Chamber of Secrets

Venture capitalists aren't about to let the details of their performance get aired publicly without a fight. They've been lining up their lawyers to help them plead their case that their returns, which measure how well their investments perform, are trade secrets. Gunderson Dettmer's Steven Franklin, who helped about 20 clients prepare declarations for the suit, said his clients' fears aren't centered on the release of their performance data -- but rather "where the data release is going to stop."

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Venture capitalists aren’t about to let the details of their performance get aired publicly without a fight. They’ve been lining up their lawyers in recent weeks to help them plead their case that their returns, which measure how well their investments perform, are trade secrets. Prompting the flurry of legal maneuvering is a public records suit between the San Jose Mercury News and the nation’s largest public pension fund, the California Public Employees’ Retirement System. The pension fund has refused to hand over performance information about its venture investments. CalPERS officials say they’re bound by confidentiality agreements with the VCs. If forced under public records laws to reveal information venture funds consider trade secrets, VCs would ban CalPERS from future investments, the officials say. The case is being closely watched in Silicon Valley because it could lift the veil of secrecy surrounding the private equity industry, which consists of mostly private partnerships that aren’t beholden to public financial disclosure rules. Other pension funds, however, are releasing performance data in response to open records requests. Pension funds in Texas and Massachusetts and, most recently, the California State Teachers’ Retirement System, have disclosed venture fund performance data. Karl Olson, a partner at San Francisco’s Levy, Ram & Olson who represents the newspaper suing CalPERS, said the VCs gave up their privacy when they accepted the pension’s investment. “This is public information because this is the public’s money that’s being invested,” Olson said. (Full disclosure: Olson is regular outside counsel for The Recorder.) CalPERS doesn’t have to fight off the suit by itself. A handful of Bay Area lawyers have penned letters in support of the pension’s position. And still others have helped more than 100 venture capitalists prepare declarations explaining why their performance — and any details about venture-backed companies that they share with investors — are all trade secrets. The suit, San Jose Mercury News v. California Public Employees’ Retirement System, 02-501902, could expand even further to include a third party. Grove Street Advisors, the company CalPERS contracts to invest in venture capital on its behalf, last week asked to join the fight against releasing the information. A hearing on that matter is set for Thursday. “They see no reason to, nor upside in, having information released publicly — they’re not public entities,” said Steven Franklin, a Gunderson Dettmer Stough Villeneuve Franklin & Hachigian partner. Franklin, who helped about 20 clients prepare declarations for the suit, said his clients’ fears aren’t centered on the release of their performance data. “The real concern is where the data release is going to stop,” Franklin said. “What they’re truly concerned about is releasing information specific to the portfolio companies and that that’s going to hurt the companies.” In a hearing last month, San Francisco Superior Court Judge A. James Robertson II issued a tentative ruling that said performance data isn’t a trade secret. But he invited VCs to outline in declarations — most of which were filed under seal — how they protected the information about their portfolio companies. The judge is attempting to determine if the venture funds have been consistent in protecting their portfolio company information. If they haven’t, their trade secret argument may be at risk. Robertson is expected to issue a ruling Jan. 29. Robertson also appointed a referee, William Bettinelli of JAMS, to stage hearings on whether the portfolio company information is a trade secret. Pat Macht, a CalPERS spokeswoman, said pensioners would suffer if the pension loses its public records fight. “This disclosure would cause irreparable harm in our ability to meet our investment targets,” Macht said. “We have been told by these [VCs] that they will not do business with us in the future.” CalPERS, which manages $143 billion on behalf of 1.3 million current and retired state employees, allocates 6 percent of its assets to alternative investments, which include venture capital. So far, the pension has invested $6.9 billion in private equity, which represents 5.1 percent. VCs and pension officials also argue the numbers will be misunderstood because the funds often report negative returns in the early years before venture capitalists can reap a reward on their investments. VCs fear a backlash when the public sees the negative returns. CalPERS is also getting support in its fight from an industry that has much to lose if the information is made public. A cottage industry — led by companies like Grove Street — has sprung up to interpret data venture funds generate. They then use their expertise to invest on behalf of large institutions. Leading private equity industry researcher Josh Lerner said venture capitalists should have anticipated greater pressure for disclosure as the industry became well know to Main Street investors. “Now we have a situation where it’s the worst of all possible worlds,” said Lerner, a professor at the Harvard Business School. “A lot of information is getting out there but there’s not much in terms of guidance and interpretation.” Mutual funds, he said, were once little known investment vehicles that have since entered the mainstream. As that has occurred, they have been more tightly regulated and have won investors’ confidence. Olson, the Mercury News attorney, maintains greater disclosure could also shine a light on any relationships that may exist between the people in charge of the pension and the VCs who win the pension’s investments. Politicians like State Treasurer Philip Angelides, former Controller Kathleen Connell and San Francisco Mayor Willie Brown serve on the pension’s board. Olson said the public should be able to scrutinize any links between campaign contributions and venture capital investments. “There’s every possibility the CalPERS people, even if they’re well meaning,” Olson said, “are being sold a bill of goods by the VCs who have every incentive to take their money and laugh all the way to the bank.”

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