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BookWatch: A former Silicon Valley ‘party animal’ gets hit with a $31 million hangover

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Just a few years ago, Silicon Valley venture capitalist Michael Rothenberg was on top of the world — almost literally.

The startup financier, still in his early 30s, was hosting clients at the Super Bowl, booking the San Francisco Giants’ baseball stadium for all-day events, and flying the favored few over Napa Valley vineyards in hot-air balloons.

Rothenberg, only a few years out of Harvard Business School, was an early-stage investor in new-wave fintech companies like Robinhood. He had attracted more than 200 people to invest in his funds. Bloomberg News ran a feature on him, calling him “The Valley’s Party Animal.”

Today, he’s reeling from a $31 million judgment in California federal court to settle allegations of fraud and misappropriation with the Securities and Exchange Commission. He must repay $18.8 million that he took from clients, plus nearly $3.7 million in interest and another $9 million as a civil penalty, the court ruled.

As part of the agreement, he neither denied nor admitted wrongdoing. The current charges were in civil court only; the SEC does not handle criminal charges. Rothenberg, now 36, has also been barred from the securities and brokerage industry for a minimum of five years.

MarketWatch could not immediately reach Rothenberg or the SEC for comment.

Rothenberg has compared himself to Jay Gatsby, the flashy bootlegger in F. Scott Fitzgerald’s celebrated novel. The SEC says he financed his Gatsbyesque existence by tapping freely into his clients’ money. His Instagram account handle is @VirtualGatsby:

The venture capitalist diverted $3.8 million of clients’ money into his own pocket, $8.8 million into his private businesses, and $5.7 million to cover costs at his venture-capital firm, the SEC alleged. It also says that he continued to misappropriate funds even as he was negotiating with the commission to settle its initial charges two years ago.

The SEC says that to hide his actions from clients, Rothenberg modified accounting entries to make his misappropriations look like investments, entered into undisclosed transactions to paper over diverted money, and shuffled investments from one fund to another to conceal prior diversions. It says the process began in 2015.

Rothenberg has denied the accusations and is separately suing Silicon Valley Bank, claiming that it mishandled money transfers. The bank denies the charge.

No one is questioning, however, that Rothenberg ran a successful self-promotion campaign that put him on the map very quickly. The 28-year old launched his fund in 2012, and from 2012 to 2016 the Nasdaq Composite nearly doubled, from a low of around 2,700 to more than 5,000. It was in 2016 that the index, a benchmark for high-tech industries, at least broke above its dotcom-bubble highs.

But it was just around then, in the summer of 2016, that Rothenberg’s business began to come apart at the seams. TechCrunch first broke the news that multiple senior figures had abruptly left the company amid rumors of the SEC probe.

Court documents revealed just how much outside investors are willing to pay for the dream of striking gold in Silicon Valley. Prospectuses for the Rothenberg funds, the SEC reveals, told clients that total fund management fees, capitalized as a one-off payment, amounted to 17.5% of their investment. Yet the firm and its founder had no trouble raising tens of millions from more than 200 people.