sure makes it sound like it was an account solely for Iftikar Ahmed's prop trading. (Or is "prop," like, "theatrical prop"?) It's a good trick, though. When I was a lawyer and banker setting up wire transfers I always fantasized about having people wire the money to me, but I never realized it was as easy as saying, "Oh wire the money to Matthew Levine d/b/a Goldman Sachs & Co." or whatever.

  4. Or 900 percent, depending how you count. The structure there is that the Oak fund bought shares in a joint venture from one party to the joint venture. The other party to the JV was the "BVI Company" of which Ahmed was a director. According to the SEC, that company wasn't involved in the transaction, but Ahmed convinced Oak to pay $18 million to what it thought was that company:

    Ahmed further told the Oak employee that the payment was structured the way it was at the joint venture parties' request. In another e-mail sent on or about January 3, 2015, Ahmed stated: "Just so you are clear on the funding, the purchase of [Joint Venturee Party 1's] shares was for the entire $20MM, but netted out for a $18MM obligation that [Joint Venture Party 1] had to [the BVI Company] ... and hence the fund flows were as we did. The gross purchase price from Oak was $20MM but the net amount to [Joint Venture Party 1] was $2MM."

    Of course phase 2 of this plan was allegedly getting Oak to wire the $18 million, not to the BVI Company, but rather to Ahmed's prop account, "doing business as" that company.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net