Lawsuit Accuses Keiretsu Forum Founder, Fund Manager of Fraud
Submitted March 23, 2010, 10:17 AM
A collection of well-heeled Bay Area investors has sued Randy B. Williams, founder and chief executive of angel-investor network Keiretsu Forum, and Palo Alto real estate investor David A. Taran. The investors are alleging securities fraud and other wrongdoing in relation to a multimillion dollar real estate investment fund.
Nineteen investors, including former executives for Levi Strauss & Co., Charles Schwab Corp. and Williams Sonoma, have named as defendants Williams and Taran individually, a fund management company the two men co-founded and a real estate fund the two formed together.
Among those who sued is Colin Wiel Investments. Colin Wiel is a former chapter president of Keiretsu Forum San Francisco and North Bay, according to his profile on LinkedIn. Other plaintiffs in the suit include Dennis A. Chantland, a former chief financial officer for Williams Sonoma; John H. Quandt, a former chief financial officer for Levi Strauss Americas; David S. Pottruck, a former president, chief executive officer and board member for the Charles Schwab Corp., and Randy M. Haykin, a Bay Area venture capitalist and angel investor also on the faculty of Berkeley’s Haas School of Business.
The investors are represented by Oakland law firm Wendel, Rosen, Black & Dean LLP.
According to voluminous documents on file at the Santa Clara County Superior Court, the 19 investors collectively committed more than $30 million to the Page Mill Properties Access Fund, a parallel or “sidecar” investment vehicle to a larger real-estate investment fund, Page Mill Properties II L.P.
Page Mill Properties II has been the subject of widespread press reports following the loss of its more than 1,800 East Palo Alto apartments and other properties to its lender earlier this month. Wells Fargo Bank took the portfolio after Page Mill defaulted on a nearly $250 million loan, failing to make a required $50 million payment due Aug. 4, 2009. The California Public Employees’ Retirement System invested and lost $100 million in equity in Page Mill Properties II. The suing investors have presumably lost all of their investments as well.
The sidecar fund could have invested in a multitude of real properties and property types, according to a May 2007 Private Placement Memorandum on file with the court. But the East Palo Alto portfolio was highlighted in “pitches to potential investors,” the plaintiffs say, and ultimately, the portfolio was the only investment by the PMP Access Fund.
The investors allege they made commitments to the sidecar fund based on incomplete information. “Defendants portrayed the EPA (East Palo Alto) Portfolio as a highly desirable investment,” the complaint says. “The undisclosed truth was that Defendants—far from offering Plaintiffs the privilege of participating in an exclusive investment opportunity—were desperate for infusions of cash.”
At the time they were being asked to become part of the Access Fund in early 2007, the plaintiffs allege, the East Palo Alto portfolio was operating at a monthly loss of $1.5 million, a fact they say was not disclosed. They also say they were not told of the $50 million balloon payment due the bank in August 2009. An attorney for defendants claimed they were not obligated to make the disclosure, saying the loan was not finalized at the time “some” of the plaintiffs joined the fund.
According to the private placement documents, Taran and Williams formed the Access Fund “to provide an invited group of select strategic investors access to Page Mill’s significant off-market deal flow” of medium and small property investment opportunities.
The fund’s membership, consisting of “high net worth investors,” would “create investment synergies, promote the cross cultivation of ideas and bring strategic relationships and deal flow to the Fund…,” the placement documents continue.
Taran and Williams also co-founded PMP Access Fund Manager LLC, the sole managing member of the Page Mill Properties Access Fund.
Williams is the founder and chief executive of Keiretsu Forum. Founded in 2000, Keiretsu Forum is a network of 850 members in 19 chapters on three continents. The forum’s members specialize in early-stage investing in start-up companies. They share the cost of due diligence but each makes investment decisions independently. Keiretsu has four Bay Area chapters in San Francisco, Silicon Valley, the North Bay and the East Bay.
Taran is a well-known Bay Area real estate investor and fund manager. Taran and Williams have invested together since at least 1999.
The Access Fund was intended to produce a 20 percent or greater internal rate of return on a leveraged basis. It operated as a “no-money-down” investment vehicle, with each investor committing up to a certain equity level. Commitments ranged as high as $5 million, according to court record. The bank’s credit facility to the Page Mill Access Fund was supposed to have been backed by the investor commitments.
Now, instead of making 20 percent-plus on their money, the investors are being throttled with requests from City National Bank. The bank is demanding that the investors produce $14.8 million to repay the credit facility. According to the investors’ pleadings, however, neither the bank nor the Access Fund managers have produced documents to fully explain the terms of the credit facility or offered adequate explanation of how the $14.8 million was spent. The investors also assert that they have nothing that assures them that if they satisfy the bank demands, the Access Fund will view that as satisfying its demands.
The investors have sought unsuccessfully to replace Taran as the fund manager since late 2009, saying they have “lost all faith” in the manager’s ability to properly oversee the fund. Since the beginning of the year, the bank, Taran and the fund management company have successfully compelled the disputes into arbitration.
In early arbitrations with at least three investors, the fund manager obtained awards from arbitrators finding that a fund operating agreement required that the investors post security with the bank equal to their capital commitments. One investor, Shane Albers, a former Keiretsu Forum member, is seeking in federal court to vacate an arbitrator’s award of $400,000 in the fund manager’s favor. Albers contends that the arbitrator exceeded the scope of his authority and excluded compelling evidence.
More broadly, in the current litigation, the investors are seeking to determine if their capital commitment obligations are void because, as they allege, there has been an underlying fraud.
If the cases are settled during arbitration, few if any additional documents would be filed with the courts and consequently become public. Taran has a history of seeking extensive redactions in court filings and frequently demands that records be filed under seal. Court records in the United States are presumptively open and can only be sealed from public view under special circumstances. The current lawsuits provide a rare insight into Page Mill’s operations and history because so few of the documents, including the Private Placement Memorandum, have been redacted or sealed.
An attorney for Randy Williams, Jim McManis, criticized the investors for what he described as their sour-grapes attitude. “These people were very sophisticated investors, people of vast wealth. It’s unbecoming that they are filing lawsuits and acting like it is all a big surprise,” he said.
McManis denied that Williams had done anything wrong and expressed doubt as to the appropriateness of his being named as a defendant. His client had no day-to-day executive responsibilities for the Access Fund or to investors, he said.
Allen Ruby, an attorney for Taran, did not respond to an email seeking comment.
